Ford Virtual Integration Via Dell Essay.
Ford continues to face increased completion from foreign competitors while operating in an industry that is experiencing significant over-capacity. In the face of the challenges presented to us, we must determine if Ford should embrace the direct business model which utilizes “virtual integration” that has driven Dell to become a clear leader in their industry. Further, if we chose to utilize “virtual integration” based on the Dell model, we will need to develop and implement significant changes in the some of our most fundamental supply chain operations.
In addition, we must determine how Ford should utilize emerging information technology to transform the way we interact with supply chain members. While progress in this area will be integral should Ford choose to pursue “virtual integration”, it is also a stand-alone issue even if Ford does not choose to pursue the “virtual integration” approach to supply chain management.
It is imperative our decisions regarding these issues align with Ford’s key strategic objectives of placing emphasis on shareholder value and customer responsiveness.
“One Best Way”: (Tactical / Short Term) – There are members of our organization who are of the belief there is one “one best way” to approach supply chain design and management regardless of the type of business, industry, or level of complexity associated with the supply chain. This opens Ford to risk of refining our supply chain functions and practices in ways that don’t optimize our ability to achieve our strategic objectives. Information Technology Growth: (Tactical / Mid-Term) – As part of the “Ford 2000” initiative, there was general agreement that information technology would be deployed to dramatically enhance material flows and reduce inventories or “substitute information for inventory”. Ford’s growth in this area has significantly outpaced that of our supply partners with the magnitude of this issue increasing greatly in the lower tiers of the supply chain. This capability gap limits Ford’s ability to leverage the perceived gains information technology would bring to the supply chain.
Product Complexity (Strategic / Long-Term) – Worldwide, Ford currently offers over 70 models of cars and trucks and with “trim levels” and interior / exterior colour selections taken into account that number increases to over 14,350 without even taking into account the single option factor. While we have made great strides in rationalizing our model offerings, this complexity still presents a great challenge to us when we attempt to satisfy consumer wants with vehicles that have been pre-produced. Supplier Complexity (Strategic / Long-Term) – To spite Ford’s efforts, and its positive results, in reducing the number of suppliers it directly dealt is still extremely large.
This complexity increases significantly when looking beyond Tier 1 which is required in order to maintain a true supply chain orientation. This issue is in part, driven by product complexity, the large number of components required to manufacture a vehicle, and Ford’s worldwide operations. This extremely large number of supplier complicates supply chain communication, coordination, and can slow supplier responsiveness. Relationship With Supply Chain Partners (Strategic / Long-Term) – To spite Ford’s recent move to forming longer-term relationships with suppliers and sharing management improvement techniques such as JIT, TQM, and SPC with them, overall Ford has bad history with some suppliers.
This, coupled with Ford’s expectation of lower pricing each year from all suppliers, has led to distrust and there are many outstanding issues with suppliers. This is environment does not foster cooperation or help build a more integrated supply chain. Internal Relationships (Strategic / Long-Term) – Ford has over 360,000 employees worldwide and an extremely powerful and independent dealer network we have relationship issues with. Our hourly workforce is highly unionized and we have a tenuous relationship with many of those unions. These factors limit Ford’s ability, in regard to both scope and velocity, to implement changes in the supply chain.
Ford is the second largest industrial corporation in the world employing over 370,000 people in 200 countries while generating more than $144 billion in revenue. We continue to face every increasing levels of foreign competition in an industry where that is there is significant over-capacity and new companies are entering the market on an ongoing basis. Ford identified it needed to change and has started to do so through our “Ford 2000” efforts. Key aspects of the “Ford 2000” project call for dramatic cost reductions driven by elimination of organizational and process redundancies resulting in huge economies of scale in manufacturing and purchasing. Significant gains are to be realized from reducing the “order to delivery” (OTD) time from more than 60 days to less than 15 days with information technology being a key enabler in this supply chain reengineering process.
In order to help achieve the deliverables of “Ford 2000”, the company has been analyzing the direct business model Dell has utilized since its inception to become an industry leader who has experienced unprecedented growth and market capitalization. The focus of Ford’s interest has been Dell’s “virtual integration” approach to supply chain management which is a way of capturing the benefits of virtual integration without actually doing so. Supply chain partners are treated as if they are members the organization, as would be the case with vertical integration, while they are in fact not. This addresses issues regarding communications, coordination, and control while incurring lower overhead costs an leveraging the focus and specialization of each supply chain partner.
As Dell brings supply partners into their “virtual integration” supply chain, they enjoy the benefit of lower overhead costs, however, they also lose a great deal of control over the supply of critical goods and materials. As well, lower overhead costs are offset by higher prices from suppliers in many cases which is a trade-off Dell has chosen to make for, to some degree, shifting fixed costs to variable costs. Given Ford’s supply chain is much more complex than Dell’s surrendering control over key aspects of the supply chain open’s Ford to significant supply chain risk.
Dell’s direct business model results in them having intimate and ongoing contact with their end user customers. This is largely facilitated by the fact that 90% of Dell’s sales go to institutional customers with 70% of their customers each purchasing more than $1 million dollars in product annually. This makes Dell’s volumes relatively steady especially given many of their large customers work with Dell to derive a lifecycle replacement plan for the equipment. This is exactly the opposite of our situation at Ford where, due to our dealer network, we have very little contact with the end-use consumer.
As well, the majority of our customers are individual consumers with no set lifecycle plan for the vehicles they purchase from us. Dell’s virtually consistent demand flow allows for a “pull approach” with supply partners which is a key to its “virtual integration” model and, as noted above, Ford does not experience this normalized demand flow for our vehicles. Additionally, Ford’s volume is much more susceptible to impact by external factors it cannot control, such as general economic conditions, as the purchase of a vehicle requires a much larger expenditure than a computer and the lifecycle of a computer is generally shorter than that of a vehicle.
Another key difference between Ford and Dell is the complexity of the products produced and the processes utilized to create those products. Dell’s products have relatively low complexity with customers steered toward different models with relative ease and also utilize a relatively small and flat supply chain consisting of a limited number of vendors. These factors are key drivers to the success of “virtual integration” as they help facilitate uniform demand for a smaller number of models of computer and make supply chain management less complex.
Ford is, in realty, on the opposite end of the complexity scale in regard to both product and process complexity with a very deep supply chain that feeds a very complex production process driven by both product and market complexity. Further, “virtual integration” is key to Dell managing it’s inventory obsolesce risk which is significant to Dell while this risk is minimal for Ford hence negating for Ford one of the key deliverables of “virtual integration”. These key differences allows Dell to undertake “virtual integration” with much less supply chain business risk than would be added into the supply chain should Ford move to this “virtual integration” model.
In addition to the supply chain structure and market differences between Ford and Dell, Ford’s ability to drive the change required to implement “virtual integration” through its supply chain needs to be considered. Ford faces significant challenges in rolling out supply chain re-engineering than Dell specifically in the areas of the “human factor”. Ford is highly unionized while Dell’s labour force is non-unionized. Further, Dell enjoys a reasonably good relationship with its suppliers while Ford has a bad history with our suppliers resulting in distrust and many issues still being outstanding. Ford also needs to manage this change through our dealer network which does not exist in Dell’s world.
To further complicate this matter, the Ford dealer network is powerful and independent and there are long standing ongoing relationship issues with them. Another key factor to consider in this area is that Dell evolved using the “virtual integration” model and did not have to evolve into it as would be the case at Ford where the supply chain has operated “status quo” for an extremely long time. Based on these facts, implementing the supply chain change required to move to “virtual integration”, in regard to both scope and velocity of change, is limited within Ford itself and within our supply chain overall.
Differences in the behaviours and expectations of the ultimate consumer must be considered. A motor vehicle is much more complex and costly than a computer and, as such, the current end use consumer has different expectations and behaviours for each purchase consideration. Dell’s direct model requires consumers to pay for the product, that has limited options available and is available able from many other suppliers, before deliver and buy it without ever having a “hands on” experience with it. Purchasing a vehicle is a much less frequent action which normally involves buyers physically and examining and test driving vehicles before they purchase.
Due to the high cost of a vehicle purchase, in order to pay for the vehicle at the time of delivery the consumer often has to obtain some sort of financing. All of these services utilize the services of a Ford dealer which is absent in the Dell model. While consumer behaviour in these areas can be changed over time, doing so will take a great deal of time and ignoring these key differences between Ford and Dell would be punitive to Ford as consumers would most likely move to another vehicle manufacture that offers a “traditional” buying experience. Given a key strategy of Ford is an emphasis on customer responsiveness this point requires significant consideration.
The alternatives to be considered need to align with our company-wide emphasis on shareholder value and customer responsiveness. Alternative 1 Do
Nothing – Tactical: This alternative would require no additional action in any way from any member of the Ford or its supply chain. All aspects of supply chain operation would remain “status quo” and Ford will proceed onward with “Ford 2000” as planned. Pros: No resources of Ford or our supply chain would be taxed in any way and no funds would need to be expended other than those already earmarked for the “Ford 2000” initiatives Cons: This inaction would leave opportunity on the table based on some of the identified gaps in the current “Ford 2000”. This option also foregoes the change for Ford to implement any best practices identified in the Dell “virtual integration model”. Long standing issues such as our relationship with our Dealers would also not be addressed by selecting this alternative.
Alternative 2: Ignore “Virtual Integration” and Focus on “Ford 2000” and Other Known Issues – Strategic: As discussed previously, the “virtual integration” model used by Dell will not easily transfer to Ford nor will it be as beneficial to Ford as it has been to Dell as, in reality, there is no “one best way” for manage a supply chain. As such, this alternative involves Ford and it’s supply chain partners focusing all of their efforts on the “Ford 2000” initiatives and well as supply chain issues that impede the progress of the “:Ford 2000” initiative Additional issued to be addressed include relationship management (improvement) between Ford and its suppliers and Ford and its dealers.
Additionally, while information technology is a key aspect of “Ford 2000”, however, this technology has actually caused some of our suppliers some issues we need to go back and revisit in order to optimize the return on our investment in I.T. Finally, we have made available to our supply chain partner’s management tools such as JIT, TQM, and SPC, however, there is no evidence we have provided guidance to them on how to utilize these tools specifically in regard to the items they supply to Ford. This alternative addresses this gap. Pros: This alternative builds on the work that was done to develop “Ford 2000” which was modeled after a successful supply chain in Ford’s own industry that faced many of the challenges Ford does now.
It will also allow Ford to build on the progress it has made with “Ford 2000” while ‘tweaking” some area of the program and addressing long standing issues, such as relationship management, that will not only resolve those issue but enhance supply chain orientation and make additional change easier to drive through the supply chain. Cons: This alternative involves revisiting and revising some of the aspects of “Ford 2000” which may provide the opportunity for some to assess it as a failure when, in fact, it has been a success, Also, much of the effort in this area involves interpersonal communication and relationship management which are both difficult aspects of change to manage. Ford will also have to change its view on relationships with dealers, suppliers, and customers which will require a change in management prospective at all levels of Ford.
I recommend we do not implement any aspect of Dell’s “virtual integration” supply chain model and focus our supply chain resources on our “Ford 2000” initiatives as well as other issues that have been identified in relation to “Ford 2000”.
“Ford 2000” is the result of root cause analysis that was undertaken by Ford to address our specific issues in all key areas of our supply chain. The program was then developed to address the root cause issues identified and then benchmarked against similar programs developed by others in our industry. Dell’s “virtual integration” model works well for the direct-to-consumer computer industry they operate in, however, their supply chain model does not translate to the automotive industry well for the reasons discussed previously.
This course of action addresses communication and relationship issues with supply chain members. Issues such as this are never easy to address as often they involve deep seeded feelings and human emotions, That said, once Ford’s relationship with its suppliers and its dealers is improved this will open the door to additional improvement going forward for which change management will be much simpler and easier.
Key benefits to Dell of the “vertical integration” supply chain model include significant risk reduction in the area of inventory obsolesce and increased flexibility which comes at a higher overall cost to Dell. Inventory obsolescence and flexibility do not pose as significant a risk to Ford as to Dell, hence, the value and benefits to Ford of what would be a mammoth supply chain re-alignment do not rationalize. Further, the focus of Ford has been to continually, year after year, drive cost out of the supply chain and implementing “virtual integration” would actually add cost back into Ford’s supply chain.
Overall, it is vital Ford move forward with addressing areas of concerns and issues that have been identified and address them using corrective actions and processes that Ford believes will deliver results respective of both our internal and external business environments. Actioning this alternative will facilitate Ford in its continued effort to focus on shareholder value and customer responsiveness..
Ford must continue to re-engineer its supply chain and continue to strive to meet the objectives set out in “Ford 2000” which will ensure shareholder value is maximized and that Ford continues its focus on customer responsiveness. That said, adopting the direct business model and utilizing “virtual integration” that has been successful for Dell is not the best course of action for Ford to follow.
The recommended course of action will not only improve Ford’s supply chain orientation and reduce order to delivery times, it will drive cost out of the supply chain and help ensure our supply chain partners continue to prosper while deliver high quality product to Ford at lower costs. As well, the improved relationships and communication with our suppliers and dealers which will result from these efforts can be leverage to help Ford make gains in other areas of the business.
Overall, this solution that aligns with Ford’s philosophy of building long term relationships with capable supply chain members and it’s long term strategy.