Ford case

MIS 517

Advanced Operations Management

Ford Motor Company: Supply Chain Strategy

Presentation Report

M.Can KAPLAN Abdullah S. ÇETĐN

Bogazici University

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CONTENTS

1 INTRODUCTION ....................................................................................................................2

2 CASE DESCRIPTION .............................................................................................................3

2.1 Company History ...............................................................................................................3

2.2 Automotive Industry .........................................................................................................3

2.2.1 Traditional Supply Chain ..............................................................................................6

2.2.2 Virtually Integrated Supply Chain ...............................................................................8

3 FORD MOTOR COMPANY AND DELL COMPUTERS COMPARISON ...............9

3.1 Similarities ...........................................................................................................................9

3.2 Differences ..........................................................................................................................9

4 ALTERNATIVE SOLUTION PROPOSALS................................................................... 12

5 E-BUSINESS STRATEGY AND AFTER 1999 ............................................................... 13

5.1 Transformation of the Customer, Dealer, and Owner Relationships ..................... 15

5.2 Customer Assistance Centers and In-Vehicle Communication ............................... 16

5.3 Supply-Chain Integration: The Trading Hubs ........................................................... 17

5.4 Transforming the Supply Chain.................................................................................... 18

6 CONCLUSION ....................................................................................................................... 19

7 REFERENCES........................................................................................................................ 20

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1. INTRODUCTION

Henry Ford, founder of Ford Motor Company, was in his time an innovator in offering 'cars

for the masses'. He introduced to the car industry methods and systems innovative in their

day. After then, Ford Motor Company finds itself in a dynamic business environment where

new technologies and practices offer the potential to alter in a significant way the landscape

in which it operates. Ford needs once again to forge new paths to ensure future competitive

advantage.

In the fall of 1999, Jacques Nasser, Ford Motor Company’s president and chief executive

officer, announced a grand new vision for the firm: to become the “world’s leading

consumer company providing automotive products and services.” Key to that dream was

the transformation of the business using Web technologies. The company that taught the

world how to mass-produce cars for the consumer market was going to become the leading

e-business firm.

Executives at Ford have been considering the 'Direct Model' created by Dell Computer

Corporation and finds that there is considerable appeal. Dell has been able to speed up

inventory velocity such that there is only eleven days of inventory on hand. This has led to

an inventory turnover rate of thirty times per annum. This achievement, termed by Michael

Dell 'Virtual Integration' has been achieved by blurring the line between supplier, Dell and

client, to the extent that third party service staff are often thought, by clients, to be Dell's

own staff.

In order to see how congruent the Dell model is to Fords' business the similarities and

differences between the two companies should be examined. But, before that, the company

history will be explained in the following section. Then the similarities and differences

between Dell & Ford will be examined. After elaborating the possible roadblocks that Ford

will probably confront with while trying to implement Dell Model, alternative courses of

action will be discussed shortly. And lastly current decisions and situation of the company

will be explained.

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1 CASE DESCRIPTION

1.1 Company History

The Ford Motor Company was founded by Henry Ford on June 16, 1903, in Dearborn,

Michigan. Five years later, he introduced the Model T, and five years after that the Model T

was being built on a revolutionary moving assembly line. In 1914, Ford produced 308,162

cars, which was 299 more than all other auto manufacturers combined. In 1919, Ford

bought out the smaller investors and reincorporated the company in Delaware. Soon after

began the construction of the River Rouge plant, the largest and perhaps the best-known

industrial complex in the world: 90 buildings, 330 acres of windows, a plant that took iron

ore in at the Lake Erie end and rolled out finished autos at the other. 1From 1919 to 1956,

the company was privately held by the Ford family, the Ford Foundation, and the Edison

Institute. During that time, the company gave up most of the dominant market position it

had achieved with the Model T. Stock was first offered to the public in 1956, trading on the

NYSE under the symbol F. As the twenty-first century began, Ford had produced 270

million vehicles. It was the number-one maker of trucks, the world’s number-two maker of

autos and trucks, and the industry leader in profitability. With 345,000 employees, it had car

and truck operations in 38 countries. The company produced Ford, Mercury, Lincoln,

Aston Martin, Jaguar, and Volvo autos. It also owned 33 percent of Mazda and 81 percent

of Hertz, the world’s largest auto-rental firm. Hertz rented vehicles in 140 countries. Ford

Credit, operating in 36 countries, was the world’s largest auto-finance company, with 16,000

employees and nine million individual and corporate customers. Ford also owned Kwik-Fit

Holdings, Europe’s largest auto-repair operator, which had been acquired in 1999.

1.2 Automotive Industry

In order to fully understand the case, it is important to understand the auto industry as well.

The auto industry was the world’s largest, what Peter Drucker proclaimed 2 “the industry of

industries.” It consisted of tens of thousands of firms giving employment to millions of

individuals and generating revenues from the sale of new and used vehicles, parts, and

service in excess of $1.3 trillion. Not only was it one of the oldest industries, but it was also

1 John A. Byrne, The Whiz Kids (New York: Doubleday, 1993) 2 Peter Drucker, The Concept of the Corporation (New York: John Day, 1946 )

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arguably the most fragmented. Critics said its purchasing activities had not changed much in

100 years, that its costs were excessive, and that its customers were thoroughly dissatisfied

with automobile manufacturers and dealers.

The industry had undergone several fundamental

transformations since its inception in the late nineteenth

century. Ford’s use of mass production was the first,

followed by the rise of the Japanese auto industry and its

commitment to lean production in the 1960s and 1970s.

In the past three decades, the auto industry has grown more

competitive. Since the 1970s, the Big Three automakers

(GM, Ford, and Chrysler) have seen their home markets

invaded by foreign-based auto manufacturers (Toyota and

Honda). The bar chart on the right shows the US sales of

various car manufacturers in 2001. You will notice that Toyota and Honda are beginning to

nip on the heels of the “Big 3” and Toyota has already surpassed Dodge in sales. In

addition, the auto industry was facing overcapacity of an estimated 20 million vehicles. This

led to decreased profit margins for automakers as well as reduced sales.

Another trend in the automobile industry, as well as many other industries at this time, was

consolidation. With increased technology and economies of scope and scale, companies

wanted to capitalize on the benefits of being a larger company, so they frequently merged.

Two notable consolidations were Chrysler merging with Daimler-Benz in the summer of

1998 and Ford acquiring Volvo in early 1999. So, with all of these changes going on in the

automobile industry, it was no wonder that Ford felt like it needed to make some changes

within its organization to compete.

Ford’s large-scale plans for change began in 1995, with an ambitious framework called Ford

2000. The first part of this plan included merging North American, European, and

international automotive operations into a single global operation. Just like with

consolidation, this allowed for economies of scale and scope, allowing Ford to save huge

amounts of money by reengineering and globalizing corporate organizations and processes.

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Next, product development activities were consolidated into 5 Vehicle Centers (VCs), each

responsible for the development of vehicles in a particular market segment.

The major reengineering projects that were part of Ford 2000 were initiated around major

company processes like, Order to Delivery (OTD), Ford Production System (FPS), and the

Ford Retail Network (FRN). Order to Delivery is the time that it takes from a customer

placing an order to delivery of a finished product. The goal in the OTD project was to

reduce the current 45-60 days it took to deliver the finished product to the customer in only

15 days. These manufacturing efforts were dependent on a couple of other changes that

were being made at Ford during the same period of time namely; continual forecasting of

customer demand, a minimum of 15 days of vehicles in each assembly plant, regional centers

that dealt with optimizing schedules and deliveries, and a order amendment system to

replace the need to submit new orders.

The Ford Production System, FPS, was designed to make Ford more responsive to change,

just like OTD. This system focused on the production process. The goal of this revised

process was to make the production of goods a relatively stable process, balancing out the

bumps that occur in the process along the way. The case also mentioned Synchronous

Material Flow (SMF), an important part of FPS. SMF strives to produce a continuous flow

of products and ensures that the vehicles are assembled in the consistent manner. When the

cars are assembled in a consistent manner, Ford can easily predict with great levels of

accuracy, when the vehicles will be completed and ready for delivery. This is quite a

difference from the old, “guess when the car will be done” methodology employed by Ford.

The Ford Retail Network, also known as FRN, was the final piece in the Ford 2000

reengineering process and was a relatively new Ford venture that was formed under the Ford

Investment Enterprises Company (FIECo). FEICO had two goals; to be a testing

environment for best practices in retail distribution and to create an alternative distribution

channel. Ford expected FRN to reduce advertising and personnel costs while increasing

business.

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In short, by adopting new supply chain and production techniques, Ford was hoping to

achieve the same cost savings that their Japanese adversaries in the automobile business have

already achieved. This would allow Ford to offer vehicles at lower prices, while generating

higher revenue for the company. As a secondary benefit, Ford hoped that their Ford 2000

plan would create a competitive advantage through the lowering of prices and the associated

reduction in production cycle times.

While Ford 2000 was underway, the Internet burst onto the scene. The Internet created new

opportunities for Ford and they embraced these opportunities in a timely manner. First,

came the public Web site in 1995, then a corporate Intranet site came in 1996. And by 1997,

Ford had launched a Business-to-Business (B2B) Web site that connected the company with

its suppliers. As well, Ford teamed up with Chrysler and General Motors to work on the

Automotive Network Exchange (ANX), to create standards in the supplier network.

Through the creation and use of these Web sites, Ford positioned itself not only as an

innovator in the automotive industry, but also in a position to capitalize on further

Information Technology developments as they emerged.

In the case, Ford, like many older companies, is still using traditional supply chain methods.

Ford has tried to control as many aspects of the end vehicle production as possible; from the

production of raw materials in steel mills and rubber plantations, through all of the design,

manufacturing, and assembly and distribution activities. This has resulted in a truly vertically

integrated supply chain within Ford Motor Company. Unfortunately, this approach makes it

difficult for Ford to compete in the global automobile industry, and for that reason in the

case study, Teri Takai wondered if it was time to change Ford’s supply chain.

1.2.1 Traditional Supply Chain

In order to understand the proposed changes to the Ford supply chain, it is important to

understand how the traditional supply chain model is comprised. The most simplistic or

basic model of a traditional supply chain has one company performing all functions of the

supply chain. Within this company, the planning/purchasing department is in charge of

manufacturing and orders to internal or external manufacturing locations. After the orders

have been completed within the company, the finished goods are then stored at the

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company’s warehouse and shipped out using the company’s trucks or a distribution

company when ordered by the customer. This type of approach was what Ford used until

the late 1980s, when their suppliers, which numbered in the 1000’s, got to be unmanageable

and they needed to make a change.

The change that was made in the late 1980s had Ford using a modified version of the

traditional supply chain approach, by utilizing outsourcing and partnerships to handle certain

functions of the supply chain. Ford does this through its “Tier 1” suppliers. These “tier 1”

suppliers would manage relationships with a larger base of suppliers of components of

subsystems-tier 2 and below suppliers. Ford made its expertise available to assist suppliers in

improving their operations.

Unfortunately, the traditional supply chain model is fragmented and slow to adapt to change

in the market, which makes it difficult for companies to effectively control all aspects of the

production process. This along with other issues has led Teri and her team to consider

changes to the Ford supply chain. Teri’s team has recommended to her that Ford should

utilize emerging Information Technologies and model Ford’s supply chain after Dell’s. Dell

utilizes a virtual integration approach to their supply chain, but Teri is not sure if virtual

integration will work as well for Ford’s supply chain.

Figure 1 – Traditional Supply Chain

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1.2.2 Virtually Integrated Supply Chain

With a virtually integrated supply chain, they have loose affiliations of companies organized

as a supply network. In virtual integration physical assets are replaced by information.

Within a virtually integrated supply chain, manufacturing continues to be controlled by the

company’s planning department. However, this is no longer done directly through the

issuing of purchase orders, but instead by providing logistics management and forecasts for

demand and receipts. The company can then pass along this production information to

their manufacturing partners to use in planning their production to meet the needs of the

original company and the market. The company no longer delivers finished goods to the

customers; instead the finished goods are completed by one partner and then go to the

warehousing/distribution partner who sends the products to the customers as orders come

in. The largest benefit of virtual integration is that it allows partners to be located far apart

from each other, they do not even have to be within the same country. This means that

companies can choose strategic partners based on skills and pricing, not only on proximity,

literally opening up a world of options. The key to virtual integration is Information

Technology. Information Technology allows the companies to work as though they are one

company, without the physical and other constraints of actually being one company.

Through the use of computer software, the Internet, and other emerging technologies,

companies are able to selectively share their information with partners in real time, allowing

for collaboration like never before.

Executives at Ford have been considering the 'Direct Model' created by Dell Computer

Corporation and finds that there is considerable appeal. In order to elaborate the possibility

that the Dell model fits to Fords' business, these two companies will be compared and

analyzed below.

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2 FORD MOTOR COMPANY AND DELL COMPUTERS COMPARISON

To begin the comparison of Dell Computer and Ford Motor Company, let’s begin by

discussing the similarities between the companies.

2.1 Similarities

The main similarity between two companies is in their operating principles. All of the

principles that led to Dell’s success are in place in some form at Ford. It should be noted

that most of these operating principles are newer additions to Ford, through the Ford 2000

efforts, but they are still part of the company’s operating structure. Main similarities between

two companies that are related to the supply chain issue are listed below.

- Both cars and computers are consumer items that are directly bought and used by

consumers themselves.

- For both of the companies suppliers are often located close to manufacturing

facilities. From its historical background Ford maintains local links with its suppliers.

- Both companies try to keep long term relationships with smaller number of

suppliers. Especially, Ford tries to have strategic alliances with its main suppliers.

- For both of the companies customers varies from large corporations, governments

to individual consumers.

2.2 Differences

The differences between the automobile and computer industry present challenges for Ford

to implement a virtually integrated supply chain like Dell. Such a major change to Ford's

supply chain structure could also be very costly if not properly managed.

a) Company Size

Specifically size is a big difference. Dell has 16,100 employees while Ford (including

automotive and financial services) has 363,892 employees. There is also significant

difference in assets, revenue, manufacturing facilities and more financial information

between Dell and Ford. As the size increases it is more difficult to adopt changes for a

company, which is also true for Ford.

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b) Company Age

Ford is a 107 years old company, Dell on the other hand founded 27 years ago. Because it is

difficult to break the habitual ways of doing things, being an old company limits the

flexibility and responsiveness of Ford.

c) Company Culture

Dell and Ford have different corporate cultures. Dell is an entrepreneurial, new company

that can react quickly to change and does not have a lot of people or history to slow it down.

On the other hand, while Ford is innovative, they are slow to react to changes in the industry

and the employees do not have the same way to doing things as the Dell employees.

d) Supplier Base

One major difference is in the supplier base. Ford has derived a multi-tiered system of

supply. The tier system consists of numerous generic suppliers, "tier two" and below, who

are managed by "tier one" vehicle sub-system suppliers. The "tier one" suppliers, by nature,

are completely dependent upon Ford's survival since the provided sub-system component is

specific solely to Ford. Ford has such a complex network of suppliers to deal with, and

much of their supplier base does not have the IT knowledge or capabilities of Dell's

suppliers. This difference could be a problem because virtually integrated supply chains

require considerable IT capability for sharing information.

e) Product Complexity

Product modularity also works for Dell, but not for Ford. “Dell Direct” depends heavily on

the modular product architecture of a personal computer, which is made up of a small

number of separately-produced, physically independent “modules” joined along a common

interface. The current dominant product architecture for automobiles is still substantially

integral rather than modular, and closed rather than open. That is, most components are not

standardized across products or companies, and have no common interface, hence they are

highly interdependent with other components and idiosyncratic to a particular model.

Due to the generic nature of computer parts, Dell possesses the ability to negotiate and

procure necessary items for plant assembly from several independent purveyors. Therefore,

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Business-To-Business (B2B) transactions are accomplished with relative ease and minimal

cost. Although generic items, such as spark plugs and windshield wipers, are provided to

Ford by lower tier suppliers, wholly-dependent, "tier one" partners supply components, such

as dashboards and drive trains, that are tailored specifically for Ford, alone.

f) Product Variety

Product variety is defined as the number of vehicle permutations offered to the customer of

a particular model. As the number of changeable products and the number of models are

higher for Ford, the product variety is much higher than Dell.

3 Historic Product Variety, four Major Volume Models

Higher product variety leads to;

- Management of large number of individual component inventories.

- Production capacity for individual components set long in advance to meet the

demand. And this production capacity plans cannot be changed quickly.

g) Process Complexity

Dell and Ford have significantly different processes related to the ownership of inventory,

suppliers, forecasting, and demand. Also, cars require more components to build than a

computer does and cannot be easily shipped in a box. This makes coordinating the supply

chain effort more challenging.

Another difference in processes is that Ford has traditionally kept purchasing activities

somewhat secretive because it provides leverage dealing with industry suppliers. However, a

virtually integrated system requires close collaboration and extensive information sharing

with suppliers, and full disclosure might conflict with Ford's purchasing power.

3 Holweg, Greenwood, Product Variety, Life Cycles, and Rate of Innovation – Trends in the UK Automotive Industry, 1991

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In addition, since Ford sells most of its cars through traditional dealerships, the selling

process is not as efficient as Dell's direct sales model. For Ford to truly adapt Dell's model it

would have to eliminate these distribution channels. However, it would be very difficult and

unlikely for Ford to ever completely eliminate its dealers.

Possibly the biggest obstacle of transforming the supply chain is the effect on the rest of

Ford's operations and traditional processes. Significant changes to Ford's factories, vehicle

design, logistics, forecasting methods and other processes would have to be made. There

would also be a need to overcome resistance from existing dealers and suppliers, as well as to

re-train employees to handle the new procedures and information technology.

3 ALTERNATIVE SOLUTION PROPOSALS

a) No Change Alternative

First alternative may be considered as keeping the processes and the supply chain as it is and

not to implement major changes. This strategy, obviously, is the safest strategy as there is no

risk related to the changes. Also it may be least costly in short run. However, Ford wouldn’t

choose this alternative in order to keep up with the market competitiveness. The risk of

falling behind other manufacturers and also the opportunity cost of (reducing costs by

adopting some changes in the processes) this alternative will probably compel Ford to make

some changes in its processes and supply chain.

b) Total Virtual Integration Alternative

An alternative strategy to consider would be a total jump to a virtually integrated supply

chain based completely on Dell's model. Ford and all its suppliers would share information

between their systems and the Internet to coordinate the flow of materials and production.

All customer orders would be taken either by phone or on Ford's web site and then built. A

pull system would be implemented, where production and material orders were based on real

time data from customer orders, thus reducing inventory. Once orders were built they

would be shipped out directly to the customer. However, many of Ford's traditional

processes and production methods would have to be changed to take advantage of this new

form of supply-chain management. As it is mentioned before, there are significant

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differences between Dell and Ford, which would obstacle Ford from jumping to a complete

virtual integration.

c) Extending E-Business Alternative

A third and a hybrid solution alternative must be proposed if the differences between Ford

and Dell are considered. This option would be to extend Ford's E-business strategy with

customers and suppliers and make a partial jump towards virtual integration. The Internet

would serve as a primary tool for dealing with suppliers and allow for customization of

automobiles by consumers. This strategy incorporates many of Dell's supply chain activities

like direct sales, customization, and information sharing over the Web. There would also be

IT initiatives taken to reduce order to delivery time and inventory, share production data

with suppliers, and track materials throughout the supply chain. However, this approach

would not fully adopt Dell's virtual integration model. There would still be dealers serving as

distribution centers for the product, only the cars sold on the Internet would be built to

order, and Ford's factory operations would remain largely the same. E-Business alternative,

which the company chose as the heart of its new vision, will be examined in detail in the

following sections.

4 E-BUSINESS STRATEGY AND AFTER 1999

Beyond the information presented in the case a further look to Ford’s decision, after 1999,

will be summarized at this section.

In September 1999, Ford announced an ambitious Internet strategy that was endorsed by

CEO Nasser.

Nasser’s vision is a sweeping one. He pictures the day when a buyer hits a button to

order a custom-configured Ford on-line, transmitting information to the dealer who

will deliver it, the finance and insurance units that will underwrite it, the factory that

will build it, the suppliers that provide its components, and the Ford designers

planning future models. 4

4 Jennifer Reingold, Marcia Stepanek, and Diane Brady, “Ford: Accelerating into the On-line Age,” Computing 9 March 2000

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The old “push” model built cars at maximum capacity and then showed them to dealers,

where aggressive selling and rebates unloaded the units consumers did not otherwise find

attractive. The new “pull” model would build cars quickly in response to customer orders, at

least for the more popular combinations. Unusual configurations would take longer. Cars

would be built to order, dealerships would report problems immediately to the factories for

quick changes, and suppliers would control inventories at Ford plants. The new “order-to-

delivery” basis would generate a constant flow of consumer preference information to

suppliers who would fill parts orders in real time without waiting for a purchase order.

Brian P. Kelly, Ford’s e-business vice president, described Ford’s plan to rebuild itself as a

move to “consumercentric” from “dealercentric” and stated that Ford would transform itself

from being a “manufacturer to dealers” into a “marketer to consumers”.

Our consumer-connect business has a totally integrated strategy to reach the

consumer in conjunction with our dealers at every touch point. . . . Ford continues

to be at the forefront, integrating our global e-commerce activity from the consumer

back through the entire supply chain, including linking our Customer Assistance

Centers and in-vehicle communications. 5

New Web sites were launched for buyers and owners. In-car computer and communications

services were announced that would bring travel, security, entertainment, and Web access to

the motorist and an electronic connection between consumers and the Ford Motor

Company. In February, the company announced it was purchasing Internet PCs for all

employees, “to reach its vision of being on the leading edge of technology and connect more

closely with its customers.” In March 2000, the company announced the creation of a

business- to-business integrated supplier exchange through a single global portal – a joint

venture with GM and DaimlerChrysler to create the world’s largest virtual marketplace. It

seemed as if Ford had adopted the Dell model:

• Sell direct

• Mass-produce customized products

• Build to order

5 Brian P. Kelly, “Ford Motor Company: Inside the Company News Room,” 15 September 1999.

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• Substitute virtual integration with suppliers for vertical integration

• All hosted and integrated on the Web

4.1 Transformation of the Customer, Dealer, and Owner Relationships

Goal of becoming the world’s leading consumer company required a fundamental change in

the selling process; a new, continuous relationship between Ford and the customers; and a

restructured and integrated set of processes from buyer through the supply chain. Nasser

also had to address the role of the retail dealer. Any change in the buying process for autos

and any direct company-to-consumer relationship had to either embrace the dealers and

incorporate them into the process or circumvent them, risking an all-out fight because the

dealers controlled the market space between the consumer and the manufacturers.

Disintermediating the dealers with technology and information was a tempting thought.

As the new vision began unfolding, it became clear that the role of the dealer would be a

central issue. In Kelly’s words, “. . . from dealer-centric to consumer-centric had an

ominous ring for dealers.” Harold Kutner, group vice president of worldwide purchasing at

GM and the company’s e-business thought leader, rejected the idea that people wanted to

buy cars from dealer inventories. He said 70 percent of customers would want to custom-

order and would be happier6. Neither Ford nor GM seemed quite sure what to do with their

dealers.

Dealers saw both hope and danger in Ford’s new directions. A more market-aware Ford

could be producing vehicles much closer to what consumers actually wanted. Shorter cycle

times would also help dealers. Dealers took ownership when the vehicle rolled off the

assembly line and hit the common carrier. But it could be anywhere from a week to five

weeks before the vehicles actually reached the dealer.

The “consumercentric” aspect of the new strategy concerned dealers. Dealers with an

aggressive Web-selling capability were suspicious of the selling practices on the Ford.com

6 Philip Evans and Thomas Wurster, Blown to Bits: How the New Economics of Information Transforms

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site. Also some dealers were not convinced that the “lowest price on the page” type of

selling encouraged by the Web was what buyers really wanted.

But some dealers thought the Web would help them more than it would help Ford. As a

dealer explained, “Fifty percent of my business will soon be Internet-related. I have a list of

5,000 names. We’ll use that list and what we know about those vehicles to fill up my service

bays — we’ll target special mailings and notices to segments of that data base: people who

need an alignment or an inspection, who have a vehicle about to come off lease, or who’re

about ready for a new car.”

4.2 Customer Assistance Centers and In-Vehicle Communication

Ford’s plan to build a direct relationship with its customers was implemented with the

Customer Assistance Centers and its In-Vehicle Communication products. There were three

new consumer sites:

- BuyerConnection, where buyers could custom-order a vehicle, receive a quote from a local

dealer, and apply for financing and insurance (the first national on-line “request-a-quote”

system);

- DealerConnection, where buyers could find a dealer, review dealer inventories,

see dealer service specials, and make appointments for service; and

- OwnerConnection, which was a virtual community of owners providing forums,

maintenance schedules, and special offers from Hertz.

These early efforts met with some success. Ford was the first automotive manufacturer to

include its family of brands on a single Home Page, allowing consumers single-click access

to the Aston Martin, Jaguar, Volvo, Lincoln, Mercury, Ford, and Mazda brands. Ford.com

was a leading automotive destination, with more monthly “hits” than any other

manufacturer, according to MediaMetrix. DealerConnection was giving 35,000 quotes a

month to Ford and Lincoln Mercury dealers.7

7 “Car Dealer Group Plans to Link Its Members with E-Commerce Site,” Wall Street Journal, 16 March 2000.

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Ford’s interest in new strategy was not just as a means of building an enduring customer

relationship. Ford had also been intrigued with the other 57 percent of the automobile

revenue “downstream” from the first purchase. Several of its acquisitions would take Ford

further into this business, like Ford Credit used for used-car financing or after market

accessories online, etc.

4.3 Supply-Chain Integration: The Trading Hubs

On November 2, 1999, Ford announced the formation of AutoXchange, an automotive e-

business integrated supply chain to be created and run by a newly formed joint venture with

Oracle Corporation. The venture would initially facilitate Ford’s $80 billion in annual

purchasing transactions with its more than 30,000 suppliers and $300-billion extended

supply chain. The two companies would create the world’s first automotive on-line supply

chain network, and the world’s largest business-to-business electronic network. It would

also be the e-business backbone for warranty transactions and design collaboration. This

new trading hub was expected to reduce Ford’s purchasing costs dramatically and increase its

operating efficiencies through an integrated Internet supply-chain system. “Thirty percent of

a vehicle’s cost comes after it leaves the assembly line.” 8Dealers typically carried 60 days’

inventory, but with AutoXchange, “You really don’t need more than 30 days,” observed a

Ford executive. 9Further, it would extend Ford’s core business into a virtual e-business

enterprise, allowing direct connections of the supply chain to the consumer to reduce Ford’s

time to market. AutoXchange would use catalogs as well as on-line auctions for components

and materials. Early applications would be the purchasing of production parts and

nonproduction goods and services; next would be order tracking, financial services, and

access to CAD drawings; later would come status of payments—a top priority for suppliers.

AutoXchange would take a “small fee” from every transaction; first-year-revenue forecasts

were $200 million. In five years, revenues could be $5 billion. The trading hub was to be

spun off as a separate venture; some analysts estimated it might produce a market cap of

$100 billion. It was expected that Ford’s suppliers would be able to invest in the venture.

8 Robert Rewey, group vice president for Sales, Marketing, and Service, taken from customer profile brochure of Cisco, 2001

9 Davis Garrity, global auto-research coordinator at Dresdner Kleinwort Benson., taken from customer profile brochure of Cisco, 2001

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There were also many concerns: the value of the long-established supplier relationships

could be jeopardized and those first-tier suppliers could themselves become transformed in

terms of their supplier relationships; smaller suppliers and new suppliers could be precluded

from using the system through lack of knowledge.

4.4 Transforming the Supply Chain

As noted earlier, Ford’s e-business vision for Ford was driven in part by the promise of

major reductions in existing supply-chain costs, which included both real costs to the

consumer and opportunity costs to the manufacturer. The latter included stockout costs

(lost sales from not having the right vehicle in the right place), costs of suboptimal mix, and

price discounts by the manufacturer and dealer that were a result of manufacturing vehicles

based on the needs of the inflexible supply chain and the sales force, rather than the needs of

the consumer.

Inventory costs were only one of the costs associated with the material component of the

vehicle supply chain. Purchased materials were the largest component of cost for an

automotive OEM manufacturer (and the single largest category of costs across the entire

supply chain), roughly 50 percent of the retail sales price10. The costs of procuring these

materials included both product-related costs (direct and indirect materials), which were

fairly easy to determine, and process-related costs (the costs of activities associated with

procurement), which were less easy to determine. Such activities included needs

identification, vendor selection and material ordering, review and approval, and inventory

costs.

In pursuing their e-business vision, Ford executives acknowledged that the transformation of

the business would start with B2B supply-chain initiatives at the “back end” of the chain,

connecting the manufacturer with its thousands of suppliers, as noted earlier. By moving

suppliers away from their EDI systems onto the Web, dramatic reductions in back-end

supply-chain costs were possible. Web-enabled forecasting, planning, and scheduling

10 “eAutomotive: Gentlemen, Start Your Search Engines,” Goldman Sachs Research Department, January 2000

19

processes could drive out work-in-process inventory at both suppliers and manufacturer;

manufacturing productivity would also rise through improved asset utilization and reduced

overtime. On-line procurement processes could eliminate much of the low value-added

administrative work now associated with purchasing. A rich database of on-line material

requirements and transactions could enable material cost reductions by aligning material

specifications, coordinating and leveraging volume scale across the entire supply chain, and

consolidating the buy with cost-advantaged suppliers. The implementation of a true make to-

order system would have even greater economic implications, both in terms of cost

reduction and revenue enhancement, by providing consumers with exactly the product they

desired.

5 CONCLUSION

Ford extended its E-business strategy attempt a partial move towards virtual integration.

This supply chain strategy takes the nature of the auto industry into consideration and adapts

Dell's model to better fit Ford. Dealers would still play a role with distribution, and core

processes at Ford would remain the same. Nevertheless, the Internet should become a

greater part of Ford's sales methods to consumers and communications with suppliers.

Although it is not a complete adoption of Dell's virtual integration model, utilizing these

information technologies will enhance supply chain activities for Ford and create value for

the company.

20

6 REFERENCES

Robinson, E. (2001) The Re-Education of Jacques Nasser

“The Cutting Edge; On-Line Purchases Save Ford $10 Million.” Los Angeles Times, 10

February 2000

“Ford Motor Company: The American Road.” Hoover’s (2000)

Dohring Report on Automotive E-Commerce (1999)

Georgievksi, Biba (1999). “The Case for Higher Levels of Integration,” Presented at

Interiors Exposition; Working Paper, Visteon Automotive Systems, Dearborn, MI.

“The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell,”

Harvard Business review, March-April 1998

Cusumano, Kahl, Suarez (2008). “A Theory of Services in Product Industries”

Holweg, Greenwood, Product Variety, Life Cycles, and Rate of Innovation – Trends in the

UK Automotive Industry, 1991

Brandt, A. Ford’s E-Business Strategy, Oct. 21, 2008

“Ford 2000 a Global Vision”, The Irish Times, Business 2000

Associates, J. F. (2001) Impact of E-Commerce on Auto Dealers. Washington

Helper, S., & MacDuffie, J. P., (2000). E-volving the Auto Industry: E-Commerce Effects on

Consumer and Supplier Relationships, Berkeley University