CASE 2 Ford Motors Group ITStalwarts

7/30/2019 CASE 2 Ford Motors Group ITStalwarts

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Group 2 IT StalwartsBalaji Kannan

Carlos SalvadorGary KwongKathleen OjoKurtis Franklin

I N F O 6 0 9 F a l l 2 0 1 1C a l i f o r n i a S t a t e U n i v e r s i t y , S a n B e r n a r d i n o

Ford Motor CompanySupply Chain Strategy


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Table of Contents

TABLE OF CONTENTS..............................................................................2

GENERAL ISSUES....................................................................................3

BACKGROUND........................................................................................4

MAIN STAKEHOLDERS.............................................................................5

THEORY AND CONCEPTS.........................................................................6

SYMPTOMS AND PROBLEMS....................................................................7

CAPABILITIES AND OPPORTUNITIES.........................................................7

ALTERNATIVES.......................................................................................8

EVALUATION CRITERIA:...........................................................................9

EVALUATION AND REVIEW......................................................................9SOLUTION 1: MAINTAINING STATUS QUO........................................................................9SOLUTION 2: DIRECTORDERFROMCUSTOMERSANDDELIVERYTHROUGHDEALERSHIPS..........10

BEST SOLUTION & IMPLEMENTATION PLAN............................................11SOLUTION 3: INTEGRATED SUPPLY CHAIN:......................................................................11

CURRENT STATUS UPDATE....................................................................14

REFERENCES........................................................................................16

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General IssuesThe business strategy for Ford for a couple of decades was to compete in the

market with its own supply chain -- multi-tiered suppliers and dealernetworks. With globalization and much more nimble competition from Asianmanufacturers, this approach of managing vertical silos was no longer anoption.

Ford needed a strategy centered on a newer concept that aims to takecomplexity out of the supply chain, and enhance information progression inmultitude of ways. Business could not be viewed as a sequential processsimilar to an assembly line anymore. Ford's former business model centeredon coming up with ideas, studying those ideas, obtaining full approval for theideas, and understanding how to staff and evaluate the business results.

With the paradigm shift to consumer-centric from production-centric, this oldmodel was no longer relevant. The speed to market and responsiveness toconsumer needs became the critical factor and success enabler.

Ford looked at companies like Dell, with its innovative supply chain modelbased on "Order to Delivery. How much of Dell's process Ford could mimicsuccessfully and deliver results was unknown. The objectives for Ford were:

1. Drive costs out of supply chain2. Improve product quality and reduce cycle time3. Integrate more closely with Tier-1 Suppliers and reduce the complexity

of the sourcing organization

4. Make information available to the whole supply chain simultaneouslyunlike the cascade process that may take days, weeks or even months.

5. Eliminate organizational and procedural redundancies6. Realize economies of scale in manufacturing and purchasing

Ford looked at Information Technology as an enabler of the reengineeringand business transformation projects. IT became the main tool that helpedFord Motor Company drive their transformation throughout the enterprise.

The transformation was necessary as Ford faced a major challenge in itsexisting supply network. Suppliers were picked on cost to Ford with little orno concern for total supply chain cost. Complexity of interactions was veryhigh, and the number of tiers and partners was staggering. The time tomarket for the products was very high because of complexity incommunication and decision-making. Ford Motor Company had a 100-yearinertia to overcome. As Ford Motor Company grew in size, the "why change aworking model" attitude lead to a buildup of mediocre practices andinefficiency. This inertia led to:

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Decreasing market share with increased competition from European

and Asian car manufacturers

Transforming from a linear, top down organization to nimble, net-ready

organization

Mounting cost pressures as margins were becoming lower More demanding customers as Ford moved away from customers with

its heavy organizational structure

Fractured or fragmented automotive market place with myriad ofsuppliers

Multi-tiered supplier base leading to inefficiencies in procurement

Focus on company profitability and not supply chain profitability

Lack of accurate demand forecasting

Competing dealerships within a local region

Fractured vision in the organization and conflicting objectives

BackgroundIf Ford had to live up to its founder's vision of providing the customer withthe right product at the right time and at the right price then it had toradically change its strategy and revive its legacy as a great company. Theturnaround was tough and the senior executives of Ford Motor Companyrealized that.

In 1995, a new vision "Ford 2000" was created. Its goal was to dramaticallyreduce costs by reengineering and globalizing the corporate organizations

and processes. Consolidation of myriad product development centers intofive Vehicle Centers was a means of achieving this goal.

As a part of this initiative Ford realized that in order to gain benefits from itssuppliers, it should share its knowledge with its suppliers, provide supplierswith tools and technology to enable them improve supply quality at a lowerprice. The fragmented automotive supply market needed to be unified toachieve this goal. In 1997, Ford initiated the Automotive Exchange alongwith its competitors General Motors and Chrysler. Unlike Ford of the past, thenew Ford shared information to enhance the overall supply chain profitabilityby providing those key supply chain levers of 'aggregation' and 'economies

of scale' to its suppliers.

The Automotive Exchange was possible with the growing Internet capabilitiesand Ford embraced the technology successfully. It used the web to improveits communication with suppliers in real time, increase healthy competitionamong suppliers and directly having an impact in the lead time for vehiclesto reach the market.

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In 1999, when Jac Nasser took over as CEO, Ford progressed beyond costreduction into a consumer centric organization. The focus shifted toincreasing shareholder value and increase customer responsiveness. It isthen Ford looked at best practices in the supply chain world and the Dellstrategy seemed promising. It was a completely different industry with non-

comparable products and service. It was not an easy path for Ford but therewere forerunners in the automotive industry who have achieved theflexibility and responsiveness without compromising on containing costs.Toyota and Honda were successful contemporaries with streamlinedprocesses, reduced inventories and a highly focused consumer orientation.

The second major issue that Ford had was managing the cultural shift. The"One Ford" vision within the company and with its suppliers was the target.Downsizing the workforce, reducing facilities without compromising onresponsiveness, retraining employees, suppliers and dealers to the newsystem was critical to the mission's success. Ford achieved most of this by

leveraging on the IT infrastructure, the Ford Production System and sharingknowledge with its suppliers. At one point, in 1997, Ford had close to350,000 employees worldwide. In 2010, Ford has been able to achieve thefinancial targets with 164,000 employees worldwide or close to 50%reduction in workforce. 200 plants were reduced to 70. The number ofbrands was cut down and newer models reached the market sooner thanbefore.

Main StakeholdersThe key stakeholders in the Ford 2000 initiative were the Ford stockholders,

Ford Executives, Ford Suppliers, Ford Customers, Ford Employees, Dealersand their employees, and Competitors.

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Theory and ConceptsOld Business Model: Maintain multiple but disconnected suppliers, sequentialdecision-making process [come up with ideas, study those ideas, get fullapproval of ideas, make staffing decisions based on results expected].Production centric. It was a push system.

New Business Model: Customer centric. Pull System. Speed to market,responsiveness to customerFord had several key trends that they wanted to follow such as:

1. Global Market

2. Ford 2000

3. The need to improve quality and reduce cycle times while also

lowering the cost of developing and building cars.

4. Reducing OTD from 60 days to less than 15

5. Fords Existing Supply Chain and customer responsiveness initiatives

Values:1. Improve quality

2. Maintain a hold on to the global market

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3. Reduce Cost

4. Increase Shareholder Value

5. Provide expertise to supply base

Symptoms and ProblemsAn automobile consists of some 20,000 parts. In order to source all of theseparts, Ford had developed relationships with thousands of suppliers since itsbeginnings. Ford had too many suppliers that were picked primarily on cost,rather than overall cost within the supply chain. This created a large complexnetwork of relationships that Ford had to constantly deal with.

The tier-one suppliers were supplied with IT-enabled cost savings techniquessuch as just-in-time inventory, total quality management, and statisticalprocess control. However, these suppliers were not able to bolster thesecapabilities and invest in more IT like Ford because of costs. These IT

capabilities were not adoptable by some of the lower tier suppliers becausethey lacked IT sophistication.

Since an automobile is a lot more expensive than a computer, implementingDells model of virtual integration will be a challenge. It is doubtful thatFord customers would order a car online without driving it first. Also, sincethe automobile has much more parts than a computer, reducing the numberof suppliers will be difficult and the building of the vehicles will require morebusiness systems.

In adopting Dells virtual integration, Ford wanted to become closer to theconsumer by eliminating the middlemen. However, Ford had bottleneckswithin its supply chain that caused the order to delivery date of a vehicle tobe anywhere from 45 to 65 days.

Capabilities and OpportunitiesTo overcome this challenge, Ford reduced the number of suppliers it dealtwith directly. It provided expertise to its tier 1 suppliers to improve theiroperations using Just In-Time, Total Quality Management, and StatisticalProcess Control. As Ford moved to a more IT-capable buyer, the IT capability

of suppliers became a major limitation with their reduced ability to movequickly with costly IT investments.

This dichotomy between Ford as a buyer and their top suppliers being unableto keep up technologically was a fundamental difference over that of Dell.The supply base was more complex than Dell's. Additionally, purchasinghappened at Ford was central and almost an organization unto itself, whereDells purchasing worked very closely with product development.

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The Ford production system was based on a multiyear project that drew oninternal and external expertise. The key transformation was moving from apush system to a pull system with synchronized production, continuous flowand process stability. Ford defined a "Synchronous Material Flow (SMF)" that

focused on streamlined material flow and lean manufacturing conceptsaimed at improving flexibility.

Another goal was reducing order to delivery (OTD) time from 60 days to 15days. Improvements in the areas of demand forecasting, safety inventory of15 days of vehicles in each assembly plant, regional mixing centers to fast-track transportation and delivery and order amendment process. The visionwas to create a lean, flexible and predictable process.

AlternativesAlternatives Pro Cons

Status Quo Keep itsexisting supply chain

Least disruption to

the business

No cost of

reorganization

Unsustainable

Business will cease

to exist

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Direct order fromcustomers anddelivery throughdealerships

More responsive to

customer

Vertical integration

of layers between

customer and Ford

Dealer network

Centralized control

Potential for

increased revenue

Expensive

Discretionary

product purchase

without physical

product

Large integration

efforts

Company will grow

larger, more layers

Potential for

decreased revenue

Integrated SupplyChain

Bring suppliers in

earlier in the

product

development cycle Increased supply

chain profitability

Improved time to

market

Restructuring

Plant closures and

Layoffs

Divesting of non-core areas

Increased

investment in

technology

infrastructure

Evaluation Criteria:In order to compare the alternative solutions, a set of decision criteria that

covers the entire supply chain operation is necessary. The decision criteriathat we used to evaluate the solutions are:

1. Meet a high service level2. Improve capacity of suppliers3. Decrease lead-time4. Handle a variety of products5. Respond to wide ranges of quantities demanded6. Respond to changes in order made7. Price

Evaluation and Review

Solution 1: Maintaining Status QuoMaintaining the current system was not a viable solution for Ford MotorCompany. With the organizations inefficiencies and the business model nottuned to address the changed market landscape, it was not possible for Fordto address the challenges adequately.

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Criteria Result ReasonHigh Service level Unattainable The organization structure and

the current practices does notallow Ford to maintain high

service level.Improve capacity ofsuppliers

Unattainable The focus of Ford was to improveits bottom line. Low cost was theprimary driver for the suppliersand volumes were dwindling withdecreased market share

Decrease lead time Unattainable Goal of 15 days to delivery wasnot attainable mainly due toprocesses and communicationmethods followed.

Handle a variety of

products

Unattainable Product development was

fragmented and handling varietywas prohibitive due to costs.Visibility of customerrequirement was not complete.

Respond to quantitydemanded

Unattainable Push system with inventorybased order fulfillment.Customer requirement visibilitywas not complete

Respond to changes inorder made

Unattainable Push system with inventorybased order fulfillment.Customer requirement visibility

was not complete.Price Unattainable Margins were already low and

with unstructured production andorder fulfillment system it is waspossible.

Solution 2: Direct order from customers and delivery throughdealerships

A solution with a high customer focus would have addressed responsivenessbut with dealer organizations not buying-in to the Ford vision and mottowould be detrimental to the overall plan and hence the solution will not be

viable. Supplier or upstream components of the supply chain was also notstreamlined and hence Ford could not achieve the momentum it needed ifthis solution was implemented.

Criteria Result Reason

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High Service level Maybe Direct customer order provideshigh visibility to Ford. But dealerinvolvement is minimal and theyhold no stake in the solution.

Improve capacity of

suppliers

Unattainable Supplier processes and volume

constraints restrict Ford fromachieving this.

Decrease lead time Unattainable Supplier processes and volumeconstraints restrict Ford fromachieving this.

Handle a variety ofproducts

Unattainable The product developmentfunction and the facilities werestill fragmented and not tuned toaddress variety.


Yes Ford's production would followcustomer order. Due to

inefficiencies in the upstreamand downstream side in thesupply chain, this response willnot lead to increased revenues


Yes This would have been at anincreased cost to the customer

Price Unattainable Ford's responsiveness can onlybe met with increased costs inthis model as cost reduction isnot possible with inefficientsupplier and dealer

organizations. Therefore increasein price would have lead todecreased customer orders

Best Solution & Implementation Plan

Solution 3: Integrated Supply Chain:The best solution for Ford Motor Company is to implement an integratedsupply chain that allows it to take advantage of new technologies whilereducing costs. By better planning their use of raw materials, they can avoid

over stocks and under stocking of vehicles. Also, but simplifying the supplychain and integrating the purchasing process with the development of newvehicles, better decisions can be made regarding parts sourcing.

A fully integrated supply chain met Ford's strategic goals. Ford's vision of'One Ford' with the board approved "Four Point Plan" was achievable withthis solution.

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Four point plan

balance cost structure with revenue and market share; reduced time to market on cars that customers want and value;

financing the plan and rebuilding balance sheet;

working together to leverage resources around the world

Ford's new competitive strategy of high responsiveness to customer andhighly efficient internal system aimed at cost containment will address thefour point plan adequately as outlined below

Criteria Result ReasonHigh Service level Yes High order visibility

between dealer and Ford.The lead time reductionfrom 60 to 14 days allowsFord to maintain a highservice level.

Ford One Network

practices streamlineddealer processes andcurtailed competitionamong Ford Dealers and

focused competition withdealers of other carmanufacturers

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Improve capacity ofsuppliers

Yes A centralized logistical

network throughAutomotive Exchangeand specific initiativeswith key suppliers such

as Penske. Streamlined supplier and

carrier operation withimproved transportationnetwork. Penske trainedmore than 1500 tier-2and tier-3 suppliers instreamlining. Penskebecame Ford's strategicpartner in supply chainimplementation

Real time accountabilityprocedures combinedwith advanced logisticsmanagementtechnologies providevisibility to Ford

Decrease lead time Yes Ford Production System(FPS)

Consolidation of production

facilities to 5 vehiclecenters

Process reengineeringinitiatives with Ford andwith suppliers and dealernetwork

Handle a variety ofproducts

Yes Decreased lead times withstreamlined suppliernetwork

Reduced inefficiencies withFPS


Yes Flexibility introduced in thesystem with FPS

High order visibility acrossthe entire supply chainnetwork

Reduced lead times from 60

to 15 days allowed lowerinventory

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Yes Synchronized productioncapability due to FPSallowed Ford to quicklyrevise production schedulesor switch from inventory toaddress dealer andcustomer needs.

Reduced lead time strategy

and supplier alignment.

Price Yes Lower inventory costs Improved process

efficiencies leading to lowercost

Customer satisfaction

leading to higher margins

The various elements of the integrated supply chain: Network Design

Optimization, Carrier and Premium Freight Management, Information Systemand Technology Integration, better Finance Management benefits, helpedFord achieve the goals of the four-point plan.

Current Status UpdateFord Motor Company delivered solid results for third quarter of 2011 despiteuncertain business environment and weakening global economy. Accordingto Alan Mulally, the President and CEO of Ford, they achieved this byfocusing on developing outstanding products with quality, fuel efficiency,safety, smart design and value. Sales were up 14% from a year ago and themarket share increased in United States and Europe. The year 2010 endedwith $1.66 billion in net earnings and $128 Billion in total revenue.

Much of the turnaround since 2007 has come about due to the change inbusiness strategy and transformation that was seeded more than a decadeago. Jim Yost, the then Chief Information Officer for Ford said that thetransformation from the old view of a manufacturing company to aconsumer-oriented company was essential.

Fords goal was to provide products and services that consumers want, whenthey want them, the way they want them, and at an affordable price. Fordwas not far off from Henry Ford's initial goals when he began Ford MotorCompany and started assembling Model-Ts. In his days, Ford wanted todeliver affordable, personalized means of transport to consumers. As FordMotor Company grew to about 164,000 employees over 70 plants and across200 countries, it became harder and more complex to keep to those ideals.

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Since the Ford 2000 initiative, Ford has had a second restructuring plancalled The Way Forward that was announced in 2006. The companyreduced its size, which included the elimination of 30,000 factory jobs, aswell as the sale and discontinuation of many of their brands. Theconsolidation of brands began in 2007 with the sale of Aston Martin,

continued in 2008 with the sales of Jaguar and Land Rover, and completedwith the 2010 announcement that the Mercury brand would be discontinuedafter over 70 years of production.

The divestment of these properties brought additional resources to Ford thatallowed them to expand with new products such as hybrid vehicles, newcompact cars based on global platforms, and a revitalization of the Lincolnbrand.

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References

Penske. Ford Motor Company: Six Sigma Initiatives. Retrieved November 4,

2011.Article Stable URL:

http://www.penskelogistics.com/casestudies/ford2.html

Ford Motors. (2010). Form 10-K (Annual Report). Retrieved November 4,2011 from http://www.ford.com.

Ford Motors (1997).Ford Manufacturing Supply Chain - Video. You Tube. Article StableURL: http://www.youtube.com/watch?v=qyO9QSo0FjU

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CASE 2 Ford Motors Group ITStalwarts