Ford Motor Company: Supply Chain Management and Strategic Fit
This report covers the performance of Ford Motor Company over the past 10 years and analyzes the results of its “One Ford” business plan. The main question this report answers is whether Ford’s resent actions match the supply chain strategy of the new plan. There is also a short comparison between Ford and it closest competitor in the United States, General Motors.
Data was collected from different sources such as, annual and quarterly reports, company websites, organizations such as the United Nations, along with independent sources.
This data was review and non-financial and financial computations were performed to see it if Ford’s overall performance had improve since the implementation of “One Ford” and the assignment of new management. The results show that the company has made improvements to it performance both financial and quality based off forecasting, employee efficiency, contribution and cost margins, net income, and higher prices demanded for their products. Table of Contents Industry Overview In their industry report, First Research (2011) describes both the United States and global automobile manufacturing industries.
The industry in the United States is comprised of about 200 companies . In 2010, two of the larger manufactures, Ford and General Motors, had combined annual revenues of approximately $235 billion & . The automobile manufacturing industry is a global industry with players from several major countries. Some of the larger global companies based outside the United States include Toyota (Japan), Volkswagen (Germany), Hyndai (South Korea), Peugeot (France), Fiat (Italy), and SAIC (China) .
Although these manufacturing companies are foreign based a few have manufacturing facilities inside the United States. Some of these include Honda, Nissan and Toyota . While other manufactures have facilities here in the United States, Ford and General Motors have located facilities in other countries. Companies that locate facilities in foreign countries are attempting to maximize profits by taking advantage of lower labor costs, locate near suppliers and customers, and lower tariffs and other taxes. There are other challenges that are faced by the automobile manufactures besides the distance between their facilities and customers.
These challenges include world economic conditions, fuel prices, regulatory standards, and the amount of loanable funds available to consumers . To combat macroeconomic issues such as these, firms must find other ways to increase profitability. Ford Motor Company is one of the automobile companies that has been able to do just that. Ford Motor Company Brief Overview, Products and Services The following information was compiled from Ford Motor Company’s 2010 Annual Report (2011) and www. Ford. com. Ford Motor Company manufactures and distributes automobiles across six continents, employs about 164,000 people at approximately 70 plants.
The major bands manufactured by Ford Motor Company are Ford and Lincoln. Ford Motor Company also owns approximately 30% of Mazda that is located in Japan. Besides automobiles, the company also sells parts and offers financial and repair services for their products to the consumer. In its car segment the Ford brand offers economical and sports cars, and a sedan. The economical cars include the Focus, Figo, Fiesta, and Fusion. The sports car and sedan are the Mustang and Taurus, respectively. MSRP of these cars rang from just over $13,000 to almost $26,000.
The SUV and crossover segment includes the Escape, Flex, Explore, Edge, Kuga, Expedition, and the EcoSport. MSRP for these two types of automobiles from Ford ranges from $21,000 to $38,000. Ford brand also has a truck line that includes the F-Series, Ranger, Transit Connect, Super Duty, and E-Series Wagon. MSRP for the truck line ranges from $18,000 to $29,000. Ford Motor Company also has a domestic luxury car segment. The Lincoln brand of automobiles includes sedans, crossovers and an SUV. The sedans include the Town Car, MKZ, and MKS. These cars range from $35,000 to $47,000, MSRP.
The crossovers include the MKX and MKT and range in MSRP from $40,000 to $45,000. Lincoln’s SUV is the Navigator and starts at an MSRP of almost $58,000. Ford Motor Company’s Changes in Their Supply Chain Strategy Over the past decade Ford Motor Company has had its financial ups and downs and had not been able to maintain a stable net income (See graph below). To combat this problem in the middle of the last decade Ford made some management changes to try and improve their industry position. They addressed supply chain efficiency problems that the company was facing.
Some of the needed changes included closing plants, retooling, building flexible manufacturing facilities, and contracting with new logistics firms. The plan to make the transformation was coined “One Ford” . “In September of 2006 William Clay Ford, Jr. was named CEO of the Ford Motor Company. . In Liker and James’ journal article (2011) they noted that Ford brought in Allan Mulally whose job it was to use borrowed monies to bring Ford Motor Company back to a more stable and profitable state. Mulally had to decide where to use the borrowed $23 billion and where to cut cost.
To help with this he appointed Derrick Kuzak, former vice-president of Europe’s product development. Kuzack was appointed as the vice-president of global product development . To combat cost Ford has closed approximately ten of its facilities since 2006 . In addition to closing facilities, Ford had to pare down supplier to bring all of its production facilities and products across the globe into alignment. In 2010 James Tetreault, vice-president of North American manufacturing stated, “[it was] expensive to maintain separate product and supply chains” .
The company in 2006 started working on standardizing the architecture of the all it body panels, vehicle plat forms, die designs and processes . In addition to making manufacturing changes Ford addressed it logistics problems in the United States. From 2000 and into 2009 Ford had used United Parcel Services (UPS) as its logistics partner for transporting both inbound and outbound inventory . Since then, Ford contracted with Penske to be its logistic partner. Penske works with Ford not only in the United States but also in Europe, South America, and United Kingdom .
In addition to internal process challenges, there are other internal and external challenges that the automotive industry faces. External Challenges to Ford’s Changes In the middle of all of its changes Ford Motor Company had many different challenges besides its, financial and process changes to make the “One Ford” concept work. First, it had communication issues from upper levels to lower levels, and they could not get past “improvements” fully implemented. Second, relationships with vendors needed improvement. Third, the world was about to enter into a recession starting in 2008.
Even though the world’s GDP was falling, there was continuous inflation all over the world. Finally, iron ore price continue to rise even during the recession. In their case study, Liker and Morgan (2011) said information dissemination was described as “hand grenades” and “scud missiles. ” To improve this, two types of meetings were started inside the company. First, were the “Skip-level” meetings that allowed engineers and upper level management to communicate. Second, they had “All-Hands” meetings twice a year where the entire organization gathered to discuss the status of the improvements.
Liker and Morgan (2011) also quoted Mulally as saying “supplier were treated like enemies” and not partners of Ford. To fix the battles between Ford and its suppliers “a process of dialogues between matched pairs of Ford engineers and buyers in purchasing who were responsible for the commercial side of working with suppliers” was put into place . This can help the buyers know what, how much, and when supplies are needed, and hopefully this will increase the supplier confidence in the processes at Ford.
Shortly after Allan Mulally came on in 2006 the world was about to enter into a recession that some news reports were saying could be the next Great Depression. According to a United Nations, World Economic Situation and Prospects 2010 report, the rate of growth for GDP in most, if not all, countries began to decline in 2007 and actually entered into declines sometime in 2008. Although GDP was falling, inflation continued without any period of dis-inflation, meaning that prices were still on the rise but just at a slower rate .
See the two graphs below for a graphical view of the United Nations data. These results show that the cost of living (prices) were still on the rise, but the amount of production (income) is in decline between 2007 and 2009. This makes it harder for consumers to purchase products like automobiles. Even with the upturn in the economies between 2009 and 2010, there is still a likelihood that people are going to be reluctant to purchase expensive durable goods. Unfortunately for the automobile industry its greatest commodity is steel.
Over the past ten years world iron ore prices have been on the rise, except for a dip in prices between mid-2008 and the first quarter in 2010 . “About 98% of iron ore is used to make steel” . These price increases will drive the price of inputs for the car industry up because everything from the nuts and bolts, engine, frame and body panel, on most cars, are made from steel. Higher input prices means either lower gross profits and/or higher prices to the final consumer. The graph below shows the price changes of iron ore from 2001 until the end of 2010.
Ford’s Forecasting, Inventory, Transportation, and Revenue Management To compete, keep cost down, be profitable, and stay in business Ford has had to address the fore mentioned internal and external issues even after getting its “Ford One” plan in place. To do so it appears that management has addressed the forecasting, inventory, transportation, and revenue management functions of their operations. First, Ford had to address its forecasting so that it would not over or under produce its product to a level that would be detrimental to profitability.
Second, inventory and transportation was outsourced to capitalize on the knowledge inside a firm that specialized in logistics and also had the physical resources. With an improvement of the first and second topics in this section the third topic’s, revenue management, tasks are made much easier. After a review of the company’s quarterly reports from 4Q 2007 to 3Q 2011 and the 2001 to 2010 annual reports, it can be determined that Ford uses historical quantitative information in its aggregate forecasting. Some of this information is not automobile industry specific but macroeconomic information that affects sales inside the industry.
It appears that Ford’s aggregate demand forecast uses historical data and the macroeconomic information for world production forecasting and then they base their production off of recent market share percentages they control. Ford also recognizes that there is seasonality to its customers purchasing patterns and adjust projection levels. In the notes of the “Outlook” section of the 1Q 2008 report (2008) Ford commented that “results generally have been stronger in the first half of the year, with the first quarter being the strongest” .
After having forecast errors in 2008 and 2009 that totaled 1.9 million units, Ford’s forecast for 2010 was only off 149,000 units worldwide. As addressed earlier, Ford had shifted its logistics in 2010 from UPS to Penske Logistics. Penske claims that they have lowered Ford’s domestic plant inventory by 15% with the use of Order Dispatch Centers (ODC) and training suppliers on a uniform set of carrier procedures . With the ODCs Ford’s suppliers were no longer delivering to the plant facilities but to the ODC where supplies were cross-docked. This was done because Penske found that delivery trucks were traveling at 50% capacity and crossing routes.
Penske now reports that “most trucks are at 95% capacity when they depart for a plant . On their website, Penske states that they have setup other logistical functions to streamline Ford’s transportation portion in its supply chain activities which include information technology and finance management systems. Their information technology system communicates schedules and shipment information up and down the supply chain and the finance management handles all of the freight bill payments, claim processing and resolutions throughout the supply chain .
We have all seen the ads on television and in newspapers that start around October and run through the end of the year. The manufacturers and dealers give them titles like “Year End Blowout” and “Year End Clearance. ” The specials they are running are to clear out the previous year models. These sales are a form of revenue management used to increase sales during the upcoming holiday months when consumers are more focused on Christmas and vacations. Specifically, it is a form of dynamic pricing. Dynamic pricing is used to sale inventory that is becoming less valuable as time persists .
Ford is one of those automobile companies that partake in such pricing practices. They also offer discounts to consumers that finance through their Ford Motor Credit Company. Visit Ford’s website www. fordspecialevent. com and you will see the special interest rates, some even at 0%, and rebates that are offered on select units from the previous year models to help move them off of the dealer lots. This type of sales practice is an example what happens with an inventory push system. The Performance and Financial Results of “One Ford”
After just over three years from when Alan Mulally took the helm as CEO for Ford Motor Company, how have they performed? To determine if Ford’s changes have actually worked we can look at several metrics. First, we will look at the aggregate forecasting numbers from 2008 to 2010. Next, the utilization of employees that are working in the automobile sector of Ford will be analyzed. Finally, we will look at some financial performance numbers to see if the plan has had an effect on Ford’s bottom line. Ford’s forecasting has greatly improved over the past several years.
When forecasting, an organization, such as Ford, must take into account its existing inventory and base its production forecast on expected demand that exceeds inventory. In 2008 Ford had forecasted that it would produce just over 4. 5 million units, but actually produced only 3. 8 million. Sales that year totaled 5. 5 million units. This means that the annual forecast had an error of 1. 7 million units. In 2009 the total production forecast was 3. 7 million units, but the actual production was 4. 6 million. Sales in 2009 were almost 4. 9 million units. That’s a forecast error of -247 thousand units.
In 2010 Ford’s forecasting improved even more. Production was forecasted at 5. 4 million units, but actual was 5. 6 million units, and sales were 5. 5 million units. This results in a forecasting error of 149 thousand units. Ford has lowered its forecasting error by more than 10 times from 2008 to 2010 (See chart below). It has also lowered its mean average deviation between quarters from 1Q 2008 to 4Q 2010 a total of 367 units (See chart below). These kinds of results could show that Ford is moving from a push to a pull type of inventory control system.
Since 2003 Ford has reduced the number of employees that are in their automobile sector. Along with a reduction of employees, the implementation of the above discussed “One Ford” plan to improve and standardize production processes has had a positive effect on the company’s financial performance. Between 2003 and 2010 employment went from approximately 279,000 down to 157,000, a reduction of 44%. But with this reduction in employment, production per employee rose from 24. 1 to 35. 2 or 46%. The increased number of units per employee has had a positive effect on the company’s revenues from auto sales and gross profit margin.
Revenue from the sale of automobiles per employee has risen 53%, $495. 56 million to $759. 75 million. The total employment at Ford has dropped from 328,000 down to 164,000. This includes both the manufacturing and service sectors of the company. The effect on total net revenue per employee has increased from $501. 75 million to $786. 3 million or 57% from 2003 to 2010. See the graph below for a depiction of the above employee utilization and contribution results. Now we will look at how Ford’s change in their business model has affected the unit contribution and cost, and gross profit margin of the company.
The average contribution per unit between 2001 and 2010 was $18,668 and $21,593, respectively. That is an increased contribution of 16% per unit. In 2001 the average cost to produce one unit for Ford was $18,324. This rose to a high of $23,558 in 2007, but the company was able to reduce this cost back down to $18,908 in 2010. The percentage reduction in cost per unit from 2007 to 2010 is 16%. The negative correlation between contribution and cost per unit has a positive effect on the gross profit margin for the company. Ford’s gross profit margin from 2003 to 2010 increased 100% from 6% to 12%.
That is after dipping to lows of -4% and 1% in 2006 and 2008, respectively. See the below graph to see how the changes in Ford’s operations has affected the above mentioned financials. To analyze the total effect the “One Ford” plan has had on the company’s bottom line let us look at the revenue and income side of the financials. First, we need to take into account that the world has been in a recession since about 2008. This has had an effect on the total sales and revenues that Ford has experienced over the last several years, and the difference between 2001 and 2010 results are $160 billion and $129 billion, respectively.
To understand how the changes (One Ford) have affected the net income for the company we must look at the trend between sales and cost of goods sold. Starting in 2006 the cost of goods sold for Ford trended downward, as did total sales and revenue starting in 2007, but in 2009 there started to be a change between the rate of growth between sale and cost of goods sold. The rate of growth from sales increased at a faster pace than cost of goods sold. From 2008 to 2009 the change in sales was a reduction of 19%, and the cost of goods sold fell by 22%. Between 2009 and 2010 sales rose 15% while cost of goods only increased by 6%.
These differences are a result of the above mention average contribution and cost per unit. Other changes that could be making this difference are the outsourcing of its logistics and relations with suppliers. These increases in gross profits from operations have been enough to offset the reduced revenues (22%) from the financial sector and have resulted in a 141% increase in net income between 2009 and 2010. (All of the above employment, production and financial data was collected from annual and quarterly reports published by Ford Motor Company and can be found on their website, www.
Ford. com, and the Securities and Exchange’s website, www. sec. gov. ) Comparison of Ford and General Motors Performance To compare General Motors to Ford Motor Company we will look at worldwide sales revenues, cost of goods sold, and net income. In its 2010 Annual Report (2011), General Motors claims to lead Ford in worldwide sales . This is true, in the number of units sold. In 2010 General Motors did out sales Ford by almost 2. 8 million units.
This has been the trend even back to 2004 where the difference was in General Motors favor at 2.2 million units. Even when it comes to some financial performances General Motors has the advantage. In 2010 average unit cost for a General Motors unit was $14,200 dollars and Ford’s average unit cost was $18,900. That is a difference of $4,700. Between 2006 and 2010 General Motors was able to reduce their average unit cost by 28%. Ford only reduced its average unit cost by 19% in the same period. The big differences that gives Ford the advantage between the two companies are the average gross profit per unit and the net income.
Ford is able to demand a higher average price, $21,600 versus $16,100, than General Motors. This has given Ford the advantage in net income with a difference of almost $1. 9 billion in 2010 alone. Plus, Ford has done this all without a bailout from the United States government like General Motors. Conclusion Over the ten years this report covers, Ford has been able to make major improvements in its operations. It has been able to make architectural changes to the body assembly and tooling that makes their production facilities more flexible.
Penske was able to come in and reduce waste in the inventory and logistics that was not found by their previous logistics company. The big hurdle that Ford overcame was the implementation and communication issues they had in-house and with suppliers. With all of these changes Ford has been able to alleviate some of the financial woes it was experiencing several years back. Finally, the result of the automobile sector and the total company shows that Ford Motor Company as a whole is moving in the right direction with its “One Ford” plan.