Ford passes the buck to suppliers
Outsourcing continues with end of tooling purchases by automaker
By Ken Brack -- Industrial Distribution, 4/1/1999
DETROIT--Beginning in 2002, Ford Motor Co. will require its suppliers to buy machine tooling it previously bought for them.The number three ranked automaker has told its first-tier parts makers that they will be responsible to own the tooling used to make about 130 different parts. Some industry officials say the cost cutting measure will put more financial pressure on smaller vendors and their distributors, who may be asked to extend payment terms even longer.
Ford currently spends more than $200 million a year on tooling such as dies and workholding equipment, about one-quarter of its total machine tool costs. Ford spokesman Ron Iore says that figure isn't necessarily what the company expects to save when the program begins and those expenses get wiped from the books.
Iore says the move, which first surfaced in newspaper reports of Ford internal documents, has been discussed with some of its top 100 suppliers, such as Johnson Controls, who are bidding on parts for model year 2003. In a few instances, Ford suppliers already buy their own tooling.
"This is not radically new to us," says Iore. "This expands it. Our sense of it is it's a business practice between us and them ... I don't know what effect it will have at this point down line."
He says suppliers will gain flexibility to buy machine tooling they prefer, instead of machinery that Ford has required, and says firms can recover their costs in parts prices.
Some industry executives suggest that view oversimplifies the financing pressures that would be spread to parts suppliers and their distributors. But companies that own, rather than lease, tooling from Ford may benefit with quicker turnaround to production.
"I think Ford's announcement says outright to all their suppliers: We're no longer going to bare this burden," says Robert Bloch, Jr., president of PMC Machinery Inc., a distributor in Plymouth Township, Mich. "They think the [parts] supplier can do a better job at costing out the work holding, the fixturing, and in some cases that's not really true. Ford does a better job negotiating.
"I expect by end of this year or in 2000 the financial pressure will be on," he says. Suppliers forced to shoulder huge investments in tooling will seek extended payment terms from distributors, who in turn will search for alternative financing arrangements, says Bloch.
"We're [already] getting the pressure from the other side, our suppliers, and now we're going to get it from our customer base," he says.
Ralph Nappi, president of the American Machine Tool Distributors Assn., says Ford's plan raises a lot of questions. He expected to discuss the plan with distributors at a roundtable meeting last month in Detroit. He agrees that the financial impact will be serious, but expects parts-making suppliers will be more affected than many distributors.
"The concern I have is most of the suppliers to the automotive [market] are small companies," says Nappi. "The type of capital small companies would need to deal with this is a big cultural and financial commitment they would have to make. Although I understand where Ford is coming from, I don't think this adjustment could be easily done at first."
Gregory Safko, senior director of member resources at AMTDA, says a likely strategy for Ford suppliers may include leasing machine tools for the life of the projects, which may create issues of ownership and resales later on.
"Where the problem arises is who carries the paper on the machine tools?" says Safko. "In the event a distributor has their own captive leasing, they get the equipment back with its residual value, and would in turn resell the equipment. In the event the leasing is contracted elsewhere through a builder or leasing company the responsibility or risk may reside there."
In addition, distributors who lease equipment under the program might take a risk given the tight resale market. "A surplus of available machine tools at very competitive list prices may seriously impact the ability to resell used products," Safko says. Another risk is suppliers getting stuck with expensive tooling in a production downturn, Nappi says.
Ford has about 1,600 first-tier parts suppliers and expects to reduce that to 1,200 in the next five years or so. That is a reduction from nearly 3,000 at the start of the decade. m
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