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

Fords Traditional Procurement Process Suffered from Many Roadblocks In Addition,

It Was Paper-Based and Labor Intensive

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
Fords Accounts Payable headcount was 400% higher than that of other automakers

In addition, Fords policy of multi-vendor sourcing triggered limited ability to take

advantage of economies of scale and price reductions

Fords 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
Fords initial goal was to cut just 100 out of 500 provisioning jobs

Totally re-engineering the processenabled by appropriate technologyallowed

elimination of 400 provisioning jobs

Characteristics of Fords 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
-Joint problem solving
Partners are selected based on quality, technology, technical support, delivery, and
cost

Single-vendor sourcing

Process
Revolutionary pathcost-reduction effort aimed at eliminating invoices instead of
reducing the unit cost of invoice processing
Redesign in the nature of exchange between the partnersa 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 taskspayment

authorization shifts to receiving dock
Employee empowerment

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 empowermentlack of decision- making authority and
responsibility at the execution level
Potentially many interfaces with suppliers, increasing the potential of error
Paper and labor intensivehigh 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)

New
Selected suppliers are partnersthey 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