Ford Motor Company:

Procurement

• Background
• Business Process Redesign: Process, IT
• Results Obtained
• Implications: Process, IT

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FORD: BACKGROUND

Ford Motor Company Has Been Able to Improve Market

Share at the Expense of GM and Imports
U.S. Car and Light Truck Market Share
40% (1988 - 1992)
35% GM
30%
Imports
25%
Ford
20%
15%
Chrysler
10%
5%

0%
1988 1989 1990 1991 1992

• Ford is the fourth-largest industrial corporation in the world; the second largest
producer of cars and trucks

Ford exhibits good revenue and profit potential with a much leaner
organization than in the past.

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FORD: BACKGROUND

Ford Motor Has a Complex Manufacturing and Supply

Chain in North America
Ford Motors North America

Approximately 17
a
1,500 Suppliers Production/Asse Dealers
mbly Plants

Fleet Managers

Government

Municipalities

Exports

a: Raw materials, components, and parts

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FORD: BACKGROUND

Ford Faces Severe Market and Customer Challenges

Current Challenges What They Mean to Ford Motors

• Increased foreign and domestic • Reduced sales and prices

competition

• Shifting consumer demographics • Consumers demand higher-value cars at

lower prices

• Industry-wide over capacity • Downward pressures on price

• Increased attention to environmental • High cost of compliance (e.g., new fuel-

concerns emission regulations)

• Increased reliance on “automotive • Need to increase partnership with

systems” over just parts suppliers and vendors

Since 60% of Ford’s manufacturing cost is explained by purchased

parts and materials, Ford is under tremendous pressure to achieve
lower cost solutions.

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FORD: BUSINESS PROCESS

Ford’s Traditional Procurement Process Suffered from

Many Roadblocks

Manual CE
PRI E
and redundant C
procedures PRI
Information
Exchange Same Part
TA

Suppliers
Suppliers for

are
Adversaries
Multiple

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FORD: BUSINESS PROCESS

In Addition, It Was Paper-Based and Labor Intensive

“Old Process”
Purchasing Accounts Payable

P.O. P.O. Copy

P.O. Original

Receiving Documentation

P.O.
No
Obtain
Invoice reconciliation
(Sometimes received
All Match ? information from
before the goods arrive) Purchasing and Receiving

Payment Yes
Goods
Goods and Shipping Receipt

Supplier
Accounts Payable alone employed more than 500 people. Receiving
Department
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FORD: BUSINESS PROCESS

The Complexity of This Process Translated into Significant

Inefficiencies

• For a given order, Accounts Payable had to deal with three different
documents: purchase order, receiving document, and invoice:
- Accounts Payable had to match 14 data items among the three documents

• 80% of the Accounts Payable personnel efforts were spent on reconciling

mismatches:
- Requiring several weeks for resolution
- Triggering payment delays and inaccuracies (over- and underpayments) to suppliers

• Ford’s Accounts Payable headcount was 400% higher than that of other
automakers

• In addition, Ford’s policy of “multi-vendor sourcing” triggered limited ability

to take advantage of economies of scale and price reductions

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FORD: BUSINESS PROCESS

Ford’s Experience in Redesigning Provisioning Illustrates

the Pitfalls of “Just” Automating the Business Processes

• Ford’s initial disappointments stemmed from just automating information

without rethinking the business processes:
- Ford unsuccessfully attacked the problem for eight years, between 1980 and 1989, by largely
substituting IT for people
- “Despite automation, supplier payments involved a lengthy checking process … PO, invoice,
plant warehouse”

• Ford’s initial goal was to cut just 100 out of 500 provisioning jobs

• Totally re-engineering the process…enabled by appropriate technology…

allowed elimination of 400 provisioning jobs

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FORD: BUSINESS PROCESS

Characteristics of Ford’s New Approach to Procurement

• The creation of “Partnership” relations with suppliers

characterized by:
- A high level of information sharing
- A commitment to overall quality
Supplier - Cost reduction
Management - Joint problem solving

• Partners are selected based on quality, technology,

technical support, delivery, and cost
• Single-vendor sourcing

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FORD: BUSINESS PROCESS

Characteristics of Ford’s New Approach to Procurement

(cont.)

• Revolutionary path—cost-reduction effort aimed at

eliminating invoices instead of reducing the unit cost of
invoice processing
• Redesign in the nature of exchange between the
Process partners—a “Virtual Organization” through a business
network redesign
• Elimination of redundancies in processing
• High level of information technology utilization (and
investment): IT is used as engine to alter the way work
is done

• Decision-making responsibility by individuals executing

People and the tasks—payment authorization shifts to receiving
Organization dock
• Employee empowerment

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FORD: BUSINESS PROCESS

Ford’s New Process Goes Beyond Simple Data Automation

to Use IT as a True Enabler
Purchasing “Current Process”
Accounts Payable
Shared Database

Special Cases
P.O.

P.O.
EFT P.O.
Receiving

EDI Payment
Authorization

Electronic Match
of Received Goods
EFT Yes vs. P.O. No
P.O.
Interactive Link

Goods

“Trading Partner” Return Goods to Trading Partner

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FORD: BUSINESS PROCESS
The New Procurement Process Is a Whole New Way of
Doing Business
Old
• Multiple suppliers: suppliers are adversaries
• Spot purchases are common
• Minimal (mostly unidirectional) information
exchange with suppliers
• Low employee empowerment—lack of decision-
making authority and responsibility at the
execution level
• Potentially many interfaces with suppliers,
increasing the potential of error
• Paper and labor intensive—high administrative
costs, excessive routing of documents, duplicate
documents, link documents, manual matching
• Payments to suppliers are made upon receipt of
the invoice
• Increased workload on the authorizing department
(Accounts Payable)
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New
• Selected suppliers are “partners”—they share in the
success and failure
• Elimination of spot purchases
• High level of bidirectional information exchange
among the partners
• Decision-making responsibility at the lowest possible
level
• One interface with suppliers
• Electronic process with high IT utilization; matching
of purchase order with goods
• Payment is made upon receipt of goods (in some
divisions, payment is made upon use of goods)
using “evaluated receipts” and EFT
• Accounts Payable personnel concentrating their
efforts on special cases only
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FORD: BUSINESS PROCESS

Information Technology Now Acts as an Enabler to the

Business Process
• On-line—shared database to facilitate simultaneous availability of required
information wherever needed

• Wireless data communication/portable computers—receiving-dock personnel

can send and receive information wherever they are

• Decision support system assisting reception clerk:

- Verifying shipments

- Authorizing payments to partners (combined with bar coding technology)

• Electronic Data Interchange (EDI) for transfer of purchasing orders, payment

notices, and other standard business documents:
- Direct Data Link (DDL) allowing suppliers to access Ford’s inventory systems to view real-time
production information to anticipate orders and prepare for production

• Electronic mail (E-Mail) for text-based messages accompanying the

transaction EDI data

• Electronic Funds Transfer (EFT)

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FORD: BUSINESS PROCESS

This Partnership and Process Redesign Effort Helped Ford

to Identify Further Value-Added Partnership Relationships 

• Established partnership relations with equipment suppliers/manufacturers

to bring them into the process of product design early (“simultaneous
engineering”) and reduce the delivery time

• Entered into partnership relationships with transportation companies:

- Placing all responsibility for transportation and logistics with one company, to reduce total
transportation costs
- Improving discipline in the total transportation pipeline

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FORD: IT

Ford Continues to Find Innovative Ways to Use Technology

in the Procurement Process

• Ford now has improved its ability to trade computer-aided design and
manufacturing (CAD/CAM) files with suppliers through pioneering the use of
new EDI-based administrative processes

• Use of E-Mail to receive cost-saving designs from partners using pre-

formatted forms that are entered into Ford’s database automatically:
- A potential cost saving tag of $500 - $600 mm/year

• It uses EDI to streamline the supply transportation process:

- High cost-saving potential, given that Ford buys 50% of its materials--both parts and raw
materials

• In addition, Ford suppliers now have a seamless way to transfer data files
(e.g., spreadsheets) with the company

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FORD: RESULTS OBTAINED

Ford Achieved Many Benefits from the Process Redesign

Cost Reduction Benefits Increased Quality

• Accounts payable staff reduction of 75% • Overall product quality and cost
(over 375 individuals): improvements:

• • Suppliers are not consumed/concerned

Accounts payable in some divisions is about winning the next contract and selling,
nearly 5% of old headcount dedicated only but on improving product quality and cost
to handling exceptional situations

• Reduced inventories

• Achieved high levels of purchasing Supplier Benefits

economies of scale
• Elimination of overpayment • Reduces their cost of doing business with
Ford:
• Streamlined administrative functions— •
practically eliminated paperwork and Less paperwork
indirect overhead • Fewer errors

• Better production planning, leading to:

Staff Benefits
• Reduced inventories
• Higher employee morale • Improved product quality

• More interesting work • Better delivery schedules

• Joint problem solving

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FORD: BEST PRACTICES

Ford’s Procurement Process Suggests Several Best

Practices

Operating • Form “partnership” relationships with trading partners

Procurement • Consolidate/reduce supplier base
Philosophy • Shift focus from initial purchase cost to cost performance over
time

• Define and implement trading partners selection program

• Initiate formal supplier performance and rating program
• Institute long-term contracts with selected trading partners
Supplier • Move towards single sourcing:
Management - Ford’s goal: to reduce the number of suppliers by one-third by 1995
• Maintain high level of information exchange with trading partners
• Encourage early trading partner involvement in product design
stages
• Provide suppliers with effective training
• Delegate quality inspection to trading partners:
- “Our goal is to have our suppliers be quality-independent”

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FORD: BEST PRACTICES

Ford’s Procurement Process Suggests Several Best

Practices (cont)
• Empower employees
• Assist employees in performing their jobs through proper training
People and and tools (especially technology)
Organization • Promote high employee involvement at all levels
• Use integrated teams including management and union

• Increased commitment to use Information Technology as a true

enabler:
- An integrated team representing MIS and all affected
functions/departments/ processes, including legal and auditing
- Assessment of the “build” vs. “buy” options
Information - Selection of the appropriate technology, network, and communication
architecture and standard plan of implementation
Management
• Move toward a paperless process:
- Data system accuracy and security issues
• Ensure on-line availability and accuracy of all procurement process
information
• Provide trading partners with a seamless way to access
information

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Ford’s Organization Reinforces Satisfaction of Customer
and Supplier Needs
Ford’s Organization

People

• Effective, skill-based hiring

• Train for skills and career longevity
• Develop people for growth
• Pay for performance:
- Use evaluations for development and
Supplier compensation
Needs

Leadership Structure Culture

Distributor
Needs • Clear, actionable goals based • Team-based • Supplier- and market-
on issues customers and • Flexible focused
suppliers care about • Empowered
• Company’s heros get it right • Continuous improvement
Internal the first time and take risks • Get it right the first time
Organization • Two-way, frequent
Needs communication

Systems

• Clearly defined purchasing processes; one way to

do the work
• Measurement and reward systems aligned with
management goals
• Integrated information and automated systems

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FORD: IMPLICATIONS
Key Lessons Learned . . . Technology by Itself Offers a Limited Advantage, but
When Leveraged by an IT-enabled Process Redesign, the Result Is a Winning
Execution

• A pure automation approach to the accounts payable department would

have yielded a 20% reduction in headcount

• IT is a business investment, not an administrative expense

• Need for alignment between the organization structure and technology

• Electronic integration through innovative information exchanges offers a

serious alternative to vertical and horizontal integration

• Supplier involvement is critical

Pitfalls...

• Lack of a rigorous—and process driven—implementation strategy:

- Ford’s implementation took five years—much longer than it should have

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