Ford Motor Company: Supply Chain strategy

Marcus Eatmon

MIS 689

Introduction

Teri Takai, Director of supply chain systems contemplate recommendations to senior executives. The questions asked extremely important to Ford’s future:

How should the company use:– emerging information technologies (i.e. Internet

technologies)? – ideas from new high-tech industries to change

the way it interacted with suppliers?

Members of The Team had Different Views on the Subject

Some argued that the new technology made it inevitable that entirely new business models would prevail

Ford needed to radically redesign its supply chain and other activities or risk being left behind– favored “virtual integration”

• modeling the Ford supply chain on that of companies, such as Dell

Exhibit: Dell and Ford Compared

Exhibit Dell and Ford Compared

order

delivery

order

delivery

Suppliers Manufacturer DistributionChannel

Customers

CustomersSuppliers Dell

Direct Model

Traditional Model

Members of The Team had Different Views on the Subject

Another group was more cautious, believing that the difference between the auto business and relatively newer businesses– (i.e., computer manufacturing) were important and

substantive

Ford supplier network had many more layers and companies

Purchasing organization played a more prominent and independent role than had Dell’s

Enterprise Model Comparison

DellOperating Principles

CustomerIntimacy

DemandPull

Ford Production SystemOrder to Delivery

Supply Chain Mgmt. Leadership

Demand to DeliveryFord Retail Network

FordBreakthrough Objectives/Key Initiatives

VirtualIntegration

Order to DeliveryFord Product Development System

Velocity

Fixed to Variable Cost ShiftModular Assemble

“Extended Enterprise”

Dell had delivered on these dimensions, do you think the same methods would deliver results for Ford?

Company and Industry Background

Based in Dearborn, Michigan, Second largest industrial corporation in the world Revenues of more than 144 billion About 370,000 employees Operations spanned 200 countries.

– obtained significant revenues and profits from its financial services subsidiaries, core business had remained the design and manufacture of automobiles for sale on the consumer market

Since Henry Ford had incorporated in 1903, the company had produced over 260 million vehicles.

Last Two Decades(Industry Grew more Competitive )

Big Three U.S. automakers—General motors (GM), Ford, and Chrysler

Foreign-based auto manufactures – (i.e.,Toyota and Honda)

Facing increasing overcapacity Advantage in the industry was fast

becoming global

How could Ford and other large automakers improve quality and reduce cycle times while dramatically lowering the costs of developing and building cars?

Ford 2000

An ambitious restructuring, began 1995– Included merging its North American,

European, and international automotive operations into a single global organization

Called for dramatic cost reductions to corporate organizations and processes by:– reengineering – globalizing

Ford 2000

Product development consolidated into five Vehicle Centers (VCs)– each responsible for the development of vehicles in a

particular consumer market segment

Making processes and products globally common – Eliminate redundancies

– Realize economy of scales

How would making processes and products globally common help to improve Ford’s production, and what is economy of scale?

Economies of Scale An economic theory stating that a plant's marginal cost of production decreases as the plant's operation increases.

The more of a good you produce, the less it costs for each additional unit. For example, a plant that produces 1,000 cars would be more efficient than a plant

producing five cars.

Ford’s New Global Approach

Technology was employed to overcome constraints usually imposed by geography

Teams on different continents needed to be able to work together as if they were in the same building

In every reengineering project, information technology (IT) was critical – deployed to enhance material flows and reduce

inventories• substituting information for inventory

What major company processes could major reengineering projects be initiated around?

Ford 2000

Internet Revolution:– created new possibilities for reengineering

processes within and between enterprises Ford launched a public Internet site in mid-

1995mid-1997 visits more than 1 million per dayA companywide Intranet mid-1996 January 1997 business-to-business (B2B) Extension potential of an Extranet

Creating Consistency

Ford teamed with Chrysler and General Motors to work on the Automotive Network Exchange (ANX)

Why important?– Network aimed to create consistency in

technology standards and processes in the supplier network

– Suppliers:• Pressed to lower costs• Interaction would be the same

End of 1998

Profits of 6.9 billion Employees enjoyed record profit sharing Return on sales (3.9 percent in 1997)

– trending solidly upward World leader in trucks Taken over the U.S. industry lead

– profit per vehicle ($1,770) from Chrysler Most improved automaker on the 1997 J.D. Power

Initial Quality Study – (in fourth place overall behind Honda, Toyota and

Nissan).

Ford’s Existing Supply Chain and Customer Responsiveness

Initiatives

Existing Supply Base

As the company had grown over the years, so had the supply base

In the late 1980s: there were several thousand suppliers of production materials in a complex network of business relationships

Suppliers were picked primarily on the basis of cost, little regard was given to:– overall supply chain costs

– complexity of dealing with such a large network of suppliers.

How could Ford improve its existing supply base?

Existing Supply Base

Beginning in the early 1990s: Shifted toward longer-term relationships with a

subset:– tier 1

– tier 2

– below suppliers.

Ford made its expertise available: – just-in-time (JIT) inventory

– total quality management (TQM)

– statistical process control (SPC)

Ford Production System

Ford 2000 initiative produced five major, corporationwide reengineering projects

One was Ford Production System (FPS)Aimed at making Ford manufacturing

operations:– Leaner– more responsive– more efficient

Ford Production System

Aspired to level production and move to a more pull-based system, with:– synchronized production– continuous flow– Stability

throughout the process

What was Ford’s intentions when reengineering its production system, and how were they going to do this?

Exhibit 2 Moving from Push to Pull

Process Push Pull

Design Design strategy Please everyone Mainstream customer

Vehicle More is better wants minimal

combinations

Marketing Pricing strategy Budget-driven Market-drivenVehicle purchase Higher LowerIncentives

Manufacturing Capacity planning Multiple material/ Market-driven and and supply capacity constraints, (no constraints

FPV/Driven by program CPV* + 10% for

Budget vehicle, +15 forcomponents

Schedule and build Maximize production Schedule from make whatever you customer-driven

ordercan build bank, build to

schedule

Exhibit 2 Moving from Push to Pull

Process PushPull

Dealer network Dealer ordering Orders based on Orders based on Allocations and customer demandCapacity constraints

Order to delivery Longer (60 + days) Shorter (15 days ortimes less)

Inventory High with low Low with rapid turnover

turnover

Dealership model Independent Company-controlleddealerships, dealerships (Ford negotiations with Retail Network)company

One Important Part of FPS was Synchronous Material Flow (SMF)

Ford defined as “a process or system that produces a continuous flow of material and products driven by a fixed, sequenced, and leveled vehicle schedule, utilizing flexibility and lean manufacturing concepts.”

One key to SMF was In-Line Vehicle Sequencing (ILVS):– used vehicle in-process storage devices (such as banks

and ASRSs) and computer software to assure that vehicles were assembled in order sequence

Order to Delivery

The purpose of OTD: – reduce to 15 days from 45 to 65 days

Pilot studies in 1997 and 1998 identified bottlenecks throughout Ford’s supply chain:– Marketing– material planning– vehicle production– transportation processes

Ford’s Approach to Implementing an Improved OTD Process

(1) ongoing forecasting of customer demand from dealers

(2) a minimum of 15 days of vehicles in each assembly plant’s order bank – to increase manufacturing stability

(3) regional “mixing centers” that optimize schedules and deliveries of finished vehicles via rail transportation

(4) a robust order amendment process – to allow vehicles to be amended for minor color and

trim variations without the need to submit new orders

Ford Retail Network

July 1, 1998, launched first Ford Retail Network (FRN) in Tulsa, Oklahoma– under the newly formed Ford Investment Enterprises

Company (FIECo).

Two primary goals: – (1) to be a test bed for best practices in retail

distribution and drive those practices throughout the dealer network

– (2) to create an alternative distribution channel to compete with new, publicly owned retail chains such as AutoNation.

Comparative Metrics (latest fiscal year)

Ford

Dell Automotive Financial Services

Employees 16,100 363,892

Assets ($millions) 4,300 85,100 194,00

Revenue ($millions) 12,300 122,900 30,700

Net income ($millions) 944 4,7000 2,200

Return on sales 7.7% 3.8% 7.2%

Cash ($millions) 320 14,500 2,200

Manufacturing facilities 3 (Texas, Ireland, Malaysia) 180(in North and South

America, Europe,

Asia, Australia)

Market capitalization ($millions) 58,469 66,886

Price-earnings ratio 60 10*

5yr average revenue growth 55% per yr 6% per yr

5yr average stock price growth 133% per yr 33.4% per yr

Dell and Ford Compared

Dell Processes Ford

Suppliers own inventory until it is used in production

Suppliers maintain nearby ship points; delivery time 15 minutes to 1 hour External logistics supplier used to manage inbound supply chain Customers frequently steered to PCs with high availability to balance

supply and demand Demand forecasting is critical—changes are shared immediately within Dell

And with supply base

Demand pull throughout value chain—“information for inventory” substitution

Focused on strategic partnerships: suppliers down from 200 to 47 Complexity is low: 50 components, 8 – 10 key, 100 permutations

Enterprise Model Comparison

delivery

R & D

OrderMgmt

Dealers

Customers

Bill of Material

OutboundLogistics

Plan/SiteOperations

InboundLogistics

Suppliers

Sales

Assembly

CommoditySuppliers

ComponentSuppliers

Ford Retail Network

Supply chainLeadership

OTD

FPDS

FPS

FPS

CFOP

DTD

order

Customers

DellOperating Principles

FordBreakthrough Objectives/Key Initiatives

The End

Any questions?