Logistics and Value Chain Analysis – Ford Motor Company

1. Introduction

The Ford Motor Company Henry Ford, a talented engineer, born in Michigan in 1863, established the Ford Motor company in June 1903, with $28,000 and 11 associates, signalling the birth of what was to become one of the world’s largest automobile corporations. An American multinational company, Ford has grouped its operations into three regions, Europe, Latin America, and Asia Pacific, through a growth strategy of mergers and acquisitions. The company’s diversified operations include Ford Credit Company and Hertz Rental Corporation. The paper will examine how Logistical and value chain strategies have been used in Ford’s overseas operations, why such choices were made and suggestions as to future strategies.

2. Definition

“The Value Chain is a method of categorizing generic value-adding activities within an organisation. The main activities respectively are ‘inbound logistics, production, outbound logistics, sales and marketing, maintenance. Activities are supported by: administrative infrastructure management, human resources management, R & D and procurement”. ‘Competitive Advantage’ Michael Porter (1985)

3.Ford Motor Company Background

Ford’s first shipment was in July 1903, one month after incorporation. The Company later expanded into Britain in 1928 and shortly thereafter, in Germany. In the late 1970s Ford produced half of its company’s global vehicle production outside of the United States. Ford Motor has survived many economic trials, including the 1929 ‘Great Depression’, the difficult decade of the 1980s, the recall of defective vehicles and more recently the global economic recession of 2008 which resulted in a slow-down in sales and impacted the firm’s financial performance. Ford’s involvement in the international market is founded on a strategy of mergers and acquisitions of foreign companies.

4. Importance of Concepts to International Business

International production is dominated by multinational enterprises whose transnational operations are vertically and horizontally integrated, with activities geographical dispersed. As a consequence, Logistics and Value Chain concepts are important for the variety of value-generating activities a company performs and the methods adapted in determining a profitable margin and competitive advantage over rivals.

International business must therefore incorporate all parts of the value chain structure in each geographical area for efficacy. The approach is intended to create global synergies throughout the value chain.

5. Context of the Organisation

In the past each of Ford’s large overseas operations had its own product development, manufacturing, suppliers and various management structures. Currently the Company has a number of broad sustainability challenges that set the context of their value chain. These activities impact on environmental, social and economic systems in a multinational context.

6. Competitive Industry

Ford has always been a market leader in competitiveness and innovation as evidence by improving technology for mass production through, the moving assembly line in 1913 and the V8 Engine block in 1932. Ford’s efficiency has led to more affordable vehicles resulting in a competitive edge over its competitors. Ford’s principal competitors are: Chrysler, General Motors Corporation and Toyota Motor Corporation. The company lost competitive advantage in the late 1980s as a result of the high energy cost caused by the global gas crisis.

Asian and European brands produced more cost effective vehicles, which led to the capture of over 50% of the US market by 2008. This resulted in Ford being the first of the US Big 3 automotive car manufacturers to change its strategies by producing smaller vehicles designed to achieve competitive pricing, improve fuel economy, safety, performance, quality and technology. (2010/11 annual report), “Ford and our foreign and domestic competitors became increasingly dependent on sales of trucks and large SUVs”.

7. Market Segment

Global expansion of Ford Company became difficult to manage, thereby weakening product strength in all segments and all markets. Industry demand and consumer taste experienced change in large segments of the market when fuel prices soared in early 2008, the start of the downturn of the global economy. The focus on the company’s homogenous products in trucks and larger vehicles switched attention in the North American portfolio to a new line of midsize cars.

The global shift in market demands for smaller, more fuel-efficient vehicles became even more apparent. Thus, began the production of the new Ford brands in Europe, Africa and Asia markets, of smaller vehicles to meet changing consumer preferences. These strategies proved to be very successful with the new fuel-efficient cars, such as, the Ford Focus and Fiesta. Ford is emerging as a market leader in the production of electric powered vehicles, which is a new segment in a growing environmentally friendly market.

8. Context – Aspects dependent on Ford’s Value Chain

The activities in the Company’s value chain include, product planning and design, inbound and outbound logistics, raw material extraction, parts and components, assembly and painting, sales, use, service, end of life. Operating as an international business Ford creates ‘global synergies’ from these sources, in achieving value for its stakeholders and thus creating competitive advantage.

9. Logistic and Value Chain Concepts

The logistic and value chain strategy is the method used for analysing internal activities of a firm which aims to increase its efficiency, effectiveness and competitiveness in order to achieve its targeted profit margins.

The strategy comprises a series of value-generating primary and secondary activities useful in the separation of the business systems. The value chain comprises a sequence of activities, that include support (secondary) and primary activities, fig. 1. Support Activities Firm Infrastructure Firm Infrastructure Michael Porter Value Chain Human Resource Management Human Resource Management Procurement Procurement Technology Development Technology Development MARGIN MARGIN Service Service Marketing and Sales Marketing and Sales Outbound Logistics

Outbound Logistics Operations Operations Inbound Logistics Inbound Logistics Primary Activities Figure: 1 Source: Porter, M. , 1985. Competitive Advantage The objective of using the model is to offer customers a level of value that will exceed the cost of the activities, thus resulting in a profit margin.

10. Ford’s Support Activities in the Value Chain

The Firm’s Infrastructure Strategic policies to meet the legal requirements and accounting standards of both home and host countries for Ford are necessary in international markets.

The International Human Resource Management (IHRM) The IHRM involves the total deployment of all the human resources available to the firm. Ford’s IHRM strategy can be identified as: The ethnocentric approach – nationals of the parent company hold key positions in the host subsidiary country. (Wall, Minocha, & Rees; International Business; 3rd ed. 2010. P. 321). Throughout Ford’s internationalization, the parent-company management style, corporate culture and HRM practices have been replicated in the foreign locations.

Ford prepared its best employees for foreign assignments developing an international pool to maintain a common language and culture, thus the company follows the Ethnocentric approach for IHRM. “One of the major problems associated with hiring in less developed countries is that the skill of individuals may be less than desired” Sims (2002). In less developed countries, such as the Western region of China, Ford provides a safe and respectful working environment, e. g. educational training to increase work skills.

Technology Development Product and Technology development in process designs, engineering, marketing, research and development are the keys to the success of the firm. Ford however rapidly adopted the Japanese system of production during the difficult period of the 1980s. The company moved faster than any other auto producer in integrating its operations globally. Ford spends heavily on research and development. In recent times they have produced the electric driven Focus range of vehicles in recognition of the eco-environment.

Ford utilizes technology in the production of its vehicles, with Smart technology (computers) in vehicles and in safety designs, including the world’s first digital child, for virtual crash testing. Procurement Purchasing of materials, supplies and equipment, Ford re-engineered its process to enable appropriate technology to allow the elimination of 400 provisioning jobs and achieved lower cost solutions, staff and supplier benefits. The new approaches are characterised by:

  • Supplier Management-the creation of a partnership relations with suppliers e.g. information sharing, commitment to overall quality, etc.
  • Partners are now selected on quality, technology, technical support, delivery and cost.
  • Single-vendor sourcing.

11. Primary Activities of Ford’s Value Chain Inbound

Logistics – the manner in which Ford performs quality control (TQM), warehousing of raw materials and its supply schedules. The Company’s lead logistics provider, Penske quality associates have, ‘worked closely with Ford to streamline operations and to create and maintain an optimized central logistics network’.

Supplier operations were streamlined for improved performance and accountability. Penske established “10 Order Dispatch Centres (ODCs) and consolidated shipments to plants. 1,500 suppliers were trained on a uniform set of procedures and logistics technologies, with an addition of systems implemented to measure carrier performance with strict accountability procedures and advanced logistics management technologies to gain real-time visibility of delivery status, routing schedules and productivity and a new freight billing system was designed to capture logistics costs”.

Operations – Centralization of the Ford company logistics operations included materials handling for 35 assembly plants, 7 stamping, 21 engine and 7 casting plants dispersed globally, thereby increasing effectiveness in speed and visibility in the network, as well as reducing costs in the supply chain. Outbound Logistics – the company produces cars, sport utilities and trucks and these are sold through dealerships.

Dealerships are located in communities globally. “Ford will strive on the premise of the strongest dealer network in the industry and commits to maintaining and growing dealer contact and support in local markets”, (Steve Lyons, vice president-Marketing). Through the use of technology, customers can determine the specification of the vehicles desired and order via the Internet.

The completed vehicle is delivered to the nearest dealer of the customer’s choice. Marketing and Sales – In August 2005, Ford Motor Company announced that its Marketing, Sales and Service organisations will be integrated into unified sales and marketing functions in combining two divisions of Ford and Lincoln Mercury brands, to strengthen their individual identities.

(Steve Lyons, Ford Group vice president, North America Marketing, Sales and Service advised), “We’re going to reach customers smarter, more focused ways than ever before while being extremely efficient with resources; this new type organization will help us develop a single-minded concentration on reaching our customers with the strongest product line-up in our history”. Servicing – after sales support includes continual training, education of staff and their skills. The company provides a series of warranties for products, typically 5 years or 60,000 miles and includes complimentary roadside assistance.

Integrating these activities of the value chain efficiently will allow the Company to sell its products, at a price that exceeds the cost of the combined activities and thus achieve the targeted profit margin.

12. How Logistics form part of the Value Chain

The Value Chain Logistics are determinant on how the flow of goods and services will be transported throughout to provide the most economic method. Logistics “Logistics is the term used to refer to the total flow of finished products downstream from the plant to the customers.

It includes the major part of the total flows of materials (finished and unfinished) and information both upstream and downstream”. (Wall, Minocha & Rees; International Business; 3rd ed. 2010, P. 302). Some of the activities, which are common to international logistics, are transportation, storage of goods, materials handling, inventory and the processing of orders. Logistics can be both strategic and operational in nature.

This involves a network of interconnected components in each role or function.

13. International Business Strategies

Cost competitiveness pressures Cost competitiveness pressures Global Strategy Global Strategy Transnational Strategy Transnational Strategy High International Strategy International Strategy Multidomestic Strategy Multidomestic Strategy Low Local responsiveness pressures Low High Figure 2. Four International Strategies Source: Wall, S. , Minocha, S. , Rees, B. 2010. 3rd ed The complexity of Ford competing in the international environment, as a foreign direct investment suggests that Ford utilizes the ‘Transnational Strategy’ approach which means the firm will have to be responsive to both the competiveness and responsiveness of local situations. Fig. 2.

14. Institutional Aspect Integrated Production Process Relative Unit

Labour Cost (RULC) will place emphasis on exchange rates where depreciation of the currency can compensate for low labour productivity and high money wages thus labour cost competitiveness. Lower labour cost will encourage increase in foreign investment. Supply Factors a Foreign Direct Investment firm may use in cost oriented multinational strategy include:

a) Production costs, e. g. China/Korea

b) Distribution costs relate to the distribution channels chosen.

c) Backward or forward vertical integration saves costs, provide cost efficiency or economies of scale e. g. Ford and Firestone Tire Company.

d) Access to key technology such as investing in an existing firm.

e) Demand factors encourage foreign direct investment (FDI). Market oriented multinationals major objective is to internationalize with a view of accessing new markets and greater sales

f) Horizontal Integration takes the firm into new geographic markets.

Customer groups with market-oriented and differentiation more than the cost. Ford’s institutional aspect: Institutional Ownership Type| Value| Total Shares Out Standing (millions):| 37,292| Market Capitalization ($ millions):| 220,848| Institutional Ownership:| . 54| Price (as of 09/30/2011)| 10. 9000| 54% 54% Ownership Analysis| # of Holders| Shares| Total Shares Held:| 913| 2,026,131,012| New Positions:| 71| 29,001,603| Increased Positions:| 382| 126,945,876| Decreased Positions:| 438| 247,731,051| Holders With Activity:| 820| 374,676,927| Sold Out Positions:| 124| 78,195,256| Diagram 1 Source: NASDAQ, 2011 The Ford Company, according to NASDAQ report of 2 December 2011, has “913 Institutional holders with a total of 2,026,131,012 shares held/traded”.

15. Governmental Aspect

Regional trading blocs, economic development incentives by host, the avoidance of trade barriers are some reasons why a firm may seek to set up facilities in foreign countries. Taylor (2000) indicates “there are circumstances in which a negative (rather than positive) relationship might be anticipated between this”.

16. Political Risk

Political risk affects firms in a country. “Uncertainty that stems, in whole or in part from the exercise of power by governmental and non-governmental actors. ” (Zonis, M. , 2000). The company must act in accordance with governmental policies and in accordance with tax policies of every government.

17. Analysis

The Implementation of a transnational strategy will involve a high degree of complexity and requires coordination in the geographically dispersed primary and secondary activities in the global value chain of Ford. Modularity is one popular method of implementing this strategy in production and design, and is widely used in the car industry. It involves customisation in response to the customer’s needs. As such, production activities are broken down into separate elements that can be distributed independently to different international locations according to their mix of factor inputs, ‘cost and quality’.

The product differentiation for design and the other features, will take place within, or close to, the intended market. The Ford Company follows this modularity approach with many different models, using, ‘the basic chassis and other standardised internal parts’. Kenneth Andrews, (1970), proposed the SWOT analysis, “a framework for strategy formulation to achieve the firm’s internal capabilities (strengths and weaknesses) and detect the external environment (opportunities and threats).

Thus the company will have an objective appraisal of its current position so as to determine the factors influencing their ability to compete effectively in a market”. Poor Competencies To gain overall profitability and global synergies, the Ford Motor Company’s international business had to reconstruct its operations. That had led to inefficient processes and lacked substantial benefits of scale. The Company operated with four largely separate automotive companies around the world, focusing on economies of scope, where its product development systems, manufacturing processes, suppliers and structures became duplicated.

This method later changed to increase economic efficiencies and promote benefits of scales. Research shows that in the early stages of internationalization, Ford Human Resource Management was viewed as secondary to the success of the firm. PEST Analysis The PEST analysis is another strategy Ford must pay attention to for determining influences in the external environment. In particular the firm will have to cope with the political, environmental, social and technological factors in the market. A PESTLE analysis of Ford Company is reveals the following: (Table 1)

Ford Motor Company PESTLE Analysis Factors

a) Political

  • The company’s move must be in accordance with the governmental policy
  • The actions of the company must follow tax policies on every government

b) Economic

  • The company can reduce the cost structures of its products
  • Increase market share can be applicable to the company
  • The company can also maintain its profitability

c) Social

  • Cut in the personnel and on the jobs
  • The impact on many lives and to the strong partnerships in the suppliers
  • The minimal number of staffs can be a hindrance

d) Technological

  • Upgraded technology on Ford’s product for strengthening the growth segments and to produce profitability
  • The company’s Chicago Assembly Plant that can be used for the production of vehicles
  • Creation of new small cars and crossover cars signifies technological advancement
  • Fuel saving devices, electric, plug-ins, hybrid.

e) Legal

  • The company is required to operate within the laws of the country it is incorporated in, e. g. anti-smoking legislation
  • Environmental
  • The company has a history of working to protect the environment through green emissions and technology, e. g. reduced energy waste (carbon) by powering down PCs at night that saves $1. 2 million and the Ford Focus vehicle with zero emissions driving.

Table 1 Ford Company PESTLE Analysis Statistics show that Ford is currently the second largest automaker in the U. S. and the fourth largest in the world based on the number of vehicles sold annually. Ford has the option of theoretical ‘Strategic Choice’ to identify the main options open to the business for setting its objectives. Three approaches often referred to are:

  • Product-market strategies to determine where the firm competes and direction for growth (Ansoff);
  • Competitive strategies that influence action or reaction patterns an organisation will pursue for competitive advantage (Porter)
  • Institutional strategies involve a variety of formal and informal relationships with other firms directed towards the method of growth (acquisition v organic).

18. Recommendations

In 2008 Ford in its recommendation to sustain profitability of the company submitted a request for a temporary bridging loan through congressional legislation.

The request was in addition to the company’s sustainability plan to transform its North American business through restructuring and introducing more high end, safe and fuel-efficient vehicles with a wider range of the Hybrid-electric vehicles, advanced Plug-in Hybrids and full electric vehicles. The New York Times, Dec. 7, 2011, Global Ed. , Business Day, “On October 26, 2011, Ford’s third quarter profit fell 2%, to $1. 65 billion.

Nearly all the profit, same as 2010, came from North America, while losses in Europe increased 56%, $306 million. Total car earnings for 2011 $6. 6 billion, 4% more than the first nine months of 2010”. The company will therefore have to continue to emphasize the three main marketing processes of:

  •  An analysis of the market
  • A strategy based on satisfying customer needs; and
  • Planning and management Ford as an international investor can consider trading in foreign exchange and paper assets (bills or bonds), equity (shares), for increasing income.

It can reduce risk whilst supporting its international investments and provide a repository for the surplus of funds to be held. Outline of Future Strategy Ford had planned to pursue their sustainability plan for the future with or without the loan, which was not granted. In 2010 the wholly owned Hertz Car Rental and the Volvo line were sold and the Mercury brand discontinued. This move contributed towards the company reporting a profit for the period. Ford’s Business Plan

In 2007, part of their future strategy, included the sale of some of their product line, Aston Martin, Jaguar, Land Rover and the majority of its holdings in Mazda. The 2008 Plan included: “Four key priorities in the transformation plan:

  • Aggressively restructure to operate profitably at the current demand and changing model mix.
  • Accelerate development of new products our customers want and value.
  • Finance our plan and improve our balance sheet, and;
  • Work together effectively as one team, leveraging our global assets”and ‘cancelled bonuses in 2009 for management employees worldwide and forego all bonuses and merit increases in North America’. ‘corporate governance strategy’. Increase Technology and Skills.

Ford’s 2009 Sustainability Report: Ford Automobile will invest $14 billion to improve fuel efficiency and advance technology during a seven year period. Skills must be acquired to facilitate the production of the new high technology vehicles. Large scale management of an industrial work force using elaborate engineered moving assembly lines. The company provides training to local employees. Critical for the Future Dealerships remain a critical part in the distribution channel and are very important as economic contributors to communities in which they operate. However, the Company proposes increase efficiencies through a reduction in dealer and supplier base, to increase profit margins.

The company’s sustainability business plan means to:

  • “Reduce dealers by 606 overall or 14%
  • A reduction of product suppliers from 3400 to 1600, 53%
  • Supplier eligible for major sourcing to reduce to 75
  • Sale of the company’s fine corporate aircraft; and
  • Influence the company’s global product strengths with smaller, fuel-efficient vehicles

There will be an increase in investment in cars and crossover vehicles from 60% to 80% of its total product investment”. A number of risk factors will always have to be considered, a few of such are mentioned as:

  • Market share
  • Price competition
  • Over-capacity
  • Currency fluctuations or other factors.
  • Increase in market shift away from the sale of trucks, SUVs or other more profitable vehicles in the US.
  • Further increase in price for, or reduced availability of, fuel
  • Significant decline in industry sales from slowing economic growth, geo-political events or other factors Monitor Competitors Ford is now the second largest automaker in the United States and the fourth largest in the world based on the number of vehicles sold annually.

Their competitors General Motors and Chrysler Motors are the companies who received the bailout during the global downturn, however Ford has survived and are experiencing a profit for the period even though it is lower than the same time last year. 19.

Conclusion

In 2007, Ford received more initial quality survey awards than any other automaker, from J. D. Power and Associates and five of Ford’s vehicles ranked at the top of their categories with fourteen in the top three. It will be prudent for the company to continue to pursue reducing their debt and increase profits. The company has a very good track record for innovation in all their vehicles and the use of high technology in the production of products. The decrease of 56% for 2011 in the depressed European market will be concerning for investors. Price ChartStock Snapshot Friday's open| $10. 94| Thursday's close| $10. 75| 52-week range| | 52-week high| $18. 97| 52-week low| $9. 05| Market capitalization| 40. 9B| Avg. volume (10-day)| 57. 6M| Shares outstanding| 3. 8B| Dividend (yield)| $0. 20 (1. 81%)| Ex-dividend date| 01/27/2012| Table 1

Source: Ford, 2011, Stock snap shot The energy crisis during 2003-2008 weakened the automotive industry because of increased fuel prices and thus purchases of certain popular, high profit margin vehicles curtailed sales, e. g. sport-utility and pick-ups. Ford marketing mix must include a provision for and find ways to increase profitability, in order to mitigate the impact of the global recession. Maintenance of a comprehensive value chain will serve to enhance and guide this process. Word Count: 2995

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