Integrated SCM: Fuelling Success in the New Economy

Automotive companies will derive the most competitive advantage from integrating their supply chains. The returns
are proven and are up to ten-fold larger than those from downsizing, reengineering, realigning human resources or
rationalizing production. As the experience of Dell Computers shows, industry laggards can become leaders by
effectively integrating their supply chain. The automotive supply chain is the most complex in the world. It includes
variety of suppliers, service providers, outsourcers, distributors and dealers. Pushed by consumer demand and
technological advance, automotive companies are being pushed into factory-direct, build-to-order and just-in-time
models of manufacturing. However, the automotive supply chain is not yet integrated enough to fully respond to or
reap the benefits from these production models. This is because most automotive companies do not yet have IT
systems that can utilize the Internet. As a result, even in industrialized countries, car companies can take three
months to deliver a fully paid for order to a customer.

All players in the automotive supply chain, by and large, still have disintegrated stand-alone legacy systems. Even
within companies, functional divisions are often walled off from each other. For instance, inventory systems do not
connect into business systems. This is particularly so in Asia. Further, complexity is added by the array of legacy
systems in use. Different vendors use differing systems, most of which do not fit into that of OEM. As a result,
business processes take more time than they need to. Data entry must still be done manually. When one database is
updated, so must all the others. As a result, automotive companies have not been able to take full advantage of the
Internet and E-Commerce. More importantly, the absence of point-to-point integration has prevented companies
from reaching their full potential. Integrating the Supply Chain brings revenue benefits, through increased
customer satisfaction and reduced costs, through more efficient collaboration with suppliers & distributors. Time-
to-customer is dramatically reduced, since ordering and manufacturing systems are connected. Companies can
produce to order and handle mixed-mode scenarios. Design and prototyping have also been dramatically speeded up.

For instance, Toyota has completely integrated and internet enabled its supply chain. It now takes the Company
just 12 months to take a product from design to mass production. Three years ago, it took Toyota 22 months. It
takes all other automakers 36 months to get from design to production. Similarly, Mitsubishi has saved itself a lot
of time and energy by integrating its global production network. Earlier, its CKD facility in the United States would
manually configure the entire prototype and engineering specifications shipped by the Japanese design office.
Similarly, all supply and sales data would be entered by hand. Integrating the Supply Chain also makes it possible to
track inputs and products as they move through the system. One of SAP’s clients, for example, imports CKD parts
from Japan. SAP’s integration system enables the firm to track each kit from the point of departure in Japan,
through shipping, arrival, assembly, distribution, dealership and buyer. An integrated system enables the OEM to
immediately manage events and react to changes in the supply chain as they happen.

For example, as soon as order is received, it is configured, the vehicle manufactured and sent to the dealer. The
system automatically triggers an alert if supply chain parameters are violated. Private portals are now becoming a
popular feature of supply chain integration. They are different from public, B-to-B exchanges in the sense that
they only connect one type of player in an OEM’s supply chain. In suppliers’ portal for example, all vendors are able
to interact with each other via this private exchange. Integrating the value chain is enabling companies to work
together in a way never seen before. Some term it as collaborative commerce and see it as the future wave. Global
companies no longer compete individually against each other. Now clusters or groups of functionally integrated
companies are the ones competing. As illustration, General Motors and a select group of its top suppliers and
distributors have integrated inventory, sales and delivery processes. This cluster competes with that of Ford,
which has replicated the same model with its vendors.
Ford India Limited has integrated its supply chain by using the most up-to-date version of Ford’s in-house Common
Materials Management System. Materials Planning & Logistics is now completely integrated, ensuring uninterrupted
production at optimum inventory and lease cost. The Supply Division supervises the supply chain. It comprises of a
Materials Planning & Logistics Department that runs the production chain from raw materials to the delivery of
finished cars to the dealer. The Purchase Department executes all commercial functions. The Supply and Technical
Assistance Department handles the quality aspects of each car part, right from development to approval. In
making the Ikon, Ford India uses close to 460 parts coming from 141 suppliers in the US, Europe, Brazil, South
Africa and India. 95 of its suppliers are Indian, and Ford has achieved local content of 75%. Ford India has
pursued very aggressive strategy in ensuring that local suppliers meet its quality standards. With the help from an
international expert team, it audited 370 of the best Indian suppliers on the basis of commercial track record and
quality of these. 80 were selected. These were assisted in tying up with Ford’s top global suppliers, who assist them
on quality design and manufacturing. There is also close co-operation with Ford’s global design and quality offices.
Ford India helps manage these relationships and provides ongoing training to Indian suppliers. At present, four-
fifths of Ford India’s supplies by value come from a tie-up between its Indian and Global suppliers. One-fifth
comes from independent local suppliers. Additionally, Ford India has put in a Quality Control System across the
supply base, which reports on a monthly basis. It also continues to improve supplier quality through a no. of in-house
and external certification initiatives. 80% of suppliers are QS 9000 certified. Ford is now encouraging them to
attain ISO 14000 standard so that both its plant and suppliers’ operations are environmentally responsible. Ford
India is also devoting considerable thought and investment to devising durable, re-usable packaging for the
shipment of supplies and finished products. At the moment, there is considerable wastage, particularly in overseas
shipments.

The Material Planning and Logistics Department releases two schedules to each of its suppliers all over the world.
The first is a six-month planning schedule. The other contains confirmed orders for the next 14 days, which must
be shipped so that they reach the plant in time. Ford India has simplified the shipment process by outsourcing it.
Imports are handled by ‘trading partners’ who consolidate its parts orders at specified locations in Europe & Brazil
and ships them in full container loads according to schedule. By dealing only with trading partner, for consolidated
shipments, Ford India has minimized its cross-border documentary and payment procedures. Within India, Chennai
based suppliers provide 70% of parts. 13% come from Delhi, 12% from Western India and the rest from Bangalore
& Tirupati. Non-Chennai supplies are handled by five ‘lead logistics partners’ who collect parts from suppliers twice
a week, store and consolidate them at specified hubs and ship them to the plant as per production schedules. Ford
India also has a computerized track and trace system that follows each supply shipment through transit. Ford picks
up parts from some Chennai-based suppliers, but most deliver to the plant themselves at a fixed time everyday.
Supply-park suppliers operate just-in-time and move the material on to the line site themselves. What is unique
about Ford India’s supply system is that the company picks up parts from outstation suppliers. By doing so, it
removes uncertainties in the supply transport process and eliminates production stoppages due to non-arrival of
parts.

The automated Plant Vehicle Scheduling or PVS System runs the production process. As each stage of production
approaches completion, a trigger is sent to the next stage. There is thus a direct and sequential delivery of parts
to the production line. The system also releases a consolidated invoice for each day. Ford’s lead logistics partners
also handle outgoing shipments of ready vehicles, spare parts and knocked-down kits for export. Ford has 34
dealers and 66 sales points across India.

Ford has a global system by which its subsidiaries benchmark the efficiency of heir supply and production chains.
The system also allows subsidiaries to benchmark themselves against each other. Ford India also evaluates its
logistics partners against these parameters. Since 1996, Ford India has moved up considerably in the Ford global
ranking. It has, for instance, only two schedule changes for want of parts since April 2000 and no line stoppage
since November 2000. It is well below the benchmark on delays in the delivery of finished cars o dealers and on
damage in transit. It has controlled premium freight costs fairly successfully by using only trucks for Indian
supplies. It is also slowly reducing inventory. Since Ford clocks inventory from the time a part leaves the supplier
until the Quality Department approves the finished car, inventory days are still higher than desired. They include
the one to two months shipment time for imported parts. Ford India will soon localize power train supplies. This will
bring inventory down considerably. Ford India would like to integrate its materials planning and logistics database
with those of its suppliers and dealers. In this way, orders and releases will be automated, allowing the production
and supply chain to function more seamlessly. Ford India would also like to introduce greater modularity in its
vehicles so that the production line can respond more rapidly to its shifts in demand.

QUESTIONS:

A) Define 3 PL. What are the various services provided by a 3 PL firm? What are he advantages and disadvantages
faced by an organization when it implements 3 PL?
B) Answer the following with proper explanations:
1) How do Ford India’s inventory days compare against the industry benchmark?
2) How does Ford handle forecasting variability?
3) Is the system of lead logistics expensive?
4) Are Ford India’s lead logistics partners essentially suppliers or transporters? Justify your answer.