Ford Keeping Watchful Eye on Distressed Supply Base

DEARBORN, MI – The next three to four months will prove critical for the automotive supply base, as bankrupt General Motors Corp. and Chrysler Group LLC, which recently emerged from Chapter 11, begin to resume production, Ford Motor Co.’s purchasing chief says.

“We’re in a critical window here, one of many critical windows we’ve experienced,” Tony Brown, group vice president-global purchasing, says in a meeting with reporters here. “The first came after the year-end shutdown, and the second one when Chrysler decided to go down. Now we’re managing our way through both Chrysler and GM down, and we have to see what happens when GM and Chrysler try to come back up.

“To the supply base’s credit, they’ve done an amazing job of managing this complicated environment,” he adds.

Brown says the current supply sector stress, caused by a massive plunge in vehicle sales, is “breathtaking.”

To ensure that doesn’t lead to a harmful production hiccup at Ford, Brown and his team have been closely evaluating the auto maker’s supply base, labeling each company as either bankrupt, distressed or one to watch.

Over the past year, the number of suppliers considered distressed has doubled, Brown says, declining to reveal specifics.

Ford regularly sends teams consisting of financial experts, and sometimes engineers, to those suppliers to assess the situation and attempt to remedy it. Ford makes use of both internal teams and outside consultants for these tasks, Brown says.

Sometimes, Ford must step in with financial support, as it has with former in-house parts maker Visteon Corp., which recently filed for bankruptcy.

Ford purchasing chief Tony Brown says bankrupt Visteon still an important supplier.

Despite Visteon’s financial position, Brown says the supplier remains “important” to Ford, and the auto maker is “working with (Visteon) to deal with the current environment we find ourselves in.”

Ford also recently joined with some of its competitors in providing financial assistance to bankrupt Metaldyne Corp., Brown says.

However, in some cases, the situation is hopeless, he says. “You can’t always prevent them from tripping into bankruptcy or distress. And ultimately you may say this won’t work and (the supplier) has to liquidate. There’s some of this going on, as well.”

While the supply base remains on shaky ground, Brown is confident the Obama Admin.’s automotive task force will step in with financial assistance should the picture deteriorate further. Earlier this year, the government infused $5 billion into a program to ensure GM and Chrysler suppliers would receive payments but since then has said no additional funding would be forthcoming.

“I believe the government understands the importance of the supply base, and that a major failure would take down the industry,” Brown says. “Fundamentally, the task force’s charge is an industry charge, and absent the supply base there is no industry. I think they understand that and are paying close attention to that.”

Even before the current economic crisis, there was significant overcapacity in the supply sector, Brown points out. And with U.S. light-vehicle sales through May down 36.5%, the situation has been exacerbated.

In September 2005, Ford set out to reduce its parts base through its Aligned Business Framework (ABF) purchasing initiative designed to strengthen ties with strategically important suppliers through longer-term production contracts.

The program has worked exceptionally well, Brown says, as Ford has whittled its supply network from 2,702 companies in 2005 to 2,200 by the end of 2008. The ultimate goal is to pare the roster to 1,650 by year’s end.

Long-term preferred (LTP) suppliers, companies that continue to earn new business from Ford, are expected to be reduced to 850 by the end of 2009, down from 1,683 last year.

Because ABF membership is restricted to suppliers of key components and services, not all LTPs will be members of ABF. Among those qualifying for the ABF list are producers of seats, engine parts, frame parts and companies such as Microsoft Corp., which supplies the software for the auto maker’s multi-media Sync system.

“Despite the industry challenges we are all facing, Ford is making steady progress identifying more suppliers for long-term relationships, while at the same time reducing our total number of suppliers,” Brown says. “Both of these elements were part of our ABF strategy since it was launched. They are even more critical now as the auto industry moves through a difficult restructuring period toward a more sustainable business model for suppliers and auto makers alike.”

Ford earlier this week added 16 new ABF members, bringing the total to 82. The ABF program not only helps improve quality and profitability, it’s beneficial to supplier members as well, Brown says.

“In terms of (the) goal, it’s clear to say it’s profitable growth for all, not just Ford,” he says. “And with recent events in the industry it’s clear everybody has to be profitable to make this thing work.”

Not all ABF suppliers are doing well. But even a bankruptcy filing does not preclude a supplier from becoming an ABF member, Brown says.

“But it means you have issues to work out, and we will work with them.”

ABF suppliers benefit in several ways, including receiving commitments from Ford to source parts over the life of a vehicle program or platform. That aspect of the program also helps Ford by improving parts commonality and allowing it to share more of its product plans and forecasts with suppliers.

“ABF is enabling suppliers to benefit from the ‘One Ford’ strategy that is driving efficiency and commonality across the company,” Brown says in reference to the plan outlined by CEO Alan Mulally calling for greater product and vehicle-architecture collaboration among Ford’s global operations.

Meanwhile, Brown says Ford is paying close attention to ABF member Magna International Inc., which is in the process of acquiring GM’s Adam Opel GmbH operations in Germany.

Should the sale close, Magna would become an auto maker and a direct competitor to Ford in Europe.

“We’ve not changed our relationship with Magna at this point and there are no plans to change it, but we’re keeping an eye on what goes on there,” Brown says.

[email protected]