Supply Chain Strategy Case Study (Ford Motor)
In this assignment, you will apply strategy concepts to a real-world supply chain relationship management case study.
Review Case 2-3, “Ford Motor Company: Align Business Framework,” on pages 41–43 of your Purchasing and Supply Management text.
Complete the following:
- Write a 3–4-page paper addressing Tony’s challenges identified under “Finalizing the Plan.”
- Describe Ford’s competitive strategy. Provide examples of its competitive strategy.
- Compare and contrast the old and new contract and negotiation approaches.
- Analyze the impact of Ford’s new supplier relationship approach on its competitive strategy.
- Evaluate Ford’s new supplier relationship approach and how this new approach will improve relationships with suppliers.
Ford Motor Company: Aligned Business Framework2
Tony Brown, senior vice president of global sourcing at Ford Motor Company (Ford), was putting the finishing touches on his plan for the company’s new supply chain strategy—“Aligned Business Framework” (ABF). ABF was a bold step that would significantly change the relationships between Ford and its suppliers. Tony described his motivation: “We want to operate a supply chain management system that delivers on the dimensions of quality, technology, delivery and cost, while executing programs in a disciplined fashion with faster time-to-market.”3
It was August 10, 2005, and Tony was expected to review the final details of his proposal with company chairman and CEO William Clay (Bill) Ford Jr. before making a formal public announcement the following month. ABF would substantially reduce the number of suppliers and give those that remained long-term contracts and early involvement in new product development programs. Tony expected that the strategy would provide benefits to Ford through overall lower costs, while suppliers would benefit from long-term financial stability and profitability. The question remained, however, how he would convince Ford’s supplier community to commit to the principles of ABF.
FORD MOTOR COMPANY
Founded in 1903, Ford was the no. 2 U.S. automaker with global sales of approximately $177 billion. In 2005, its global brands included Ford, Lincoln, Mercury, Jaguar, Land Rover, Aston Martin, and Volvo.4 In recent years all of the “Detroit 3” (General Motors, Ford, and Chrysler) automakers were struggling under intense global competition, rising fuel prices, and steep product discounts and rebates. In the most recent quarter, Ford reported a $1.1 billion operating loss and the company’s debt had recently been downgraded to junk-bond status. To turn around company performance, Ford had announced plans to cut its salaried workforce, reduce capacity by closing plants and selling the Hertz rental car division, and ramp up production of hybrid vehicles.5
ALIGNED BUSINESS FRAMEWORK (ABF)
The Ford global supply chain included approximately 2,500 production and 9,000 nonproduction suppliers, with operations in more than 60 countries, supporting 107 Ford manufacturing sites. Total purchases in 2005 were more than $90 billion for roughly 250 production commodities (e.g., seats, heating and cooling systems, advanced electronics, and steering systems) and 500 nonproduction commodities (e.g., health care, software, logistics, and marketing and advertising services). The more than 130,000 active production parts accounted for approximately $70 billion of total annual purchases.6
Historically Ford leaned heavily on suppliers for annual across-the-board price reductions that averaged approximately 3 percent, although requests for more substantial reductions were commonplace. This environment had created contemptuous relationships between Ford and its suppliers, which were reinforced through annual performance evaluations and bonuses for buyers based on achieving year-over-year price reduction objectives. The foundation of the new ABF strategy was a cultural shift from confrontational to collaborative supplier relationships. Tony commented on his assessment of Ford’s current supply chain strategy: “We have a problem with the business model in this industry. It is not working effectively for our suppliers. It is not working effectively for us. When my day is dominated by issues related to financially distressed suppliers, commodity price shocks, quality problems and costs issues, it’s clear to me that there must be a better approach.”7
ABF targeted companywide cost reductions of 10 percent of Ford’s annual spend of production parts by 2010—$7 billion per year—by adopting what Tony considered best practices approach to supply chain management and supplier partnerships: “It’s an environment between Ford and a select family of suppliers where innovative ideas can emerge, and then be incubated, evaluated and incorporated into our products.”8 Under the new system, preferred suppliers would be matched with Ford purchasing and engineering managers to work on projects to achieve quality, cost, and delivery goals. The 20 key elements of the ABF that Tony planned to propose are provided in Exhibit 1, which Brown described as “a kinder, gentler era of cooperation from global suppliers that can be implemented beyond North America.”9
EXHIBIT 1 Key Elements of ABF10
|Ford Commitments||Bilateral Commitments||Supplier Commitments|
|• Up-front reimbursement of supplier engineering, design, and testing
• Long-term sourcing
• Improved commonality and reuse
• Improved product, cycle plan, and forecast volume stability
• Sharing of forecast volumes and product plans (beyond 3 years)
• More disciplined program execution through Ford Global Product Development system
|• Achieve best-in-class quality
• Data transparency
• Agree on detailed cost models
• Focus on total costs, included elimination of emphasis on bins
• Competitive cost at Job no. 1, with less emphasis on year-over-year price reductions
• Open collaboration on global manufacturing, engineering footprint
• Ongoing senior leadership communication
• Data exchange remains confidential
|• Share current financial data to demonstrate health
• Backstop other commodity suppliers
• Manage and assure proper working conditions in their facilities and in the facilities of sub-tiers
• Sourcing of minority- and women-owned suppliers
• Use mutually agreeable multi-party agreement in directed tier 2 sourcing scenarios
• Technological innovations will be provided to Ford
ony was proposing that in the first phase of the ABF implementation, his supply organization would focus on 20 high-impact commodity groups, such as seats, tires, and bumpers, where the automaker spent approximately $35 billion per year with 200 suppliers. The plan was to reduce the number of suppliers for these commodities to 100 by the 2009 model year. In the long term, Tony’s objective was to shrink the production supply base from 2,500 to 1,000.11
FINALIZING THE PLAN
Tony recognized that there would be a great many questions from other Ford executives, members of his purchasing organization and suppliers regarding how ABF would be implemented. There were obviously going to be winners and losers from the existing Ford supplier community under ABF and many of Ford’s existing suppliers would have to be told that they would not be participating in future programs. The preferred suppliers would have many questions regarding how their relationships would function with Ford in the future. For example, it was expected that suppliers would benefit from higher capacity utilization as a result of the increased production volumes. Furthermore, additional benefits were anticipated from greater collaboration, early supplier involvement in new product development, and supplier innovation. How would the associated costs and benefits be measured and shared among Ford and its suppliers?
Ford had a decades-long tradition of confrontational relationships with its supplier community. A recent survey of North American automotive tier 1 suppliers ranked Ford second to last with a score of 157 versus top-ranked Toyota at 415 and Honda at 375 (scale: 500 = very good, 0 = very poor).12 Turning around relationships with suppliers could take years. Given the difficult times in the industry and at Ford, Tony knew that Bill Ford would have questions about supplier skepticism regarding the company’s motivations behind ABF and how quickly the plan would start to show results.
Tony Brown believed that it was necessary to make major changes to Ford’s supply chain if the company was going to survive. As he got ready for his meeting with Mr. Ford, Tony pondered how he should proceed with implementation, and specifically how suppliers could be convinced to buy into the principles of ABF. Tony commented on the challenges that ABF presented: “This is not business as usual. We’re not only asking our suppliers to step up. We’re also asking ourselves to step up.”13
1 R. M. Monczka and K. J. Petersen, Supply Strategy Implementation: Current State and Future Opportunities (Tempe, AZ: CAPS Research, 2008). S. D. Hunt and D. Davis, “Grounding Supply Chain Management in Resource-Advantage Theory: In Defense of a Resource-Based View of the Firm,” Journal of Supply Chain Management 48, no. 2 (2012), pp. 14–20.
2 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Ford Motor Company or any of its employees.
3 Tom Stundza, “Ford Has a Better Idea,” Purchasing 135, no. 12 (2006), p. 49.
4 Ford Motor Company 2005 annual report.
5 Jeffrey McCracken, “Ford Retools: Seeks Big Savings by Shaking Up Parts Supply System,” The Globe & Mail, September 29, 2005, p. B19.
7Stundza, “Ford Has a Better Idea, p. 49.
10 Presentation by Tony Brown, October 7, 2005, www.oesa.org/cmspages/getAttch.php?id=180.
11 Jeffrey McCracken, “Ford Retools: Seeks Big Savings by Shaking Up Parts Supply System,” p. B19.
12 John Henke, Planning Perspectives, Birmingham, Michigan, 2008.
13 “Ford Key Suppliers Roll Out Innovative Business Model,” Ford Motor Company press release, September 29, 2005, http://media.ford.com.newsroom/release.