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 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 Customer Intimacy Demand Pull Velocity Virtual Integration Ford Breakthrough Objectives/Key Initiatives Demand to Delivery Ford Retail Network Ford Production System Order to Delivery Supply Chain Mgmt. Leadership Order to Delivery Ford Product Development System Fixed to Variable Cost Shift Modular 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- 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 Vehicle combinations Please everyone More is better Mainstream customer wants minimal Marketing Pricing strategy Vehicle purchase Incentives Budget-driven Higher Market-driven Lower Manufacturing and supply Capacity planning Multiple material/ capacity constraints, Driven by program Budget Market-driven and (no constraints FPV/ CPV* + 10% for vehicle, +15 for components Schedule and build Maximize production make whatever you can build Schedule from customer-driven order bank, build to schedule Exhibit 2 Moving from Push to Pull Process Dealer network Push Pull Dealer ordering Orders based on Allocations and Capacity constraints Orders based on customer demand Order to delivery times Longer (60 + days) Shorter (15 days or less) Inventory High with low turnover Low with rapid turnover Dealership model Independent dealerships, negotiations with company Company-controlled dealerships (Ford Retail Network) 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 Automotive Employees Assets ($millions) Revenue ($millions) Net income ($millions) Return on sales Cash ($millions) Manufacturing facilities Market capitalization ($millions) Price-earnings ratio 5yr average revenue growth 5yr average stock price growth Dell 16,100 4,300 85,100 12,300 122,900 944 4,7000 7.7% 3.8% 320 14,500 3 (Texas, Ireland, Malaysia) 58,469 60 55% per yr 133% per yr Financial Services 363,892 194,00 30,700 2,200 7.2% 2,200 180(in North and South America, Europe, Asia, Australia) 66,886 10* 6% per yr 33.4% per yr Dell and Ford Compared Dell Processes 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 Ford Enterprise Model Comparison Ford Breakthrough Objectives/Key Initiatives Dell Operating Principles Customers Customers order Dealers delivery Sales OT D Order Mgmt FPDS Bill of Material R&D Assembly DTD Outbound Logistics Commodity Suppliers Component Suppliers Ford Retail Network FP S FP S CFOP Plan/Site Operations Inbound Logistics Suppliers Supply chain Leadership The End Any questions?