Ford Motor Company:
Procurement
• Background
• Business Process Redesign: Process, IT
• Results Obtained
• Implications: Process, IT
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FORD: BACKGROUND
Ford Motor Company Has Been Able to Improve Market
Share at the Expense of GM and Imports
U.S. Car and Light Truck Market Share
(1988 - 1992)
40%
35%
GM
30%
Imports
Ford
25%
20%
15%
Chrysler
10%
5%
0%
1988
1989
1990
1991
1992
• Ford is the fourth-largest industrial corporation in the world; the second largest
producer of cars and trucks
Ford exhibits good revenue and profit potential with a much leaner
organization than in the past.
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FORD: BACKGROUND
Ford Motor Has a Complex Manufacturing and Supply
Chain in North America
Ford Motors North America
Approximately
a
1,500 Suppliers
17
Production/Assem
bly Plants
Dealers
Fleet Managers
Government
Municipalities
Exports
a: Raw materials, components, and parts
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FORD: BACKGROUND
Ford Faces Severe Market and Customer Challenges
Current Challenges
What They Mean to Ford Motors
•
Increased foreign and domestic
competition
•
Reduced sales and prices
•
Shifting consumer demographics
•
Consumers demand higher-value cars at
lower prices
•
Industry-wide over capacity
•
Downward pressures on price
•
Increased attention to environmental
concerns
•
High cost of compliance (e.g., new fuelemission regulations)
•
Increased reliance on “automotive
systems” over just parts
•
Need to increase partnership with
suppliers and vendors
Since 60% of Ford’s manufacturing cost is explained by purchased
parts and materials, Ford is under tremendous pressure to achieve
lower cost solutions.
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FORD: BUSINESS PROCESS
Ford’s Traditional Procurement Process Suffered from
Many Roadblocks
Information
Exchange
TA
Same Part
Suppliers for
Multiple
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CE
PRI E
C
PRI
Manual
and redundant
procedures
Suppliers
are
Adversaries
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FORD: BUSINESS PROCESS
In Addition, It Was Paper-Based and Labor Intensive
“Old Process”
Purchasing
Accounts Payable
P.O. Copy
P.O.
P.O. Original
Receiving Documentation
P.O.
No
Invoice
(Sometimes received
before the goods arrive)
Payment
All Match ?
Yes
Obtain
reconciliation
information from
Purchasing and Receiving
Goods
Goods and Shipping Receipt
Supplier
Accounts Payable alone employed more than 500 people.
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Receiving
Department
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FORD: BUSINESS PROCESS
The Complexity of This Process Translated into Significant
Inefficiencies
• For a given order, Accounts Payable had to deal with three different
documents: purchase order, receiving document, and invoice:
- Accounts Payable had to match 14 data items among the three documents
• 80% of the Accounts Payable personnel efforts were spent on reconciling
mismatches:
- Requiring several weeks for resolution
- Triggering payment delays and inaccuracies (over- and underpayments) to suppliers
• Ford’s Accounts Payable headcount was 400% higher than that of other
automakers
• In addition, Ford’s policy of “multi-vendor sourcing” triggered limited ability
to take advantage of economies of scale and price reductions
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FORD: BUSINESS PROCESS
Ford’s Experience in Redesigning Provisioning Illustrates
the Pitfalls of “Just” Automating the Business Processes
• Ford’s initial disappointments stemmed from just automating information
without rethinking the business processes:
- Ford unsuccessfully attacked the problem for eight years, between 1980 and 1989, by largely
substituting IT for people
- “Despite automation, supplier payments involved a lengthy checking process … PO, invoice,
plant warehouse”
• Ford’s initial goal was to cut just 100 out of 500 provisioning jobs
• Totally re-engineering the process…enabled by appropriate
technology…allowed elimination of 400 provisioning jobs
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FORD: BUSINESS PROCESS
Characteristics of Ford’s New Approach to Procurement
• The creation of “Partnership” relations with suppliers
characterized by:
- A high level of information sharing
- A commitment to overall quality
Supplier
Management
- Cost reduction
- Joint problem solving
• Partners are selected based on quality, technology,
technical support, delivery, and cost
• Single-vendor sourcing
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FORD: BUSINESS PROCESS
Characteristics of Ford’s New Approach to Procurement
(cont.)
• Revolutionary path—cost-reduction effort aimed at
eliminating invoices instead of reducing the unit cost of
invoice processing
Process
• Redesign in the nature of exchange between the
partners—a “Virtual Organization” through a business
network redesign
• Elimination of redundancies in processing
• High level of information technology utilization (and
investment): IT is used as engine to alter the way work
is done
People and
Organization
• Decision-making responsibility by individuals executing
the tasks—payment authorization shifts to receiving
dock
• Employee empowerment
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FORD: BUSINESS PROCESS
Ford’s New Process Goes Beyond Simple Data Automation
to Use IT as a True Enabler
“Current Process”
Purchasing
Accounts Payable
Shared Database
Special Cases
P.O.
P.O.
EFT
Receiving
P.O.
Payment
Authorization
EDI
EFT
Yes
Electronic Match
of Received Goods
vs. P.O.
No
P.O.
Interactive Link
Goods
“Trading Partner”
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Return Goods to Trading Partner
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FORD: BUSINESS PROCESS
The New Procurement Process Is a Whole New Way of
Doing Business
Old
New
•
Multiple suppliers: suppliers are adversaries
•
Selected suppliers are “partners”—they share in the
success and failure
•
Spot purchases are common
•
Elimination of spot purchases
•
Minimal (mostly unidirectional) information
exchange with suppliers
•
High level of bidirectional information exchange
among the partners
•
Low employee empowerment—lack of decisionmaking authority and responsibility at the
execution level
•
Decision-making responsibility at the lowest possible
level
•
Potentially many interfaces with suppliers,
increasing the potential of error
•
One interface with suppliers
•
Paper and labor intensive—high administrative
costs, excessive routing of documents, duplicate
documents, link documents, manual matching
•
Electronic process with high IT utilization; matching
of purchase order with goods
•
Payments to suppliers are made upon receipt of
the invoice
•
Payment is made upon receipt of goods (in some
divisions, payment is made upon use of goods)
using “evaluated receipts” and EFT
•
Increased workload on the authorizing department
(Accounts Payable)
•
Accounts Payable personnel concentrating their
efforts on special cases only
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FORD: BUSINESS PROCESS
Information Technology Now Acts as an Enabler to the
Business Process
• On-line—shared database to facilitate simultaneous availability of required
information wherever needed
• Wireless data communication/portable computers—receiving-dock
personnel can send and receive information wherever they are
• Decision support system assisting reception clerk:
- Verifying shipments
- Authorizing payments to partners (combined with bar coding technology)
• Electronic Data Interchange (EDI) for transfer of purchasing orders, payment
notices, and other standard business documents:
- Direct Data Link (DDL) allowing suppliers to access Ford’s inventory systems to view real-time
production information to anticipate orders and prepare for production
• Electronic mail (E-Mail) for text-based messages accompanying the
transaction EDI data
• Electronic Funds Transfer (EFT)
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FORD: BUSINESS PROCESS
This Partnership and Process Redesign Effort Helped Ford
to Identify Further Value-Added Partnership Relationships
• Established partnership relations with equipment suppliers/manufacturers
to bring them into the process of product design early (“simultaneous
engineering”) and reduce the delivery time
• Entered into partnership relationships with transportation companies:
- Placing all responsibility for transportation and logistics with one company, to reduce total
transportation costs
- Improving discipline in the total transportation pipeline
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FORD: IT
Ford Continues to Find Innovative Ways to Use Technology
in the Procurement Process
• Ford now has improved its ability to trade computer-aided design and
manufacturing (CAD/CAM) files with suppliers through pioneering the use of
new EDI-based administrative processes
• Use of E-Mail to receive cost-saving designs from partners using preformatted forms that are entered into Ford’s database automatically:
- A potential cost saving tag of $500 - $600 mm/year
• It uses EDI to streamline the supply transportation process:
- High cost-saving potential, given that Ford buys 50% of its materials--both parts and raw
materials
• In addition, Ford suppliers now have a seamless way to transfer data files
(e.g., spreadsheets) with the company
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FORD: RESULTS OBTAINED
Ford Achieved Many Benefits from the Process Redesign
Cost Reduction Benefits
• Accounts payable staff reduction of 75%
(over 375 individuals):
•
Accounts payable in some divisions is
nearly 5% of old headcount dedicated only
to handling exceptional situations
Increased Quality
• Overall product quality and cost
improvements:
•
Suppliers are not consumed/concerned
about winning the next contract and selling,
but on improving product quality and cost
• Reduced inventories
• Achieved high levels of purchasing
economies of scale
• Elimination of overpayment
• Streamlined administrative functions—
practically eliminated paperwork and
indirect overhead
Supplier Benefits
• Reduces their cost of doing business with
Ford:
•
Less paperwork
•
Fewer errors
• Better production planning, leading to:
Staff Benefits
• Higher employee morale
• More interesting work
•
Reduced inventories
•
Improved product quality
•
Better delivery schedules
• Joint problem solving
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FORD: BEST PRACTICES
Ford’s Procurement Process Suggests Several Best
Practices
Operating
Procurement
Philosophy
• Form “partnership” relationships with trading partners
• Consolidate/reduce supplier base
• Shift focus from initial purchase cost to cost performance over
time
• Define and implement trading partners selection program
• Initiate formal supplier performance and rating program
• Institute long-term contracts with selected trading partners
Supplier
Management
• Move towards single sourcing:
-
Ford’s goal: to reduce the number of suppliers by one-third by 1995
• Maintain high level of information exchange with trading partners
• Encourage early trading partner involvement in product design
stages
• Provide suppliers with effective training
• Delegate quality inspection to trading partners:
- “Our goal is to have our suppliers be quality-independent”
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FORD: BEST PRACTICES
Ford’s Procurement Process Suggests Several Best
Practices (cont)
People and
Organization
• Empower employees
• Assist employees in performing their jobs through proper training
and tools (especially technology)
• Promote high employee involvement at all levels
• Use integrated teams including management and union
• Increased commitment to use Information Technology as a true
enabler:
-
Information
Management
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An integrated team representing MIS and all affected
functions/departments/ processes, including legal and auditing
Assessment of the “build” vs. “buy” options
Selection of the appropriate technology, network, and communication
architecture and standard plan of implementation
• Move toward a paperless process:
- Data system accuracy and security issues
• Ensure on-line availability and accuracy of all procurement process
information
• Provide trading partners with a seamless way to access
information
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Ford’s Organization Reinforces Satisfaction of Customer
and Supplier Needs
Ford’s Organization
People
•
•
•
•
Supplier
Needs
Leadership
Distributor
Needs
Internal
Organization
Needs
Effective, skill-based hiring
Train for skills and career longevity
Develop people for growth
Pay for performance:
- Use evaluations for development and
compensation
Structure
• Clear, actionable goals based
on issues customers and
suppliers care about
• Company’s heros get it right
the first time and take risks
• Two-way, frequent
communication
• Team-based
• Flexible
Culture
• Supplier- and marketfocused
• Empowered
• Continuous improvement
• Get it right the first time
Systems
• Clearly defined purchasing processes; one way to
do the work
• Measurement and reward systems aligned with
management goals
• Integrated information and automated systems
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FORD: IMPLICATIONS
Key Lessons Learned . . . Technology by Itself Offers a Limited Advantage, but
When Leveraged by an IT-enabled Process Redesign, the Result Is a Winning
Execution
• A pure automation approach to the accounts payable department would
have yielded a 20% reduction in headcount
• IT is a business investment, not an administrative expense
• Need for alignment between the organization structure and technology
• Electronic integration through innovative information exchanges offers a
serious alternative to vertical and horizontal integration
• Supplier involvement is critical
Pitfalls...
• Lack of a rigorous—and process driven—implementation strategy:
- Ford’s implementation took five years—much longer than it should have
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