Ford Motor Company Supply Chain Management Strategy

Introduction to Ford's Supply Chain

Founded in 1903, Ford Motor Company now manufactures or distributes automobiles across six continents. Ford employs about 164,000 people in approximately 70 plants worldwide. The company's automotive brands include Ford and Lincoln. According to Ford's corporate website, in 2010 Ford earned $6.6 billion — its highest net income in more than 10 years.

In 2010, Ford launched 24 new or redesigned vehicles in key markets around the world. Ford expects 70% of its growth in the next 10 years to come from its Asia Pacific and Africa region. By 2014, at least 80% of the vehicles sold under the Ford brand globally were to be built off 13 core platforms. By bringing suppliers into the development process earlier, Ford hoped to generate a healthier and more efficient supply chain.

The recession had at least one positive effect for Ford: it forced the company to closely examine its supply chains, analyze its assumptions, and move to eliminate major inefficiencies.

Ford's website describes the automotive supply chain as one of the most complicated in any industry. Automakers like Ford rely on thousands of suppliers to provide the materials, parts, and services needed to make their final products. Ford's direct Tier-1 supply chain involves a million people and more than 100,000 parts made at more than 4,000 manufacturing sites.

Many Ford suppliers serve numerous automakers, and each of those suppliers in turn has multiple suppliers of its own. There are often six to ten levels of suppliers between an automaker and the source of the raw materials that eventually enter the manufacturing process. As Ford points out on its Supplier Relationship webpage, the breadth, depth, and interconnectedness of the automotive supply chain make it challenging to effectively manage both business and sustainability issues.

Key Supply Chain Challenges

The global economic meltdown increased pressure on automotive executives to make sound decisions about their supply chains in hopes of improving performance. Ford faces a highly challenging and competitive environment in which the supply chain is viewed as a tool for improving organizational competitiveness. These conditions necessitate an efficient and effective supply chain strategy for Ford and its component manufacturers in order to meet changing consumer demands.

Ford must contend with serious challenges that include:

• Changing business conditions of the 21st century ranging from globalization and economic uncertainty to new technologies and increasing consumer demands
• Manufacturing processes that design and build vehicles globally
• Increasingly complex supply chains with challenges that undermine profitability and shareholder value
• Long order-to-delivery (OTD) lead times, unreliable production schedules, and excess inventory across the supply chain
• Lengthy demand planning cycles
• Lack of visibility into the supplier base

Today the automotive industry is characterized by fierce competition, fluctuating market demands, and rising customer requirements. The realities of the marketplace require Ford to manage shorter product lifecycles along with volatility in demand. While globalization has created significant opportunities, it has simultaneously put more pressure on manufacturers like Ford to enhance quality, increase organizational efficiencies, and drive innovative features into products in order to attract customers and expand into new markets. Industry analysts see Ford's vertical integration as a limiting factor in a world of changing customer preferences. Ford must manage these challenges to remain flexible and responsive to customer demand.

As a result, the last two decades have seen Ford move toward supply chain management (SCM) practices with leaner processes in order to increase supply chain efficiency by reducing costs and eliminating inefficiencies.

Supplier Relationships and the Aligned Business Framework

Ford describes the need to work jointly with its suppliers to deliver great products, maintain a strong business, and make a better future. In today's challenging economic environment, achieving lower costs, improving quality, and meeting sustainability goals require an unprecedented level of cooperation with suppliers and the maintenance of strong supplier relationships.

To this end, in 2005 Ford introduced an Aligned Business Framework (ABF) with strategic suppliers to accomplish these goals. In 2010, Ford expanded the ABF by designating additional companies to join the select group of key component and service suppliers chosen for closer collaboration on a global basis. With the new suppliers named in 2010 and early 2011, the ABF network includes 102 companies — 75 production and 27 non-production suppliers from around the world. Ford built the network into a diverse group of suppliers to help implement its global sourcing plans, thereby helping improve Ford quality and lower development and production costs.

Ford states its commitment to maintaining strong relationships with its ABF and other suppliers. Key elements of that commitment include:

• Deploying a single global product-creation process that combines aggressive execution of product plans with minimal variances
• Enhancing process stability, commonality, and reusability
• Improving communication by providing real-time performance data to the supply base
• Providing suppliers with greater access to senior Ford managers in small-group settings
• Establishing organizational stability models in manufacturing, product development, and purchasing
• Improving order fulfillment
• Engaging the supply base in discussions about process stability, incoming quality, and corporate responsibility, and involving suppliers in coalitions to create awareness of industry issues

According to Ambe and Badenhorst-Weiss (2010), the automotive industry is composed of supply management and physical distribution management. The industry supply chain ranges from producers of raw materials to assembly of the most sophisticated electronic and computing technologies. Major components of the supply chain include Tier 1–3 suppliers, OEMs, distribution centers, dealers, and customers. Most OEMs create 30 to 35% of value internally and delegate the rest to their suppliers. Automotive manufacturers purchase entire subassemblies — such as doors, power trains, and electronics — from those suppliers.

Ford's desire to work with partners to outsource subassemblies is leading to radically new infrastructure to support design, procurement, and logistics processes. Some of the tools available to Ford to improve innovative ability, get vehicles to market faster, and reduce errors include:

• Computer-aided design (CAD)
• Computer-aided process planning (CAPP)
• Computer-assisted manufacturing (CAM)
• Computer-aided engineering (CAE)
• Concurrent engineering (CE)
• Product data management (PDM)
• Business process engineering

Source: Ambe and Badenhorst-Weiss, 2010, "Strategic supply chain framework for the automotive industry," p. 2118

Lean and Agile Supply Chain Strategies

Ford's supply chain strategy is part of its overall business strategy. This involves decisions relating to the selection of suppliers, the location of facilities, and the choice of distribution channels. Accepted best practices now recognize that "one size does not fit all" when it comes to designing a supply chain strategy that must support a wide range of products with different characteristics.

A lean supply chain involves a strategy that produces just what is needed, when it is needed, and where it is needed. The primary objective of the lean supply chain can be implemented by integrating the most basic form of data communication on inventories, capacities, and delivery plans and fluctuations, using just-in-time principles. The lean supply chain is mainly concerned with cost reduction achieved by operating basic processes at minimum waste. Customers in lean supply chains receive value through low production costs, and logistics are achieved by using all available synergies and economies of scale. However, because the lean supply chain is a low-cost strategy, it is unable to deal effectively with turbulent market conditions.

The agile supply chain, on the other hand, focuses on responsiveness to customer demand. The drivers behind the need for agility stem from the rate of change and uncertainties in the business environment. The main focus is on running businesses in network structures with an adequate degree of agility to respond to changes, anticipate future shifts, and seek new emerging opportunities.

By 2003, Ford was still using an order-to-delivery (OTD) process, and one of its primary strategic goals announced that year was to decrease OTD from 60 days to less than 15. While Ford continues to move in the direction of agility, industry experts characterize its supply chain strategy as more lean than agile.

With respect to supply chain management, Henry Ford's original goal was to achieve total self-sufficiency by owning, operating, and coordinating all of the resources needed to manufacture an automobile. By the 1930s, this goal was realized at Ford's Rouge Factory located just south of Detroit.

Nearly a century later, Ford's manufacturing strategy and supply chain structure is nearly the exact opposite of the Rouge Factory's self-sufficiency model. Because Ford manufactures only approximately 20% by value of its production parts, components, and assemblies, the remainder of its production is provided by an external network of partners and suppliers. As a consequence of this strategy, Ford has experienced:

• Loss of visibility and control of a strategic commodity category and significant cost driver
• Fragmented metals spending that reduces purchasing leverage and priority status with steel producers
• A more complex and extended planning process for the entire supply network
• Exposure to price and supply volatility as well as financial instability in the supply base
• Excessive parts and materials proliferation affecting capacities and inventory held at multiple points in the network

Ford made a strategic decision to take back control of its aggregate metals spending on behalf of its value chain. The company introduced a multi-tier procurement process to its North American parts-component supply network. The "buy-sell" process allowed Ford to control cost and supply by purchasing production volume directly from the source and reselling it in volume to external parts suppliers. This strategy effectively allowed Ford to become the single supply source to its sub-tier community — achieved without Ford taking ownership of manufacturing assets or assuming physical or financial inventory exposure.