Supply Chain Matters highlights this week’s news related to Ford Motor in having to warn investors of an unanticipated $1 billion in added quarterly supply chain costs.
In recent Supply Chain Matters commentaries focused on automotive industry supply networks, we have focused on how the ongoing global wide shortage of semiconductor logic devices continues to provide noteworthy manufacturing, supply chain as well as financial impacts. With the semiconductor demand and supply imbalance forecasted to extend into 2023, automakers are forced to make decisions as to which models are to be prioritized to compensate for limited supply. Some decisions are being predicated on models most in demand by consumers while others focus on most profitable vehicles.
In a broader strategic context, the industry is transforming its product development, planning, production operations, business process and decision-making processes in introducing multiple models of more sustainably powered and electronics enabled vehicles.
This week, Ford Motor Company warned its investors that the automaker expects to incur an additional $1 billion in unplanned costs as a result of supplier related cost inflation and supply network shortfalls. Noted is that part shortages, especially semiconductor related, are affecting the completion of upwards of 40,000 to 45,000 vehicles which are mostly assembled but not completed. Once more, these shortages reportedly involve higher margin trucks and SUV’s. Implied is that these vehicles will remain as factory inventory until needed components arrive and customer or dealer orders can then be fulfilled. Ford will formally report its Q3 financial performance in late October but was compelled to issue this week’s warning.
The company expects to be able to complete these vehicles in the fourth quarter and has indicated ongoing confidence in its overall 2022 adjusted EBIT forecast in the range of $11.5 to $12.5 billion.
As has been the pattern with other warnings by companies related to supply chain challenges. The Ford warning caused the company’s stock to fall 12 percent, the biggest one-day loss since 2011. This week’s sudden and unexpected warning from supply chain bellwether FedEx relative to an unexpected revenue and earnings shortfall caused the company’s stock to suddenly drop to its lowest level since 1980.
Readers may recall that rival General Motors indicated in late July that ongoing parts shortages, including semiconductor devices prevented the shipping of 95,000 vehicles at quarter end. That vehicle backlog was expected to clear over the next few months as missing components were received. GM CEO Mary Barra maintained guidance that the company would meet its sales and profitability targets for the full year.
Together, there are building concerns as to when a semblance of demand and supply balance can be achieved. That is especially concerning with the ongoing signals that consumers have now pivoted away from material purchases. With concerns for economic recession growing, especially in Europe, demand and supply planning among the industry players has to be especially agile.
Broader Industry Perspectives
While the broader picture indicates that global supply chain stress and variability levels may be easing, the ongoing impacts to industry supply chains, including the automotive industry, remain highly visible and an impact to financial and business performance levels. As the industry undertakes a wide span transformation, the alignment of business transformation and supply chain strategies becomes paramount.
In August of last year, Ford announced a new make-to-order (MTO) planning and production scheduling online order entry process to be better able respond to consumer demand in the United States and at the same time reduce overall finished goods inventory costs.
Reporting indicated that Ford’s motivation was to take advantage of the ongoing semiconductor shortage to initiate changes to its U.S. sales organization and vehicle distribution strategies. CEO Jim Farley indicated at the time that the company’s goal is to have MTO factory orders account for upwards of a quarter of vehicle sales and consequently, the automaker can reduce overall finished vehicle inventories among U.S. dealers from an historic average of 75 days to a targeted range of 50-to-60 days.
At the time, Supply Chain Matters shared our view that a new MTO focus can definitely help automakers to better anticipate, and plan critical component inventory needs based on actual demand compared to expected model levels. In the current case of prioritizing more sophisticated and higher margin models to achieve profitability needs. MTO provides added intelligence as to whether semiconductor or other critical component demand levels equate to ongoing tactical supply plans at any given point. The opportunity is both more demand-driven planning as well as reduced finished goods inventories.
Today, Ford additionally announced a number of senior leadership changes which include company CFO John Lawler now overseeing a makeover of Ford’s global supply chain operations on an interim basis until a chief global supply chain officer is selected. Jonathan Jennings, Vice President, Supply Chain, was assigned additional responsibility for supplier technical assistance and quality. He will report to Lawler. Other senior leadership changes involve an expanded role for the Chief Advanced Product Development and Technology Officer
Also this week, CFO Magazine highlighted a recent survey of senior global finance executives indicating that many of these executives are rethinking the notions of efficient supply chains, with nearly half reportedly inclined to abandon just-in-time supply inventory management for one of a “revenue assurance” model that emphasizes agility and resilience. Obviously, for automotive industry, semiconductor and electronic components have provided added reinforcement to such new thinking. This blog will feature additional commentary related to this reported survey in a subsequent posting.
All of the above are areas to watch in the coming months, namely which automakers can apply new thinking and business process practices to overcome the legacy of Just-in-Time inventory practices as supply network agility and resilience needs become more of the business driver.
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