Understanding Fords Procurement Process 1e5p6v

Understanding fords procurement process Ford is the fourth-largest industrial corporation in the world; the second largest producer of cars and trucks Ford Faces Severe Market and Customer Challenges Current Challenges • Increased foreign and domestic competition • Shifting consumer demographics • Industry-wide over capacity • Increased attention to environmental concerns • Increased reliance on “automotive systems” over just parts Ford’s Traditional Procurement Process Suffered from Many Roadblocks In Addition, It Was Paper-Based and Labor Intensive For a given order, s Payable had to deal with three different documents: purchase order, receiving document, and invoice: -s Payable had to match 14 data items among the three documents •80% of the s 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 s 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

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 Characteristics of Ford’s New Approach to Procurement

Supplier Management The creation of “Partnership” relations with suppliers characterized by: - A high level of information sharing -A commitment to overall quality -Cost reduction -t problem solving •Partners are selected based on quality, technology, technical , delivery, and cost Single-vendor sourcing Process 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 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 People and Organization Decision-making responsibility by individuals executing the tasks—payment authorization shifts to receiving dock •Employee empowerment The New Procurement Process Is a Whole New Way of Doing Business

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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 istrative 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 (s Payable)

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Selected suppliers are “partners”—they share in the success and failure

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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 s Payable personnel