INSOURCING

It was nearly a year ago that Ford Motor Co. called a meeting in Dearborn of its top suppliers — about 100 of them — to talk quality.

For a few hours, Tony Brown, Ford's vice president of global purchasing, shared internal data suggesting suppliers were more culpable than the auto maker as recalls and warranty claims seemed to be spinning out of control. The Firestone tire debacle got the most attention, but in many respects it was merely a symptom of a much broader ailment afflicting the No.2 auto maker.

The Ford Focus has been recalled 13 times, the Escape CUV five times. The new Thunderbird and redesigned Explorer stumbled out of the gate with embarrassing launch problems. Ford suffered through two massive recalls in 2001 — one for faulty seatbelt buckles (1.3 million units) and one for a wiper-motor switch malfunction (1 million units). Parts makers were responsible for both.

Brown contended that suppliers deserved a trip to the woodshed for a number of costly, boneheaded mistakes. “The theme of the meeting was obvious,” recalls one attendee. “(Ford) wanted to bring in suppliers and bang their heads together.”

By last fall, however, Ford's tone toward suppliers had softened dramatically. Instead of berating parts makers for missteps, Ford was openly conciliatory, actually encouraging suppliers to tell Ford when it's wrong. The customer is not always right, in other words. For the first time, Ford seemed to realize that perhaps it deserved a trip to the woodshed.

In November, David Thursfield, Ford president-International Operations and Global Purchasing, began another series of meetings with suppliers in which he admitted Ford may have been asking for too much. Caught up in the industry-wide trend toward outsourcing, Ford may have relied too heavily on suppliers for engineering, he said.

To rectify the problem, Ford would reclaim some engineering responsibility, Thursfield said. The new theory? The company assembling the vehicle knows best — or should know best — how components or modules interact with each other. It is a strategy Ford believes will result in smarter sourcing decisions as well. The first vehicle programs affected by Ford's new insourcing strategy will begin production around 2005 or 2006.

The ripple effect of the new philosophy will be felt for years to come by many of the 2,000 production suppliers Ford taps for parts every day. Many suppliers interviewed for this story are reserving judgment until the strategy is fully implemented over the next two years, but most are cautiously optimistic.

It is humbling for the company that pioneered mass production of the automobile to admit nearly 100 years later that it took its eye off the ball, that it sacrificed engineering prowess in what ironically was an attempt to make itself more efficient.

This is the dark side of outsourcing, for it demonstrates that OEMs run the risk of becoming subservient to the technical capabilities — or liabilities — of their suppliers if they merely purchase, rather than engineer.

Skeptics could see the danger of this strategy a decade ago when outsourcing arrived in earnest in North America as the industry was rebounding from the early 1990s recession. But outsourcing of engineering and manufacturing seemed one of the few ways auto makers could rein in costs on a massive scale. Besides, outsourcing was a bone to be thrown to Wall Street, where stock analysts loved the idea of suppliers doing the same job better, faster, cheaper.

Over the next several years, that strategy gave birth to megasuppliers such as Lear Corp. and Johnson Controls Inc. General Motors Corp. would spin off or sell operations that later became Delphi Corp., American Axle & Mfg. and Guide Corp. Ford would spin off Visteon Corp. All of those suppliers — and hundreds of others — then bolstered their engineering capabilities at the request of their OEM customers to win new business.

But a funny thing happened along the way: The Internet arrived and redefined “value” in the eyes of Wall Street. The auto industry was left to languish like an ugly stepchild. Outsourcing continued, but Wall Street was too captivated with the overnight wealth surrounding the Internet to care.

Ford ultimately began questioning its engineering competence in recent years as performance lagged in quality studies. “We found some trends, and we were not really happy,” says Will Boddie, Ford's vice president-North American Engineering. “Anyone who wants to make improvements to the product can analyze the data critically. That's exactly what we did.” (Ford credits this approach for nearly halving the number of recall campaigns it was compelled to conduct in 2002 — 16, compared with 2001's 28.)

He says Ford decided a decade ago that it would rely more heavily on supplier engineering in certain product segments, but that the company ultimately misjudged the engineering capability of those suppliers. “As we look at the results of that decision in the rear-view mirror,” Boddie says, “we find in some critical areas we shouldn't have relied on suppliers as much as we did.”

Too often, Boddie says, Ford had to use its own engineering resources to supplement those of its suppliers.

One supplier executive says Ford — as well as other OEMs — have benefited tremendously from outsourcing. Richard Allen is chief executive officer-automotive sector of Freudenberg-NOK General Partnership, which handles entire sealing packages for engines, transmissions and brakes — a lot of it for Ford. It's an expertise that has translated into significant warranty avoidance, Allen says.

“It's unwise to say outsourcing is a bad thing,” Allen says. “People like to use the term outsourcing, but we look at it as ‘insourcing’ of our intellectual property to the OEM. We're comfortable helping an OEM understand sealing technology.”

Allen says Freudenberg-NOK has increased the number of engineers working on-site at OEM locations by a factor of 10 in the last three years. Over that same period, OEMs have given the supplier complete responsibility for 16 full-sealing packages. “The OEMs (including Ford) clearly recognize the merit to it,” he says, adding that he doubts Freudenberg-NOK will be negatively impacted by Ford's new strategy.

Sealing systems do not appear on the list of nine product segments that Ford has identified for more in-house engineering. That list includes seats, engine cooling, safety restraints, multimedia and brakes, but Ford officials suggest the insourcing list could grow in the near future.

DIVVYING UP DUTIES

The insourcing of certain engineering functions will play a central role in Ford's new Team Value Management waste-reduction strategy, which also was announced last fall. It dissects vehicle programs, production processes and transportation strategies — in cooperation with suppliers. Ultimately, Thursfield says the strategy should end Ford's practice of stepping on supplier margins with arbitrary, across-the-board price cuts. And it places a higher priority on long-term engineering at Ford.

The auto maker has a structure in place by which it will decide exactly how the engineering duties will be divided between Ford and its suppliers. Ford has a steering group of senior managers, which Boddie chairs. “When someone wants to propose a change in a supplier's responsibility or our responsibility, there must be a formal proposal to that group. We evaluate it and determine if it's a good technology and business decision.”

Ford wants a greater engineering role in products that affect vehicle attributes readily seen and felt by consumers. “We've decided that on certain critical systems, such as brakes, we will do more system-integration work,” Boddie says. “That doesn't mean suppliers will be uninvolved — we will be more involved. It's an issue of balance.”

Brake suppliers are nervous about the new philosophy. They suggest Ford's pendulum swing is the most pronounced in their product segment because the auto maker over the years has outsourced complete brake systems, including antilock electronics, foundation brakes and all components and even adjustable pedals. The brake system integrator, be it TRW Automotive, Continental Teves Inc. or Robert Bosch Corp., need not make every component but will integrate them all into a corner module.

Now, Ford is saying no aspect of a brake system — down to the smallest component — is off-limits to its engineers. “This is the biggest extreme we've ever seen,” says one brake supplier. “Ford went from sourcing only (brake) components in the 1980s to sourcing complete systems in the late 1990s. And in a few months the pendulum is swinging totally in the other direction.”

In the recent past, Ford would define vehicle attributes, and the supplier would define the brake system to meet certain performance requirements. Now, Ford wants to define the brake system and send it out for quote by the brake manufacturers.

Brake suppliers still would have plenty of engineering work to do, but they would work more in concert with Ford engineers. The fear is that the new structure merely results in redundant, so-called “shadow engineering,” which historically has proved to add cost and frustration. Brake suppliers also hope the new strategy allows them to share with Ford their expansive knowledge of global brake requirements — fed by contracts with auto makers around the world.

Ford's motives are well-placed: More engineering firepower could lead to fewer brake systems and more standard brake components across the company's vehicle lineup. In that respect, the benefit to the supply base would be tremendous.

Boddie says brake engineering was picked as a segment to pull in-house partly because Ford realized it had a lot of good brake engineers who had been reassigned elsewhere in the company. It wouldn't be that difficult to “re-amalgamate” those engineers into a center of brake expertise.

Throughout the company, Ford plans to regain engineering competence by redeploying some engineers internally and by hiring new ones. A few hundred already have been hired, and about 100 more will be hired this year, Boddie says. Despite the economy, he says it's tough to find really good engineering talent.

Ford's No.1 supplier, Visteon, puts a positive spin on the auto maker's new strategy, even though Visteon is affected in four of the nine product segments Ford will pull in-house — climate control being the largest.

“We certainly understand where Ford is going,” says James Orchard, Visteon's president of North America and Asia who oversees the Ford account in North America.

“The customer has to fundamentally decide how they will engage suppliers to design and deliver great vehicles for their consumers,” Orchard says, calling Ford's strategy evolutionary.

“We don't view it as a huge risk to our supply arrangement,” he says. “I don't think Ford's adding a huge engineering department to shadow-engineer their supply base. We don't see that happening.”

SHADOW ENGINEERING

Boddie, for the record, says Ford is going to “extraordinary lengths” to prevent shadow engineering in the new strategy. “We know what we pay for engineering in-house and for engineering by the suppliers, and that forms the basis of what we'll pay,” he says. “We don't want to pay for the same thing twice.” Supplier sources suggest Ford engineers generally are paid about 25% more than their supplier counterparts.

Orchard says he doesn't expect Visteon to downsize its engineering staff because Ford is moving some work in-house. “I don't see Ford reinvesting millions and millions of dollars in engineering equipment” when suppliers such as Visteon already are well-equipped for such testing. Besides, Visteon is eager to win non-Ford business, and no other auto maker is as aggressive as Ford in taking engineering in-house.

So do suppliers bear inordinate responsibility for Ford's recent quality woes? “I don't think you can say quality problems are only the suppliers' fault,” Orchard says. “It is an OEM and supplier collaborative agreement that results in getting quality designed-in in the first place. Ford recognizes they need to take a bit more ownership.”

He's not suggesting Visteon has been flawless. “We're not satisfied with our quality, so I wouldn't expect our customers to be,” Orchard says.

Boddie says many suppliers have reviewed Ford's plan and have given “good endorsement. Some people have had misgivings about it, and we've modified our action based on those. In some cases we stay the course.”

Ford signs the checks, so supplier protests may be irrelevant. Some sources quote Ford officials as saying suppliers resisting the new strategy ultimately will be replaced.

A relationship between OEM and supplier must not be dictatorial, says David Cole, president of the Center for Automotive Research in Ann Arbor, MI. A smart insourcing strategy, he says, is one that keeps suppliers very much in the product-development loop.

Cole says he's astounded how much learning goes on every day in the auto industry. “I've never seen a period when NIH (Not Invented Here) was so intent on being pushed off the cliff,” Cole says. “That was the ruling dogma for a long time.” Today's thinking, however, suggests OEMs need suppliers too much — for both engineering and manufacturing prowess — to alienate them with heavy-handed corporate edicts.

“Most people in this industry live in a box — there's the Ford box, a GM box. But in the last few years, people have been able to break out of the box. A new world emerges. It used to be that teamwork in class was cheating. Today, it isn't. It's literally taken the fear of death to get them (people in the industry) to come out of the box.”

Indeed, Ford, GM and Chrysler Group have established individual models for interacting with the supply base.

Chrysler says it isn't looking to insource any engineering work currently handled by parts makers. In fact, its proposal for a new plant in Windsor, Ont., Canada, demonstrates a willingness to outsource even more aggressively. The new plant, if it wins government approval, would have suppliers building and running the body and paint shops, and a supplier park onsite or nearby would directly feed components and modules to the final assembly line.

GM says it won't insource engineering work the way its Dearborn rival has. GM continues with its plan, for instance, to outsource complete interiors to the likes of JCI, Lear and Intier.

There was a time, however, when GM was concerned that it was losing its core engineering competence — the way Ford feels today.

“I would say that thought was pervasive in the early days of outsourcing,” says Robert Kruse, executive director-vehicle systems, GM North America Engineering. “But we took care in leveraging our supply base to ensure that we didn't lose that core competency. There were areas of the vehicle where we were more willing to take risks and others (where) we were not.”

Ford knows its supplier relationship can be much more productive. Phil Martens, Ford's vice president-product creation, North America, says suppliers are not fully to blame if they could not live up to the “full-service” expectations of OEMs.

“Many suppliers had to go out and man up. They had to hire agency people or hire engineers or services and develop their own internal engineering processes, facilities,” Martens says. “And what you are left with is a supplier who's trying to service your business, who's doing some things for the first time, doing it differently — potentially — for different OEMs, and not really able to deliver at the expectation that you want. It's not a fault of the supplier. It's basically a fault of the process.”

Mazda Motor Corp.'s former product development chief says the Japanese auto maker tended to do all of its own engineering in-house — “almost to an extreme.”

TOO MANY CHIEFS

The Japanese supplier relationship model differs widely from that in North America. Japan's No.1 supplier, Denso Corp., has been independent since 1949, but always closely affiliated with Toyota Motor Corp., which owns 24.9% of the parts-making company.

Japanese OEMs in general have a more collaborative relationship with suppliers, which are invited early in the product development stage to suggest the optimal part to meet certain performance targets set by the OEM customer, says Tony Takeuchi, chairman and CEO of Denso International America Inc.

Japanese auto makers also have one chief engineer for each new vehicle program, compared to 10 or 12 chief engineers for many Big Three vehicle programs. The centralized leadership in the Japanese model eliminates confusion about the chain of command, Takeuchi says.

For example, on one Big Three vehicle program, Denso designed a power window motor as a Tier 2 supplier to the window system manufacturer. A short time later, a quality problem surfaced. The motors required an 8-volt power supply. Denso eventually learned the vehicle's voltage level dropped to 6 volts in the area of the door because of a late engineering change to the length of the wire.

Even the OEM's chief engineer for the door module was not aware of the voltage problem. No one ever told Denso of the change, which meant the supplier had to redesign the motor, wasting time and money. It's the presence of so many chief engineers, Takeuchi suggests, that contributes to quality problems for U.S. auto makers.

Denso has a lot of business with Ford (instrument clusters, alternators, engine management components), and Takeuchi has met with Ford's Martens to discuss the strategy. “According to Phil Martens' concept, I'm a bit optimistic,” Takeuchi says.

“Phil's philosophy is for Ford to control or manage holistic vehicle engineering. That is a good trend.” Takeuchi finds the notion of more common parts across Ford vehicle platforms particularly attractive.
— with Drew Winter and Eric Mayne

FORD'S HIT LIST

Ford Motor Co. has identified nine product segments in which it will assume greater engineering responsibility. More product segments may be added in the near future.