Ford Out to ‘De-Risk’ Supplier Contracts

Soaring raw material costs and an unprecedented number of supplier bankruptcies are challenging the automotive supply chain like never before. Auto maker purchasing departments have become pivotal to the success, and survival of both suppliers and the customers they serve.

Ward's 7-part series stems from interviews with the purchasing chiefs of GM, Honda, Chrysler, Nissan, Ford and Toyota. This is Part 6.

DEARBORN, MI – Andrew Hinkly, Ford Motor Co.’s executive director-Americas production purchasing operations, has heard the complaint from suppliers that Ford – along with other auto makers – too often misses its volume projections for vehicle programs, causing massive headaches for parts producers.

Ford’s Andrew Hinkly wants “fruitful dialogue” with suppliers.

Hinkly wants to do something about it.

Part of his solution is the Aligned Business Framework (ABF), which Ford unveiled last September as a way to strengthen ties with suppliers through greater upfront product development and more long-term contracts.

“As we work through the ABF, we will have ultimately fewer suppliers per product,” Hinkly tells Ward's. “Accordingly, our suppliers will have a larger portfolio of vehicles they are supplying to. With that, we manage to reduce the risk.”

Although certain Ford vehicle programs in North America have not achieved intended volumes (for example, Ford Freestar, Five Hundred and redesigned Explorer), Hinkly says some programs elsewhere in the world have over-performed.

“We have had some very successful vehicle programs in South America, where we have significantly exceeded our volume projections for the Bahia (Brazil) plant,” he says.

With a smaller number of suppliers serving a wider portfolio of vehicle programs, Hinkly says the natural result should be a hedge against risk for parts makers.

“The other thing we’re able to do with a closer relationship with suppliers – one of the things we committed to do – was to share our volume projections, not just for new vehicles but for existing vehicles further out into the cycle plan than we have done previously,” he says.

“Part of the sharing will be to not only tell suppliers what we are projecting but listen to suppliers on where they think we can improve the products to either take some risk out or ensure the product really is hitting the market,” Hinkly says, adding he hopes the “fruitful dialogue” will help to “de-risk the equation.”

Risk, however, is a 2-way street. Auto makers face potential disruptions as North American suppliers scrap for their survival in a difficult market and more than two dozen cope with bankruptcy.

General Motors Corp. has admitted to stockpiling certain parts in anticipation of a potential strike at its No.1 supplier, Delphi Corp., which is bankrupt.

Hinkly does not admit to stockpiling any parts, largely because Ford business counts for only about 4% of Delphi’s revenues, compared with about 50% from GM.

About 85% of the parts Ford buys from Delphi come from outside the U.S., meaning only about 15% of parts come from Delphi facilities that are part of the bankruptcy proceeding, Ford says.

In light of the bankruptcy case, GM has said it pays a premium of about $2 billion for Delphi parts, because of Delphi’s high legacy costs.

Ford Purchasing – By The Numbers

Asked whether he believes Ford is paying too much for Delphi parts, Hinkly is tactful.

“We are always striving to ensure we are paying a competitive price for all the parts we purchase,” he says. “I think if GM has a unique situation with any one of its suppliers, it’s probably due to the product mix that they are purchasing relative to other customers from that same supplier.”

Hinkly says Ford is willing to award new business to suppliers in bankruptcy, so long as there is a viable plan to exit Chapter 11.

“The main things we are looking at are the plan for reorganization; obviously the management team that is steering the company through that restructuring; and if the management team is aligned with our own views of what needs to be done, and they have a well thought-out plan,” Hinkly says. “Then we will support them through that restructuring, which includes sourcing new business to them.”

Ford’s No.1 supplier, Visteon Corp., is not in bankruptcy but is undergoing massive restructuring that includes last year’s handing back to former parent Ford 23 component plants (including 13 U.S. factories) that Visteon deemed unprofitable.

Ford is attempting to sell the plants. In the meantime, those facilities continue to win new business with the No.2 auto maker.

“We have taken an active role, clearly, in the restructuring of Visteon with the re-acquisition of many of the plants,” Hinkly says. “Those plants we have taken back, we are ensuring they are viable, long-term and healthy component suppliers to us, and therefore, receive replacement business.”

The remaining facilities Visteon kept, however, must compete on the open market for future contracts. “They compete as other suppliers do for replacement business and incremental business,” Hinkly says. “Nothing has changed in that relationship.”

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