Executive Briefings

How Ford's Supply Chain Put the Company Back in the Driver's Seat

You've seen it in movies, and possibly in real life as well. A desperate gambler, down to his last chance, stakes everything he has on one play. And while the scene makes for great drama, it rarely goes well. The lesson: never bet the store.

Apparently Ford Motor Co. didn't get the message. In 2006, it mortgaged virtually the entire company - including the famous blue oval that serves as its logo - against bank loans of nearly $27bn. The appeal to private lenders took Ford in a different direction from its two biggest American rivals, General Motors and Chrysler Group LLC, which together accepted nearly $25bn of government bailout money. (Ford didn't reject government aid entirely - it asked Congress for a $9bn line of credit, plus a $5.9bn loan from the Department of Energy to built more fuel-efficient vehicles.) The privately sourced loans were extended in 2006, before the coming of the Great Recession, causing some to question Ford's sanity at the time.

One condition of the loan package was that Ford's debt would have to return to investment grade, in the judgment of two major rating agencies, in order for the company to get back its brand, buildings and factories. "We were way down in junk," recalled Stephen Harley, executive director of global material planning and logistics.

What looked at the time like a wild gamble appears to have paid off. In April and May of this year, Ford recaptured investment-grade ratings from, successively, Fitch Ratings and Moody's Investors Service. The agencies' decisions followed three solid years of revenue growth, including a 15.2-percent increase in sales in 2010. March of this year represented the automaker's best month in five years, and it chalked up its 11th consecutive quarterly operating profit in the first quarter of 2012.

There were bumps along the way, including a horrendous year in 2008, but Ford today appears to be on relatively solid footing. In 2010, it surpassed Toyota Corp. as the second-largest automobile seller in the U.S. In Europe today, where auto sales are slumping across the board, its fortunes are far less drastic than those of archrival General Motors.

"We got it back," Harley said, speaking at the recent Gartner Executive Supply Chain Summit in Palm Desert, Calif. "We did it on our own speed. There were government loans, but the money was funded against our performance, and through our performance we paid it back."

While far from debt-free, Ford has been able to reduce its borrowing by some 40 percent by offering a combination of cash and stock to debt holders. It has also cut costs through the sale of its Aston Martin, Jaguar Land Rover and Volvo Cars divisions, and discontinuation of the venerable Mercury line.

Harley insisted that tight management of Ford's supply chain has also been responsible for its recent good fortunes. The chief objective, he said, has been to "offset all economics, and reduce cost year over year."

Given the size and scope of Ford's operations, that's a huge task. The company currently builds around 6 million cars a year at 70 plants around the world, drawing on an annual volume of 35 billion parts. It oversees 1,400 Tier 1 suppliers with a total of 4,400 manufacturing sites, and there are as many as 10 tiers of suppliers between the automaker and its source of raw materials.

Key to Ford's efforts is a new platform strategy, by which it seeks to build cars on a smaller number of base vehicles. Even with those new efficiencies, however, Ford must deal with a supply line that grows longer all the time. New models require a 13-percent increase in remote suppliers, 34 percent of which are located more than 2,500 miles from the plant, Harley said.

Good risk planning is central to Ford's supplier-management program. Harley said the company has weathered several major disruptions in recent years, including a fire at the Michigan factory of a trim supplier. ("We didn't miss a beat working with the buyer," he said.) Operations at a tooling plant in Thailand were up and running within two weeks of that country's severe flooding in the fall of 2011. Other recent incidents with which the automaker has had to cope include a spring 2012 fire at a resin producer in Germany and the contamination of wood pallets from China with cerambycid, or longhorn beetle larva.

Ford deploys a tracking chart that manages risk for 50 major suppliers and 1,500 part numbers, using green, yellow and red to indicate status conditions. Interestingly, in a time of highly sophisticated software applications, the tool is nothing more than a simple Excel spreadsheet.

The company works hard to proactively identify areas of greatest risk. "We're trying to drive some of the risk decision back into the actual sourcing," said Harley. He takes an especially close look at those first-tier suppliers whose failure could bring production to a halt. Pre-approved and qualified alternative suppliers are kept on hand in order to prevent any supply disruption.

Ford intends to rely on a flexible supply chain and manufacturing strategy to stay healthy. At the same time, acknowledged Harley, it needs to do a better job of capacity planning and forecasting. "Suppliers cut capacity in the recession," he said. "That caught most of us by surprise."

Chief executive officer Alan R. Mulally has set a worldwide sales goal of 8 million vehicles a year by the middle of the decade. "Supply chain is going to have to shoulder the burden of growth," said Harley.

Like all automakers, Ford must deal with the possibility that big swings in demand are the new normal. "If we don't get carried away, don't slip back into bad habits, hold the margin and make sure that break-even stays where it is, and continue to hold our costs, we'll be able to weather any minor storm," said Harley. With any luck, the company will be able to stay away from the gambling tables.

- Robert J. Bowman, SupplyChainBrain

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You've seen it in movies, and possibly in real life as well. A desperate gambler, down to his last chance, stakes everything he has on one play. And while the scene makes for great drama, it rarely goes well. The lesson: never bet the store.

Apparently Ford Motor Co. didn't get the message. In 2006, it mortgaged virtually the entire company - including the famous blue oval that serves as its logo - against bank loans of nearly $27bn. The appeal to private lenders took Ford in a different direction from its two biggest American rivals, General Motors and Chrysler Group LLC, which together accepted nearly $25bn of government bailout money. (Ford didn't reject government aid entirely - it asked Congress for a $9bn line of credit, plus a $5.9bn loan from the Department of Energy to built more fuel-efficient vehicles.) The privately sourced loans were extended in 2006, before the coming of the Great Recession, causing some to question Ford's sanity at the time.

One condition of the loan package was that Ford's debt would have to return to investment grade, in the judgment of two major rating agencies, in order for the company to get back its brand, buildings and factories. "We were way down in junk," recalled Stephen Harley, executive director of global material planning and logistics.

What looked at the time like a wild gamble appears to have paid off. In April and May of this year, Ford recaptured investment-grade ratings from, successively, Fitch Ratings and Moody's Investors Service. The agencies' decisions followed three solid years of revenue growth, including a 15.2-percent increase in sales in 2010. March of this year represented the automaker's best month in five years, and it chalked up its 11th consecutive quarterly operating profit in the first quarter of 2012.

There were bumps along the way, including a horrendous year in 2008, but Ford today appears to be on relatively solid footing. In 2010, it surpassed Toyota Corp. as the second-largest automobile seller in the U.S. In Europe today, where auto sales are slumping across the board, its fortunes are far less drastic than those of archrival General Motors.

"We got it back," Harley said, speaking at the recent Gartner Executive Supply Chain Summit in Palm Desert, Calif. "We did it on our own speed. There were government loans, but the money was funded against our performance, and through our performance we paid it back."

While far from debt-free, Ford has been able to reduce its borrowing by some 40 percent by offering a combination of cash and stock to debt holders. It has also cut costs through the sale of its Aston Martin, Jaguar Land Rover and Volvo Cars divisions, and discontinuation of the venerable Mercury line.

Harley insisted that tight management of Ford's supply chain has also been responsible for its recent good fortunes. The chief objective, he said, has been to "offset all economics, and reduce cost year over year."

Given the size and scope of Ford's operations, that's a huge task. The company currently builds around 6 million cars a year at 70 plants around the world, drawing on an annual volume of 35 billion parts. It oversees 1,400 Tier 1 suppliers with a total of 4,400 manufacturing sites, and there are as many as 10 tiers of suppliers between the automaker and its source of raw materials.

Key to Ford's efforts is a new platform strategy, by which it seeks to build cars on a smaller number of base vehicles. Even with those new efficiencies, however, Ford must deal with a supply line that grows longer all the time. New models require a 13-percent increase in remote suppliers, 34 percent of which are located more than 2,500 miles from the plant, Harley said.

Good risk planning is central to Ford's supplier-management program. Harley said the company has weathered several major disruptions in recent years, including a fire at the Michigan factory of a trim supplier. ("We didn't miss a beat working with the buyer," he said.) Operations at a tooling plant in Thailand were up and running within two weeks of that country's severe flooding in the fall of 2011. Other recent incidents with which the automaker has had to cope include a spring 2012 fire at a resin producer in Germany and the contamination of wood pallets from China with cerambycid, or longhorn beetle larva.

Ford deploys a tracking chart that manages risk for 50 major suppliers and 1,500 part numbers, using green, yellow and red to indicate status conditions. Interestingly, in a time of highly sophisticated software applications, the tool is nothing more than a simple Excel spreadsheet.

The company works hard to proactively identify areas of greatest risk. "We're trying to drive some of the risk decision back into the actual sourcing," said Harley. He takes an especially close look at those first-tier suppliers whose failure could bring production to a halt. Pre-approved and qualified alternative suppliers are kept on hand in order to prevent any supply disruption.

Ford intends to rely on a flexible supply chain and manufacturing strategy to stay healthy. At the same time, acknowledged Harley, it needs to do a better job of capacity planning and forecasting. "Suppliers cut capacity in the recession," he said. "That caught most of us by surprise."

Chief executive officer Alan R. Mulally has set a worldwide sales goal of 8 million vehicles a year by the middle of the decade. "Supply chain is going to have to shoulder the burden of growth," said Harley.

Like all automakers, Ford must deal with the possibility that big swings in demand are the new normal. "If we don't get carried away, don't slip back into bad habits, hold the margin and make sure that break-even stays where it is, and continue to hold our costs, we'll be able to weather any minor storm," said Harley. With any luck, the company will be able to stay away from the gambling tables.

- Robert J. Bowman, SupplyChainBrain

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