Ford Motor Company:
Supply Chain Strategy
1
New Business Model
• Companies like Cisco and Dell, had aggressively used
technology to reduce working capital and inventory.
Crucial to Ford’s future is how Ford should use emerging
information technologies (e.g., Internet technologies) and
ideas from new high-tech industries to change the way it
interacted with suppliers.
• Corporate staff members began to study Dell model.
Some argued that the new IT made it inevitable entirely
new business models would prevail, and that ford needed
radically redesign its supply chain or risk being left
behind. These group favored “virtual integration,”
modeling the Ford supply chain on that of Dell.
• Another group believed that the differences between the
auto business and Dell were important and substantive. It
was different to determine the appropriate and feasible
scope for redesign of the process.
2
Company and Industry Background
• Ford was the second largest industrial corporation in the
world, with revenues of more than $144 billion and about
370,000 employees. Operations spanned 200 countries.
The company’s core business is the design and
manufacture of automobiles for sale on the consumer
market. The company was the world leader in trucks.
• In 1998, Ford had amassed profits of $6.9 billion and
return on sales was trending solidly upward. It had taken
over the U.S. industry lead in profit per vehicle ($1,770)
from Chrysler.
• The auto industry had grown much more competitive over
the last two decades. The industry was also facing
increasing over-capacity (estimated at 20 million
vehicles). Ford and the other large auto-makers were
moving toward industry consolidation to take advantage
of their size and global presence.
3
Ford 2000 Restructuring Plan
• In 1995, ford had embarked on an ambitious restructuring
plan called Ford 2000.
• Ford 2000 called for dramatic cost reductions to be
obtained by reengineering and globalizing corporate
organizations and processes.
• Major reengineering projects were initiated around major
company processes, such as Ford Production System
(FPS) and Order-To-Delivery (OTD), with goals such as
reducing OTD time from more than 60 days to15 days.
• Ford’s new global approach required that technology be
employed to overcome the constraints imposed by
geography in information flow. Teams on different
continents needed to be able to share information and
worked together as if they were in the same building.
• New CEO Jac Nasser emphasized on shareholder value
and customer responsiveness.
4
Internet Revolution
• Ford launched a public Internet site in mid-1995; by mid1997 the number of visits to the site had reached more
than 1 million per day.
• A company-wide intranet was launched in mid-1996, and
by January of 1997 Ford had in place a Business-ToBusiness (B2B) capability through which the intranet
could be extended in a secure manner into an extranet,
potentially connecting Ford with its suppliers.
• Ford teamed with Chrysler and General Motors to work
on the Automotive Network Exchange (ANX), which
aimed to create consistency in technology standards and
processes in the supplier network.
5
Ford’ Existing Supply Base
• In the early 1990s, Ford had begun to actively decrease
the number of suppliers and develop long-term
relationships with a subset of very capable suppliers who
would provide entire vehicle sub-systems. These “tier
one” suppliers would manage relationships with a larger
base of suppliers of components of sub-systems -- tier two
and below suppliers.
• While first tier suppliers had fairly well developed IT
capabilities, they were not able to invest in new IT at the
rate Ford could. Also, the IT maturity decreased rapidly in
lower tiers of the supply chain. This supply base was
different in its nature and complexity from Dell’s.
• Another major difference between Dell and Ford was
organizational. Ford’s purchasing organization had
historically played a more prominent and independent role
than Dell’s.
6
Ford Production System
• Modeled roughly on the Toyota Production System, FPS
was an integrated system aimed at making Ford
manufacturing operations leaner, more responsive, and
more efficient.
• One important part of FPS was “Synchronous Material
Flow” (SMF), which 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.”
• The vision was of trucks constantly in motion in
continuous circuits between suppliers and Ford, feeding a
process that worked like a finely tuned and smoothly
running system.
7
Order To Delivery
• The purpose of the OTD project was to reduce to15 days
the time from a customer’s order to delivery of the
finished product - a significant reduction versus the
present performance of 45-65 days.
• Ford’s approach to implementing and improved OTD
processes relied on several elements: 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
“mixed centers” that optimize schedules and deliveries of
finished vehicles via rail transportation; and 4) a robust
order amendment process to allow vehicles to be amended
for minor color and trim variations without having submit
new orders.
• The OTD vision was to create a lean, flexible and
predictable process that provide consumers with the right
products in the right place at the right time.
8
Ford Retail Network (FRN)
• One of the principles of the FRN was to buy all the Ford
dealers in a local market so that the dealers were in
competition against the “real” competition (i.e., GM,
Toyota, Honda), rather than with each other.
• The overriding goal was for the consumer to receive the
highest level of treatment and to create an experience they
would want to come back to again and again.
• The number of showrooms would be consolidated to
focus resources on creating a superior selling experience,
while the number of service outlets would increase to be
closer to customer population centers.
• Ford expected personnel and advertising cost savings, as
well as inventory efficiencies due to economies of scale
and greater use of the Internet.
9
The Decision
• Teri Takai, Director of Supply Chain Systems, had set
aside this time on her calendar to contemplate
recommendations to senior executives.
• Whatever she decided, she would have to do it soon.
Meetings were already scheduled with the VP of Quality
and Process Leadership, and from there the
recommendations would move upward, eventually to
CEO Nasser.
• She perused the neatly prepared documents by her staff.
They included a comparison between Dell and Ford on
many important dimensions (Exhibit 1) and a shift from
“push” to “pull” processes (Exhibit 2).
• What should she recommend to senior executives? Note
that whatever she decided was extremely important to
Ford’s future.
10
Traditional Model Versus Direct Model
Traditional Model
Suppliers
Distribution
Channel
Manufacturer
order
Customer
delivery
Dell Model
order
Suppliers
Customer
Dell
delivery
11
Enterprise Model Comparison
Dell
Operating Principles
Customer
Intimacy
Ford
Breakthrough Objectives / Key Initiatives
Demand to Delivery
ford Retail Network
Demand
Pull
Ford Production System
Order to Delivery
Supply Chain Mgmt Leadership
Velocity
Order to Delivery
Ford Product Development System
Virtual
Integration
Fixed to Variable cost Shift
Modular Assembly
“Extended Enterprise”
12
Enterprise Model Comparison
(continued)
Customers
Customers
order
Dealers
delivery
Ford Retail
Network
OTD
Order
Mgmt
Sales
R&D
Assembly
FPDS
DTD
Commodity
Suppliers
Bill of
Material
Outbound
Logistics
Component
Suppliers
FPS
FPS
CFOP
Plant / Site
Operations
Supply Chain
Leadership
Inbound
Logistics
Suppliers
13
Exhibit 2 Moving from Push to Pull
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
14
Exhibit 2 Moving from Push to Pull
Design
Marketing
Process
Push
Design strategy
Please everyone
Pull
Mainstream customer
wants
Vehicle
combinations
More is better
Minimal
Pricing strategy
Budget-driven
Market-driven
Vehicle purchase
incentives
Higher
Lower
Manufacturing Capacity planning
and Supply
Schedule and build
stability
Dealer
Network
Multiple material/capacity Market-driven (no
constraints, FPV/CPV+10%
constraints, driven by
for vehicle, +15% for
program budget
components
Maximize production make whatever you can
build
Schedule from customerdriven order bank, build to
schedule
Dealer ordering
Order based on allocations Order based on customer
and capacity constraints
demand
Order to delivery
times
Inventory
Longer (60+days)
Shorter (15 days or less)
High with low turnover
Low with rapid turnover
Dealership model
Company controlled
Independent dealerships,
negotiations with company dealerships (Ford Retail Network)
15