By Blake Johnson and Mark Everson

Jointly Optimizing Capacity Flexibility, Supply Flexibility and Component Commonality at Ford Motor Company

Ford is able to predict its overall vehicle sales with reasonable accuracy, but faces much greater uncertainty about the sales volumes of individual models and model options. It is at this level of specific models and model options that Ford’s supply chain obviously must match supply with demand. Relative to many other industries, creating flexibility of supply in the auto industry is challenging and expensive, due to the complex tooling, machinery and manufacturing processes required, both at Ford and its component suppliers.

Because the variability of demand is largest for individual models and gradually “smoothes” when aggregated across multiple models, Ford has actively researched the optimal level of production flexibility across models to build into its factories. Capacity that can produce two or more vehicles can be built, but is generally more expensive. In addition, its maximum throughput is often somewhat lower than capacity optimized for a single model.

To determine the optimal type and amount of flexibility to include in its capacity, Ford first analyzed the level of variability in the demand for individual models, and the correlation between the levels of demand of multiple models. Next, it evaluated the flexibility, cost, and throughput of alternative capacity investment options, determining their impact on overall production costs and service levels for its vehicle portfolio.

As mentioned above, however, in order for Ford to capture the value of its investments in flexible production capacity, its suppliers must be able to supply necessary components with equal levels of flexibility. To determine the optimal level of flexibility, Ford therefore also included the performance impact and cost of alternative levels of supply flexibility in its analysis.

Like Ford, Ford’s suppliers also face substantial capacity investment costs, making it expensive and risky for them to provide high levels of flexibility for components utilized only in individual vehicles subject to high levels of demand uncertainty. Ford can reduce these costs and risks of supply flexibility by increasing the use of common components across models, resulting in supply requirements for less variable aggregate demand. To determine where and how component commonality can most effectively contribute to overall flexibility and performance, it was included as a third decision variable in Ford’s flexibility optimization analysis.

While the specific results of Ford’s analysis are proprietary, a number of key insights can be shared. First, investment by Ford in flexible production facilities can reduce its cost and improve its customer service levels, particularly for models that share common components and which have high levels of model-specific demand uncertainty. Second, while the optimal level of capacity flexibility depends on model features, margins and demand uncertainty, the levels of assembly capacity flexibility and supply flexibility should always be matched. Third, assembly flexibility and component commonality are complimentary. Investment in either individually increases profits, and the benefits of investing in both over reasonable investment ranges is roughly equal to the sum of these individual benefits. The best overall flexibility investment plan depends on the demand uncertainty of the relevant products, the cost structure of flexible assembly and supply capacity, and gains from commonality, for example in the area of engineering efficiency.

At a higher level, the key take-away from Ford’s experience is that optimizing cost and flexibility in a supply chain as complex and capital intensive as that of the auto industry is challenging, and requires that the flexibility of internal capacity, the flexibility of component supply, and the appropriate use of component commonality be optimized jointly. The cost and performance benefits that result, and the increase in alignment across the supply chain, however, can more than justify the investment.

©2003 ChainLink Research, Inc.