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Ford Motor Company: Supply Chain Strategy

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Ford Motor Company: Supply Chain Strategy

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Bus 754: Information Systems Management

Case Presentation:   Ford Motor Company – Supply Chain Strategy

Submitted by:   Jenny Binsfeld and John P. Williams

April 6, 2003

Since the Ford Motor Company’s incorporation by Henry Ford in 1903, its strategic focus has remained on automobile design and manufacturing.   Up until 1970, competition was from the two other manufacturers making up the Big Three Automakers; General Motors and Chrysler. However, starting in the 1970’s, foreign competition, mostly from Toyota and Honda, eventually lead to overcapacity within the industry.   As more and more developing and industrial nations encouraged development into the automobile industry, overcapacity in the automobile markets reached an estimated 20 million vehicles.

In 1995, in an effort to reduce cost and increase efficiency, Ford developed a restructuring plan called Ford 2000 that was to focus on globalizing corporate organizations and taking advantage of the economies of scale in purchasing and manufacturing by consolidating the North America, European, and international automobile operations.   Ford 2000 also called for a complete reengineering of several key company processes including Order to Delivery (OTD) and Ford Production System (FPS).   One of the primary strategic goals of Ford 2000 was to decrease OTD from 60+ days to less than 15.  

To help overcome information constraints in Ford’s new global approach, they launched a company-wide Intranet in mid-1996.   In addition, Ford further expanded upon that system to include business-to-business (B2B) capacity by January 1997 which also comprised the Automotive Network Exchange (ANX).   Ford’s public Internet site went live in 1995.   Internet usage exploded, and by mid-1997, Ford’s website was getting more than 1 million hits per day.   During this revolutionary time, Ford was honored as the most improved automaker in the 1997 JD Power Initial Quality Study; listed as number 4 overall behind Honda, Toyota, and Nissan.     

With an eye on the global market, each automobile manufacturer was looking to expand their global reach.   By mid-1998, Chrysler merged with Daimler-Benz. Several months later, Ford announced that it would acquire Sweden’s Volvo. Rumors of other mergers began to surface. By the end of 1998, Ford surpassed Chrysler in profit per vehicle ($1770) while total profit hit $6.9 billion.

In 1999, Jack Nasser, who was second in charge since Ford 2000 was initiated, took over as CEO.   Mr. Nasser had a reputation of being a cost cutter, a capable leader, and a senior manager focused on increasing shareholder value.

Today, the Ford Motor Company is the second largest industrial corporation in the world operating in 200 countries around the globe.   Ford employs more than 350,000 and revenues exceed $144 billion annually.   Since incorporation, Ford has produced over 260 million vehicles.   

Ford needs to address a couple of issues in trying to determine which information technology strategy will work best for supplier interaction as well as with their current engineering projects.

1)       Ford’s current supplier base:

a.        Ford recently decreased their supplier base to have a closer and more long-term relationship with fewer suppliers called ‘Tier 1’ suppliers.   These suppliers provide Ford with complete vehicle subsystems.   The Tier 1 suppliers work with multiple Tier 2 suppliers who provide the components that make up the vehicle subsystems.  

b.       The Tier 1 suppliers do not have the capital to invest in the new technologies that Ford seeks to get into.   However, the Tier 1 suppliers do have fairly solid IT capabilities, but these capabilities severely drop when dealing with the Tier 2 suppliers.

2)       Purchasing organization:

a.        Ford’s purchasing department is independent of the product development area.   However, purchasing has a strong dominance over the product design price negotiations because “a very slim reduction in purchasing cost could result in very significant savings” for the company.

b.       Dell’s vertical integration has these areas working very closely together. Could Ford also successfully merge these two areas?

3)       Forecasting within the Ford 2000 projects:

a.        Two key initiatives under the Ford 2000 project are the Ford Production System (FPS) and Order to Delivery (OTD).   The FPS project was geared at making Ford manufacturing operations leaner, more responsive, and more efficient by focusing on continuously flowing material through using vehicle in-process storage units and proper assembly order sequence.   The OTD project was started to reduce the order time from 60+ days down to only 15.  

b.       The accuracy of Ford’s forecasting is an integral step in being able to maintain the continuous flow of materials from suppliers as well as being able to turn the vehicles around within 15 days.   This is the first time that Ford had ever involved the dealers with forecasting the customer demand.

Recommendations

1)       In order for Ford to keep technologically advancing, they will need to keep their Tier 1 suppliers on track with them and develop direct links to Tier 2 suppliers.   Ford should invest in setting up a more web-based supply chain system that would allow the Tier 1 suppliers to use their strong IT capabilities without having to invest a lot of capital in emerging technology and allow Tier 2 suppliers to access the system to input progress of production as well as to take part in future designs.

There are several reasons why this web-based supply chain would be beneficial.   First, suppliers would be able to work off of a central design database in which Ford could control their level of access.   Price variable inputs could be independently established for each supplier so as to not disclose the actual cost of the material.   Due to an aggressive purchasing strategy, Ford does not like to disclose cost of contracts between suppliers.

Second, Ford would have more control in establishing the technological level that it would like to operate at.   Each supplier would have their access limited by functionality and need.   Ford would be able to update and modify the program with little or no program changes needed on any of the supplier’s systems.   Security of the system could be centralized and the risk of proprietary information or software getting out would be minimized.  

Third, the initial investment for both sets of suppliers would be minimized.   This could lead to overall lower material prices and decrease the risk of losing valuable Tier 2 suppliers.   Currently, the working relationship with Tier 2 suppliers is in fact non-existent. If something should happen with the Tier 1 supplier, Ford would essentially lose the relationship with all of the Tier 2 suppliers working under that one supplier.   Having a direct relationship with each Tier 2 supplier would effectively create a more stable environment for that supplier because they would not only have a relationship with the Tier 1 supplier but also directly with Ford.  

2)       Ford could successfully realign the purchasing department with the product development area and would cut costs and increase efficiencies along the way.   The purchasing team could work out proposals as to what standard components the engineers should use so that purchasing can decrease the batch cost of a component by ordering more without running the risk of building large amounts of inventory.  

In addition, purchasing can search out suppliers to analyze which one can provide certain components at the most reasonable price based again on batch size.   Then purchasing would work with product development to use that component in a new or existing design.   Ford will not have to be concerned about being too tied to one supplier because, afterall, product diversity will still be large enough to maintain several suppliers for components that would be used in a Ford Focus versus others used in a Land Rover or Jaguar.

3)       Since the dealers have not been involved in forecasting customer demand in the past, Ford should look to outsource the forecasting to a third party that would be able to work with each dealer or network of dealers.   Ford would have to work very closely with this firm to make sure that they understand the intricacies of Ford’s new process flow crease under the Ford 2000 project.   Also, the firm would have to be large enough to cover Ford’s global presence as well as have a very good understanding of all the automobile markets in each region/nation.   This might be costly at first for Ford but necessary considering the ramifications that an inaccurate forecast would have on suppliers and, ultimately, customer satisfaction.

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Ford Motor Company: Supply Chain Strategy

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4 Supply Chain Lessons from Ford Motor Company

With a current net worth of  more than $48 billion , Ford Motor Company is one of the biggest automotive giants in the world. The American-made company was founded in the early 1900s, and since then, it has remained one of the most successful companies worldwide.

Its success can be attributed to its unique supply chain and ongoing investments in new technology. As the company continues to innovate, many businesses can learn a few supply chain lessons from Ford.

A Brief History of the Ford Motor Company

The first vehicle built by Henry Ford was more of a moving contraption than a traditional car. First built in 1896 before the founding of Ford Motor Company, the Quadricycle featured a four-horsepower engine, a tiller instead of a steering wheel, two gears with no reverse, and it rode on four bicycle wheels. 

Henry Ford and 12 others  founded Ford  on June 16, 1903, with an investment of $28,000. The company sold its first car, a Model A, in 1903. Shortly after that, in 1904, the Ford Motor Company of Canada was founded. 

The Model T, often considered the most famous automobile, was introduced in October 1908. The original Piquette Avenue plant only produced 11 Model Ts in its first month, but the vehicle quickly proved itself. With  only 18,000 miles of paved roads in the U.S. at the time , it was constructed from a robust but light vanadium steel alloy. Rather than a luxury novelty, the Model T became a reliable, durable, easy-to-maintain "everyman’s car.” 

The First Moving Assembly Line

In October 1913, Ford revolutionized the production line at the Highland Park assembly plant in Michigan. Previously, workers arranged automotive parts on the floor, placed  the car (the Model N) on skids, and dragged it down the line . 

Ford improved the process by using interchangeable auto parts, separating the assembly process into 84 steps, and specializing workers to perform a single action. Additionally, the line used pulley-powered conveyor belts to power the now-modern assembly line and production of the Model T, the successor to the Model N. 

Specialized automotive workers, interchangeable parts, and conveyors drove the "first moving assembly line ever used for large-scale manufacturing.” However, Ford did not receive credit for the uptick in production processes.  

Despite this, these advancements led to a better, cheaper, more quickly built car, realizing Ford Motor Company’s ambition of bringing affordable automobiles to the masses. The assembly line also allowed personalization. Eventually, there would be eleven model T body types , including racers, ambulances, police vehicles, snowmobiles, and milk wagons, with "5,000 custom gadgets that were manufactured by external companies.” 

Automaking was majorly expedited, improving chassis assembly speed from 12 hours and eight minutes to one hour and 33 minutes. As a result, Ford cranked out  308,162 cars in 1914 , significantly surpassing the combined output of all other automotive manufacturers. 

Ford’s Domestic and Global Supply Chain

Today, Ford’s selected suppliers  span the globe , with components originating in the Americas, Asia, and Europe.

The Ford supply chain also relies on various indirect suppliers , including Cisco (CSCO), FedEx (FDX), Penske Logistics, Roush, and Union Pacific. Ford works with approximately 1,400 tier 1 production suppliers who deliver car components made of more than 1,000 materials, creating a successful global supply chain. 

In 2021, the automaker established Ford’s Supplier Code of Conduct, which ensures suppliers adhere to  numerous principles  encompassing human rights, environmental impacts, and responsible business and sourcing practices. The company seeks to use raw materials that have only been responsibly produced. Additionally, as of 2015, Ford has operated the largest closed-loop recycling program to handle metal scrap.

There are more than 60  Ford factories  around the world,  with eight of them in the U.S.  Most Ford vehicles sold in America are fabricated domestically "with the help of a few plants in Mexico and Canada.” For example:

• Mustangs and Fusions are built in Flat Rock, Michigan. 
• E-Series automobiles are assembled in Avon Lake, Ohio.
• The F-150 is made in Kansas City, Missouri. 
• Explorer and Taurus assemblies are located in Chicago, Illinois.

The  largest fabrication facility  is the Ford Kansas City Assembly Plant, which spans 4.7 million square feet of production space, employs 7,000 workers, and has been supplying the popular F-150 since 1957. 

Ford Supply Chain: Issues and Instability

Currently, Ford faces  supply chain uncertainty and instability . In an interview in late 2022, Ford CEO Jim Farley reported various Ford supply chain ailments: inventories remained low, there was a parts shortage, product launches were delayed, and challenges constrained V8 engine production.

Workforce shortages also abound as suppliers face labor difficulties and struggle to maintain shipping schedules and quotas. Raw material costs have increased, while semiconductor chips (necessary in every industry and sector) are in short supply. Some of these problems result from the COVID-19 pandemic, and others to inflation.   

It may be impossible to predict when such issues may end — Farley says he’s "stopped forecasting” and focuses on becoming "more efficient in helping our suppliers find labor” and overcoming other related hurdles. As always, adversity inspires innovation, and Ford has "developed a bit of a rhythm” in dealing with challenges.

Refiguring and Restructuring the Ford Supply Chain

In 2022, Ford announced a  restructuring of its global supply chain . The auto giant also reported $1 billion in unexpected, inflation-related supplier costs for the third quarter of 2022. The restructuring will include internal development of "key technologies and capabilities,” improved "cost and quality execution,” as well as "[more] efficient and reliable sourcing of components.”

Global supply chain issues and a recent onus on electric vehicles (EV) drive Ford’s restructuring, which has been underway for some time. The restructuring campaign also involves initiating a new chief supply chain officer. On an interim basis, Ford CFO John Lawler will take on the expanded role of managing the automaker’s global supply chain while Ford seeks to fill the position permanently. As well, Jonathan Jennings, the company’s vice president of supply chain, will gain additional responsibility.

4 Lessons from Ford Motor Company

1. support efficiency from multiple angles.

Ford’s innovations shaped global work culture. The company created the modernized assembly line and spearheaded the truncated work-week and the abbreviated work-day to  boost efficiency from multiple angles .

2. Roll with the Punches

Cliches shouldn’t always be observed, but sometimes they reveal essential truths.  As Ford CEO Jim Farley says , in response to manufacturing curveballs, "I don’t think the labor market’s going to ease any time soon … we’re kind of running our business now and have developed a bit of a rhythm around [these] challenges that we’re seeing.” Challenges may be unpredictable and inevitable, so the onus is on adaptability.

3. Continue Evolving

The Ford assembly line was realized by pondering what could be. Ford adheres to this principle today, pushing to  achieve ecological accomplishments , and is set to achieve carbon neutrality no later than 2050. From 2017 to 2022, Ford reduced manufacturing facility emissions by 40%, and in 2022, 60% of its electricity was carbon-free. One way it has done so is by conducting "30 supplier audits along select critical mineral battery supply chains at all tiers to the mine site.”

4. Embrace the Wave of the Future

Ford is embracing the EV market, sourcing battery capacity and raw materials to manufacture 600,000 new EVs by 2023 and more than 2 million by the end of 2026. The  expected run rate for new EVs by late 2023 includes the following:

• 270,000 Mustang Mach-E SUVs
• 150,000 Transit EV vans
• 150,000 Lightning F-150 trucks
• 30,000 new yet-to-be-specified SUV vehicles

To effect  more conscionable manufacturing practices , Ford also proudly partners with multiple sustainability initiatives, including Partnership for a Cleaner Environment (PACE) and Responsible Business Alliance’s (RBA) “audit-driven, third-party verified program.”

Like many other major manufacturing movers, Ford hopes to achieve zero emissions and adopt "100% locally-sourced renewable energy for all manufacturing plants globally by 2035” as part of their carbon neutrality by 2050 outlook.

Part of Ford’s sustainable shift will also include protecting water security and using recycled, renewable plastics. Ford bolsters its supply chain by working with suppliers across the globe and across various tiers while implementing analytic and predictive tools to avoid bottlenecks, shortages, cyberattacks, economic swings, and disasters like fires.

What’s Next for Ford?

From the Mustang and the Thunderbird, Ford has manufactured some of the most popular cars in history — and it’s continuing to innovate. Last month,  Ford released its 2023 Integrated Sustainability and Financial Report, which detailed the “company’s progress on its commitment to create a more sustainable, inclusive and equitable transportation future.”

This includes:

• Accelerating progress to carbon neutrality,
• Building a responsible EV supply chain,
• And helping communities thrive.

As Ford plans to lead the EV revolution, other companies can learn a few things from the infamous automaker.

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