One-stop shopping: Ford, Chrysler scramble to meet supply base targets

It seems like just yesterday that the North American auto industry was deep in recession with red ink flowing everywhere. The industry was critically ill. Automakers were struggling to identify and repair myriad profit leaks in the industry's superstructure.

One significant area targeted by Chrysler Corp. and Ford Motor Co. for reengineering was supply-base management methods, including fundamental purchasing practices.

A promising outgrowth of those efforts would give one supplier-partner (with one vendor code) responsibility for the entire breadth of the parts demand -- a "system integrator" for the entire commodity.

As the decade began, Chrysler and Ford decided current supply-base management methods were outmoded. Parts were overpriced, the burden of managing suppliers was excessive, and too little value-added was being provided by suppliers. The supply chain, from the automakers' perspective, had become fat, slow, and non-competitive.

Automakers responded by substantially reducing the number of Tier 1 suppliers. Many of the easier supply-base cuts are behind us now. Small suppliers, financially weak partsmakers and those with poor part quality didn't make the cut.

Ford pared its North American suppliers from 1,250 in 1990 to 800 in 1994. The goal is 625 by 1998.

Chrysler went from 1,700 in 1990 to 750 by 1995. Long-term goals are much more ambitious for the No. 3 automaker, with predictions of Tier 1 numbers as low as 150.

What now remains is a core of well-performing large- and medium-sized suppliers, and a substantial number of key small-niche suppliers. The challenge for purchasing strategists today is to structure networks that reduce the number of vendor codes while maintaining access to this group of high-performing manufacturers.

Chrysler's Commodity Distributor Process (CDP) selects a single source to manage the supply of an entire commodity at a particular location. It was first tried with non-productive materials such as lubricants, perishable tooling, and cleaning supplies, but already it has progressed to productive parts such as fasteners.

In the Chrysler process, one supplier-partner (with one vendor code) handles the entire demand for the commodity. The distributor frequently will manufacture many of the parts and buy the balance from Tier 2 suppliers.

By fall 1995, Chrysler was using CDP at 29 locations; more than 100 suppliers were managing 37 different commodities. All sides give the program a thumbs-up.

Ford also is talking to suppliers about a hybrid distribution process. Ford buyers encourage smaller niche suppliers to initiate collaborative working arrangements with larger Tier 1 suppliers. In this plan, the small niche manufacturer ships parts directly to Ford plants using the vendor code of its collaboration partner. There is no change in ship point, manufacturer, process or quality system, only a new billing and shipment process or something akin to a "phantom distribution" company.

Ford also may involve the Tier 1 supplier as a full-line commodity distributor. In this model, the Tier 1 supplier orders parts from Tier 2 suppliers, receives and warehouses inventory, and ships on a just-in-time basis to the automaker.

A word of caution is needed. The effort by Chrysler and Ford to reduce Tier 1 suppliers is appropriate. And the use of creative distribution models have numerous benefits and will, over time, contribute to and support their lean manufacturing strategy. But public announcements on supply-base reduction targets and excessive emphasis on meeting short-term supply-base targets may be driving the re-tiering process more quickly than either automakers or suppliers can manage effectively.