Supply Excellence
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Ford’s $45 million Supply Management Morality Tale

November 20th, 2006 · by Tim Minahan · 2 Comments · automotive sector, best practices, design and development, supplier management, supply management, supply risk

Thinking about beating up suppliers to meet your short term cost savings targets? Think again.

Faced with lackluster sales and disappearing profits, Detroit automakers seem to have thrown out their copy of the sound supply management principles book — resorting instead to cutting supplier rolls and demanding price concessions. Such myopic cost cutting tactics are now coming back to haunt them.

For evidence, look no further than Ford Motor Company. After aggressive supply cost reduction actions, the ailing automaker has been hit with a supply risk double-whammy in recent weeks. Earlier this month, auto supplier Collins & Aikman stopped shipments to Ford after a price negotiation dispute.

Just last week, Ford said it would delay the launch of two of its new cross-over utility vehicles by three weeks due to supplier problems. According to Ford, some suppliers have failed to deliver parts on time and there are cycle time issues on the assembly line. Ford wouldn’t finger the problem suppliers, but one company exec admitted that “We’ve had some disrputions of the manufacturing process because of the [supplier] issues.” And even slight delays can wreak havoc on Ford’s inventory-lean just-in-time manufacturing process.

According to auto analysts, the launch delay will cost Ford $45 million in operating earnings. The news couldn’t come at a worst time. Ford lost $7 billion during the first nine months of the year and said it won’t return to profitiability until 2009.

To be fair, delivery issues are part of doing business. But, with the delays coming so close to launch, it is fair to question whether a narrow focus on near-term cost reduction is straining supplier relationship maangement and causing Ford to take its eye off crucial supplier development and assurance issues.

By comparison, Toyota, Honda, and others have embraced long-term supplier relationships, working to develop supplier capabilities, align product roadmaps, and assure supply for years to come. Just consider Toyota and Honda’s edge in the hybrid vehicle markets, which is largely attribute to the automakers’ moves to develop and lock-up suppliers of hybrid engine technology. A practice which Ford execs have publicly cried foul about during earnings calls, saying it gives the Japanese automakers an unfair advantage. (To borrow a phrase from my six-year-old daughter: “Duh!”)

Dr. Martin Hofmann, Group Executive Director for Purchasing for Volkswagen, summed it up best when presenting at ProcureCon Europe earlier this month: “Purchasing is touching innovation and design issues. To gain and maintain a competitive advantage we want to keep our most critical suppliers locked with us. We recognize that, to do so, we need to pay a premium.”

Hofmann says Volkswagen leverages supplier innovation across its multiple brands, solidifying even longer and closer working relationships with suppliers. “We have synergies across the brands, affording us both volume leverage and the ability to share [supplier] innovation. Innovation typically comes from Audi and eventually flows into other brands.”

One example is the soon-to-be-released heads-up cockpit display system. This multi-functional display will be an optional feature within the next Audi release and will later find its way into the other VW brands.

In short, Hofmann says supply management is about building mutually beneficial relationships. “You need to find the synergies [with your suppliers] that define joint competitive advantage. The negotiation is the final act when everything else is done.”

Prescient insight for Ford and others to consider. Find the right partner and identify value levers that benefit both parties — before negotiating on price.

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2 responses so far ↓

  • 1 Mark Usher // Nov 21, 2006 at 7:06 pm

    Tim, I’d say the Ford episode represents an intersection of 3 issues - TCO, strategic supplier relationships, and supply risk. The truth is that you can give and take in any of these provided you have visibility of the impact on each of the others. In other words, make sure you have all the information and then make the right business decision for you. So in the Ford case the focus was on reducing suppliers and reducing prices in a JIT environment. The lack of visibility was the impact on TCO (delivery problems from suppliers picked on price), the supplier relationships (no supplier loyalty) and the risk of supply discontinuance (no backups when the suppliers said take a hike). If - up front - Ford had formally assessed (and quantified) the impact of the selected supply strategy on each of these areas they could still have pushed but at least with a knowledge of how far they could go. This is another example for me of a gap in the provider marketplace for a tool/service to help procurement folks formally balance cost reduction targets against supply risk when developing their supply strategies. Go for 50% supply base reduction and 15% cost savings or 25% reduction and 10% savings? Quantify the effect on the probability of a supply shortage then - based on your personal risk averseness - make your choice.

  • 2 Tim // Nov 21, 2006 at 7:22 pm

    Mark:

    Excellent points. True strategic sourcing and supply management is a constant balance between (total) cost, performance, and risk. Top organizations manage supply like a financial portfolio, constantly adjusting strategies and allocations based on market dynamics and goals.

    Technology has yet to effectively address this balance because there’s been to much clutter — mainly limited visibility into spend, transactions, and performance. I agree that the next wave of improvements will come from technology enabling new decision analyses and processes that were previously unattainable.

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