Ford May Finally Have a Better Idea

Ford May Finally Have a Better Idea
MiBiz • October 17, 2005
by Jim Gillette

I have suspected for a long time that the only way that DaimlerChrysler, Ford, and General Motors would change the way they work with suppliers would be if enough of their key suppliers started going belly up. I commented in this space four weeks ago that a good portion of the financial distress in the industry results from the shortsighted, price-driven approach that has dominated supplier relationships for the past fifteen years. Recognizing that the current free-for-all is not producing desired results, all three companies have announced new supplier selection initiatives within the last two months with Ford’s “Sustainable Supplier Structure” being the latest and, for Ford at least, probably the most radical departure from recent practice.

Admitting that the company’s current relationship with its suppliers is “stressed” and there is a “lack of supplier trust,” Ford purchasing executives are embarking on a new set of policies hoping that suppliers’ animosity will be quelled. Judging from the feedback I have received from some of the suppliers, however, the restoration of trust may take years.

Here’s one example. A feature of Ford’s initiative that seems like a clear gain for suppliers is their commitment to pay “upfront” for design, engineering, and testing (ED&T). One the surface, this appears to be an attempt to bolster supplier cash flow and profitability. The perception from suppliers may be different, however. The response I got from one was, “as soon as you accept payment for ED&T, the automaker customer gains the right to steal your patent.” Not being an attorney, I am unsure of the legal ramifications, but I expect the initial reaction from other suppliers may be similar.

May not lead to further consolidation

With regard to cutting suppliers for each “commodity” to two, I have been frequently asked, “Will this accelerate supplier consolidation?” I don’t think it will have a huge effect. Ford’s supply structure, in North America at least, is already concentrated as evidenced by CSM’s component database.

CSM has detail on ten of Ford’s twenty “high impact commodities” included in phase one of the new policy. The top two suppliers already have 94% or more of Ford’s business for 2005 for five of the commodities. Ford, for example, purchases 98.9% of its North American instrument panels and 97.7% of its steering gears from two sources each.

For three of the remaining five commodities, Ford uses two suppliers for between 76.6% and 88.0% of their North American requirements. Not a wide-open market to be sure. Ford does have more a more fragmented supply base for brakes and wiring harnesses; less than 60% of each are supplied by the top two. De-sourcing of non-top two suppliers is possible, but will take several years as switching is unlikely to occur before a major platform redesign.

The more likely result of Ford’s actions will be strategic repositioning where many companies will find it more profitable to move to a lower tier. Studies I have conducted frequently over the last fifteen years conclude that there is insignificant profit difference among firms based on tier position alone. In fact, focused Tier Two and Three suppliers with innovative products and a good customer mix will outperform Tier Ones more often than not. For others, there are still plenty of other automakers to sell to.

Deep organizational commitment is required

If Ford truly wants its new supplier program to be a success, it has to make a commitment far deeper in its organization than anything we have seen in the past decade. Achieving the stated goals will take several years and suppliers need to be sure they won’t be jerked around in before this decade closes. We’ve also seen instances where top-level management at Ford has announced one policy, but those in the trenches either haven’t gotten the message or were incentivized to continue with the status quo.

Ford is clearly on the right road. Staying there could give the company a competitive advantage. I hope it works.