Automakers spend millions on the design and promotion of snazzy new vehicles. Yet all their efforts can be nullified by the lack of a critical service part.

Ford Motor Co. knows how important it is to minimize the time a customer spends at the dealer for repairs or maintenance. That's why the company has undertaken a far-reaching program to overhaul its service-parts supply chain. Now, the final piece of that puzzle - new software to manage the entire process - is well under way.

The world's second-largest automotive manufacturer has a correspondingly large and complex aftermarket parts operation. It has 600,000 part numbers in inventory, drawing on 5,000 suppliers and serving 15,000 dealers worldwide, including 5,400 dealers in the U.S. The company generates 120 million order lines per year through 63 distribution centers, 21 of them in the U.S. now, and 24 by the middle of this year.

The current network repair job dates back to 1998, when Ford's top management vowed to improve customer service at the dealership. Back then, a given service part could spend up to 87 days in the aftermarket supply chain, moving from supplier through packager, warehouse, dealer and on to the customer, says Steve McKelvey, Ford's business technology renewal manager in Lavonia, Mich. What's more, the assignment of inventory to various distribution centers didn't take into account the special characteristics of each part - where it was needed, how fast it typically moved, how critical was its nature. Most importantly, customers were waiting too long for the parts needed to fix or maintain their cars.

All of which prompted Ford to launch its ambitious Daily Parts Advantage (DPA) network for getting spares to dealers. In the process, it would increase from 10 to 21 the number of distribution centers in the U.S., with the most critical parts located closer to dealers and inventories better geared toward actual need. Parts would be restocked on a daily basis, and delivery times drastically shortened. Emergency order cut-off times would be extended to 9:00 p.m. Eastern, up to five hours later than before.

Ford targeted several key areas for improvement, including supplier lead time, packager and throughput time, warehouse receipt and item availability time, and transportation. In addition, the company sought better visibility of its parts shipments, especially in the hand-off between links of the chain.

According to McKelvey, Ford envisioned the whole system as a three-legged stool, with customer satisfaction the "seat" and the legs consisting of business processes, the parts supply network and information technology.

With the help of consultant Cap Gemini Ernst & Young, the first two parts of the project were put into place fairly quickly, yielding early results. They included:

• a reduction in the supply-chain cycle to 37 days as of 2003 (with an ultimate goal of 21 days);

• a 40-percent decline in inventory levels in the U.S. over six years, with a commensurate drop in U.S. and European inventory value to $838m from more than $1bn;

• a rise in customer fill rates to 98 percent from 93 percent in the U.S., and to 96.8 percent from 93.6 percent in Europe; and

• an 85-percent reduction in customer back-order lines to 15 percent of a day's business in the U.S., and 60-percent reduction to less than 40 percent of the day in Europe.

Part of the project's success was due to the segmenting of parts according to volume, velocity and dimension. Ford created three distinct types of warehouses: high-velocity, for small, high-volume parts moving on a daily basis (at 19 locations); low volume/low-cube, for small, slow-moving parts available within 24 hours (one location); and high-cube, for larger, bulkier items that could be shipped in one to two days (three locations). In general, says McKelvey, the fastest-moving items have been placed closest to the largest number of dealers. The result has been a repair order fill rate at the dealers of better than 95 percent.

Supplier Performance
On the supplier side, Ford set up a series of metrics, coupled with report cards, through which it could measure and monitor supplier performance. The effort has yielded steady improvements in the receiving process, with Ford continually raising the bar even as it expands the program across its global supply chain. Some 60 percent of the U.S. service parts network is now functioning under the new processes, says McKelvey. (Distribution facilities in Detroit; Hartford, Conn.; New Jersey and Washington, D.C. have yet to be launched; they should be on line in the first part of this year.)

	"The stated goal was to create a next-generation service parts-management software solution." - Barb Hodel of CAT Logistics

The systems portion is a longer-term effort. "It allows us to take the next step," McKelvey says, leading to a more efficient use of inventory, the retirement of numerous legacy systems and sales growth at the dealerships. For that stage, Ford turned to Caterpillar Logistics Services, Inc., the third-party logistics (3PL) arm of Caterpillar Inc., and SAP AG, the German-based business software giant.

Headquartered in Morton, Ill., Cat Logistics has around 50 outside clients today, in addition to Caterpillar itself, the big maker of farm and construction equipment. It has an extensive background in the automotive industry, notes program manager Barb Hodel, who has worked closely with Ford to develop a new IT system for the service parts supply chain.

Cat Logistics doesn't perform physical logistics services in the U.S. for Ford's main "blue oval" brands of Ford, Lincoln and Mercury. But it has a history with the automaker nevertheless. According to global marketing director Michael Schmidt, Cat's first client as a 3PL in 1987 was Land Rover, which was subsequently sold to BMW and then to Ford. Land Rover was also one of the first accounts for which Cat Logistics helped to implement SAP's supply-chain management (SCM) software.

In addition, Cat acts as a traditional 3PL for various other units of Ford, including the automaker's branded operations in Mexico and Japan, Volvo in Europe and Mazda in North America. Says Schmidt: "Cat is the preferred provider of 3PL services to all Ford brands, if they do outsource their logistics."

Ford's intention in hiring Cat Logistics in the U.S. was to secure a partner with expertise in the automotive supply chain, laying the foundation for development of a new information system. The goal was to obtain end-to-end visibility of service parts, increase the speed of time to market, optimize inventories at each location, and generally do a better job of serving the customer. Dealers would have access to inventory data on a real-time basis, allowing them to improve scheduling and cut service time.

An initial comparison of Ford's and Cat's systems revealed a large amount of legacy software and significant gaps in their supply-chain capabilities, Hodel says. The companies need to upgrade as well as stay on top of future advances in technology.

Fortunately, they turned out to be compatible partners. "With 80 to 90 percent of our processes in common, we could work together," Hodel says.

Search for a Vendor
At the outset, Ford and Cat Logistics appeared to be getting into the business of software development, without the help of a traditional technology vendor. "There might have been a moment [where that was considered]," says Schmidt, "but it passed quickly." Instead, the companies began casting about for an experienced partner.

They came up with SAP. At first blush, the choice might seem unusual. For the most part, Ford doesn't run SAP's enterprise resource planning software. But neither does it outsource logistics to Cat - and that didn't stop it from turning to the 3PL for help with its information systems. Ford and Cat were drawn to SAP because of its expertise in supply-chain software, particularly in the automotive sector; overall financial strength, and global business support.

SAP is so big, in fact, that one might assume the vendor already had a suite of software tools that was perfect for managing Ford's service-parts supply chain. Indeed, SAP offers a variety of systems for parts logistics, fulfillment, execution, planning and optimization, says Dagmar Fischer-Neeb, vice president of business development for service management. Existing users of the vendor's warehouse management and service-parts fulfillment tools include DaimlerChrysler, Volkswagen, General Motors and Peugeot.

But SAP's existing products couldn't address the huge volume of parts handled by Ford on a daily basis, says Fischer-Neeb. Nor did it combine supply-chain processes with customer-relationship management (CRM), a software category that continues to grow in importance.
In Ford's view, there was a marked lack of off-the-shelf supply-chain software that could manage parts facilities with "our velocity and breadth of product and services," McKelvey says. "There was nothing that could handle the complete supply chain."

Especially difficult is the management of service parts with sporadic demand, says Hodel. Even the most advanced system can't pinpoint exactly which parts will be needed for service or repair within a given span of time. The demand for an individual part can swing from 30 percent to more than 400 percent during a single period.

Inventory planning software was also lacking in depth, maturity and market saturation. Volkswagen, for example, uses SAP software at its service parts warehouse in Germany, one of the world's largest. "They're very happy with SAP's system," says Fischer-Neeb, "but they have not yet implemented highly sophisticated planning operations."

One of SAP's biggest challenges was integration of the numerous systems that controlled processes across Ford's supply chain. The automaker's materials-management function alone consisted of multiple systems on platforms up to 30 years old, says McKelvey. All would be dumped in favor of the new system.

Ford and Cat would contribute their respective expertise in automotive parts management and third-party logistics. They have worked closely with the vendor to define specifications for the ultimate system, McKelvey says. In fact, adds Schmidt, their input was essential to keeping SAP on the leading edge of SCM software development for spare parts.

The actual creation of new logistics and supply-chain software would be left up to SAP. The idea, says Hodel, was to "get technology development out of our house and into the hands of the experts at SAP - and keep current as we move forward forever."

The deal between Ford and Cat Logistics was formally announced toward the end of 2001. SAP came aboard in July 2002. The stated goal at the time was to create "a next-generation service parts-management software solution." Development and marketing of the resulting system would proceed under the umbrella of the mySAP Business Suite, incorporating both SCM and CRM applications. SAP is also drawing on components from other areas of its product mix, Fischer-Neeb says.

Tackling the Reverse Flow
The partners are moving ahead simultaneously with all three of the system's main modules: warehousing, materials management and commercial systems. Reverse logistics will also be part of the mix, as Ford works to manage a process "that can be a headache for our dealers," says McKelvey.

He describes the anticipated result as "an end-to-end [system] with excellent visibility through all pieces of the supply chain, so that we can continue to drive inventory efficiencies and improve fill rates."

For its part, Cat Logistics expects the software will help it to save money not just for Ford, but for its entire account base. Typically, says Hodel, the 3PL has been able to cut clients' inventory costs by 18 to 20 percent within a year and a half through outsourcing. "Based on our intellectual property going into the system, that's still the target," she says. Customer satisfaction should rise as well, she's quick to add.

SAP is expected to tackle a number of high-level processes that constitute the Ford parts chain. They include service parts planning and optimization, parts fulfillment, order management and warehouse management. The outcome, says Fischer-Neeb, will be two systems engines, one for parts planning and the other for warehousing. Also included will be elements of SCM, CRM and even some of SAP's existing ERP capability as it relates to fulfillment and warehouse management.

The final system will feature classic inventory management in addition to the planning of slow-moving items, ability to supersede old parts with new ones, and multi-echelon planning.

The IT project on behalf of Ford and Cat Logistics consists of two phases, although the first will deliver most of the system's capabilities, with the second adding certain refinements, including more sophisticated algorithms for inventory optimization. SAP plans to ship the initial system to its two development partners by the end of this year.

After that, the modifications laid out by Ford and Cat will become part of SAP's standard SCM and CRM offering for aftermarket parts management. Fischer-Neeb says the enhancements should start showing up in the vendor's basic products for all customers in early 2005. Additional features will be added with each subsequent yearly release of the SAP software, extending into 2007. The system will also be made available to Cat Logistics' entire account base, the principals have said.

Schmidt says there is no precedent for a manufacturer, 3PL and software vendor to collaborate so closely on the development of new logistics-based systems. But SAP is well accustomed to letting customers lead the way to improvements that later show up in the standard product, says Fischer-Neeb. The company has crafted a new banking information system in partnership with one of Germany's largest retail banks, as well as a large retail system with a European chain of department stores. Additional so-called strategic development projects are in the works, she says.

Helping to guide the latest effort is a new service-parts advisory board created by SAP and consisting of representatives from Ford, Cat Logistics, several of Cat's clients and current users of SAP systems across several industries. The board was due to convene in February, according to Schmidt.

The project has stayed on schedule since its inception, McKelvey says. "The team seems to have done a very good job up front of charting the course," he adds - not a small accomplishment, given the size and complexity of the three partners.

In the end, it's the critical nature of the service-parts supply chain that keeps everyone on track. Says McKelvey: "Every time a customer comes in [for service], it's an opportunity to win their loyalty - but also to lose it."

Three Partners at a Glance

The manufacturer: Ford Motor Co. Headquarters: Dearborn, Mich. Sales: more than $164bn in 2003. Employees: approximately 350,000 worldwide. Aftermarket parts supply chain: 600,000 part numbers, 5,000 suppliers, 63 distribution centers and 15,000 dealers around the world. Service parts inventory value: approximately $838m. The third-party logistics provider: Caterpillar Logistics Services, Inc., a subsidiary of Caterpillar Inc., maker of construction and agricultural equipment. Provides services to Caterpillar plus approximately 50 other clients. Service network: more than 95 facilities in 25 countries. Collaborating with Ford on specifications and guidelines for software to manage the automaker's spare-parts supply chain. The software vendor: SAP AG. Seller of software for financial systems, supply-chain management, customer relationship management and other business processes. Will develop and market new supply-chain software for Ford's spare-parts operation, then incorporate the enhancements into generally available systems. Headquarters: Walldorf, Germany. Sales: $8.7bn in 2003. Employees: approximately 29,000.