Ford suppliers to be hit with a velvet hammer

Lindsay Chappell, Automotive News

Detroit, Michigan - For parts suppliers, the bad news in Ford Motor Co.'s stern new North American reorganisation plan is that stress levels will be cranked up a notch or two.

In addition to plant closings and job layoffs, Ford's Way Forward plan, announced last week, will seek $6000 million in material cost reductions over the next five years. That target represents almost 7 percent of Ford's $90 000 million global budget for parts, materials and tools.

"This is all going to come out of the hides of suppliers," predicts John Murphy, senior auto industry analyst with Merrill Lynch & Co. in New York. "They'll be lucky to get there by 2010."

Now the good news. Unlike previous supplier cost-reduction programmes, Ford will rely on a critical new tool this time: a collaborative supplier programme it unveiled last September to reward its supply chain for bringing down production costs globally.

That earlier program, dubbed the "Aligned Business Framework," is designed to tap into supplier ideas for cost savings during vehicle design projects. It also seeks to spread supplier costs over longer periods and more models. Another goal is to reduce Ford's worldwide supplier ranks to give fewer companies more business.

Those moves were taken in preparation for last week's restructuring plan.

"The Aligned Business Framework wasn't done without knowledge of the new plan," says Paul Wood, spokesman for Ford's purchasing operations. "When you look at the Way Forward plan, you'll see language that's similar to what's in the framework."

Change coming

Suppliers are still learning what Ford will expect of them in both the September purchasing plan and last week's $6000 million cost-cutting programme. But Wood says Ford will be able to get lower prices for parts and materials when suppliers develop parts over common platforms shared around the world. He said the cost cutters also will target steel and energy costs.

The difference, says Brett Smith, industry analyst with the Center for Automotive Research in Ann Arbor, Michigan, is that past Ford reduction efforts played out at the purchasing level. The automaker simply demanded price cuts. The new effort, he said, will be driven by engineering, with Ford and its suppliers attempting jointly to find cheaper ways to make parts.

Ford CEO Bill Ford last week stressed the need to work closer with suppliers.

"Doing so will not only improve our cost structure through economies of scale," Ford said, "but it will allow us to foster greater innovation through stronger, smarter partnerships with our key suppliers."

Neil De Koker, president of the Original Equipment Suppliers Association, says Ford appears to be serious about changing the way it works with suppliers. In the past, he said, cost-cutting programmes soured relations with suppliers to the point that some suppliers backed away from future Ford business.

De Koker says he thinks Ford is attempting to make amends. "I've never seen the level of sincerity and commitment we're seeing from Ford now," De Koker said. "If this is how they're planning to reach that $6 billion target, then I think it's pretty doable."

Not everyone is cheering

Shawn Riley, head of the business restructuring department at the Detroit law firm McDonald Hopkins Co., called the cost plan troubling.

"Many of my automotive clients are in a vulnerable position right now," Riley said. "Ford is closing plants and doing away with models. Some of them don't know if they're even going to have any Ford business. This new message indicates that they're going to be paid less for whatever business they still have."

Some analysts were more reserved about the plan.

Joseph Amaturo, an analyst who tracks Ford at Calyon Securities (USA) Inc. in New York, says that while last year's Aligned Business Framework is Ford's best bet for saving $6000 million, he believes the results will wane in importance if Ford's North American market share continues to decline.

"It will help them reduce costs," Amaturo agreed. "But the question is whether cutting $6000 million will matter."

From Automotive News (A Crain publication)