Ford Motor Company: Procurement

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

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FORD: BACKGROUND

Ford Motor Company Has Been Able to Improve Market Share at the Expense of GM and Imports
U.S. Car and Light Truck Market Share
40% 35% 30% 25% 20% 15%

(1988 - 1992) GM Imports Ford

Chrysler
10% 5% 0% 1988 1989 1990 1991 1992

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.
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FORD: BACKGROUND

Ford Motor Has a Complex Manufacturing and Supply Chain in North America
Ford Motors North America

Approximately a 1,500 Suppliers

17 Production/Assem bly Plants

Dealers

Fleet Managers

Government Municipalities

Exports

a: Raw materials, components, and parts

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FORD: BACKGROUND

Ford Faces Severe Market and Customer Challenges

Current Challenges Increased foreign and domestic competition Shifting consumer demographics What They Mean to Ford Motors Reduced sales and prices

Consumers demand higher-value cars at lower prices Downward pressures on price High cost of compliance (e.g., new fuelemission regulations) Need to increase partnership with suppliers and vendors

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.
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FORD: BUSINESS PROCESS

Fords Traditional Procurement Process Suffered from Many Roadblocks

Information Exchange

Manual and redundant procedures

TA

CE PRI E C PRI

Same Part

Suppliers are Adversaries

Suppliers for

Multiple
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FORD: BUSINESS PROCESS

In Addition, It Was Paper-Based and Labor Intensive

Old Process
Purchasing
P.O. P.O. Copy

Accounts Payable

P.O. Original
Receiving Documentation

P.O. No Invoice
(Sometimes received before the goods arrive)

All Match ?

Obtain reconciliation information from Purchasing and Receiving

Goods

Payment

Yes

Goods and Shipping Receipt

Supplier Accounts Payable alone employed more than 500 people.

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Receiving Department
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FORD: BUSINESS PROCESS

The Complexity of This Process Translated into Significant Inefficiencies

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

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FORD: BUSINESS PROCESS

Fords Experience in Redesigning Provisioning Illustrates the Pitfalls of Just Automating the Business Processes
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

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FORD: BUSINESS PROCESS

Characteristics of Fords New Approach to Procurement

The creation of Partnership relations with suppliers characterized by:

- A high level of information sharing - A commitment to overall quality

Supplier Management

- Cost reduction - Joint problem solving

Partners are selected based on quality, technology, technical support, delivery, and cost
Single-vendor sourcing

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FORD: BUSINESS PROCESS

Characteristics of Fords New Approach to Procurement (cont.)

Revolutionary pathcost-reduction effort aimed at eliminating invoices instead of reducing the unit cost of invoice processing Process 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
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People and Organization

FORD: BUSINESS PROCESS

Fords New Process Goes Beyond Simple Data Automation to Use IT as a True Enabler
Purchasing

Current Process
Shared Database P.O. Special Cases

Accounts Payable

P.O. EFT

Receiving

P.O.

EDI

Payment Authorization

EFT P.O. Interactive Link

Yes

Electronic Match of Received Goods vs. P.O.

No

Goods

Trading Partner
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Return Goods to Trading Partner

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FORD: BUSINESS PROCESS

The New Procurement Process Is a Whole New Way of Doing Business

Old
Multiple suppliers: suppliers are adversaries

New
Selected suppliers are partnersthey share in the success and failure Elimination of spot purchases High level of bidirectional information exchange among the partners Decision-making responsibility at the lowest possible level

Spot purchases are common Minimal (mostly unidirectional) information exchange with suppliers Low employee empowermentlack of decisionmaking 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

One interface with suppliers

Electronic 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
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Increased workload on the authorizing department (Accounts Payable)

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FORD: BUSINESS PROCESS

Information Technology Now Acts as an Enabler to the 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)
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FORD: BUSINESS PROCESS

This Partnership and Process Redesign Effort Helped Ford to Identify Further Value-Added Partnership Relationships
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

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FORD: IT

Ford Continues to Find Innovative Ways to Use Technology in the Procurement Process
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 preformatted 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

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FORD: RESULTS OBTAINED

Ford Achieved Many Benefits from the Process Redesign

Cost Reduction Benefits 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

Increased Quality

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

Reduced inventories Achieved high levels of purchasing economies of scale Elimination of overpayment Streamlined administrative functions practically eliminated paperwork and indirect overhead Supplier Benefits Reduces their cost of doing business with Ford:
Less paperwork Fewer errors

Better production planning, leading to: Staff Benefits Higher employee morale More interesting work
Reduced inventories

Improved product quality

Better delivery schedules

Joint problem solving

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FORD: BEST PRACTICES

Fords Procurement Process Suggests Several Best Practices

Operating Procurement Philosophy
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

Supplier Management

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

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FORD: BEST PRACTICES

Fords Procurement Process Suggests Several Best Practices (cont)

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

People and Organization

Information Management

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

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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

Leadership
Distributor Needs
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

Structure
Team-based Flexible

Culture
Supplier- and marketfocused Empowered Continuous improvement Get it right the first time

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

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FORD: IMPLICATIONS

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 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 drivenimplementation strategy:

- Fords implementation took five yearsmuch longer than it should have
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