Supply Chain at Ford vs. Dell

Supply Chain at Ford vs. Dell

Supply Chain Management -- SCM is fundamentally a process that entails the flow and conversion of materials and other resources into products and services, which fulfill the demands of the ultimate consumer. Supply Chains are considered as regards processes, activities and organization. The processes link the activities which carry out this transformation. Processes focus towards the end product for an end user in mind. The importance of managing a supply chain has been there ever since the days of Ford Plant at River Rouge when companies wished to own all of the activities included within the supply chain and as an alternative have recently relied increasingly on external partners. Dell follows a new approach, wherein it produces very few of its own products, depending on external suppliers, procurement and inventory management. (From Markets to Networks: The Concept of Supply Chain)

Supply Chain diagram

(Retrieved From Markets to Networks: The Concept of Supply Chain)

(i) Situational Analysis:

Ford:-

Ford is the largest manufacturer of trucks and it ranks second in the manufacture of cars and trucks taken together thereby marketing and selling roughly 7 million vehicles worldwide armed through its seven brands. Ford has a workforce of 3, 45,000 spread over in its production facilities, offices and laboratories to cater to its customers in more than 200 nations and territories. Globally, it is also among the largest providers of financial services through its 2,400 branches spread over 33 nations. (Cisco signs pact with auto-xchange, a Ford/Oracle joint venture; becomes equity partner)

Considering its scale, it has a mammoth 200,000 part numbers, 3,100 suppliers, and 5,100 dealers. The U.S. auto industry until the present has continued with the policy of service parts replenishment strategy with several large one-size fits all local warehouses carrying high volumes of a wide selection of components that increases complexity, in the opinion of Don Johnson, Global Director, Ford Customer Service Division Parts Supply and Logistics -- PS& L. The novel segmented network caters to the same day or the following day repair needs and those which are planned and/or more serious needing second day delivery. Ford has embarked on a parts delivery network revolving around a customer centric model. The advantages of this model will be that it will enhance the Order Response Time -- ORT through segmenting parts for scheduled repairs at the dealer. This design strategy is a unique one as it utilizes decentralization and centralization concurrently to produce optimal service with reduced costs. (Supply Chain Collaboration and Visibility)

The new business model comprises of three warehouse categories viz (i) 19 High Velocity Centres -- HVCs concentrating on the faster delivery of smaller, high volume components to dealers on a daily basis (ii) 1 Low Volume / Low-Cub Centre or LV/LCC holding small, slow moving parts based on critical orders available within a 24-hours ORT. (iii) 3 High Cube Centres -- HCCs stock large-size inventory items supplied to the dealers within 24 to 48 hours ORT. The outcome of this will be that Ford seeks to attain increased fill, faster ORTs and reduced costs while delivering higher customer satisfaction from this network design. (Supply Chain Collaboration and Visibility)

Dell:

In 1994 Dell was a not a frontline PC manufacturer like it is today. Similar to a lot of other companies, Dell placed orders for its components and manufactured as per inventory following which it started to implement a new business model. Dell converted its operations to a build-to-order process, did away with its inventories by means of a Just-in-Time system, and sold its Computers directly to its customers and the results were outstanding. Through placing these new supply chains potential at the centre of its strategy, Dell developed a supply chain strategy which transcended the simple pursuit of efficiency and productivity of assets. But, Dell had to undertake a string of extremely difficult strategic tradeoffs so as to bring its functional activities to dovetail with its new business model. (Knowledge Zone -- Operations: Supply Chain Management)

Dell Computer is an acknowledged Case Study of build-to-order manufacturing system, on which is based on the integration of information technologies across every facet of the functioning of the company. Michael Dell describes his company as 'virtually integrated', which is different from vertically integrated. In the case of computing technology, vertical technology was required during the initial year as the supplier base was not properly set up, leaving companies without any means but to design and produce product components in-house. Under this scenario, the propriety technology which was costly was the main source of competitive advantage. (Dell's Made-to-Order System Leaves Competitors in the Dust)

Virtually integrated companies like Dell have secured direct relationships which bride the gap between customer, manufacturer and supplier according to Michael Dell. Virtual companies have accurate knowledge regarding how to add value and they have set up partnerships with the best category of suppliers. These suppliers are bound within their businesses and should show results up to the same quality, standards and metrics. Virtual companies exploit the Internet not just an additional facility, but as fundamental part of their strategies. It is by this process, that it can be used as a cross-traditional company-to-company boundary to attain virtual integration. (Dell's Made-to-Order System Leaves Competitors in the Dust)

(ii) Main Issues and Problems:

At Ford there were problems in its supply chain as the existing supply base was on several counts old. Since Ford had grown over the years, similarly had the supply base, to an extent where during the late 1980s several thousand suppliers of production material were present in an intricate network of business relationships. Suppliers were selected mainly on basis of cost and scanty attention was paid to the overall supply chain costs, inclusive of the complexity of dealing with such a huge network of suppliers. Starting in the initial stages of 1990s, Ford started to reduce the number of direct suppliers and Ford leaned towards longer-term relationships with a core group of efficient suppliers having potential of providing complete vehicle subsystems. These 1st -- tier suppliers would manage relationships with a larger base of suppliers of components or subsystems i.e. 2nd tier and below suppliers below them. (Article given by client)

Ford made available its competence to help the suppliers in bettering their operations through various techniques like Just-in-Time or JIT inventory, Total Quality Management -- TQM and Statistical Process Control -- SPC. As a reciprocal measure, Ford expected that for closer relationships and long-term commitments, the suppliers would lower their costs on a year-to-year basis. Whereas the 1st tier suppliers possessed properly streamlined IT capabilities they were incapable to invest in new technologies at the pace Ford could. Besides, the IT maturity decreased rapidly in lower tiers of the supply chain. On the other hand, Dell's supply base was different as regards its inherent nature and complexity.

An additional important difference between Ford and Dell was at the organizational level. At Dell the procurement activities reported into the product development organization. However at Ford, purchasing was organizationally independent of product development and had been since long till the present a potent force within Ford. Due to the total volume of materials and services that Ford procured, a slight lowering in procurement cost could outcome in very substantial savings. Accordingly, purchasing was involved closely in almost every product decision. The Engineers were taken into confidence to avoid discussing price while interacting with suppliers since price negotiation was the only realm of purchasing agents. (Article given by client)

The existing supply chain at Ford was the world's most complex one. Ford might be excelling in quality; nevertheless managing the inbound stream of deliveries from 4,000 suppliers spread across the globe to roughly 100 plants throughout the world constitutes a daunting task. Indeed the target at Ford since several years has been to formulate a procedure to optimize its immense and intricate worldwide production network and to exploit the Internet for exchanging and disseminating movement of materials and production planning data internally and with its suppliers and logistic service providers. Figures speak eloquent regarding the complexity of the network at Ford. The logistic division engages an army of 300 logistics and trade professionals to tackle the inbound movement of materials to assembly points, finished vehicles from manufacturing facility to dealer point, and the global custom and trade operations for Ford and all of its associates. (Optimization Engine Powers Ford's Supply Chain)

Roughly, 4000 global suppliers deliver components to 31 power train plants manufacturing engine and transmissions, 13 stamping plants and 54 assembly plants. It is from these assembly plants, the vehicles move to more than 20,000 dealers in more than 200 nations. Ford consistently is the world's second biggest global trader. The company at any given point of time has half-million tons of freight in transit. The main challenge at Ford as the company steps into the 21st century entails re-orienting the company from a conventional iron-pumping industry loading the dealers with vehicles and expecting that consumers are able to find something which is almost what they desire to a build-to-order, consumer driven environment manifested by a lean manufacturing like Dell which is based on the principle of build to order and Toyota which is based on the principle of lean manufacturing.

This makeover requires a remarkable modification for a lot of different functions inside Ford, and as the company progresses to realign its order fulfillment and development of new product processes, Ford hopes the logistics group to supply -- right, timely, precise and repeatable logistics cost estimates based on potential sourcing situations. An additional major expectation revolves around synchronizing inbound logistics with asynchronous material flow objectives and strategies within the manufacturing facilities which is a challenge that has deepened with the increased volumes of rail traffic which have been diverted to truck because of repeated deficiencies in service in the rail system of the country. Overcrowding at the manufacturing facility frequently destabilize the motive of the planner to have inbound trucks dump their materials at specific dock locations and feed those parts and components directly to points on the various assembly lines. (Optimization Engine Powers Ford's Supply Chain)

In its place, Ford's practice was to rack up unexpected time and labor expenses by dropping and hooking inbound trailers and deliver those materials at different locations within the manufacturing facility resulting in-plant movements of plants and components. Confronted with the ground realities of its immense network, the global logistics technology group at Ford decided that the tools available with them falling short of the impending challenges. By visualizing at the makeover with in progress at Ford and taking stock of the situation regarding the manner in which the key drives of the business was looking for transformation, the company viewed and assessed the current technology and was quick enough to decide that was incapable of providing an answer to the problems of the customers. Ford realized that it was necessary to solve this business problem, as also the potential to integrate their technology with their partners.

Considering the complexity of the Ford network, the company realized that in order to provide an answer from an optimization perspective, it is pertinent to consider all the points and all of the material simultaneously. The holistic view gives an important edge compared to looking at things in a series. The logistics planning life cycle in case of new vehicles in designed in three stages at Ford viz strategic, tactical and operational. In the strategic stage, it entails sourcing decisions under which a lot of sourcing scenarios are developed based on a multiplicity of drivers -- plant locations, current trade issues, emerging market considerations for instance. Subsequently, this information is entered into the tactical planning process that is the starting point for essentially developing logistics plan. Logistics cost estimates are projected during this stage and thereafter entered into the strategic processes. With the sourcing setting starts to evolve, the operational planning process begins, and Ford starts delivering logistics needs to the company's Lead Logistics Providers -- LLPs. (Optimization Engine Powers Ford's Supply Chain)

These LLPs in turn devise the logistics network to support the plan. After examination of the current technology, which optimally suits the strategic responsibility of assessing sourcing decisions, Ford chose the most modern in its class - Supply Chain Designer which is a product from the SynQuest stable. But the examining team drew a blank as regards tactical planning is considered. The current technologies according to Ford were unable to provide an answer to the complex problem confronting the company. And apart from that they were unable to solve them in one go; rather it was tackling the problem in piecemeal. SynQuest presented a core competency in providing an answer to a huge, complex mathematical problem with an expanded cost perspective which is a matter critical to Ford.

At this Ford was satisfied with the collaboration with SynQuest which would permit the both the companies to share the investment in time and intellectual property ownership was suitable. The management at Ford influenced by the capability of optimizing Ford's inbound materials operation convinced that the company would benefit from the competitive advantage through research and self-examination intrinsic in the development process, agreed to a proposal for a collaborative effort with SynQuest to build an inbound planning system and the exercise was initiated in proper solemn. (Optimization Engine Powers Ford's Supply Chain)

Comparing the Built-to-Order or BTO model of Dell with Ford it is important to note that several historical legacies are present which impacts Ford's potential to graduate to a BTO model. Ford belongs to the automotive sector and is a 100-year-old company whereas Dell has just crossed 15 years. The product variety at Ford needs the inventory management of a huge amount of individual components and the most important is the inherent manufacturing cycle time due to which production capacities for individual components are chalked out with a much greater time schedule and cannot be altered quickly. There is a large complexity in process because of large no. Of suppliers in three tiers and business is conducted normally over telephone and Fax. The systems at Ford are incompatible with one another as Ford Credit is handled by DEC Corporation whereas IBM handles its components and service divisions and the various suppliers and dealers are put on a variety of systems. (Ford Motor Company: Supply Chain Strategy)

(iii) Generating and Evaluating Alternative Solutions:

Dell Computers has a virtual integration in place and it benefits from it as it solves production problems related to communications, coordination, control, and however at a cost of the increased overhead required to arrange production organization. Thus vertical integration is the capability to derive the benefit of vertical integration without having to incur the overheads. The major benefits achieved by Dell from virtual integration are (i) communication and coordination issues. Under this sphere vertical integration results in efficient and effective coordination by means of number of mechanisms that comprise chances of physical closeness, established styles of communications and increased enthusiasm to cooperate with other members of the identical group. (ii) Another benefit, which according to Michael Dell is connecting together, a business with partners who are regarded as though they are inside the company. (iii) improved control over the actions of suppliers and un-integrated partners can exert pressure over one another as transactions open up in the course of time (iv) real time responsiveness and inventory management under which real time updation of order status and the capability to verify the order status irrespective of the position of the order in the fulfillment process assisted Dell with differentiating capabilities and increased the inventory velocity. (v) Forecasting: Dell bears a direct relationship with the customers who are crucial to forecasting (vi) Dell's access to data is simple which is useful for forecasting and greater proportion of the data are already in Dell systems. But, in case of Ford, it is the dealers in whose hands are the direct data regarding the customer demand. (Ford Motor Company: Supply Chain Strategy)

On the comparison front of Ford and Dell as regards old channel players there are issues relating to (i) Costs of building web potential. (ii) Implications for information sharing (iii) Problems of linking suppliers and other external entities who are not so technologically progressive compared to Ford. (iv) Able to forecast what customers will buy for Ford and Dell. (v) Problems in executing a genuine BTO model for a product like automobile which is a complex product. In order to go for Internet linkages with its supply bases, it is pertinent to consider as to what are the practical challenges which has to be tackled by Ford. These are (a) problems in establishing B2B linkages and (b) Technological deficiency and sophistication which are present within the supply chain particularly at the lower tiers.

As an alternative measure, Ford must utilize Internet technologies to interact with its suppliers. (i) In order to tackle this problem, Ford should consider about its relationship not just with its suppliers, but also with the dealers and customers. (ii) When the supply chain staff members do a study regarding the Dell model in particular, they realize that 'virtual integration' should include design of not just the supply chain, but also the fulfillment, forecasting, purchasing, and several other operations which was for many years regarded as distinct within the Ford hierarchy. (Ford Motor Company: Supply Chain Strategy)

(iv) Recommending solution and justification:

In recommending a solution to Ford, it lies in using appropriate technology and the only correct approach to provide a solution is to consider, assess and suggest fundamental transformation of Ford's total business model and adopt the Dell model for its business. Dell's BTO capability considerably enhanced its demand planning and accuracy at the factory execution, reduce the order-to-delivery time and improve the customer service. Dell entered in partnership with world famous company Accenture in order to rapidly deploy a new high performance supply chain planning solution which is operational in Dell's plants throughout the globe. Dell has the capability to mould itself to the rapidly changing technology and maintain its position as a high performance business. (Dell: Build to Order Manufacturing -- Summary)

Since it was founded, Dell's forte has been to challenge traditional business knowledge. To give an instance, it pioneered direct-to-customer and global BTO processes in the high technology industry. Dell only assembles a computer following receipt of the actual order; hence every Computer that rolls of its assembly lines has already a waiting customer. This translates into very low inventory hold up levels, which is a tenth of that of several customers as also favorable cash -- conversion cycle. Till recently, Dell's supplier-management processes have characteristically depended on manual mechanism that restricted the company's capability to scale its international businesses, keep an optimal balance between supply and demand, and to respond changes in the marketplace in a jiffy. In order to solve this, Dell embarked upon an initiative to enhance and automate its factory-scheduling and demand-planning potentials. In order to drive that initiative, there was a business and technology ensemble which was represented by Dell which consisted of servers, storage systems and supply chain specialists; Accenture included program planning and management, business processes and system design, technical architecture, and integration services, and i2 which is a supply chain planning and management application. (Dell: Build-to-Order Manufacturing -- Business Challenge)

As a first step of the solution Accenture observed that normally a customer's order history and a business forecast are utilized as the basis for planned purchasing and production activity. The refinement processes at Dell looked forward to take order fulfillment nearer to real time through concurrently evaluating supply constraints, capacity at the factory, shipment constraints and the particular needs of every customer order. Accenture realized these capabilities through its customization, implementation and integration of i2 Factory Planner which looks after manufacturing scheduling, i2 Supply Chain Planner handling MRP and inventory planning and i2 Collaboration Planner addressing communications with suppliers and logistics operations. Through it for the very first time that at Dell all the 3 modules were executed simultaneously in a BTO setting. The complete solution was carried out in "Wintel" environment completely on Dell PowerEdge Servers and PowerVault storage products, an initiative which had the potential of lowering ownership costs by upto two thirds compared to a Unix-based environment. Also it was implemented in mere 110 days which is 50% of the time consumed by earlier implementations of i2 software of these proportions. (Dell: Build to Order Manufacturing -How we Helped)