Ford is one of the leading companies in the auto industry. The director of Supply Chain Systems at Ford was put in a tough position to make recommendations with regards to the company’s supply chain strategy. There are two groups within Ford that have two different opinions on how Ford should be using emerging information technologies and ideas from high tech industries, such as Dell, to change the way it interacts with suppliers. The first group argued that Ford should adopt Dell’s business model to improve efficiency and increase profits. This group emphasizes that Ford’s virtual integration should be the blueprint for what ford should attempt. On the other end, the second group believes that Ford and Dell operate in two different industries and it is not feasible to adopt Dell’s business model. This case study will demonstrate the toot causes of the problem and will present the reason why Ford should pursue with the mixed approach. Some of the solutions in the mixed approach are based on Dell’s business model, while the rest are not. These solutions are costly and time consuming, but Ford will eventually harvest the benefits of this approach.
Teri Takai, Director of Supply Chain Systems, is about to make critical recommendations to senior executives on Ford’s usage of emerging information technologies and ideas from high tech industries to alter the methods Ford interacted with suppliers. There are two different views on this matter. The first view, which is in favor of virtual integration, argues that technology became a major player in supply chain, and Ford needs to redesign its supply chain by adopting new technologies to prosper. Supporters of this view used Dell as an example of virtual integration. Dell utilized new technologies to cut down working capital and risk of inventory obsolescence. The other view was more conservative. Supporters of this view argued that the auto industry is much different the computer industry with regards to layers of suppliers, complexity of parts, and history. Ford supplier network is massive and has many layers and a lot of companies. The growth of Ford resulted in growing the supply base to reach several thousands of suppliers
in the 1980s. Even though Ford started reducing its supply base in the 1990s, there were still too many suppliers. In comparison to Dell, Ford needed thousands of parts to manufacture a vehicle, whereas Dell need few hundreds to manufacture a computer. This shows how complicated Ford’s supply chain versus Dell’s. Ford also has to controls the supply chain for its dealerships that are spread around the globe. The longer the supply chain is, the more problems would arise. For Dell, the supply chain is shorter and customers buy directly from Dell without going through dealerships or retail stores. Ford has no direct feedback from customers due to the fact that many of the dealerships were independent and not owned by Ford. Many Ford dealers were competing against each other’s instead of the real competition. For Dell, the situation was vice versa, Dell dealt and interacted directly with customers with no dealership involvement. While Ford’s first tier supplier has moderately developed IT infrastructure, they cannot afford to invest in new technologies to keep up with Ford’s pace. The lower tiers of suppliers have very weak IT infrastructure and technological advancements, which would limit Ford’s supply chain and increase lead time and cost. In Dell processes, demand forecasting is important, where changes are shared with suppliers instantly. This is not the case for Ford. Before the Order to Delivery project, Ford never involved dealers in the forecasting process. Environmental & Root Cause Analysis:
With returns of $144 billion, and 370,000 employees in 200 countries, Ford became the second largest industrial corporation worldwide. Ford’s main business is design and manufacturing of automobiles. Since 1903, Ford had produced more than 260 vehicles. The auto industry has been growing, at the same time some of the international automakers entered the US market and are competing fiercely with the US automakers: Ford, GM & Chrysler. With this tight competition, Ford and many automakers felt the need to move industry consolidation to reduce cost and improve quality. In 1998, Ford had profits $6.9 billion, and 3.9% return on sale. Ford has a huge supply based which was picked primarily based on cost. A lot of these suppliers lacked the IT infrastructure. Although Ford has good relationships with some of its suppliers, they aren’t treated as a part of Ford. On the other side, Dell’s suppliers have a very developed IT infrastructure and they are treated as
part of Dell, and they acted like one. Ford’s suppliers are unique with nature and complexity. For Dell, suppliers own inventory until it is used in production, whereas the situation is opposite for Ford. This affects Ford’s cash flow and turnover rate and puts a lot of pressure on Ford’s production facilities. It also makes Ford hold the risk of holding sizable inventories to produce end products. Ford is lacking on demand forecasting, changes are not shared with the supply base immediately. Dell utilizes new technologies to share changes with its suppliers. Ford’s organizational structure is another challenge, where Ford’s purchasing is independent of product development, even engineers cannot discuss pricing with suppliers. At Dell, the purchasing function works collaboratively with the product development team. With all these challenges in the US market, Ford initiated a restructuring plan called Ford 2000. This plan was aimed to reduce costs by reengineering and globalizing organizations and techniques. Ford introduced the Order to Delivery (OTD) where it aimed to reduce the cycle time from 60 days to 15 days. Ford also created the Ford Production System (FPS) which is similar to the Toyota Production System, and it was intended to streamline Ford’s operations and make it more productive. Another initiative Ford took was the Ford Retail Network (FRN), and the goal was to deliver a high level of customer service and maintain customer satisfaction. Alternatives & Options
Ford has some options with regards to using emerging information technologies and ideas from high-tech industries to change the way it interacts with suppliers. The first Alternatives to adopt Dell’s business model of virtual integration, where Ford would share information and systems with its supply base to coordinate inventory and streamline production. Ford would promote online customer shopping experience to receive orders and feedbacks and integrate them into Ford systems and its suppliers. This option has some advantages and disadvantages. It would improve the relationship between Ford and its suppliers, where information are communicated instantly between both of them. It would help in forecasting demand based on the information received and shared. It would also connects Ford directly to its suppliers and customers. This virtual integration would help Ford reduce its cycle time and costs dramatically, which would be reflected on the end products
prices. The major disadvantage of this option is the high cost and lengthy process to execute it. It does not involve Ford only, but its suppliers as well. Ford and Dell operates in two different industries, and each industry has its own features. There is a big chance that virtual integration might not work as well as it does in the auto industry due to the complexity of manufacturing process, consumer behaviour, and history. The second alternative is to maintain the status quo and wait for the new Ford 2000 plan to start giving results. This recent initiative proposed solutions for a lot of Ford problems including suppliers and usage of new technologies. The advantages of this alternative are that Ford has already in the middle of executing the Ford 2000, and it should be long enough until the results are revealed. It is a comprehensive plan where there was an initiative for almost every aspect of the supply chain. The main disadvantage of this alternative is that it overlooks the instant communication between Ford and its suppliers. The third alternative is the mixed approach. Ford would adopt some of Dell’s business Model, at the same time introduce other changes. Ford would pick the feasible and applicable operations of virtual integration that best fit the automobile industry. On the other side Ford would narrow down its supply base and increase tier 1 suppliers. Ford would encourage and coordinate with suppliers of sub-system components. This alternative would allow Ford to tailor the best practices for its needs, but it would be costly, time consuming, and changes would affect different parties of the supply chain. Recommendations & Implementation
Ford and Dell operate in two different industries that have different characteristics. Ford cannot copy Dell’s business model and expect positive results, but Ford can benefit from Dell’s experience. Based on the analysis of the above information and the study of this case, I would recommend to proceed with the third alternative. Ford has the organizational infrastructure to adopt and execute this alternative. Ford has a very well developed IT system and the resources to move on with these changes. Ford would update its IT system to share information with its supply base including tier 2 and tier 3 suppliers, where supplier would have access to Ford’s central data. Ford might have to team up with some of these supplier to develop their IT systems to ease the transformation and synchronization
of information. Ford would reduce its supply base as much as it could, by short-listing suppliers and encouraging sub-systems suppliers through incentives. Ford would re-discuss terms with its suppliers to pay for inventory only when parts are used in production. Ford would adopt new technologies to share real-time information with all its supply chain members. Ford cannot skip dealerships before reaching end users, but can use dealership as a demand forecast channel and to deliver high customer service. These changes would ensure the smooth flow production and eliminate bottlenecks , which would in turn increase efficiencies and revenues and reduce lead times.
Monitor & Control
Ford must monitor that actions that it would take to measure the success of changes. Ford would have to assign a team of IT specialists to monitor the transition of suppliers IT systems and to help with any challenges. Ford would monitor lead times for customer orders regularly to see if lead times are improving and to check for bottlenecks. Ford to create an interactive website to answer and address customers concerns and suggestions. Form to create a committee of different supply chain members to lead these changes and direct them. This committee would meet semi-annually to discuss the changes and to address any problems or concerns. Conclusion
Ford is one of the biggest car companies in the world. To overcome the challenges and to enjoy continuous success , Ford must adopt the above recommendations. The process is costly and time consuming, but it would pay off on the long run.