Ford Motor Company: Supply Chain Strategy Case Analysis

Introduction of Ford Motor Company

Ford Motor Company, American automotive corporation founded in 1903 by

Henry Ford and 11 associate investors. In 1919 the company was

reincorporated, with Ford, his wife, Clara, and his son, Edsel, acquiring full

ownership; they, their heirs, and the Ford Foundation (formed 1936) were

sole stockholders until January 1956, when public sale of the common stock

was first offered. The company manufactures passenger cars and trucks as

well as automotive parts and accessories. Headquarters are in Dearborn,

Michigan. Henry Ford built his first experimental car in a workshop behind

his home in Detroit in 1896.

Executive Summary

Upon studying Ford’s existing supply chain it is not hard to see the high level of complexity

within. This level of complexity blended with other internal and external factors have

made Ford realize they need to explore solutions to deal with the supply chain challenges

leading to cost and the reality they are facing and may continue to face in the future.

The majority of issues in Ford’s present chain result from inefficient control of their large

supplier base and the complexity of their supplier network in addition to inability to

communicate to server their end customers. Ford has realized the urgent need to change

their supply chain in order to be more cost effective and more profitable for its
shareholders. Since Dell and Ford are two different types of markets, one is in the

computer manufacturing/distribution business and the other is in the automobile

business, it does not seem right for Ford to implement the exact “virtual integration

model” deployed by Dell. The fact the car buyer usually wants to touch and feel the car

before they make a purchase of a car would put Ford at risk of losing their customers to

the competitors. On the other hand when customers buy computers on-line they don’t

have to worry about touching and testing the computers and they require a better price

than the other retail avenues to buy computers. Some other considerations in this case

are the consideration of the buying frequency of cars versus computers and financing

requirements for a car versus a computer. Another consideration would be the number

of suppliers to support Ford manufacturing versus Dell’s computer manufacturing.

Although the model deployed by Dell seems to be a stretch there are certain aspects of

the model Ford can fully adopt or partial implement to place them in a better position to

grow and realize more profit for the shareholders.

Issue Identification

Ford has a need come up with a solution to the below issues to try to determine which

information technology strategy will work best for their supplier interaction as well as

with their current engineering designs and projects.

1) Ford’s current supplier base:

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 a. Ford has recently decreased their supplier base to have a better long-term

relationship and closer relationship with fewer suppliers called ‘Tier 1’ suppliers.

The Tier 1 suppliers provide Ford with complete vehicle sub-systems. The Tier 1

suppliers work with multiple Tier 2 suppliers who provide the components that

make up the vehicle sub-systems.

b. The Tier 1 suppliers do not have the capital to invest in the new technologies

that Ford seeks to get into. However, the Tier 1 suppliers do have fairly solid IT

capabilities, but these capabilities severely drop when dealing with the Tier 2

suppliers. Ford has also made it expertise available to support the Tier 1 suppliers

through tools like Just-in-Time inventory, Total Quality Management and Statistical

Process Control.

2) Purchasing organization:

a. Ford’s purchasing department is independent of the product development

area. However, purchasing has a strong dominance over the product design price

negotiations because “a very slim reduction in purchasing cost could result in very

significant savings” for the company.

b. Dell’s vertical integration has these areas working very closely together.

Could Ford also successfully merge these two areas to get reach a common goal?

3) Forecasting within the Ford 2000 projects:

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a. Two key initiatives under the Ford 2000 project are the Ford Production

System (FPS) and Order to Delivery (OTD). The FPS project was geared at steering

Ford manufacturing operations to be leaner, more responsive, and more efficient.

This would be promoted by focusing on continuously flowing material through

using vehicle in-process storage units and proper assembly order sequence. The

OTD project was started to reduce the order time from the present of 45-65 days

down to only 15.

b. The accuracy of Ford’s forecasting is an integral step in being able to maintain

the continuous flow of materials from suppliers as well as being able to turn the

vehicles around within 15 days. This is the first time that Ford had ever involved

the dealers with forecasting the customer demand.

c. In 1998 Ford launched the Ford Retail Network (FRN), which was put in

place to address the changing face of retail vehicle distribution systems in North

America. One of the principles was to buy the local dealers so the dealers

competed with the competition instead of each other. This may provide Ford with

another level of detail to the customer requirements.

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Environmental and Root Cause Analysis

In the 70’s Ford’s main competition was General Motors and Chrysler. With the entrance

of Japanese companies like Honda, and Toyota the Ford Motor Company faced stiffer

competition in the market. Ford along with General Motors and Chrysler were forced to

react to the foreign-based auto manufacturers. They also had to face the reality of an

industry issue of an over-capacity due to economic reasons. This drove Ford to develop

and expand their export-oriented auto industry reach. The focus in the auto industry

changed to becoming a global force and Ford and other North American automakers

looked at acquiring such companies as Sweden’s Volvo. The addition of further

automakers abroad for Ford only added more complexity to the supply chain and the

need to manage more supplier relations. To deal with the complexities added by the vast

number of suppliers Ford in the 1990’s implemented a tiered approached. The focus was

long term relationships with Tier 1 suppliers who in turn would manage and handle Tier

2 and Tier 3 suppliers. In order to deal with the further complexities Ford initiated the

Ford 2000 plan which aimed at restructuring many of their key processes. The systems

and processes identified were Order to Delivery (OTD), Ford Production System (FPS)

and Ford Retail Network (FRN). The goal was to minimize the complexity in the supply

chain and manage costs to the business. Takai has been tasked with a task of deciding

quickly which approach or decision to put forth and whether to adopt Dell’s model. Dell’s

model of virtual integration is a full swing the other way from Ford’s current vertical

integration model. There is a great deal to implementing a full virtual integration model

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successfully. The best approach may not be a full commitment to virtual integration due

to the over complexity of Ford suppliers compared to Dell. The approach to adopt the

parts of Dell’s model which will be seen as feasible may be optimum decision. The overall

cost to implement a virtual integrated system may not be feasible or successful. There

are certain aspects of buying a car and buying a computer that have similarities although

they do drive different behaviors.

Alternatives and Options

1) Keep its existing supply chain

a) Advantages: No major changes and additional costs involved.

b) Disadvantages: Ford’s IT will eventually become obsolete and Ford will slip away

from not embracing technology across its organization.

2) Create mix of online and offline operations and put processes & procedures in place

to enable customization and ordering by customers over the internet but maintain

physical dealerships and FRN’s.

a) Advantages: Customization to clients, start of vertical integration,

b) Disadvantages: Could be costly, time consuming, requires internal and external

changes which are not easy to handle and integrate with other operations.

3) Create a virtually integrated supply chain based on Dell's model. Ford and all its

suppliers would share information between their systems and the Internet to coordinate

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the flow of materials and production. All customer orders would be taken either via Ford's

web site or at the dealership via Ford’s intranet and then built. A pull system would be

implemented completely.

a) Advantages: Customization to clients, start of vertical integration in the supply chain.

b) Disadvantages: Ford's traditional processes and production methods would have to be

changed to make full of this new form of supply-chain management. It is a very costly

and time consuming activity, the difference in the two industries makes it a risky option.

Recommendations

In order for Ford to keep embracing technologically they will need to keep their Tier 1

suppliers on track with them and develop direct links to Tier 2 suppliers. Ford facilitate

setting up a web-based supply chain system that would allow the Tier 1 suppliers to use

their advanced IT capabilities without having to invest a lot of capital in emerging

technology. This would allow Tier 2 suppliers to access the system to input progress of

production as well as to take part in future designs. There are numerous reasons why

this web-based supply chain would be beneficial to Ford and its suppliers. First, suppliers

would be able to work off of a central design database in which Ford could control their

level of access. Due to Ford’s aggressive purchasing strategy a discrete access to supplier

costs the lower tier suppliers would not disclose costs and contract terms between

suppliers. Second, Ford would be able to control the technological level that it would like

to operate at. Each supplier would have their access limited depending on the functions

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needed. Ford would be able to update and modify the program with little or no program

changes needed on any of the supplier’s systems. The system would be secured and

segmented to individual suppliers and the risk of proprietary information or software

getting out would be minimalized. Third, the initial investment for levels of suppliers

would be minimized. This could drive lower material prices and decrease the risk of losing

valuable Tier 2 or even Tier 3 suppliers. Currently the relationship with Tier 2 suppliers

does not exist. If something happened with the Tier 1 supplier, Ford would lose the

relationship with all of the Tier 2 suppliers working under that one supplier possibly. With

a direct relationship with the Tier 2 suppliers it would create a more secure environment

for that supplier because they would not only have a relationship with the Tier 1 supplier

but also directly with Ford.

Ford could change focus within the purchasing department by realigning them with the

product development area leading to cost reduction and increased efficiencies. The

purchasing team could provide proposals to standardize components the engineers

should use so that purchasing can decrease the batch cost of a component by ordering

more without running the risk of building large amounts of inventory. In addition to

standardizing, purchasing could source suppliers and analyze which one can provide

certain components at the most reasonable price based on batch run size. Purchasing

would then work directly with product development and design to use that component in

a new or existing designs.

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One of the challenges faced by most manufacturers, including Ford is forecasting. Ford’s

current model does support the “Pull” system and automobiles are just a “Push” into the

end dealerships. Ford has internet sites in place today which would be not too far from

the Dell Model. You essential chose your model and add options. A V6 engine or a V8

engine is comparative to an Intel I5 processor to an Intel I7 processor. The internet site

would need to have the ability for a customer to essential build their automobile the same

as a computer and request a quote or price. The different base level models would be

available at the dealerships for a test drive. The order would be placed by the dealership

or from the online quote provided by the customer. The financing and arrangements

would take place in the traditional sense at the dealer. This would drive the dealerships

to understand and possibly forecast for base model requirements. The vehicles would be

then manufactured and suppliers would provide the parts required to meet the specific

customer orders.

Implementation

The recommendation is for Ford to extend its IT investment by going partially to the Dell’s

model of supply chain. There are parts of the virtual integration model used by Dell that

do not fit Ford’s model and they need to be discarded. The dealerships would still play a

role in the distribution since we understand the need for customers to still test drive and

sit in the vehicles as virtual tours does not do it for them. The IT systems should be

centralized since its Tier 2 and Tier 3 suppliers might not be able to update their IT

infrastructure as frequently as Ford or have the money to invest. Suppliers can have

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access to Ford’s design database while Ford controls the access and functionality as

required. The whole coordinated system would ensure a smooth flow of materials and

reduced bottlenecks and enhance the efficiency of the supply chain giving a competitive

edge to Ford. The dealers should play a more important role in forecasting customer

demand and Ford should explore the option of outsourcing it to a company who is

specialized in forecasting systems.

Monitor and Control

Metrics will be an important part of determining the success of the changes and

investments put forth by Ford Motor Company. Some key measurement will be

manufacturing efficiencies, cost control, supplier performance and Order to Delivery

times. Manufacturing efficiencies will be measured by the number manufacturing line

changeovers and/or model changeovers. Supplier performance will be measured on the

basis of their ability to supply the right parts required and on time. Another important

measurement of a successful automobile manufacturer is the recall figures. This would

also allow Ford to recognize a low quality or off spec supplier. And the last area to

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monitor and provide metrics on would be the overall order to delivery time. The bar has

been set at 15 days. With the new supply chain in place it may be reasonable to put in

a target of less than 15 days based on performance.

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