Ford Motor Company: Procurement

1
Ford Motor CompanyProcurement

• Background
• Business Process Redesign Process, IT
• Results Obtained
• Implications Process, IT

2
Ford Motor Company Has Been Able to Improve
Market Share at the Expense of GM and Imports
FORD BACKGROUND
U.S. Car and Light Truck Market Share (1988 -
1992)
40
35
GM
30
Imports
25
Ford
20
15
Chrysler
10
5
0
1992
1990
1989
1988
1991

• Ford is the fourth-largest industrial corporation
  in the world the second largest producer of cars
  and trucks

Ford exhibits good revenue and profit potential
with a much leaner organization than in the past.
3
Ford Motor Has a Complex Manufacturing and Supply
Chain in North America
FORD BACKGROUND
Ford Motors North America
17 Production/Assembly Plants
Approximately 1,500 Suppliers
a
Dealers
Fleet Managers
Government
Municipalities
Exports
a Raw materials, components, and parts
4
Ford Faces Severe Market and Customer Challenges
FORD BACKGROUND
What They Mean to Ford Motors
Current Challenges
Reduced sales and prices Consumers demand
higher-value cars at lower prices Downward
pressures on price High cost of compliance
(e.g., new fuel- emission regulations) Need to
increase partnership with suppliers and vendors
Increased foreign and domestic competition
Shifting consumer demographics
Industry-wide over capacity Increased
attention to environmental concerns Increased
reliance on automotive systems over just parts
Since 60 of Fords manufacturing cost is
explained by purchased parts and materials, Ford
is under tremendous pressure to achieve lower
cost solutions.
5
Fords Traditional Procurement Process Suffered
from Many Roadblocks
FORD BUSINESS PROCESS
Manual and redundant procedures
6
In Addition, It Was Paper-Based and Labor
Intensive
FORD BUSINESS PROCESS
Old Process
Purchasing
Accounts Payable
P.O. Copy
P.O.
P.O. Original
Receiving Documentation
P.O.
No
Obtain reconciliation information
from Purchasing and Receiving
Invoice (Sometimes received before the goods
arrive)
All Match ?
Payment
Yes
Goods
Goods and Shipping Receipt
Supplier
Receiving Department
Accounts Payable alone employed more than 500
people.
7
The Complexity of This Process Translated into
Significant Inefficiencies
FORD BUSINESS PROCESS

• For a given order, Accounts Payable had to deal
  with three different documents purchase order,
  receiving document, and invoice
• Accounts Payable had to match 14 data items
  among the three documents
• 80 of the Accounts Payable personnel efforts
  were spent on reconciling mismatches
• Requiring several weeks for resolution
• Triggering payment delays and inaccuracies (over-
  and underpayments) to suppliers
• Fords Accounts Payable headcount was 400 higher
  than that of other automakers
• In addition, Fords policy of multi-vendor
  sourcing triggered limited ability to take
  advantage of economies of scale and price
  reductions

8
Fords Experience in Redesigning Provisioning
Illustrates the Pitfalls of Just Automating the
Business Processes
FORD BUSINESS PROCESS

• Fords initial disappointments stemmed from just
  automating information without rethinking the
  business processes
• Ford unsuccessfully attacked the problem for
  eight years, between 1980 and 1989, by largely
  substituting IT for people
• Despite automation, supplier payments involved a
  lengthy checking process PO, invoice, plant
  warehouse
• Fords initial goal was to cut just 100 out of
  500 provisioning jobs
• Totally re-engineering the processenabled by
  appropriate technologyallowed elimination of 400
  provisioning jobs

9
Characteristics of Fords New Approach to
Procurement
FORD BUSINESS PROCESS

• The creation of Partnership relations with
  suppliers characterized by
• A high level of information sharing
• A commitment to overall quality
• Cost reduction
• Joint problem solving
• Partners are selected based on quality,
  technology, technical support, delivery, and cost
• Single-vendor sourcing

Supplier Management
10
Characteristics of Fords New Approach to
Procurement (cont.)
FORD BUSINESS PROCESS

• Revolutionary pathcost-reduction effort aimed at
  eliminating invoices instead of reducing the unit
  cost of invoice processing
• Redesign in the nature of exchange between the
  partnersa Virtual Organization through a
  business network redesign
• Elimination of redundancies in processing
• High level of information technology utilization
  (and investment) IT is used as engine to alter
  the way work is done
• Decision-making responsibility by individuals
  executing the taskspayment authorization shifts
  to receiving dock
• Employee empowerment

Process
People and Organization
11
Fords New Process Goes Beyond Simple Data
Automation to Use IT as a True Enabler
FORD BUSINESS PROCESS
Current Process
Purchasing
Accounts Payable
Shared Database
Special Cases
P.O.
P.O.
EFT
P.O.
Receiving
EDI
Payment Authorization
Electronic Match of Received Goods vs. P.O.
EFT
No
Yes
P.O.
Interactive Link
Goods
Return Goods to Trading Partner
Trading Partner
12
The New Procurement Process Is a Whole New Way of
Doing Business
FORD BUSINESS PROCESS
New
Old
Selected suppliers are partnersthey share in
the success and failure Elimination of spot
purchases High level of bidirectional
information exchange among the partners Decisio
n-making responsibility at the lowest possible
level One interface with suppliers Electr
onic process with high IT utilization matching
of purchase order with goods Payment is made
upon receipt of goods (in some divisions, payment
is made upon use of goods) using evaluated
receipts and EFT Accounts Payable personnel
concentrating their efforts on special cases only
Multiple suppliers suppliers are
adversaries Spot purchases are
common Minimal (mostly unidirectional)
information exchange with suppliers Low
employee empowermentlack of decision- making
authority and responsibility at the execution
level Potentially many interfaces with
suppliers, increasing the potential of error
Paper and labor intensivehigh administrative
costs, excessive routing of documents, duplicate
documents, link documents, manual
matching Payments to suppliers are made upon
receipt of the invoice Increased workload on
the authorizing department (Accounts Payable)
13
Information Technology Now Acts as an Enabler to
the Business Process
FORD BUSINESS PROCESS

• On-lineshared database to facilitate
  simultaneous availability of required information
  wherever needed
• Wireless data communication/portable
  computersreceiving-dock personnel can send and
  receive information wherever they are
• Decision support system assisting reception
  clerk
• Verifying shipments
• Authorizing payments to partners (combined with
  bar coding technology)
• Electronic Data Interchange (EDI) for transfer of
  purchasing orders, payment notices, and other
  standard business documents
• Direct Data Link (DDL) allowing suppliers to
  access Fords inventory systems to view real-time
  production information to anticipate orders and
  prepare for production
• Electronic mail (E-Mail) for text-based messages
  accompanying the transaction EDI data
• Electronic Funds Transfer (EFT)

14
This Partnership and Process Redesign Effort
Helped Ford to Identify Further Value-Added
Partnership Relationships 
FORD BUSINESS PROCESS

• Established partnership relations with equipment
  suppliers/manufacturers to bring them into the
  process of product design early (simultaneous
  engineering) and reduce the delivery time
• Entered into partnership relationships with
  transportation companies
• Placing all responsibility for transportation and
  logistics with one company, to reduce total
  transportation costs
• Improving discipline in the total transportation
  pipeline

15
Ford Continues to Find Innovative Ways to Use
Technology in the Procurement Process
FORD IT

• Ford now has improved its ability to trade
  computer-aided design and manufacturing (CAD/CAM)
  files with suppliers through pioneering the use
  of new EDI-based administrative processes
• Use of E-Mail to receive cost-saving designs from
  partners using pre-formatted forms that are
  entered into Fords database automatically
• A potential cost saving tag of 500 - 600
  mm/year
• It uses EDI to streamline the supply
  transportation process
• High cost-saving potential, given that Ford buys
  50 of its materials--both parts and raw
  materials
• In addition, Ford suppliers now have a seamless
  way to transfer data files (e.g., spreadsheets)
  with the company

16
Ford Achieved Many Benefits from the Process
Redesign
FORD RESULTS OBTAINED
Cost Reduction Benefits
Increased Quality

• Accounts payable staff reduction of 75 (over 375
  individuals)
• Accounts payable in some divisions is nearly 5
  of old headcount dedicated only to handling
  exceptional situations
• Reduced inventories
• Achieved high levels of purchasing economies of
  scale
• Elimination of overpayment
• Streamlined administrative functionspractically
  eliminated paperwork and indirect overhead

• Overall product quality and cost improvements
• Suppliers are not consumed/concerned about
  winning the next contract and selling, but on
  improving product quality and cost

Supplier Benefits

• Reduces their cost of doing business with Ford
• Less paperwork
• Fewer errors
• Better production planning, leading to
• Reduced inventories
• Improved product quality
• Better delivery schedules
• Joint problem solving

Staff Benefits

• Higher employee morale
• More interesting work

17
Fords Procurement Process Suggests Several Best
Practices
FORD BEST PRACTICES

• Form partnership relationships with trading
  partners
• Consolidate/reduce supplier base
• Shift focus from initial purchase cost to cost
  performance over time
• Define and implement trading partners selection
  program
• Initiate formal supplier performance and rating
  program
• Institute long-term contracts with selected
  trading partners
• Move towards single sourcing
• Fords goal to reduce the number of suppliers by
  one-third by 1995
• Maintain high level of information exchange with
  trading partners
• Encourage early trading partner involvement in
  product design stages
• Provide suppliers with effective training
• Delegate quality inspection to trading partners
• Our goal is to have our suppliers be
  quality-independent

Operating Procurement Philosophy
Supplier Management
18
Fords Procurement Process Suggests Several Best
Practices (cont)
FORD BEST PRACTICES

• Empower employees
• Assist employees in performing their jobs through
  proper training and tools (especially technology)
• Promote high employee involvement at all levels
• Use integrated teams including management and
  union
• Increased commitment to use Information
  Technology as a true enabler
• An integrated team representing MIS and all
  affected functions/departments/ processes,
  including legal and auditing
• Assessment of the build vs. buy options
• Selection of the appropriate technology,
  network, and communication architecture and
  standard plan of implementation
• Move toward a paperless process
• Data system accuracy and security issues
• Ensure on-line availability and accuracy of all
  procurement process information
• Provide trading partners with a seamless way to
  access information

People and Organization
Information Management
19
Fords Organization Reinforces Satisfaction of
Customer and Supplier Needs
Fords Organization
People

• Effective, skill-based hiring
• Train for skills and career longevity
• Develop people for growth
• Pay for performance
• Use evaluations for development and compensation

Supplier Needs
Structure
Culture
Leadership
Distributor Needs

• Supplier- and market-focused
• Empowered
• Continuous improvement
• Get it right the first time

• Clear, actionable goals based on issues customers
  and suppliers care about
• Companys heros get it right the first time and
  take risks
• Two-way, frequent communication

• Team-based
• Flexible

Internal Organization Needs
Systems

• Clearly defined purchasing processes one way to
  do the work
• Measurement and reward systems aligned with
  management goals
• Integrated information and automated systems

20
Key Lessons Learned . . . Technology by Itself
Offers a Limited Advantage, but When Leveraged by
an IT-enabled Process Redesign, the Result Is a
Winning Execution
FORD IMPLICATIONS

• A pure automation approach to the accounts
  payable department would have yielded a 20
  reduction in headcount
• IT is a business investment, not an
  administrative expense
• Need for alignment between the organization
  structure and technology
• Electronic integration through innovative
  information exchanges offers a serious
  alternative to vertical and horizontal
  integration
• Supplier involvement is critical
• Pitfalls...
• Lack of a rigorousand process drivenimplementati
  on strategy
• Fords implementation took five yearsmuch longer
  than it should have