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 Traditional Model order Suppliers Manufacturer Distribution Channel Customers delivery Direct Model order Suppliers Dell Customers delivery

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 Dell Operating Principles Ford Breakthrough Objectives/Key Initiatives Customer Intimacy Demand to Delivery Ford Retail Network Ford Production System Order to Delivery Supply Chain Mgmt. Leadership Demand Pull Velocity Order to Delivery Ford Product Development System Fixed to Variable Cost Shift Modular Assemble “Extended Enterprise” Virtual Integration

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-1995 mid-1997 visits more than 1 million per day A 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-driven Vehicle purchase Higher Lower Incentives Manufacturing Capacity planning Multiple material/ Market-driven and and supply capacity constraints, (no constraints FPV/ Driven by program CPV* + 10% for Budget vehicle, +15 for components Schedule and build Maximize production Schedule from make whatever you customer-driven order can build bank, build to schedule

Exhibit 2 Moving from Push to Pull Process Push Pull Dealer network Dealer ordering Orders based on Orders based on Allocations and customer demand Capacity constraints Order to delivery Longer (60 + days) Shorter (15 days or times less) Inventory High with low Low with rapid turnover turnover Dealership model Independent Company-controlled dealerships, 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 Ford Breakthrough Objectives/Key Initiatives Dell Operating Principles Customers Customers Ford Retail Network Dealers order delivery OTD Order Mgmt Sales FPDS R & D Bill of Material Assembly DTD Outbound Logistics Supply chain Leadership Commodity Suppliers Component Plan/Site Operations FPS Inbound Logistics FPS CFOP Suppliers

The End Any questions?