Ford Motor Company: Supply Chain Strategy Case

Ford Motor Company, incorporated in 190 by Mr. Henry Ford, is one of the largest vehicle markers in the world today. This company employees more than 360,000 employees and has produced more than 260 million vehicles over its history. Since the 1970s, the auto industry has evolved from an industry with only a few large companies to one in which competition has become tough. Instead of two main competitors, Ford now faces foreign automakers in the marketplace. With the increased competition, car dealers are seeing more cars sit on lots for a longer period of time and are now offering a variety of incentives to get people to buy these products.

Diagnosis

In 1995, the CEO of Ford established an initiative called Ford 2000 in an effort to reduce costs and become more market competitive. This new initiative encompassed all of Ford’s activities, such as product development, manufacture and marketing. Most of these projects were based around IT improvements. These improvements were done as an effort to bring Ford closer to all aspects of their supply chain, from their supplier to their customers.

In 1998, Ford also opened the first of its Ford Retail Networks. This project was started to help the dealers compete with the real competition, such as GM and Chrysler instead of each other. It also brought Ford closer to the end customer.

This Ford 2000 project was a major undertaking, but what is helping the company as a whole? Well, in 1998, the Ford 2000 initiative had raised Ford’s profits, return on sales, and had made the company the industry leader in profit per vehicle. Ford had been named the most improved automaker in 1997 by JD Power Initial Quality Study and had become the world leader in trucks. They were making progress, but where still burdened with large inventories.

Ford’s Director of Supply Chain Systems began to research what Ford could do to decrease these inventories to become the industry leader and to increase shareholder wealth. She did some research into Dell Computers. This company was enjoying 55% per year growth at the time that Ford’s growth was steady at about 6% a year. They were also seeing a 133% growth of their stocks while Ford was seeing at 33.4% growth.

Dell had adopted a virtual integration business model. Within this model Dell uses the Internet for almost all business activities. Customers place an order specifying exactly what they want. This can be done over the Internet or over the phone. Dell then places an order for the components of this machine over an Internet based JIT ordering system. The parts are received assembled and shipped to the customer within 5-6 days.

After much research, the director tried to determined if this same system could be used for Ford Motor Company.

Analysis

The Director found that there would be several challenges if they were going to implement this type of virtual integration system. First, Ford Motor Company is more than 100 years old whereas Dell was opened in 1984. Since the company is so old and has been doing business the same way for a long period of time, it will be harder to implement a large change such as virtual integration. For example, Ford’s procurement process is not where it needs to be if the company is going to virtually integrate. Ford currently has a very large number of suppliers. Procurement personnel are highly involved with every aspect of the supplier relationship, while Dell uses a JIT ordering system. Ford’s manual process is more apt to errors than an electronic process would be, but the procurement department has been so powerful for so long that it may be hard to convince those working in this department that this change will be beneficial.

The implementation of an electronic ordering system could put some of these employees out of a job. These employees are also choosing suppliers on the basis of cost only. If Ford was going to implement a virtual integration system, procurement professionals would have to take other aspects into account, such as delivery time and willingness to partner.

If Ford was going to implement an electronic system for ordering, they would also face some challenges while establishing Internet links with their suppliers. First, they would have to choose whom they would want to partner with in this fashion. Then they would have to determine if these suppliers have information technology systems that would support an Internet based communication system. Currently Ford has started to develop this type of system with their “tier one” suppliers who are their most advanced and largest suppliers. If they were to extend the electronic ordering to other suppliers who did not have the technology to support this type of system, Ford would be forced to decide if they would want to help their suppliers develop or acquire the technology needed for this interaction. Other issues such as what type of information would be shared and the security system they would use to make sure only those with the need to know would have access to this information would have to be addressed as well.

Another challenge Ford Motor Company would face when trying to implement a virtual integration model like Dells is there are some major differences between the computer and automotive industries. An automobile is a more complex product and includes many more parts than a computer. If Ford were going to implement a virtual integration model they would have to manage a larger number of component parts suppliers than Dell is managing, which would add costs.

Ford, if moving towards virtual integration, must also address their network of privately owned dealerships. Dell’s model of virtual integration includes no dealers or retailers. If Ford were to adopt complete virtual integration, they would technically not have dealers. Having no dealers would not be possible for Ford. These dealerships are franchises that are owned legally by individuals. Also a person that is going to buy a car may not be receptive to ordering one off the Internet. Most people test-drive an automobile before they buy, which could not be done if cars were ordered strictly from the manufacturer. If Ford did not offer test-drives and other companies such as GM did, Ford would have a large disadvantage.

Conclusion

In order to implement the type of virtual integration model that Dell currently employs, Ford would have to overcome some obstacles. These obstacles come from every aspect of their current supply chain. They would have to partner with suppliers and provide these suppliers the infrastructure and training they would need in order to communicate over the Internet. They would also have to change the way their dealers worked with customers. Since most customers would not accept buying a car directly off the Internet, Ford would have to implement other methods of changing this aspect of their supply chain.

Recommendations

Although there are several differences between Ford and Dell, I do recommend that Ford implement some of Dell’s virtual integration model.

I recommend that they set-up an extranet, or extend their current system so that they may use JIT ordering with their suppliers. They could use some sort of incentive plan to encourage their supplier to invest in their technology systems so that they would be able to use this extranet for accepting orders. The amount of money Ford would save from the direct link they would have to their suppliers should supplement the investment they would have to make in developing an extranet.

I also recommend that Ford make some changes in the way they interact with their customers. Ford could set-up some type of virtual showroom. This may encourage more customers to order direct from Ford instead of going to a dealer. They could also create an intranet, or enhance their current intranet, in which dealers could check the stock of other dealers for the vehicle a customer is looking for. If they could have this vehicle shipped from one dealer to the other it would not only reduce dealer inventory, but would also please the customer since the lead-time for them receiving their new vehicle would be reduced.

Although Ford may never be able to virtually integrate to the extent that Dell has, the company will be able to see cost savings from their integration efforts. Ford should be able to reduce dealer inventories and should be able to move towards a pull strategy of manufacture if they implement these changes.