Bogazici University

MIS 517
Advanced Operations Management

Ford Motor Company:

Supply Chain Strategy

Presentation Report

M.Can KAPLAN
Abdullah S. ÇETĐN
CONTENTS
1 INTRODUCTION ....................................................................................................................2

2 CASE DESCRIPTION .............................................................................................................3

2.1 Company History ...............................................................................................................3

2.2 Automotive Industry .........................................................................................................3

2.2.1 Traditional Supply Chain ..............................................................................................6

2.2.2 Virtually Integrated Supply Chain ...............................................................................8

3 FORD MOTOR COMPANY AND DELL COMPUTERS COMPARISON ...............9

3.1 Similarities ...........................................................................................................................9

3.2 Differences ..........................................................................................................................9

4 ALTERNATIVE SOLUTION PROPOSALS................................................................... 12

5 E-BUSINESS STRATEGY AND AFTER 1999 ............................................................... 13

5.1 Transformation of the Customer, Dealer, and Owner Relationships ..................... 15

5.2 Customer Assistance Centers and In-Vehicle Communication ............................... 16

5.3 Supply-Chain Integration: The Trading Hubs ........................................................... 17

5.4 Transforming the Supply Chain.................................................................................... 18

6 CONCLUSION ....................................................................................................................... 19

7 REFERENCES........................................................................................................................ 20

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1. INTRODUCTION
Henry Ford, founder of Ford Motor Company, was in his time an innovator in offering 'cars
for the masses'. He introduced to the car industry methods and systems innovative in their
day. After then, Ford Motor Company finds itself in a dynamic business environment where
new technologies and practices offer the potential to alter in a significant way the landscape
in which it operates. Ford needs once again to forge new paths to ensure future competitive
advantage.

In the fall of 1999, Jacques Nasser, Ford Motor Company’s president and chief executive
officer, announced a grand new vision for the firm: to become the “world’s leading
consumer company providing automotive products and services.” Key to that dream was
the transformation of the business using Web technologies. The company that taught the
world how to mass-produce cars for the consumer market was going to become the leading
e-business firm.

Executives at Ford have been considering the 'Direct Model' created by Dell Computer
Corporation and finds that there is considerable appeal. Dell has been able to speed up
inventory velocity such that there is only eleven days of inventory on hand. This has led to
an inventory turnover rate of thirty times per annum. This achievement, termed by Michael
Dell 'Virtual Integration' has been achieved by blurring the line between supplier, Dell and
client, to the extent that third party service staff are often thought, by clients, to be Dell's
own staff.

In order to see how congruent the Dell model is to Fords' business the similarities and
differences between the two companies should be examined. But, before that, the company
history will be explained in the following section. Then the similarities and differences
between Dell & Ford will be examined. After elaborating the possible roadblocks that Ford
will probably confront with while trying to implement Dell Model, alternative courses of
action will be discussed shortly. And lastly current decisions and situation of the company
will be explained.

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1 CASE DESCRIPTION

1.1 Company History

The Ford Motor Company was founded by Henry Ford on June 16, 1903, in Dearborn,
Michigan. Five years later, he introduced the Model T, and five years after that the Model T
was being built on a revolutionary moving assembly line. In 1914, Ford produced 308,162
cars, which was 299 more than all other auto manufacturers combined. In 1919, Ford
bought out the smaller investors and reincorporated the company in Delaware. Soon after
began the construction of the River Rouge plant, the largest and perhaps the best-known
industrial complex in the world: 90 buildings, 330 acres of windows, a plant that took iron
ore in at the Lake Erie end and rolled out finished autos at the other. 1From 1919 to 1956,
the company was privately held by the Ford family, the Ford Foundation, and the Edison
Institute. During that time, the company gave up most of the dominant market position it
had achieved with the Model T. Stock was first offered to the public in 1956, trading on the
NYSE under the symbol F. As the twenty-first century began, Ford had produced 270
million vehicles. It was the number-one maker of trucks, the world’s number-two maker of
autos and trucks, and the industry leader in profitability. With 345,000 employees, it had car
and truck operations in 38 countries. The company produced Ford, Mercury, Lincoln,
Aston Martin, Jaguar, and Volvo autos. It also owned 33 percent of Mazda and 81 percent
of Hertz, the world’s largest auto-rental firm. Hertz rented vehicles in 140 countries. Ford
Credit, operating in 36 countries, was the world’s largest auto-finance company, with 16,000
employees and nine million individual and corporate customers. Ford also owned Kwik-Fit
Holdings, Europe’s largest auto-repair operator, which had been acquired in 1999.

1.2 Automotive Industry

In order to fully understand the case, it is important to understand the auto industry as well.
The auto industry was the world’s largest, what Peter Drucker proclaimed 2 “the industry of
industries.” It consisted of tens of thousands of firms giving employment to millions of
individuals and generating revenues from the sale of new and used vehicles, parts, and
service in excess of $1.3 trillion. Not only was it one of the oldest industries, but it was also

1 John A. Byrne, The Whiz Kids (New York: Doubleday, 1993)

2
Peter Drucker, The Concept of the Corporation (New York: John Day, 1946 )

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arguably the most fragmented. Critics said its purchasing activities had not changed much in
100 years, that its costs were excessive, and that its customers were thoroughly dissatisfied
with automobile manufacturers and dealers.

The industry had undergone several fundamental

transformations since its inception in the late nineteenth
century. Ford’s use of mass production was the first,
followed by the rise of the Japanese auto industry and its
commitment to lean production in the 1960s and 1970s.
In the past three decades, the auto industry has grown more
competitive. Since the 1970s, the Big Three automakers
(GM, Ford, and Chrysler) have seen their home markets
invaded by foreign-based auto manufacturers (Toyota and
Honda). The bar chart on the right shows the US sales of
various car manufacturers in 2001. You will notice that Toyota and Honda are beginning to
nip on the heels of the “Big 3” and Toyota has already surpassed Dodge in sales. In
addition, the auto industry was facing overcapacity of an estimated 20 million vehicles. This
led to decreased profit margins for automakers as well as reduced sales.

Another trend in the automobile industry, as well as many other industries at this time, was
consolidation. With increased technology and economies of scope and scale, companies
wanted to capitalize on the benefits of being a larger company, so they frequently merged.
Two notable consolidations were Chrysler merging with Daimler-Benz in the summer of
1998 and Ford acquiring Volvo in early 1999. So, with all of these changes going on in the
automobile industry, it was no wonder that Ford felt like it needed to make some changes
within its organization to compete.

Ford’s large-scale plans for change began in 1995, with an ambitious framework called Ford
2000. The first part of this plan included merging North American, European, and
international automotive operations into a single global operation. Just like with
consolidation, this allowed for economies of scale and scope, allowing Ford to save huge
amounts of money by reengineering and globalizing corporate organizations and processes.

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Next, product development activities were consolidated into 5 Vehicle Centers (VCs), each
responsible for the development of vehicles in a particular market segment.

The major reengineering projects that were part of Ford 2000 were initiated around major
company processes like, Order to Delivery (OTD), Ford Production System (FPS), and the
Ford Retail Network (FRN). Order to Delivery is the time that it takes from a customer
placing an order to delivery of a finished product. The goal in the OTD project was to
reduce the current 45-60 days it took to deliver the finished product to the customer in only
15 days. These manufacturing efforts were dependent on a couple of other changes that
were being made at Ford during the same period of time namely; continual forecasting of
customer demand, a minimum of 15 days of vehicles in each assembly plant, regional centers
that dealt with optimizing schedules and deliveries, and a order amendment system to
replace the need to submit new orders.

The Ford Production System, FPS, was designed to make Ford more responsive to change,
just like OTD. This system focused on the production process. The goal of this revised
process was to make the production of goods a relatively stable process, balancing out the
bumps that occur in the process along the way. The case also mentioned Synchronous
Material Flow (SMF), an important part of FPS. SMF strives to produce a continuous flow
of products and ensures that the vehicles are assembled in the consistent manner. When the
cars are assembled in a consistent manner, Ford can easily predict with great levels of
accuracy, when the vehicles will be completed and ready for delivery. This is quite a
difference from the old, “guess when the car will be done” methodology employed by Ford.

The Ford Retail Network, also known as FRN, was the final piece in the Ford 2000
reengineering process and was a relatively new Ford venture that was formed under the Ford
Investment Enterprises Company (FIECo). FEICO had two goals; to be a testing
environment for best practices in retail distribution and to create an alternative distribution
channel. Ford expected FRN to reduce advertising and personnel costs while increasing
business.

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In short, by adopting new supply chain and production techniques, Ford was hoping to
achieve the same cost savings that their Japanese adversaries in the automobile business have
already achieved. This would allow Ford to offer vehicles at lower prices, while generating
higher revenue for the company. As a secondary benefit, Ford hoped that their Ford 2000
plan would create a competitive advantage through the lowering of prices and the associated
reduction in production cycle times.

While Ford 2000 was underway, the Internet burst onto the scene. The Internet created new
opportunities for Ford and they embraced these opportunities in a timely manner. First,
came the public Web site in 1995, then a corporate Intranet site came in 1996. And by 1997,
Ford had launched a Business-to-Business (B2B) Web site that connected the company with
its suppliers. As well, Ford teamed up with Chrysler and General Motors to work on the
Automotive Network Exchange (ANX), to create standards in the supplier network.
Through the creation and use of these Web sites, Ford positioned itself not only as an
innovator in the automotive industry, but also in a position to capitalize on further
Information Technology developments as they emerged.

In the case, Ford, like many older companies, is still using traditional supply chain methods.
Ford has tried to control as many aspects of the end vehicle production as possible; from the
production of raw materials in steel mills and rubber plantations, through all of the design,
manufacturing, and assembly and distribution activities. This has resulted in a truly vertically
integrated supply chain within Ford Motor Company. Unfortunately, this approach makes it
difficult for Ford to compete in the global automobile industry, and for that reason in the
case study, Teri Takai wondered if it was time to change Ford’s supply chain.

1.2.1 Traditional Supply Chain

In order to understand the proposed changes to the Ford supply chain, it is important to
understand how the traditional supply chain model is comprised. The most simplistic or
basic model of a traditional supply chain has one company performing all functions of the
supply chain. Within this company, the planning/purchasing department is in charge of
manufacturing and orders to internal or external manufacturing locations. After the orders
have been completed within the company, the finished goods are then stored at the

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company’s warehouse and shipped out using the company’s trucks or a distribution
company when ordered by the customer. This type of approach was what Ford used until
the late 1980s, when their suppliers, which numbered in the 1000’s, got to be unmanageable
and they needed to make a change.

Figure 1 – Traditional Supply Chain

The change that was made in the late 1980s had Ford using a modified version of the
traditional supply chain approach, by utilizing outsourcing and partnerships to handle certain
functions of the supply chain. Ford does this through its “Tier 1” suppliers. These “tier 1”
suppliers would manage relationships with a larger base of suppliers of components of
subsystems-tier 2 and below suppliers. Ford made its expertise available to assist suppliers in
improving their operations.

Unfortunately, the traditional supply chain model is fragmented and slow to adapt to change
in the market, which makes it difficult for companies to effectively control all aspects of the
production process. This along with other issues has led Teri and her team to consider
changes to the Ford supply chain. Teri’s team has recommended to her that Ford should
utilize emerging Information Technologies and model Ford’s supply chain after Dell’s. Dell
utilizes a virtual integration approach to their supply chain, but Teri is not sure if virtual
integration will work as well for Ford’s supply chain.

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1.2.2 Virtually Integrated Supply Chain
With a virtually integrated supply chain, they have loose affiliations of companies organized
as a supply network. In virtual integration physical assets are replaced by information.
Within a virtually integrated supply chain, manufacturing continues to be controlled by the
company’s planning department. However, this is no longer done directly through the
issuing of purchase orders, but instead by providing logistics management and forecasts for
demand and receipts. The company can then pass along this production information to
their manufacturing partners to use in planning their production to meet the needs of the
original company and the market. The company no longer delivers finished goods to the
customers; instead the finished goods are completed by one partner and then go to the
warehousing/distribution partner who sends the products to the customers as orders come
in. The largest benefit of virtual integration is that it allows partners to be located far apart
from each other, they do not even have to be within the same country. This means that
companies can choose strategic partners based on skills and pricing, not only on proximity,
literally opening up a world of options. The key to virtual integration is Information
Technology. Information Technology allows the companies to work as though they are one
company, without the physical and other constraints of actually being one company.
Through the use of computer software, the Internet, and other emerging technologies,
companies are able to selectively share their information with partners in real time, allowing
for collaboration like never before.

Executives at Ford have been considering the 'Direct Model' created by Dell Computer
Corporation and finds that there is considerable appeal. In order to elaborate the possibility
that the Dell model fits to Fords' business, these two companies will be compared and
analyzed below.

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2 FORD MOTOR COMPANY AND DELL COMPUTERS COMPARISON
To begin the comparison of Dell Computer and Ford Motor Company, let’s begin by
discussing the similarities between the companies.

2.1 Similarities
The main similarity between two companies is in their operating principles. All of the
principles that led to Dell’s success are in place in some form at Ford. It should be noted
that most of these operating principles are newer additions to Ford, through the Ford 2000
efforts, but they are still part of the company’s operating structure. Main similarities between
two companies that are related to the supply chain issue are listed below.
- Both cars and computers are consumer items that are directly bought and used by
consumers themselves.
- For both of the companies suppliers are often located close to manufacturing
facilities. From its historical background Ford maintains local links with its suppliers.
- Both companies try to keep long term relationships with smaller number of
suppliers. Especially, Ford tries to have strategic alliances with its main suppliers.
- For both of the companies customers varies from large corporations, governments
to individual consumers.

2.2 Differences
The differences between the automobile and computer industry present challenges for Ford
to implement a virtually integrated supply chain like Dell. Such a major change to Ford's
supply chain structure could also be very costly if not properly managed.

a) Company Size
Specifically size is a big difference. Dell has 16,100 employees while Ford (including
automotive and financial services) has 363,892 employees. There is also significant
difference in assets, revenue, manufacturing facilities and more financial information
between Dell and Ford. As the size increases it is more difficult to adopt changes for a
company, which is also true for Ford.

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b) Company Age
Ford is a 107 years old company, Dell on the other hand founded 27 years ago. Because it is
difficult to break the habitual ways of doing things, being an old company limits the
flexibility and responsiveness of Ford.

c) Company Culture
Dell and Ford have different corporate cultures. Dell is an entrepreneurial, new company
that can react quickly to change and does not have a lot of people or history to slow it down.
On the other hand, while Ford is innovative, they are slow to react to changes in the industry
and the employees do not have the same way to doing things as the Dell employees.

d) Supplier Base
One major difference is in the supplier base. Ford has derived a multi-tiered system of
supply. The tier system consists of numerous generic suppliers, "tier two" and below, who
are managed by "tier one" vehicle sub-system suppliers. The "tier one" suppliers, by nature,
are completely dependent upon Ford's survival since the provided sub-system component is
specific solely to Ford. Ford has such a complex network of suppliers to deal with, and
much of their supplier base does not have the IT knowledge or capabilities of Dell's
suppliers. This difference could be a problem because virtually integrated supply chains
require considerable IT capability for sharing information.

e) Product Complexity
Product modularity also works for Dell, but not for Ford. “Dell Direct” depends heavily on
the modular product architecture of a personal computer, which is made up of a small
number of separately-produced, physically independent “modules” joined along a common
interface. The current dominant product architecture for automobiles is still substantially
integral rather than modular, and closed rather than open. That is, most components are not
standardized across products or companies, and have no common interface, hence they are
highly interdependent with other components and idiosyncratic to a particular model.

Due to the generic nature of computer parts, Dell possesses the ability to negotiate and
procure necessary items for plant assembly from several independent purveyors. Therefore,

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Business-To-Business (B2B) transactions are accomplished with relative ease and minimal
cost. Although generic items, such as spark plugs and windshield wipers, are provided to
Ford by lower tier suppliers, wholly-dependent, "tier one" partners supply components, such
as dashboards and drive trains, that are tailored specifically for Ford, alone.

f) Product Variety
Product variety is defined as the number of vehicle permutations offered to the customer of
a particular model. As the number of changeable products and the number of models are
higher for Ford, the product variety is much higher than Dell.

3
Historic Product Variety, four Major Volume Models
Higher product variety leads to;
- Management of large number of individual component inventories.
- Production capacity for individual components set long in advance to meet the
demand. And this production capacity plans cannot be changed quickly.

g) Process Complexity
Dell and Ford have significantly different processes related to the ownership of inventory,
suppliers, forecasting, and demand. Also, cars require more components to build than a
computer does and cannot be easily shipped in a box. This makes coordinating the supply
chain effort more challenging.

Another difference in processes is that Ford has traditionally kept purchasing activities
somewhat secretive because it provides leverage dealing with industry suppliers. However, a
virtually integrated system requires close collaboration and extensive information sharing
with suppliers, and full disclosure might conflict with Ford's purchasing power.

3 Holweg, Greenwood, Product Variety, Life Cycles, and Rate of Innovation – Trends in the UK Automotive Industry, 1991

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In addition, since Ford sells most of its cars through traditional dealerships, the selling
process is not as efficient as Dell's direct sales model. For Ford to truly adapt Dell's model it
would have to eliminate these distribution channels. However, it would be very difficult and
unlikely for Ford to ever completely eliminate its dealers.

Possibly the biggest obstacle of transforming the supply chain is the effect on the rest of
Ford's operations and traditional processes. Significant changes to Ford's factories, vehicle
design, logistics, forecasting methods and other processes would have to be made. There
would also be a need to overcome resistance from existing dealers and suppliers, as well as to
re-train employees to handle the new procedures and information technology.

3 ALTERNATIVE SOLUTION PROPOSALS

a) No Change Alternative
First alternative may be considered as keeping the processes and the supply chain as it is and
not to implement major changes. This strategy, obviously, is the safest strategy as there is no
risk related to the changes. Also it may be least costly in short run. However, Ford wouldn’t
choose this alternative in order to keep up with the market competitiveness. The risk of
falling behind other manufacturers and also the opportunity cost of (reducing costs by
adopting some changes in the processes) this alternative will probably compel Ford to make
some changes in its processes and supply chain.

b) Total Virtual Integration Alternative

An alternative strategy to consider would be a total jump to a virtually integrated supply
chain based completely on Dell's model. Ford and all its suppliers would share information
between their systems and the Internet to coordinate the flow of materials and production.
All customer orders would be taken either by phone or on Ford's web site and then built. A
pull system would be implemented, where production and material orders were based on real
time data from customer orders, thus reducing inventory. Once orders were built they
would be shipped out directly to the customer. However, many of Ford's traditional
processes and production methods would have to be changed to take advantage of this new
form of supply-chain management. As it is mentioned before, there are significant

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differences between Dell and Ford, which would obstacle Ford from jumping to a complete
virtual integration.

c) Extending E-Business Alternative

A third and a hybrid solution alternative must be proposed if the differences between Ford
and Dell are considered. This option would be to extend Ford's E-business strategy with
customers and suppliers and make a partial jump towards virtual integration. The Internet
would serve as a primary tool for dealing with suppliers and allow for customization of
automobiles by consumers. This strategy incorporates many of Dell's supply chain activities
like direct sales, customization, and information sharing over the Web. There would also be
IT initiatives taken to reduce order to delivery time and inventory, share production data
with suppliers, and track materials throughout the supply chain. However, this approach
would not fully adopt Dell's virtual integration model. There would still be dealers serving as
distribution centers for the product, only the cars sold on the Internet would be built to
order, and Ford's factory operations would remain largely the same. E-Business alternative,
which the company chose as the heart of its new vision, will be examined in detail in the
following sections.

4 E-BUSINESS STRATEGY AND AFTER 1999

Beyond the information presented in the case a further look to Ford’s decision, after 1999,
will be summarized at this section.

In September 1999, Ford announced an ambitious Internet strategy that was endorsed by
CEO Nasser.
Nasser’s vision is a sweeping one. He pictures the day when a buyer hits a button to
order a custom-configured Ford on-line, transmitting information to the dealer who
will deliver it, the finance and insurance units that will underwrite it, the factory that
will build it, the suppliers that provide its components, and the Ford designers
planning future models. 4

4 Jennifer Reingold, Marcia Stepanek, and Diane Brady, “Ford: Accelerating into the On-line Age,” Computing 9 March 2000

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The old “push” model built cars at maximum capacity and then showed them to dealers,
where aggressive selling and rebates unloaded the units consumers did not otherwise find
attractive. The new “pull” model would build cars quickly in response to customer orders, at
least for the more popular combinations. Unusual configurations would take longer. Cars
would be built to order, dealerships would report problems immediately to the factories for
quick changes, and suppliers would control inventories at Ford plants. The new “order-to-
delivery” basis would generate a constant flow of consumer preference information to
suppliers who would fill parts orders in real time without waiting for a purchase order.

Brian P. Kelly, Ford’s e-business vice president, described Ford’s plan to rebuild itself as a
move to “consumercentric” from “dealercentric” and stated that Ford would transform itself
from being a “manufacturer to dealers” into a “marketer to consumers”.
Our consumer-connect business has a totally integrated strategy to reach the
consumer in conjunction with our dealers at every touch point. . . . Ford continues
to be at the forefront, integrating our global e-commerce activity from the consumer
back through the entire supply chain, including linking our Customer Assistance
Centers and in-vehicle communications. 5

New Web sites were launched for buyers and owners. In-car computer and communications
services were announced that would bring travel, security, entertainment, and Web access to
the motorist and an electronic connection between consumers and the Ford Motor
Company. In February, the company announced it was purchasing Internet PCs for all
employees, “to reach its vision of being on the leading edge of technology and connect more
closely with its customers.” In March 2000, the company announced the creation of a
business- to-business integrated supplier exchange through a single global portal – a joint
venture with GM and DaimlerChrysler to create the world’s largest virtual marketplace. It
seemed as if Ford had adopted the Dell model:
• Sell direct
• Mass-produce customized products
• Build to order

5
Brian P. Kelly, “Ford Motor Company: Inside the Company News Room,” 15 September 1999.

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• Substitute virtual integration with suppliers for vertical integration
• All hosted and integrated on the Web

4.1 Transformation of the Customer, Dealer, and Owner Relationships

Goal of becoming the world’s leading consumer company required a fundamental change in
the selling process; a new, continuous relationship between Ford and the customers; and a
restructured and integrated set of processes from buyer through the supply chain. Nasser
also had to address the role of the retail dealer. Any change in the buying process for autos
and any direct company-to-consumer relationship had to either embrace the dealers and
incorporate them into the process or circumvent them, risking an all-out fight because the
dealers controlled the market space between the consumer and the manufacturers.
Disintermediating the dealers with technology and information was a tempting thought.

As the new vision began unfolding, it became clear that the role of the dealer would be a
central issue. In Kelly’s words, “. . . from dealer-centric to consumer-centric had an
ominous ring for dealers.” Harold Kutner, group vice president of worldwide purchasing at
GM and the company’s e-business thought leader, rejected the idea that people wanted to
buy cars from dealer inventories. He said 70 percent of customers would want to custom-
order and would be happier6. Neither Ford nor GM seemed quite sure what to do with their
dealers.

Dealers saw both hope and danger in Ford’s new directions. A more market-aware Ford
could be producing vehicles much closer to what consumers actually wanted. Shorter cycle
times would also help dealers. Dealers took ownership when the vehicle rolled off the
assembly line and hit the common carrier. But it could be anywhere from a week to five
weeks before the vehicles actually reached the dealer.

The “consumercentric” aspect of the new strategy concerned dealers. Dealers with an
aggressive Web-selling capability were suspicious of the selling practices on the Ford.com

6 Philip Evans and Thomas Wurster, Blown to Bits: How the New Economics of Information Transforms

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site. Also some dealers were not convinced that the “lowest price on the page” type of
selling encouraged by the Web was what buyers really wanted.

But some dealers thought the Web would help them more than it would help Ford. As a
dealer explained, “Fifty percent of my business will soon be Internet-related. I have a list of
5,000 names. We’ll use that list and what we know about those vehicles to fill up my service
bays — we’ll target special mailings and notices to segments of that data base: people who
need an alignment or an inspection, who have a vehicle about to come off lease, or who’re
about ready for a new car.”

4.2 Customer Assistance Centers and In-Vehicle Communication

Ford’s plan to build a direct relationship with its customers was implemented with the
Customer Assistance Centers and its In-Vehicle Communication products. There were three
new consumer sites:
- BuyerConnection, where buyers could custom-order a vehicle, receive a quote from a local
dealer, and apply for financing and insurance (the first national on-line “request-a-quote”
system);
- DealerConnection, where buyers could find a dealer, review dealer inventories,
see dealer service specials, and make appointments for service; and
- OwnerConnection, which was a virtual community of owners providing forums,
maintenance schedules, and special offers from Hertz.

These early efforts met with some success. Ford was the first automotive manufacturer to
include its family of brands on a single Home Page, allowing consumers single-click access
to the Aston Martin, Jaguar, Volvo, Lincoln, Mercury, Ford, and Mazda brands. Ford.com
was a leading automotive destination, with more monthly “hits” than any other
manufacturer, according to MediaMetrix. DealerConnection was giving 35,000 quotes a
month to Ford and Lincoln Mercury dealers.7

7 “Car Dealer Group Plans to Link Its Members with E-Commerce Site,” Wall Street Journal, 16 March 2000.

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Ford’s interest in new strategy was not just as a means of building an enduring customer
relationship. Ford had also been intrigued with the other 57 percent of the automobile
revenue “downstream” from the first purchase. Several of its acquisitions would take Ford
further into this business, like Ford Credit used for used-car financing or after market
accessories online, etc.

4.3 Supply-Chain Integration: The Trading Hubs

On November 2, 1999, Ford announced the formation of AutoXchange, an automotive e-
business integrated supply chain to be created and run by a newly formed joint venture with
Oracle Corporation. The venture would initially facilitate Ford’s $80 billion in annual
purchasing transactions with its more than 30,000 suppliers and $300-billion extended
supply chain. The two companies would create the world’s first automotive on-line supply
chain network, and the world’s largest business-to-business electronic network. It would
also be the e-business backbone for warranty transactions and design collaboration. This
new trading hub was expected to reduce Ford’s purchasing costs dramatically and increase its
operating efficiencies through an integrated Internet supply-chain system. “Thirty percent of
a vehicle’s cost comes after it leaves the assembly line.” 8Dealers typically carried 60 days’
inventory, but with AutoXchange, “You really don’t need more than 30 days,” observed a
Ford executive. 9Further, it would extend Ford’s core business into a virtual e-business
enterprise, allowing direct connections of the supply chain to the consumer to reduce Ford’s
time to market. AutoXchange would use catalogs as well as on-line auctions for components
and materials. Early applications would be the purchasing of production parts and
nonproduction goods and services; next would be order tracking, financial services, and
access to CAD drawings; later would come status of payments—a top priority for suppliers.

AutoXchange would take a “small fee” from every transaction; first-year-revenue forecasts
were $200 million. In five years, revenues could be $5 billion. The trading hub was to be
spun off as a separate venture; some analysts estimated it might produce a market cap of
$100 billion. It was expected that Ford’s suppliers would be able to invest in the venture.

8 Robert Rewey, group vice president for Sales, Marketing, and Service, taken from customer profile brochure of Cisco, 2001
9 Davis Garrity, global auto-research coordinator at Dresdner Kleinwort Benson., taken from customer profile brochure of Cisco, 2001

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There were also many concerns: the value of the long-established supplier relationships
could be jeopardized and those first-tier suppliers could themselves become transformed in
terms of their supplier relationships; smaller suppliers and new suppliers could be precluded
from using the system through lack of knowledge.

4.4 Transforming the Supply Chain

As noted earlier, Ford’s e-business vision for Ford was driven in part by the promise of
major reductions in existing supply-chain costs, which included both real costs to the
consumer and opportunity costs to the manufacturer. The latter included stockout costs
(lost sales from not having the right vehicle in the right place), costs of suboptimal mix, and
price discounts by the manufacturer and dealer that were a result of manufacturing vehicles
based on the needs of the inflexible supply chain and the sales force, rather than the needs of
the consumer.

Inventory costs were only one of the costs associated with the material component of the
vehicle supply chain. Purchased materials were the largest component of cost for an
automotive OEM manufacturer (and the single largest category of costs across the entire
supply chain), roughly 50 percent of the retail sales price10. The costs of procuring these
materials included both product-related costs (direct and indirect materials), which were
fairly easy to determine, and process-related costs (the costs of activities associated with
procurement), which were less easy to determine. Such activities included needs
identification, vendor selection and material ordering, review and approval, and inventory
costs.

In pursuing their e-business vision, Ford executives acknowledged that the transformation of
the business would start with B2B supply-chain initiatives at the “back end” of the chain,
connecting the manufacturer with its thousands of suppliers, as noted earlier. By moving
suppliers away from their EDI systems onto the Web, dramatic reductions in back-end
supply-chain costs were possible. Web-enabled forecasting, planning, and scheduling

10 “eAutomotive: Gentlemen, Start Your Search Engines,” Goldman Sachs Research Department, January 2000

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processes could drive out work-in-process inventory at both suppliers and manufacturer;
manufacturing productivity would also rise through improved asset utilization and reduced
overtime. On-line procurement processes could eliminate much of the low value-added
administrative work now associated with purchasing. A rich database of on-line material
requirements and transactions could enable material cost reductions by aligning material
specifications, coordinating and leveraging volume scale across the entire supply chain, and
consolidating the buy with cost-advantaged suppliers. The implementation of a true make to-
order system would have even greater economic implications, both in terms of cost
reduction and revenue enhancement, by providing consumers with exactly the product they
desired.

5 CONCLUSION
Ford extended its E-business strategy attempt a partial move towards virtual integration.
This supply chain strategy takes the nature of the auto industry into consideration and adapts
Dell's model to better fit Ford. Dealers would still play a role with distribution, and core
processes at Ford would remain the same. Nevertheless, the Internet should become a
greater part of Ford's sales methods to consumers and communications with suppliers.
Although it is not a complete adoption of Dell's virtual integration model, utilizing these
information technologies will enhance supply chain activities for Ford and create value for
the company.

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6 REFERENCES
Robinson, E. (2001) The Re-Education of Jacques Nasser
“The Cutting Edge; On-Line Purchases Save Ford $10 Million.” Los Angeles Times, 10
February 2000
“Ford Motor Company: The American Road.” Hoover’s (2000)
Dohring Report on Automotive E-Commerce (1999)
Georgievksi, Biba (1999). “The Case for Higher Levels of Integration,” Presented at
Interiors Exposition; Working Paper, Visteon Automotive Systems, Dearborn, MI.
“The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell,”
Harvard Business review, March-April 1998
Cusumano, Kahl, Suarez (2008). “A Theory of Services in Product Industries”
Holweg, Greenwood, Product Variety, Life Cycles, and Rate of Innovation – Trends in the
UK Automotive Industry, 1991
Brandt, A. Ford’s E-Business Strategy, Oct. 21, 2008
“Ford 2000 a Global Vision”, The Irish Times, Business 2000
Associates, J. F. (2001) Impact of E-Commerce on Auto Dealers. Washington
Helper, S., & MacDuffie, J. P., (2000). E-volving the Auto Industry: E-Commerce Effects on
Consumer and Supplier Relationships, Berkeley University

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