Fords supply chain strategy in 2000

An analysis of the current situation revealed the following issues in the current spply chain:Information flow impaired beyond level one suppliers.

Development of Information Technology in the supplier base.

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Competitors headed to a virtual organisation.

The decision to be taken is whether to virtually integrate the supply chain (create a virtual marketplace accessible to authorised personnel) or carry on operating the traditional way automakers have. The recommendation is to virtually integrate by creating an online centre where for a small fee, using only an Internet browser suppliers will have access to the centre’s large database. This facility will be extended to dealers and customers. The implementation costs will be approximately, but there will be significant amount of savings by the way of purchase discounts and lower transaction costs on materials, and parts. Also as there is reduced buffer stock due to speedy real time information flow leading to reductions in inventory and storage costs. Additional revenue will be generated from transaction fees and advertisements placed. Ford has a large supplier base for material procurement in a complex network of business relationships. The supply base consists of several tiers of suppliers. Ford directly deals with tier one suppliers and these deal with the next tiers. If feasible the lower tier suppliers ship materials directly to Fords’ manufacturing unit.

Long-term contracts with suppliers have been negotiated to ensure uninterrupted supply and minimum inventory levels.

Ford has provided its suppliers with techniques like Just-In-Time, (JIT) Total Quality Management (TQM) And Statistical Process Control (SPC). Ford benefits by procuring materials at reduced cost and supplier involvement in the company operations like design process, leading to cost saving for both parties.

The Ford Production System (FPS) is designed to make the operations leaner, efficient and more responsive to the customer needs, hence reducing production costs and improving profit margins. The Regional mixing centres optimise schedules and delivery of finished vehicles via railway, to provide customers the right product at the right time and place, by improving the speed and predictability of new vehicle deliveries. The pressure is on for suppliers to provide materials at a reduced cost per year with increased value added services. The supply chain is highly visible to both upstream and downstream activities, enabling Ford to meet customer demands. The information flows freely due to the close relationships Ford shares with its tier one suppliers and dealers. But the information flow beyond the tier one suppliers is restricted mainly due to the use of old technology by lower tier suppliers. Ford encourages lower tier suppliers to initiate collaborative working arrangements with larger tier one suppliers.

Ford includes the ongoing forecasting of customer demand from the dealers in its production schedule. Dealer’s suggestions are used to fill in gaps in the order bankTier one suppliers communicate frequently with Ford using electronic data interchange (EDI).

But these tier one suppliers are not financially sound enough to invest in new technologies as rapidly as Ford can.

The powerful purchasing department, deals closely with the new product design engineers. All negotiations with suppliers are done by the purchasing department and engineers are discouraged from discussing prices with suppliers. All the components in the chain work closely to reduce costs and improve customer service.

At Ford, the purchasing department enjoys a prominent position. It is organisationally independently of product development. It works closely with every major product design.

Price negotiation with suppliers is done by the purchasing department, aloneIt has gained power because of the sheer volume of purchases annually; a small reduction in price leads to large saving in the annual procurement spend.

The supply chain performance is frequently analysed and it is restructured to save costs by enhancing material flows, reducing inventory (JIT) and lowering manufacturing costs (FPS)The information flows smoothly across the supply chain streams, but is handicapped beyond the tier one suppliers.

Ford reviewed the different components of its chain, identified bottlenecks and took measures to make them more efficient, leaner and responsive. For eg: The Ford Production System, its important part “Synchronous Material Flow” (SMF) and the Ford Retail Network were implemented. Ford has a large supplier base. It procures from over 30000 suppliers and deals directly with less than a 1000. ( Type=301&UserId=IPAuto&Passwd=IPAuto&JSEnabled=1&TS=953862775Up-to-date techniques like EDI, JIT and TQM are being used to communicate and coordinate between Ford and tier one suppliers.

Ford’s major suppliers have modern Information Technologies (IT) but do not have the capacity to invest in new technologies as rapidly as Ford. This technology modernity diminishes further in the lower tiers of the supplier base, mainly due to financial constraints. The question here is “Should Ford harness the benefits of the emerging information technologies and ideas from new high-tech industries to change the way it interacts with suppliers?”In this light, the major issues identified are as follows:1.Information flow impaired beyond level one suppliersFord’s supplier network, is its ability to handle information. But that must cascade into the second and third tiers of the supply chain, for Ford to reap complete benefits of chain.

The sub-tier suppliers are not technologically up-to-date as tier one suppliers or Ford, leading to overall supply chain inefficiency.

As communication is not in real time, increase in costs is inevitable due to situations like mis-communication and delayed communication. Ford is not directly in touch with sub-tiered supplier, leaving the job to its main suppliers. A direct relationship will usually produce better results for both parties.

2.Development of Information Technology in the supplier baseFord has a network of 30000 suppliers operating with different levels of technology. Its tier one suppliers have fairly modernised information systems but do not have the ability to rapidly invest in new emerging ones. The lower tier suppliers do not even have the same level of IT understanding and modernity as the tier one suppliers do leading to bottlenecks in the supply chain.

Furthermore, Ford faces constraints imposed by geography in information flow, as it operates in 200 countries3.Competitors headed to a virtual organisationOther automakers like Chrysler and General Motors (GM) have been posting their procurement requirements on the web with tremendous success. GM has taken to seeking tier one suppliers by posting its needs over the Internet, successfully. For example a belt fastener manufacturer in Lima could have access to GM’s requirement over the web and be in a position to supply at a lower cost than an American supplier. Ordering supplies the traditional way is time consuming and costly ie paper, stationery costs.

Annual procurement spend is approximately $80 billion dollars (;UserId=IPAuto;Passwd=IPAuto;JSEnabled=1;TS=953862725), hence a small change in procurement cost will result in substantial savings. Although Ford is using EDI to link with big suppliers, EDI transmits basic information about transactions, but it cannot adapt to rapidly changing markets and is too expensive for smaller suppliers to use.

There are 2 alternatives that Ford can choose from. ALTERNATIVE 1: To Virtually integrate the supply chainThis means that the 30,000 suppliers will be able to access information and data with restricted security codes for different levels of access. (http://global.umi. com/pqdweb?ReqType=301;UserId=IPAuto;Passwd=IPAuto;JSEnabled=1;TS=953864545)The goal is to switch to a ‘pull mode’ where cars and parts are produced according to consumer demand leading to overall savings (explained in advantages and recommendation). At the moment we crank at full capacity, building a predetermined mix of cars and ship them to dealers who then rely on strong-arm tactics or large rebates to move the ones customers don’t want. Streamlining purchasing and reduction in inventory throughout the supply chain will save several billion dollars in purchasing costs and lessen the time it takes to build cars for custom orders.

The supplier can communicate (changes in product or design, orders etc.) to the required party in quickly and in real time ( online vs. paper )Suppliers will be able to use the web site to quickly communicate needed changes in parts design and make for easy changes in product specifications.

Smoothen communication between tier-one, and sub-tier suppliers. This will allow the supplier to reduce costs, supply better quality parts, and there is quicker access to engineering design to change orders, leading to saving of overall purchase and production cost.

Giving the supplier online access to the required data will also give them responsibility towards the product, motivating them to design quality processed materials with low costs. Dealing via the net will, make ordering and billing almost immediate, The site can provide sales forecasting and similar services, so suppliers can better predict and manage their operations.

Dash for quicker service: electronic dealing with suppliers could cut costs and speed deliveries. New teams involving suppliers and dealers can be formed online. Dealers will be able to provide vital data to the company and take part in processes like product scheduling. Feedback from the suppliers will be invaluable information in areas like new product development and design.

Main suppliers can form a part of the design or new product development team, playing an active role in cutting costs and streamlining process. Streamlining suppliers and distribution via the Web could amount to savings equal to 25% of the retail price of a car.

Reductions in costs like procurement costs (due to strategic supplier sourcing), administrative costs (online servicing), communication costs (as it is via the web), inventory costs (custom built cars hence reduction in finished inventory) and storage costs.

Costs like promotions and rebates offered to dispose of excess finished inventory will not be necessary.

Customers will decide what they want built. That could shorten the current 60-day average time from customer order to delivery, freeing a good chunk of finance tied up in completed-vehicle inventories.

Reduce working capital by shrinking excess inventories and wipe out costly rebates needed to move unwanted cars The Internet will enable finding world-class suppliers, worthy of alliances, opening up the marketplace worldwide.

Suppliers around the world might be in a better position to supply required materials.

Also, Ford employees, dealers, and suppliers will be able to communicate as if they were in the same building, and make joint decisions. Will facilitate to reduce cycle time and inventory requirements by sharing data about business processes with suppliers, dealers and even consumers.

The automobile industry is a century-old industry with an infrastructure that impedes change. New online ways to sell cars directly to buyers collide with an entrenched dealer base, which is protected by tough state franchise laws. Even though all the online data is protected with high levels of security there might be “hackers” who could break into the system and gain unauthorised access to restricted data. In other words, do not harness the advantages of the emerging technologies to our benefit and carry on business the traditional way, using the push mode. Ford’s supply chain has always been updated and is using techniques like Just-In-Time (JIT), and Total Quality Management (TQM). This ensures that costs are kept low (like manufacturing costs, inventory costs) and quality maintained. Will save investing billions of dollars on untested/unproved grounds ie no success stories.

Might loose market share as other companies like Toyota ( are planning their move on to the net.

There is an ever-growing demand for lower prices and high quality cars. The only way to lower prices any further is to minimize the gap between the different components in the supply chain to obtain maximum benefits. In today’s auto world to remain competitive, Ford will have to remain a low-cost producer of high-quality vehicles. I would strongly recommend alternative one: To virtually integrate the supply chain. The site will be a collection point for data residing in Ford’s many client/server and Mainframe applications that manage activities ranging from product design and quality control to sales and after market services.

The Ford site will let the automaker and all its suppliers to share more information and do it more quickly for design requirements, demand forecasts and production schedules. Using the Internet to supply real time information will result in inventory reduction across the supply chain, reducing days and dollars overall. Furthermore, it will help the components of the supply chain to work closely together, especially when developing new products. Purchasing should be strategically geared toward further improvement of the relationship with suppliers. Change of purchasing strategies will focus on cross-functional purchasing teams, strengthened supplier alliances, the development of world-class supplier programs, and the refinement of internal performance metrics for supplier evaluation.

The site eases communication flow presenting real opportunities to improve end products. Furthermore the new system will help monitor the vehicles across the entire supply chain till it reaches the end customer. This technology can be modified to include dealers. Dealers can track the progress of vehicles from production to final delivery using a web-based information system. Then the tracking service can be extended to consumers who will shop online for cars and trucks. By entering their order number they will be able to find out at what stage of manufacturing or delivery their vehicle is in.

The project will be rolled out in phases starting with the current facilities provided on the Internet to where products can be ordered for the future. For successful implementation the following should be carried out:-1.All the components of the supply chain should be informed of the change and information sessions organised to discuss the change. This will provide a general view from the sprawling work force, the suppliers, and especially the purchasing department.

2.Jacques Nasser should strongly support the project at all stages for successful implementation.

3.To manage and coordinate ie drive the efforts across company lines, groups and teams will need to be formed. This is essential to ensure unbiased decisions. There should be sufficient technical people on the team as it is involves IS and IT. These cross-functional teams will help ensure that the project stays on track as they progress.

4.Training programs should be chalked out for Ford’s employees, if the company is going online the employees should be skilled for the new technology.

5.Call centres or information centres should be set up for suppliers, staff, dealers and customers. This will facilitate acceptance and understanding of the project. 6.The purchasing department holds considerable power at Ford. Top level people will need to redraw its functions and communicate the same to the purchasing personnel. Training them for the new job description is a must. 7.Details will need to be worked out and suppliers from tier one and beyond given the information they need to bring their dealings onto the Internet. 8.Incentives to adapt to the Internet backed by facilities to do so should be provided to employees eg free/subsidised net access. 9.We will need to partner with existing related sites like Carpoint, ISP’s for the web space and service and with PC manufacturers to get the best deals on equipment.

10.The entire software solution should be outsourced. A joint venture with a company like IBM would be a good option.

1.Cross-functional teams: These should comprise of members from different departments ie finance, marketing, sales, especially IS/IT department (or from the company it is outsourced from). 2.Hardware/Software: New modern hardware will be need eg fast server/ networks, computers to form the infrastructure.

3.Training Personnel: Trained personnel will be required to familiarize and train the workforce for the new system4.New Skilled Staff: New employees with web based background will be required. Eg system administrators.

5.Dollars: will be need to be invested recurringly, in the project to ensure successful implementation (see costs)This will involve high initial investments but the benefits of lower inventory costs, manufacturing cost, less wastage, less or no paper shuffling, reliant suppliers. The entire project will roughly cost an estimated $100 billion per annum. This will include costs like:Outsourcing the software company who will provide services like database managementPartnering with Internet service Providers.

Purchasing new hardware required. This will be offset against savings like:Reduction in inventory costs.(parts inventory and finished automobile inventory)Quicker delivery of finished goodsReduction in excess inventory (pull mode, built to order cars)Furthermore Ford will receive hefty income from transaction fees and access fees from users of its site.

The network will be launched in phases over 15 to 24 months. The first phase will include getting all the suppliers online. The network should be fully operational 12 months from commencement. Dealers should be able to access soon thereafter. The dealer’s online tracking service should take 13-15months from commencement. Consumers will be able to access the net once the supplier and the dealers have full access to the site and it the glitches have been solved. Customers get last access, because once the supplier and dealer networks are in place Ford will be in a position to supply at lower costs and provide faster delivery to the customer. Approximately, the entire purchasing function will be carried out on the within 3 years of implementation. This means the 76.5 billion dollars of annual procurement spend will be put online!The main monitors that will indicate the success of the site are: 1.Reduction in the annual procurement spend: The amount reduced from the current $ 76.5 billion 2.Reduction in order to delivery time: from the current 60 days. 3.Reduction in finished and parts inventory:4.Customer feedback: This alternative should provide better information to customer like availability of cars, tracking of a customer order.

This could eventually change the way vehicles are bought, the progress toward a Dell Computer Corporation style, build-to-order models. Ford will be able to peel out to an early lead in the race to shorten delivery times, enhance or even completely replace the car-buying experience and stay involved with the consumer throughout the life of the car. Bibliography:Ballou, R. 1999, 4th edn, Business Logistics Management, Prentice Hall, NJ, USA.

Boysn S, 1999, Logistics and the Extended Enterprise, John Wiley ; Sons, Inc., USA.

Christopher, M. 1998, 2nd edn, Logistics and Supply Chain Management, Prentice Hall, U.K. Guezlo, C. 1986, Introduction to Logistics Management, Prentice hall, NJ, USA.

Handsfield, R. and Nichols, E. 1999, Introduction to Supply Chain Management, Prentice hall, NJ, USA.;UserId=IPAuto;Passwd=IPAuto;JSEnabled=1;TS=953862775 24/03/00, 1.00pm;UserId=IPAuto;Passwd=IPAuto;JSEnabled=1;TS=953864545 23/03/00, 1.30pm;UserId=IPAuto;Passwd=IPAuto;JSEnabled=1;TS=953862725 27/3/00, 2:00pm

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