This case report addresses the challenges to implement virtual integration in Ford Motor Company, one of the largest automobile manufacturing companies in the world. It focuses on the viability of implementing a supply chain strategy following Dell’s “Direct Business model” Dell’s direct business model used information and technology to revolutionize the PC industry; it focused on developing effective supplier partnerships and JIT manufacturing becoming a highly horizontal or “virtual integrated” company. Dell skipped the intermediate retailers, selling to customers directly eliminating the reseller’s markup and the cost and risk associated with carrying large inventories.
All this combined gave Dell a leading position in a very competitive market in only a 13 year period time. In 1970’s Ford’s main competition was with General Motors and Chrysler. However with the entry of Japanese companies like Honda, Toyota and Nissan the American firm faced a harder competition. In order to maintain its leading position, in 1995 Ford initiated the Ford 2000 plan; aimed to restructure many of their key processes like Order to Delivery (OTD) and Ford Production System (FPS).
They wanted to reduce the OTD from 60 or more to 15 or less days. FPS was created to convert the supply chain from a push type to a pull type basing their forecast, production and inventory decisions on real market demands. The decision to radically redesign Ford’s supply chain infrastructure may significantly affect in a positive way the growth and competitiveness of Ford Motor Company in a short, mid and long term period.
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I strongly support the implementation of virtual integration and a pulled based system in Ford’s supply chain. It has been proven by Dell’s KPI’s that producing based on actual customer requirements using information technologies for the efficient information flow from the consumers all the way down to suppliers will directly improve the supply chain by reducing inventory levels and the related cost, reducing lead times, making your suppliers, the production systems and the overall SC more responsive and efficient.
This new strategy will include the creation of an IT platform which its objective is to support an online operation, it will establish procedures to enable customization and ordering by customers via advanced EDI, this platform will be integrated to the physical dealerships as well so they can transmit in real time customer’s requirements. All customer orders would be taken either via Ford's web site or by phone and then produce. A pull system would be implemented completely.
This Platform will also virtually integrated Ford’s supply chain where Ford and all its suppliers would share information by an intranet and Internet to coordinate in real time the flow of materials and production. Issues Identification Industries Differences One major issue is the differences between the auto business and the computer business were compared to Dell’s; Ford’s supplier network had many more layers and many more companies making Ford’s supply chain more complex than Dell’s. Change Management (short term issue)
For the reasons above some Ford’s SC staff thought that the Dell’s direct business model will not deliver the same results for Ford. Ford’s staff never faced with the challenge of modifying work flow processes and standard operating procedures, this can result in employees being uncomfortable, dissatisfied and challenged by this new system, therefore they may fall back to their original habits. The adaptation of this new initiative at staff level will be a major challenge for Ford. Purchasing (short term issue, potentially long term issue)
Different from Dell’s were purchasing activities reported to product development, Ford’s purchasing division is separate from product development, this is another source of disconnect in the supply chain. The efficient roll-out of new products may be impacted negatively due to lack of communication between these two key departments. Also suppliers were picked based on cost, and little regard was given to the overall supply chain cost. At this level of the supply chain restructuring may be difficult due to corporate history and politics. Information Technologies (short term issue, potentially long term issue)
An important issue is the lack of technological knowledge and application throughout Ford’s supply chain, were first tier suppliers well developed IT capabilities interacting with Ford via EDI, but they were not able to invest in new technologies at the same rate as Ford did. The understanding of modernity technology rapidly decreased in the lower tiers of the supply chain. This situation was different to Dell’s supply chain, were by using new technologies Dell shared information in a real time fashion with its suppliers, helping them know Dell’s daily production requirements making the supplier more responsive to Dell’s needs.
Also Dell only kept suppliers that maintained their leadership in technology and quality making the overall supply chain more competitive. Lead Times/Production Process (short term issue, potentially long term issue) The production at Ford is based on a predetermined schedule making its production system push based, creating high inventory levels with low turnover, in addition to this; bottlenecks were an issue in the material planning and vehicle production processes.
So far this production system created a lead time of 65 days from the time a customer placed an order until the product was delivered, making the overall supply chain inefficient. Environmental and Root Cause Analysis Ford, as any other corporation is looking to achieve the ultimate goal; increase profit margins. The OTD and FPS initiatives established an aggressive goal to reduce lead times from over forty five days to fifteen days. To do this, it is necessary to improve the flow of information throughout the supplier network and reduce manufacturing time.
The challenges faced include the unavailability of accurate demand information, poor supplier communication at every level, lack of interaction between product development and purchasing, and resistance to change within the organization. Ford’s current OTD time requires production to guess the real demands. Consumer demand is therefore met through a push rather than a pull manufacturing process. To move to a pull system and to improve demand forecasting, Ford must implement a process that will provide earlier demand notification to the supplier network.
They must also be able to immediately link the actual orders to the manufacturing schedule at any of their almost two hundred manufacturing locations. Purchasing must also play an integral role in this process to insure the correct suppliers are receiving the information. Another important step for Ford is to coordinate thousands dealerships to transmit data sales efficiently, Dell’s business model involves direct manufacturer contact with the consumer, this greatly reduces order time by removing middle-man interference and inventory requirements.
But for the automobile industry without the distribution channels will be impossible for a potential customer to decide to buy a car without testing it, seeing it and feeling it. For this reason the auto industry lacks this ability. Considering all the issues above and their associated challenges, would be fair to say that Ford’s multi-layered supply chain is in great need of a technological solution to its information sharing and communication needs. Alternatives 1. Keep Ford’s existing supply chain and initiatives of improvement without investing in a new IT platform:
The existing initiatives such as FPS and OTD and their overall objectives and their supply management goals are a step in the right direction for providing the necessary data sharing with suppliers and therefore achieve the goals of Ford’s initiatives. Ford will have to rely on the actual technology (EDI) such as phone or email in some cases depending if it is a tier 1 suppliers can depend in a more sophisticated tools such as the FRN or the extranet created to connect ford with its suppliers in the B2B initiative.
The advantage of this is that there will not be major changes and additional cost involved besides the ones related to the overall SC efficiency, the disadvantages of this is that it has been proven that any enterprise which is not up to date with the newest information technologies will not stay competitive and in a leadership position within mid and long terms, facing the chance of getting behind in a such competitive market. 2. Support Ford’s FPS and OTD initiatives by creating a specialized IT frame that will help to achieve the virtual integration in Ford’s SC.
The initiatives above must now incorporate an advanced IT solution to be linked to the outside groups, tier-2 suppliers and upstream to the distribution network. The IT system will focus on developing the open sharing of real time demand information between the distribution network and the supplier pool. Further development of long-term supply contracts with key vendors and a continued focus on the sub-systems supply format will improve confidence while simplifying and speeding the entire process.
Building linkages from the dealerships (Also is necessary to invest in the E-business infrastructure) all the way down to the lowest tiers, so the right people get the necessary data in the fashion and time that is needed to improve the SC. The disadvantage of this will be in the short term and probably midterm period, due to all the effort and extraordinary monetary investment that an initiative like this requires. If the system is poorly chosen, the entire initiative will fail.
Technology costs, if not monitored and controlled, can escalate uncontrollably. Also while the platform is operational there may be unexpected issues which the staff and suppliers will not be able to solve causing inefficiencies in the supply chain, affecting Ford’s and its suppliers revenue directly. The advantage is that with an infrastructure like this Ford will virtually have automated its supply chain translating in achieving Ford’s initiatives and therefore their ultimate goal “Be more profitable and a leader automobile manufacturing company”
Recommendation I strongly support the implementation of alternative number 2. Dell’s direct business model will be the guideline to follow when applying this model in Ford’s organization. Although there are several major differences between the companies, Dell’s direct business approach can be applied to every facet of Ford’s operation. The decision to support virtual integration will help redefine Ford as a competitive, cost effective and profitable company.
Instead of remaining static, Ford must pursue continually evolve along with the new technologies trends, failure to incorporate the latest information technologies will result in continued inefficiencies and eventually Ford will be displaced from the automobile manufacturing leading positions. Accurate and timely information should be the primary focus of the IT implementation. For this stage, the existing FPS initiative should be combined more extensively with the existing intranet and extranet.
Ford should leverage the B2B capabilities to incorporate upstream ordering information from the distribution network. To minimize risk, stage 1 should be applied on a specific product line and only with key suppliers (pilot projects). Initially, the information sharing may be a simple as providing real time demand to suppliers on a secured web site. Once this first stage has achieved quantitative results the IT objective will be to automate the order-to-scheduling process to adapt processes that would notify suppliers of orders and their manufacturing locations based upon every day orders from the dealerships.
The objective is to develop information flow upstream from the suppliers. Ford will need to know on an accurate and real time fashion the suppliers individual daily capacities, only then Ford will be able to effectively allocate orders. Control Understanding this challenge, implementation plans will require phasing and adequate training, with follow through at all levels to ensure a predictable and comfortable transition.
This stage should be split into manageable groups, action plans should be in place for addressing specific challenge areas, such as technically issues. The control will focus in monitoring the KPI’s within Ford and its suppliers, by this stage the refined IT solution will help to achieve FPS goals such as lower inventories, faster inventory turnovers, leaner manufacturing process, making the overall supply chain more cost effective and responsive, achieving the 15 days lead-time established by ODT.
Ford is an example of a company who can evolve at any stage of its existence; it is committed to be leader in the automobile market. They decision to implement major changes within the organization shows the determination to do anything to stay competitive, Ford knows that if they don’t keep up with the new trends, they will lose ground easily over the time. Once again I realize how the “information” plays the most important role within any organization, the effective and efficient manage of it will smooth any operation helping to achieve the expected results.
Whether your company is vertical, horizontal or virtual integrated a key issue is to build based on real requirements delivered in real time. If everything starts with the right step, all of the following levels of the SC will enjoy a more organized and efficient process. Supporting these basic ideas with and efficient IT infrastructure will give the ultimate competitive advantage to any company it is applied. In conclusion if the recommended strategy is implemented successfully and in a timely manner, Ford will be positioned to become a dominant player in the automotive market enjoying great growth and larger profit margins.
- Ford Motor Company: SC Strategy Case Study Harvard Business School by Robert D. Austin The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell by Joan Magretta.
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