Suppliers Should Survive Ford Cuts

October 7, 2005
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The Ford Motor Co. is changing the way it deals with suppliers. Once the company has fully implemented its new “Aligned Business Framework,” it will have reduced by one half the number of suppliers it uses for “key high-impact parts and components,” according to a company statement.

The good news for West Michigan auto suppliers is that it shouldn’t mean a loss of business for this side of the state. All of the major Tier 1 suppliers with a presence in West Michigan are among those named by Ford as being “partners” in the new strategy. Delphi, Johnson Controls, Lear and Magna all made the cut to supply Ford with the higher-ticket components such as seats, wiring, restraint systems and instrument and trim panels. According to Ford, that could actually mean an increase in business for these companies.

“The Aligned Business Framework is an innovative bilateral agreement between Ford and its family of selected suppliers. It is designed to create a stronger, sustainable business model for us both,” said Ford Senior Vice President for Global Purchasing Tony (Thomas K.) Brown. “This is not business as usual. We’re not only asking our suppliers to step up. We’re also asking ourselves to step up.”

Until recently, Ford was the second-largest automaker in the world. Toyota bumped Ford down to third place in 2004. As Ford’s market share has been slipping, so have sales of its trucks and large SUVs. With increased production and human resources costs, and decreased revenues, the company has been taking a look at its processes, trying to eke out cost savings wherever possible — hence the new supply-chain theory.

The Aligned Business Framework is a fundamental change in the way Ford does business with its suppliers. Instead of maintaining a large stable of competing suppliers and playing one off of another to get the best price possible, the plan calls for Ford to nurture relationships with a select few suppliers. While this plan may not yield immediate cost savings, it is designed for the long-term benefit of the company.

That’s good strategy, according to Erich Merkle, director of forecasting for Grand Rapids-based auto analysts IRN Inc.

“What this is for Ford is a more holistic approach to looking at their supply base, and looking beyond just the price of the part,” said Merkle. “It’s really not unlike what the Japanese have been doing for years.”

That said, Merkle is not so sure it will work.

“I guess for me, seeing is believing,” he said. “It’s one thing to come out and make this big statement and say, ‘Oh yeah. We’re going to partner with our suppliers.’ But there’s a real trust issue with Ford right now in their supply base … Now they’re all supposedly going to hug and sing ‘Kumbaya’? I just don’t see that happening in the short term.

“Long term it would be in their best interest,” Merkle said. “The problem is in the short term, given their financial situation. … Clearly Ford is still struggling in terms of new product development. So clearly they’re going to have some more financial struggles ahead of them, particularly with the full-size SUVs and the pickup trucks.”

Merkle said that even if the West Michigan workload doesn’t increase as a result of the change, those suppliers will survive.

“A lot of those suppliers have a very diversified customer portfolio,” he said. “So for instance, JCI does supply to the auto industry as a whole. They don’t just supply to Ford. So, I don’t see it having a huge impact on suppliers in the West Michigan area. But, once you start getting down into the lower tiers, I don’t know how Ford’s going to select suppliers down in the Tier 2’s. That is still going to have to be up to the Tier 1 suppliers.”

Merkle worries that Ford’s decreased sales and inefficiency in introducing new models will hurt the company more than the supply-chain restructuring might help. General Motors is preparing the launch of a new line of full-size SUVs that use new engine technology to achieve previously unattainable fuel efficiency.

“I’ve heard that they could get as high as 27 miles per gallon,” Merkle said of the new GM products. Ford, he said, does not have anything to can compete with that.

If the competition gets too tough, Merkle said, Ford may be inclined to ditch its kinder, gentler approach to supply-chain management and go back to forcing suppliers into giving the lowest price.

“That’s going to be a huge temptation for them,” Merkle said.    

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