Identify A Best Sourcing Pattern For Ford

1. Executive Summary Ford Motor Company created Automotive Components Holdings, LLC (ACH) Interiors business in 2005. Considering Ford's long-term strategy, managing the plants as internal operations is not consistent. Moreover, the manufacturing plants are not fully utilized and need substantial investment. Responding to this issue, ACH and Ford's purchasing group proposed three alternatives to reconstruct the Interiors business: (1) consolidate two manufacturing plants into one plant in order to improve utilization of that facility and also attract a potential investor to take over the operations; (2) outsource the facilities and business to outside suppliers in order to reduce investment and take advantage of suppliers' capacity; (3) combine consolidation and outsourcing for the ACH Interiors business. The aim of the report is to identify the best possible sourcing pattern for ACH from the above alternatives, thereby minimizing investment costs to Ford. To solve this problem, firstly, all determinants of cost in the ACH Interiors business should be identified. Secondly, mathematical model was applied to represent the business problem through capturing the nonlinear relationship between per-unit cost and capacity utilization of a production site. The effects of purchasing, production, transportation and intellectual property to this model were also considered. Thirdly, an algorithm was developed to operate the mathematical model dynamically and continuously. Finally, in order to identify a sourcing pattern with minimum total costs, the algorithm was implemented to assess the impact of various scenarios under different conditions. Four key facts emerged by analysing various scenarios. Firstly, the concept of substantial excess production capacity in the Interiors business only exists from the aggregate perspective. The least available manufacturing process constrains the production for an entire product programme. Secondly, the previous fact also results in outsourcing of business and moving equipments to third-party suppliers. However, complete outsourcing is not attractive due to the large amount of investment and transportation costs. Thirdly, the benefits of outsourcing some product programmes to outside suppliers are identified and implemented in almost every scenario. Finally, operating both ACH facilities at acceptable utilization levels is not available due to the lack of sufficient business. Thus, consolidating two plants into one facility is necessary. Combination of consolidation and outsourcing is recommended. The hub-and-spoke structure is suggested to employ to the ACH Interiors business, which allows the ACH business to concentrate manufacturing operations into one plant in order to obtain high facility utilization with low per-unit costs. It can also reduce moving and freight costs by outsourcing several product lines to outside suppliers rather than complete outsourcing. 2. Introduction The operations of automotive original equipment manufacturers (OEMs) highly depend on their first-tier suppliers. Ford Motor Company created Automotive Components Holdings, LLC (ACH) to take back the operations of Visteon, which is the subsidiary component suppliers and struggled in operations in 2005. Ford made substantial investment but the Interior business was not profitable. Also, managing Interiors business was not consistent with Ford's long-term strategy. Consequently, Ford decided to sell or close all existing ACH businesses. However, due to having two underutilised manufacturing plants, it was difficult to identify an interested and qualified buyer to take over the Interior business, despite many traditional improvement actions and marketing efforts. Therefore, three alternatives have been proposed: (1) Close at least one manufacturing plant in order to improve facility utilization and also attract a potential buyer for the Interior business; (2) complete outsourcing ACH business to third-party suppliers in order to take advantage of suppliers' facility utilization and hence reduce per-unit costs; (3) combine consolidation and outsourcing to ACH Interiors business. ACH and Ford need to identify a best possible sourcing pattern from the above three alternatives to restructure the business in order to fit with Ford's interest and minimise total costs. The report starts from analysing the determinants of costs and multitude of constraints in the Interior business. Then, a mathematical model and algorithmic approach will be introduced to represent the business problem. This will be followed by analysing and assessing various scenarios. Finally, a strategy recommendation is provided resulting from the main facts of scenario analysis and model results.

3. Problem Descri ption and Modelling

3.1 Determinants of expenditure Identifying the "best possible sourcing pattern" could minimise the cost to Ford, including the investment costs, freight expenditure and annual purchased-part expenditure. To minimise the cost, identifying the determinants of cost are crucial. Firstly, Ford's annual purchased-part expenditure is determined by per-unit market pricing for the components. The market pricing covers the fixed, semifixed and variables costs for the components production. Variable costs are proportional to the quantity of produced products and not related with the capacity utilization of the plant. On the other hand, the per-unit fixed and semifixed cost highly depends on the capacity utilization of a production site. Per-units market pricing would decrease as the fixed and semifixed costs spread over the number of units produced at one site. Therefore, there is a nonlinear relationship between plant utilization and per-unit pricing. Higher capacity utilization in a production site will incur lower per-unit cost because of the economies of scale. Moreover, the higher capacity utilization enables a supplier to set a competitive price to Ford and maintain sufficient profitability. Secondly, several constraints also contribute to the expenditure to Ford and the sourcing pattern decision. For example, the manufacturing process available at different facilities leads to an investment cost to modify the production tools in order to accommodate the assignment. Moreover, the limitations of manufacturing resources at different sites incur an investment cost of movement equipments from ACH to a new supplier's site. Also, the distance between suppliers and the final assembly plants will affect the transportation cost. Thus, identifying the sourcing pattern should consider how the determinants affect costs and also how to satisfy the multitude of constraints.

3.2 Mathematical model to represent the business problem

The determinants of costs can be transformed into a mathematical solution. Figure 1 illustrates the nonlinear relationship between per-unit costs and plant utilization level. Then a discrete step was introduced to the utilization curve in order to identify the appropriate utilization ranges. The established discrete utilization ranges were validated by running the existing sourcing pattern at ACH facilities and to confirm the budget by estimating costs with the nonlinear cost curve. Furthermore, the nonlinearity in the constraints remained because the capacity utilization varied both in the manufacturing processes and the moveable equipment. The effectiveness of the model to represent the business problem to Ford has been verified.

3.3 Developing an algorithm to solve the model The aims of the algorithm were to identify the facility utilization values and to establish facility costs iteratively until convergence. Figure 2 demonstrates the process of identifying convergent facility utilization values and facility costs.

For the first iteration, the highest facility utilization was the input of FCM, because it was assumed all facilities were in their maximum utilization range initially. Then, the outputs of FCM showed the manufacturing capacity move values and passed them to FUM, in order to establish process-capacity upper bounds, the number of processes available, the maximum capacity of each process, and the initial facility utilization at each production site as the input of FCM for next iteration. The outputs of FUM indicated the facility utilization levels, which enabled to establish accurate facility costs for the FCM. It was because the fixed upper bound capacity for each facility was assumed in the FUM. Thus, the capacity in each facility will not optimally include the movable capacity from ACH. Finally, the output values of FCM and FUM were compared to identify if they were within 0.5 percent of each other. If so, the algorithm can have converged; if not, the algorithm should continue until convergence.

4. Scenario Analysis The end aim of the model is enabling Ford and ACH business team to effectively implement the algorithm to assess the effect of various scenarios under different conditions and identify a best sourcing pattern with minimum total costs. Variations of scenarios were analysed. To analyse the impact of different scenarios, setting different input values and assumptions can obtain the optimization of the sourcing pattern. The first and benchmark scenario assumed it was free to move ACH Interior business to any potential production sites and the sites were eligible to receive the manufacturing resources from ACH. This solution led to the lowest investment cost. But additional constraints on where to move the business incurred additional cost. Secondly, this scenario restricted sourcing to specific suppliers among 57 sits, which can have an evaluation and insight into the specific suppliers about their performance. The third scenario was to reduce the freight by sourcing the business closest to the assembly plant and shipping units without regarding the facility utilization and capacity constraints of the production site. This fixed pattern indicated that not all sites had sufficient capacity and may required equipment movement to obtain adequate floor space, which could result in investment cost approximately $50 million to Ford. Fourthly, closing the two ACH facilities and outsourced the entire of business to the external suppliers completely was the other scenario. This scenario resulted from the lack of a buyer for the Interior business. Figure 3 shows the two network designs for outsourcing. However, the complete outsourcing will incur a large amount of cost to relocate production equipment from ACH to other production sites. On the other hand, "hub-and-spoke" pattern means highly utilization of hubs and balance of other plants utilization, which can reduce the equipment movement cost and annual freight expense to the final assembly plants.

Finally, by running ad hoc scenarios with various manually derived sourcing constraints, ACH and Ford could gain better insight into the actions and relative costs of different alternatives which are reflected by variations of sourcing constraints. This scenario analysis enabled ACH business team to identify and assess relevant alternatives based on management judgment and intuition.

5. Key Facts and Strategy Recommendation Four main facts emerged after analysing various scenarios and model results. Firstly, although the production capacity in the automotive interiors industry has substantial excess, there is a shortfall of specific combinations of manufacturing processes at specific sites to contain all ACH business. Secondly, complete outsourcing of ACH business is not attractive as the least available resource at specific locations requires moving large amounts of manufacturing equipments from ACH to third-party suppliers, which results in increasing investment and logistics costs. Thirdly, the benefits of outsourcing some product programmes to third-party suppliers are realised. Sourcing to specific suppliers enables Ford to take advantage of their high capacity utilization to reduce annual purchase-part expenditure, equipment moving costs and freight costs. Finally, due to the demand level in the market, at least one ACH facility should close in order to achieve cost efficiency. Therefore, according to the salient facts, combination of consolidation and outsourcing is recommended to ACH business. The structure of hub-and-spoke can be applied in the business. Specifically, ACH should concentrate one facility to keep facility utilization high thereby reducing per-unit costs. Moreover, it is recommended to outsource limited ranges of product programmes to outside suppliers rather than complete outsourcing. Because it not only takes advantage of suppliers' facility capacity and resources, but also decreases investment and equipment moving costs, and reduces freight costs to assembly plants.

6. Conclusion In summary, to achieve the best sourcing pattern and lower cost to Ford, nonlinear mathematical model was built to explain the relationship between per-unit cost of supplier and its facility utilization level. Besides, costs and non-costs constraints were also taken into account to decide the best sourcing pattern. Combining the qualitative scenario constructions and the relevant quantitative model results, ACH business teams were able to gain much better insight into their actual options and the trade-offs of cost and benefit in various alternatives.