Road Testing The Ford Supply Chain

Will build-to-order in the automotive industry jeopardize quality? We'll have the next decade to find out.

[From iSource Business, July 2001] Anyone who has ever bought a new car knows just how disagreeable the process can be. There's that high-pressure salesman urging you to buy what you don't really want, while at the same time you're unable to get what you do want. The black interior, super sound system and those white stripes on the wheels? That car will take three months to deliver, you're told. So you settle for less  probably not the best customer relationship strategy for a car company.

Ford Motor Co. has a better idea. The Dearborn, Mich.-based automaker wants you to get the exact car of your dreams within 15 days  at most. This heady promise will take at least a decade to bear fruit, however. In the meantime, Ford is rebuilding its infrastructure along the lines of a customer built-to-order process. The first phase of this Web-enabled strategy, which consists of locating preferred vehicles at Ford's 4,600 U.S. dealerships or in its manufacturing pipeline, has been smooth. But, as Ford and other automakers gear up to satisfy future built-to-order (BTO) customer demands, they're in for a bumpy ride.

It's not that the strategy isn't sound, rather, it's the getting there that requires major changes in the automotive industry supply chain. Automotive suppliers, already overwhelmed by automakers' demands, are routinely required to decrease the price of their products 3 percent each year unless there are significant product enhancements. That's already tough enough on profit margins, but when DaimlerChrysler insists its suppliers reduce the price of their products by 5 percent, as it did in January, margins become devastatingly thin.

Suppliers must also invest in expensive technology, like joining the Internet-based virtual marketplace Covisint, which was founded by Ford, DaimlerChrysler and General Motors. The automakers expect to shift the $80 billion they each spend procuring supplies on an annual basis to Covisint, meaning that if suppliers want to participate in this bonanza they must junk their expensive electronic data interchange (EDI) systems and replace them with Web-based ones.

Although the strategy at Ford is to give consumers exactly what they want when they want it, the onus is on suppliers to make it happen. That won't be a Sunday drive in the park. As suppliers re-engineer their companies to attain a shorter product-to-market cycle, will this affect quality? And will the emphasis on speed cause inferior products to infect the marketplace? These questions are surfacing as Ford and Firestone confront the tidal wave of public outrage over the design defects that have caused the deaths of dozens of individuals over the past four years.

While it would be a stretch to blame Ford's supply chain re-engineering for the debacle, analysts are concerned that, in the rush to build cars to customer specifications, quality will take a back seat to profits. As you compress the supply chain, the challenge is not to compromise quality, says Karen Peterson, an automotive research analyst at the Gartner Group, a Stamford, Conn.-based technology consulting firm.

Tires were one of the few components Ford did not have in its quality assurance program, Peterson notes. They basically left this up to the tire manufacturers. I've heard that Ford now has brought this in as one of its quality metrics that it will watch and measure. If so, that's a good move, but I'm still concerned that quality assurance will be compromised by customer demand initiatives.

The irony is palpable: In trying to give customers the car of their dreams as fast as possible, consumers may end up with a lemon.

Customer Pull

Among automakers, Ford is said to be closest to the BTO finish line. Ford is definitely in front of the pack as far as building cars to customer specifications, says Dan Garretson, senior analyst at Forrester Research, a Cambridge, Mass.-based technology research firm. Yet, when you look at the automotive supply chain, with the thousands and thousands of components involved and the legacy of thousands of tiered suppliers, the task ahead is gargantuan.

Automobile manufacturers seek more aggressive, lean, collaborative and just-in-time manufacturing for one simple reason: their survival. The automotive industry is an asset intensive business, tied up in production facilities and production assets and handcuffed by an expensive labor force. Cars typically are designed and built based on months-old customer data and pushed to dealers for sale. Instead of selling cars that mix and match features to consumers' tastes, dealers sell what's on the lot using discounts and other incentives to close the sale. Consumers are basically shoe-horned into a vehicle via price concessions, Garretson explains. They take the moon roof for free, even though they don't really want it.

Not only does the consumer lose out in this scenario, but it's also expensive for automakers to maintain factories and for dealers to maintain inventory in an overly production-centric industry, says Garretson. Now, thanks to technology, Ford and the other automakers have an opportunity to shift to customer-centric manufacturing, which will help them maximize their asset utilization. By learning exactly what customers want and constructing a production schedule geared to providing that in a reasonable period of time, they can widen their margins. Instead of pushing cars to the dealers, they will pull cars from customers.

Ford is at the first stage of implementing this customer-pull strategy. Last year, the company launched a so-called locate-to-order pilot program in Canada. Consumers log in at and literally custom build the car of their dreams (available only for the Ford Taurus, Windstar and Focus models at this point). They select exterior and interior colors, engine size, transmission type, dashboard design, and so on  all online. Once completed, they click a button and are informed within seconds as to whether or not their ideal car is in inventory at one of the company's North American dealerships or the manufacturing pipeline.

If the car has been or is in the process of being made, the customer is then informed as to how long it will take to have that car delivered to a local Ford dealership, which is typically within 15 days, Ford maintains. We're giving consumers rare access to the plant floor, says James Gouin, CFO of Ford ConsumerConnect. This insight lets them know if we've got the car they want somewhere in North America, giving them a lot more choices than just the cars at their local dealership. If the vehicle is not available immediately or already waiting in the pipeline, then it's back to the usual months-long wait. The silver lining is that the order can be placed directly into Ford's production system (with no need to haggle with high-pressure salesmen) and secured with a $250 credit card deposit. The best aspect of all may be Ford's ePrice strategy, which trades dealer dickering for competitive prices that are explicitly stated on the Web site.

Based on the success of the Canadian pilot program, Ford launched a locate-to-order strategy (called FordDirect) in New Jersey this past January, with plans to scale this up to a national level by the end of the year. As of February 15 New Jersey dealers were online, with the remainder expected by June of this year.

Dream Car Dreams

Of course, locating a car is a lot different than building one to order, which is the vision of Ford's future. To fulfill that promise, the company has to get the buy-in of thousands of suppliers, all reading the customer's order off the same electronic page and collaborating in lockstep to manufacture and deliver that exact car within 15 days. We've been given two objectives by Jac Nasser (Ford's chairman and CEO): enhance customer satisfaction and build our e-business initiatives, says Gouin.

In a way, we've combined these two objectives, leveraging the Internet and e-commerce to give consumers more of what they want. To do that, we must reinvent Ford from the inside out, making all of our core business processes more efficient, less legacy, less complicated and a whole lot faster. Gouin concedes that this is not a challenge you can snap your fingers at and make happen. It will take a concerted effort by us and our partners and at least a decade of full cooperation to reach fruition  to get that dream car in your driveway within 15 days.

The cornerstone of the strategy is Covisint, which Gouin contends will rationalize and streamline the supply chain process, reduce overall inventories and provide improved productivity to all participants. Say the consumer comes into FordDirect and orders a vehicle, he explains. From the moment that button is pushed, the order moves through the scheduling system, giving every supplier the ability to both see the order and schedule the raw materials and components to fulfill it. You create a virtual manufacturing environment where you can't tell the difference between the suppliers and the OEM (original equipment manufacturer). In a sense, we all become part of one big plant.

But, getting suppliers on board to become de facto departments of Ford or GM will not be a slam-dunk, says Peterson. You're talking significant changes in the entire manufacturing process that will require suppliers to retool their own processes, invest in expensive technology and collaborate in an online environment that involves hitherto untold transparency, she says. Some suppliers fear their innovations  their intellectual property  will be vulnerable to predatory competitors.

Covisint has stated it will install the necessary firewalls to prevent such abuses, but there are other, nagging concerns as well. Smaller tier-two suppliers are feeling pinched, stuck in the middle between tier-one suppliers (their customers) and tier-three suppliers (their own suppliers). When a company like DaimlerChrysler demands a 5 percent price reduction from its tier-one suppliers, the tier ones simply pass on the cost reduction to the tier-two suppliers. Unfortunately, tier-two suppliers, that manufacture small parts and components like gears and muffler pipes, can't do the same. A maker of door handles usually is a small concern; it isn't going to go to its steel supplier  a company like U.S. Steel  and demand a 5 percent reduction in the cost of rolled steel. It would be laughed off the plant floor! says Peterson, because many suppliers already are cutting their margins ever closer to the bone. Meanwhile, these suppliers are being asked to jump on the Covisint bandwagon, Peterson says. They're scared that costs will be driven down to them and requirements driven up.

No wonder there are fewer suppliers in the automotive industry, depopulated from about 40,000 suppliers 10 years ago to roughly 25,000 today. Suppliers are merging or being snapped up by others. For example, Heartland Industrial Partners, an LBO private equity fund co-founded by former Reagan budget director David Stockman, within the last 12 months has brought on automotive suppliers, buying MascoTech Inc., a metal forming company; Simpson Industries, a powertrain and chassis machining company; and Global Metal Technologies, a supplier of transmission valves. The amalgamated suppliers are now called Metaldyne Inc.

That's nothing compared to the buying spree undertaken by Lear Corp., a Southfield, Mich.-based tier-one supplier. Lear has acquired 17 companies since 1994, among them Minneapolis-based Automotive Industries, which makes door panels; Masland Industries, a Carlisle, Pa.-based flooring and acoustics company; and Dearborn, Mich.-based United Technologies Automotive, which makes electrical and electronic systems.

To be fair, these acquisitions are guided by strategic desires to make more modular components, like the full interior of a car, rather than piecemeal parts. Gouin says such sub-assembled components slash inefficiencies out of the supply chain. Lear manufactures interiors for us from four sites in close proximity to our plant, he explains. This direct feed allows for more just-in-time manufacturing. Right now, we all believe it takes too long to get the product to market, not because we don't have the right design specifications or right quality checks, but because there's too much inefficiency in the way the product is designed and put together.

Gouin says that as Ford begins to forge more collaborative design and engineering capabilities with its suppliers over the Internet, the entire supply chain will become more efficient. Certainly, the design and engineering process can use a bit more speed to implementation. At present, the process calls for OEMs and suppliers to mail blueprints back and forth, ad nauseum. The ability to convene as a group heretofore required onsite meetings, Gouin says. Now we can truly collaborate in real-time, offering suggested design enhancements and adjustments at the desktop throughout the entire supply chain. I can sit here at my desk in Detroit and co-browse some engineering plans with an engineer in Japan or some other part of the world. This presents extraordinary product and project management capabilities for the automotive industry.

Rough Road

Gouin can be expected to be overly optimistic, given his charge. But will Ford actually achieve its better ideas in a decade or, for that matter, in his and our lifetimes? Peterson is not so sure. It remains to be seen, she says. There's so much re-engineering that must be accomplished, and there are sensitive supplier issues that must be surmounted. Ford and the other automakers like to call their suppliers partners,' but the truth is that many suppliers feel like victims. The relationship, to date, has been more coercive than collaborative.

There is another potential cost to the reconfiguration of the supply chain: the impact on quality. While no one blames Ford's supply chain re-engineering for the Firestone tire design failure, the industry's emphasis on just-in-time manufacturing and its push for even faster built-to-order timeframes gives pause. Peterson also is not so sure a build-to-order strategy is what customers want anyway. Hey, I'm a woman, and I can tell you that I change my mind all the time, she jokes.

I may order a red car today and in two weeks decide I didn't want red after all. Culturally, in the United States, we are trained to pick what is available and not wait to order something special. There's pressure to order what you want, since you often don't know what that is. Garretson agrees that customers find comfort in buying a car off the lot, however only to a point. It will definitely take some time for consumers to shift their expectations and mindset from buying a car off the lot to buying one online, he says.

Gouin responds that Ford's built-to-order strategy will address such customer whims. There is so much promise from the customer's perspective that, at best, this is a bump in the road, he says. As for Peterson's contention that Ford may never materialize its vision, he demurs strongly. We'll get there; it's just going to take time, he says. This is a business of relentless incrementalism  small steps that add up eventually. We know where we want to get to, and we can pretty much see what the journey will entail. But we have to be patient because it's just not going to happen all at once in one big chunk.

As the journey gets underway, other companies are joining Ford in various alliances to reach the destination. A joint venture between Ford and Austin, Texas-based Trilogy Software, an e-business solutions company, developed and will operate all of FordDirect's customer-facing Web sites. Ford also has a joint venture with UPS Logistics, a subsidiary of United Parcel Service, to deliver vehicles from Ford plants to dealers and customers. The partnership should greatly reduce the time required to deliver cars, Gouin projects, by leveraging a Web-based information system to track the status of vehicles from production through final delivery. Other joint ventures address wireless navigation and financing strategies.

All this supply chain tinkering arguably is great if consumers do, indeed, not only buy the car of their dreams, but also get it in short order. But what about the price of that vehicle? Will ripping out all the supposed inefficiencies in the supply chain ultimately reduce Ford's costs and, consequently, compel lower-priced automobiles? I think the answer would have to be yes,' Gouin says a bit hesitantly.

The consumer will demand this and the competitive marketplace will be such that it will happen. Certainly,   our costs should reduce, he maintains. Assume for the moment that we have to carry in the neighborhood of a  70-day supply of vehicles to meet current consumer demand. When we are in a position to manufacture cars  for delivery to consumers within 15 days, we no longer carry that inventory 70 days. That's quite a bit of savings. We protect our margins and the consumer wins, too.

But, Garretson is not so sure all consumers win. We did some surveys recently where we asked customers how long they'd be willing to wait for the car they wanted, he says. About 23 percent said they'd wait as long as three to five weeks. However, another 23 percent said they'd wait only three days (the rest were in the middle). Some people will always insist upon instant gratification. The moral: You can't please everyone, no matter how hard you try, he says.

Still, just gratifying that remaining 77 percent may constitute a truly improved seller-buyer relationship. And isn't that what Ford is after, anyway? We believe it is a failure for us when our consumers settle for things they wouldn't necessarily want to settle for, says Gouin. We've let that customer down.

Now if only the airline industry felt the same way.