Analysis of risk management in the automotive supply chain a case of ford motor

FOREIGN TRADE UNIVERSITY SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS  INSURANCE AND RISK MANAGEMENT REPORT Group TOPIC analysis of risk management in the automotive supply chain a case of ford mo.CHAPTER 1: INTRODUCTION ABOUT THE AUTOMOTIVE SECTOR AND THE RISKS IN ITS SUPPLY CHAIN 3 1.1. Overview automotive industry 3 1.2. Risks in the supply chain. 4 1.3. Risks in the automotive industry. 6 CHAPTER 2: THE CASE OF FORD MOTOR 9 2.1. Brief about Ford motor 9 2.2. Supply chain management of Ford before 2018 10 2.2.1. How Ford manage the automobile supply chain before 2018 10 2.2.2. How Ford motor managed risk after applying new supply chain management 12 2.3. The Case of Ford Motor: May 2nd 2018 fire accident 14 CHAPTER 3: PREVIEW OF FORDS CASE 21 3.1. Risk management assessment 21 3.2. Proposals for Ford Motor 24 CONCLUSION 26 REFERENCES 27

FOREIGN TRADE UNIVERSITY SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS



INSURANCE AND RISK MANAGEMENT REPORT

Group

TOPIC: analysis of risk management in the automotive supply

chain: a case of ford motor

Instructor: Dr Hoang Thi Doan Trang Class code: TMAE308(GD1-HK1-2223).1

Hanoi, 09/2022

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION ABOUT THE AUTOMOTIVE SECTOR

AND THE RISKS IN ITS SUPPLY CHAIN 3

1.1 Overview automotive industry 3

1.2 Risks in the supply chain 4

1.3 Risks in the automotive industry 6

CHAPTER 2: THE CASE OF FORD MOTOR 9

2.1 Brief about Ford motor 9

2.2 Supply chain management of Ford before 2018 10

2.2.1 How Ford manage the automobile supply chain before 2018 10

2.2.2 How Ford motor managed risk after applying new supply chain management .12 2.3 The Case of Ford Motor: May 2nd 2018 fire accident 14

CHAPTER 3: PREVIEW OF FORD'S CASE 21

3.1 Risk management assessment 21

3.2 Proposals for Ford Motor 24

CONCLUSION 26

REFERENCES 27

CHAPTER 1: INTRODUCTION ABOUT THE AUTOMOTIVE SECTOR AND THE RISKS IN ITS SUPPLY CHAIN

1.1 Overview automotive industry

It all started with the development of the first car by German inventor Carl Benz in 1886 Nearly

136 years later cars are the main way of transportation and the automotive industry has growninto one of the most important industry sectors of the world The global, total revenue of theindustry accumulated to about $2,86 trillion in 2021 It’s also the sector with the highest R&Dspending per company and is known for its highly automated production I think we have all seenthe robot arms assembling car pieces on a conveyor belt Because the supply chain is a bigcomplex system of suppliers many technological clusters arise around the big factories To thepoint where whole cities evolve around a company and a car plant like for example Wolfsburg,Germany, the HQ of Volkswagen

Germany has been famous for its cars for many years However China has been the biggest carproducer since 2009, with an output of about 26 Million cars in 2021 Global motor vehicleproduction in 2021 was around 80 Million units, an increase by 3% from 2020’s output but still

12 Million lower than pre-pandemic numbers Passenger cars made up the largest portion with 57million units The biggest industry players are Toyota Motor Corp with $255.817 bn annualrevenue in 2021, Volkswagen AG with an annual revenue of 250,2 bn € in 2021 and Daimler AGwith 167,9 bn € revenue in the same year Other big automotive companies are Ford Motor,Honda Motor, BMW, General Motors and Hyundai Motor

In recent years the industry has been prone to many internal and external changes and challenges.The increasing concern about human made climate has led the European Commission to issue theeuropean green deal Which only allows the registration of zero emission cars from 2035 andonwards With Tesla, BYD and Nio the industry has seen an increasing shift towards electricpowered engines instead of conventional combustion engines In 2021 Tesla became only the 5thcompany, and the first automaker, to reach a company market value of 1 trillion USD Nearly10% of global car sales were electric in 2021 which is four times the market share of 2019 Thishas brought the total number of EVs (electric vehicles) to about 16,5 million Partly due togovernment tax reductions and subsidies for EVs But the complex automotive supply chain isincreasingly dependent on China for rare metals and battery production China dominated theproduction of all lithium-ion batteries with a 79% share of worldwide output in 2021 This is an

increasing concern

for all other countries and automotive power houses which watch the debt crisis, the zero covidstrategy, human rights concerns and international tensions about Taiwan with increasing concern.Furthermore are the chip shortage, inflation and supply chain bottlenecks important growthinhibitors The future of cars as we know them today will heavily depend on the integration andimplementation of new technologies like artificial intelligence (e.g autonomous driving), internet

of things, smart mobility, blockchain and shared mobility

1.2 Risks in the supply chain.

There are various when it’s come to the supply chain In this report, we will illustrate some of thementioned risks

a) Scope of schedule risks

Schedule changes are frequently caused by natural disasters such as hurricanes, fires, or floods, or

by supplier noncompliance issues Scope risk can arise as a result of changes that are requiredwhen the initial statement of work (SOW) becomes unworkable, or as a result of market-driventechnological changes

b) Legal risks

Legal and contractual risks are frequently associated with disputes or differing interpretations ofcontractual obligations, or with failure to meet the requirements outlined in the terms andconditions The use or misuse of intellectual property can also pose a legal risk, particularly whenpatent infringement is a possibility We can also include law violations and civil lawsuits in thiscategory

An example of legal risk in supply chain activities is: forced labor

Modern slavery is a common compliance risk in global supply logistics that many companiesface, with laborers, particularly in developing countries, being forced to work under unethical andillegal conditions As part of cost-cutting measures, much production is currently outsourced tothese countries, adding to the risk The COVID-19 pandemic has highlighted the threats toworkforce continuity posed by complex supply chains that rely on forced labor, as poor andovercrowded working conditions increase the rate of virus transmission exponentially This mayresult in factory closures, disrupting multiple stages of the supply chain and causing financial andreputational harm,

as well as legal ramifications.There are numerous examples that show the importance of atransparent supply chain in addressing compliance risks.

For example, in the Rana Plaza disaster in 2013, over 1,000 factory workers were killed when agarment factory collapsed Primark, one of the retailers, paid out millions of dollars incompensation to victims as part of a compensation scheme supported by the International LaborOrganization, a UN agency In the chocolate manufacturing industry, class actions have broughtpopular brand names to court for allegedly selling cocoa farmed by children and slaves in WestAfrica while claiming it is "ethically" or "sustainably" sourced

South Korean-based Hanjin Shipping Co., Ltd was a shipping company Hanjin, one of the topten container carriers in the world, moved about 3.7 million containers annually It was madepublic that Hanjin was having a financial crisis in 2016 Ships were seized, and those at portswere not unloaded because the service providers were uncertain of their payment status Hanjinannounced office closures, employee layoffs, and the dismantling of their service network afterdebt restructuring, asset freezing, and asset confiscation They were liquidated and declaredbankrupt in 2017 The biggest bankruptcy in the container transport sector to date was HanjinShipping, which lost millions of dollars in revenue as a result of inventory that was stuck at sea

d) Human - related risks

A project or activity may be jeopardized due to an illness or injury, or the departure of keypersonnel It can also be the result of poor judgment or poor decisions In addition to thecategories already mentioned, our assessment should determine whether the risks to beconsidered are internal (related to our own operations) or external (related to conditions outside

of our organization, such

as market factors, political climate, regulatory environment, economic circumstances, and so on).

1.3 Risks in the automotive industry.

a) Regulation

The first risk is regulatory compliance Large regulatory swings could put pressure on automakers

to rethink their supply base and manufacturing locations on short notice

The automotive industry, for example, has a lot riding on the renegotiation of NAFTA, whichcould change North American content requirements and limit market access to Mexico, amongother things Brexit is already causing major headaches for automakers in the form of unknownfuture duty rates for cars and auto parts entering and leaving the UK, as well as increasedregulatory overhead Similarly, the Trans-Pacific Partnership (TPP), assuming it is implementeddespite the United States' decision to withdraw from the agreement, may force companies tomake rapid changes to their supply base, switching suppliers from one country to another to meetcertain origin requirements or even reconsider the viability of existing manufacturing plants ifthey fall outside the scope of an FTA or are no longer viable in terms of duty and regulation.The issue here is that regulation can and frequently does change overnight in many countries.And in supply chains with a lot of manufacturing and thousands and thousands of suppliers tied

to the design of individual automobile models, automakers and their suppliers find it difficult toreact as quickly as regulators can change the regulations As the industry adjusts, all of this canresult in painful dislocations

b) Poor part visibility and routing.

An average car contains about 30,000 different parts Each of the components is either producedin-house or purchased from a different supplier One blip in the supply chain might slow downthe production and delivery of vital parts, forcing the shutdown of the entire production line.Any disruption to the efficient production and distribution of vehicles as the automotive industrytransitions to just-in-time manufacturing results in inventory shortages and revenue loss Tosimplify the production and delivery of parts, automotive supply chain managers must be able tocommunicate effectively with thousands of manufacturers and supplier

c) Effects of outside factors

The automotive sector is very subject to external political, economic, environmental, market, andother variables due to its global character The cost of importing and exporting parts andautomobiles can be considerably changed by tariffs, trade agreements, and political wrangling.Large portions of the automotive supply chain can be disrupted by environmental catastrophes.The change to more electrified vehicles and increased fuel efficiency is changing consumerpreferences, which is disrupting purchase tendencies

Managers of the automotive supply chain must be aware of these risks early so they can predicttheir effects and make plans accordingly One of the examples is the effects of Japaneseearthquake and tsunami in March 2011

The most devastating natural disaster in modern Japanese history struck Japan's northeast coast inMarch 2011 with the Great Tohoku Earthquake and Tsunami The subsequent destruction of severalnuclear reactors in the area, which provided electricity for homes and industry, added to thedifficulty facing the Japanese government, businesses, and communities A large area wastemporarily evacuated in addition to the lack of electricity, making it impossible for affectedindustries to quickly reopen Numerous manufacturing facilities that are essential to the globalsupply chain for motor vehicles are situated in the disaster area and are negatively impacted bythese forces They consist of factories that put together cars as well as a large number of supplierswho produce automobile parts and accessories Some of the shuttered Japanese factories produceparts and chemicals that are difficult to find elsewhere This is especially true of automotiveelectronics, one of the major producers of which was situated close to the destruction's epicenter.The impact of these catastrophes was primarily felt by Japanese automakers, who temporarilyshut down many of their assembly plants while they evaluated their supply chain problems

and the

effects on their Tier 1, 2, and 3 suppliers Other Japanese auto plants around the globe have alsobeen impacted, including ones that are owned by Toyota, Nissan, Honda, and other USmanufacturers in the Midwest and South Conversely, the Detroit 3 automakers are less impacted,despite the fact that they have also made extraordinary efforts to maintain production, includingvisiting Japanese suppliers to aid in their reconstruction, finding alternate sources for some partsand chemicals, and rescheduling summer vacations at some plants to account for the loss of parts.The disasters in Japan are expected to result in the loss of over 4 million vehicles, 90% of whichwill be produced by Japanese automakers, according to a global consulting firm called IHSGlobal Insight It's possible that there will be a shortage of some well-known Japanese cars in the

US this summer Any demand that Japanese automakers are unable to meet may be partially met

by the Detroit 3 and South Korean automakers Congress has expressed interest in the financialconsequences of these catastrophes, and at least one hearing has been scheduled to look intothem The rebuilding of Japan is a crucial step in the restoration of the world economy because it

is not only one of the United States' biggest trading partners but also an ally in Asia Due torecent information regarding the vulnerabilities of supply chains in the automotive industry,Congress may also be interested in assessing the resilience of global supply chains

CHAPTER 2: THE CASE OF FORD MOTOR

2.1 Brief about Ford motor

Ford Motor Company is the largest automobile company and one of the top Multi NationalEnterprises based in the United States Founded in 1903 by Henry Ford, Ford Motor Companyhas its headquarters in Dearborn, Michigan, United States The company has maintained a strongglobal presence and operates its business worldwide through a large distribution network thatincludes around 10,700 dealerships

The business model of Ford Motor Company has some unique strengths, including a strongmanufacturing and supplier network The company has many subsidiaries such as Ford, Mazda,Lincoln, Mercury, and Volvo, which specializes in producing small cars, sport utility vehicles,luxury vehicles, tractors, and trucks Its business segment also includes car financing, renting,leasing, and many other operations Ford's new safety and environmental standards brought thedemand of producing high-quality cars and creating new car models, especially electric carmodels

The company had maintained a solid growth rate, except for the impact of the COVID-19pandemic, which brought car sales sliding downward in most regions of the globe in 2020 Thedemand for vehicles remained lower compared to the previous years worldwide To deal with theproblems, Ford focused on creating a resilient business model that performed fine duringchallenging times However, the company still strongly felt the bitter impact of the pandemic andexperienced around an 18% decline in unit sales of vehicles overall

Ford is among the largest vehicle brands in the US market, where its leading rivals includeGeneral Motors and Toyota The company has maintained a strong manufacturing network in the

US and some other parts of the globe It had 54 manufacturing locations in 2020 In addition,Ford produces a large range of cars, trucks, and SUVs Moreover, the company has expanded itsportfolio of electric vehicles fast in recent years to meet the growing demand globally

In 2020, the company employed approximately 186,000 globally Ford has established a culture

of creativity and innovation to fuel the company’s faster growth Its employees are among itsmost critical sources of competitive advantage Its culture has also remained a crucial driver ofperformance and growth

The largest market for Ford products is the United States The company achieves more than half

of its total sales from the North American market In 2020, the company sold 4.5 million vehicleunits

globally compared to 5.5 million a year ago Its unit sales in the United States were 2 millionunits in 2020 compared to 2.4 million units a year ago The company sold 2.3 million units in theNorth American market in 2020 compared to 2.8 million units a year ago Its net revenue fell to

$127.14 billion in 2020 compared to $155.9 billion in 2019 However, as demand returns on trackglobally and the automobile industry emerges from the impact of the pandemic, Ford MotorCompany’s sales worldwide are expected to improve

2.2 Supply chain management of Ford before 2018

2.2.1 How Ford manage the automobile supply chain before 2018

Past Supply Chain Management of Ford Ford had the luxury of pioneering the automotiveindustry with its assembly line and is now one of the major car manufacturers in the world It iscrucial for Ford to stay ahead of the curve and make its supply chain management as efficient aspossible Technology has helped everyone become faster at what they produce, it is how thesecorporations apply this technology to their operations that set them ahead of their competitors

From the 1920s to the 1970s

In the past, The Ford Company managed to stay ahead of its competitors by vertically integratingitself as it owned or controlled virtually every aspect of its business This allowed Ford toeliminate product and delivery mistakes made by suppliers and control the raw materials itneeded to produce mass amounts of automobiles Ford's mass production led to mass profits andthe company was able to buy and control its resources, everything from "the mines that providethe ore to the factories that make the glass Raw materials - iron ore, coal, and rubber, all fromFord-owned mines and plantations - came in through one set of gates at the plant while finishedcars rolled out the other” This allowed for the maximization of control for Ford, if somethingwent wrong with one of its suppliers it could be identified quickly and fixed immediately so asnot to slow production

However, compared to other automobile manufacturers these days, The method of Ford's verticalintegration seemed to be foolproof Today's supplier problems sometimes take longer than expected

to fix, affecting the manufacturing company by slowing their materials down, especially if themanufacturer relied heavily on this supplier

The Ford Motor Company still continued its Supply Chain Management for many years until themid-1970s when the Japanese began to show an interest in car manufacturing and used a different

method to approach their production and supply chain operations The Japanese felt that it was

cheaper and easier to receive supplies from out-of-house suppliers instead of paying storage costsfor large amounts of materials The Japanese decided to focus on controlling its employees toensure quality automobiles were being produced and to let the suppliers regulate themselves.These new Japanese factories began to cut into Ford's market share in a big way as their factoriesused smaller work teams to allocate resources better and make an easy transition from oneautomobile model to the next without losing much production time An assembly line could notperform this transition and due to its rigid structure, it would take more time and money to movefrom one type of automobile to the next as the employees would have to be retrained and theassembly line completely changed, losing Ford time which translated to lost sales.

Ford, however, was so bureaucratic that its employees were used to building a specific type ofvehicle they could not deal with the change needed to diversify their product market This type ofnew relaxed manufacturing caught Ford off guard and it took them some time to move this type

of production

From 2006

However, up until 2006, this type of supply chain management and rigid production structure wasstill present and is one of the reasons that Ford had trouble increasing its profits and image as aglobal automobile maker The Ford Motor Company had made plans to drastically revamp itsmanagement style with The new Ford Motor Company's Supply Chain Management: “job cutsand factory shutdowns and a dramatic shift to a less bureaucratic and more responsive andflexible management style with the ability to produce vehicles that will lure customers away fromhot Japanese models” Along with these outlines, the plan also called for an increase inmanufacturing operations designed to ensure that Ford employees are more efficient with rawmaterials In short, Ford was ultimately taking the Japanese model and applying it to its ownoperations as they see the need to bring the company out of its decline

The main reason for this change is the fact that the current management structure was unable torespond quickly to changing markets or consumer demands In the short-run, the shutdown of plantscaused Ford to revamp its supply chain management system as supplies had to be re-routed andother factories must be ready for an increase in inventory However, the long-run savings of aleaner inventory system and a more flexible production schedule outweighed these short-termcosts

Ford's Structural Problems Communication was an important part of this overhaul of Ford andwas an issue that one of the largest automakers had trouble dealing with Its vertical organization

of employees had not allowed it to communicate ideas throughout the company

During this year, the Ford Motor Company launched the first North American supply park Thefour multi-tenant buildings offer 1 5 million sq ft of manufacturing and office space and occupy

a 155-acre site that sits a one-half mile from the Chicago assembly plant This new management

of Ford to suppliers resulted in a more efficient operating system for Ford and the companies thatsupply automotive parts By allowing the suppliers to work in close proximity to Ford and othersuppliers, more ideas were communicated between companies, and any problems could beimmediately identified and dealt with accordingly This new concept of a supply park helped theFord Motor Company to keep most of its supplies in front of it and maximize control and savemoney as shipments to the factory have to travel less distance to reach the destination point.This allowed for a greater cost reduction as Ford was able to save money on transportation costsand suppliers save on shipping and fuel expenses The ability to cut costs was extremelyimportant because The new Ford Motor Company's Supply Chain Management allowed forgreater profits and more flexibility for the company to devise strategies necessary for reaching itsdesired outputs Furthermore, another perk of the supply park was that "suppliers are linkedtogether more productively - becoming an integral extension of the plant, responding in broadcastand building in sequence" Again, it came down to the fact that control and efficiency aremaximized as Ford was working with its suppliers to build the best possible automobile for itsconsumers

2.2.2 How Ford motor managed risk after applying new supply chain management

These new improvements, however, did not come without risks and costs that Ford must plan forand solve Risks and Solutions Associated with Supply Chain Management of The new supplierpark definitely make operations smoother as "disruptions can reduce your company's revenue, cutinto your market share, inflate your costs, send you over budget, and threaten production anddistribution."

While it is extremely hard to plan for natural or organized disasters, Ford could identify potentialproblems that could interrupt their supply chain and take appropriate precautions to prevent themfrom doing harm to their business Ford realized that it must outsource its supplies to focus more

of its attention on building the best quality automobile for its consumers Ford attempted to

safeguard against the temporary unavailability of raw materials by stockpiling inventories atcomfortable levels at The Ford Motor Company's Supply Chain Management supplier parks Bybringing suppliers closer to their operations, they are able to eliminate potential holdups fromsuppliers With the Ford supply park, Ford embraced just-in-time inventory and other leanmanufacturing techniques that emphasize speed and cost reduction.

With this new supply chain management strategy, Ford had begun to outsource non-coreactivities so they can concentrate on doing a better job in those areas where they sawopportunities to build real competitive advantages Ford was the first auto manufacturer to bring asupply park to North America and by doing so had attempted to separate itself from thecompetition By reducing suppliers and bringing them into closer proximity to its operations,Ford was looking for more efficiency by managing a fewer number of vendors Ford was lookingfor immediate savings by reducing its supply system The auto manufacturer had reduced theirsuppliers down to a more manageable number By reducing the number of suppliers cost is saved,

as well, and communication becomes clearer as the number of companies Ford must deal with isreduced

Ford was trying its hardest to drastically cut costs and was succeeding However, it was at theprice of downsizing and trimming suppliers to manageable numbers that result in a stronger, moreintegrated workforce Regulation of Quality Regulations and management helped an organizationsucceed but without quality control regulations and proper strategies to avoid mishaps, the companywill not profit socially or economically By learning from previous experiences, Ford was able toforesee and adjust for any future problems that may arise Ford improved upon them in thepresent to avoid potential pitfalls that may occur from negligent training, improper quality of poorsupply chain management Particularly within the supply chain management sector, the ability tolearn from previous information was crucial especially when Ford deals with as many suppliers as

it always did The ability to purchase and strategically maneuver the proper supplies to the rightfactory was the lifeblood of Ford Internally at Ford, a new position was created, the Director ofSupply Chain Sustainability reports directly to the Senior Vice President of Global Purchasing.This signals the intention to make sustainability considerations, including working conditions, anintegral part of our purchasing processes and strategy

Dealing with unsuitable materials was just as important as internal quality control is the externalcontrol of products Ford depended on outside products to make its cars and trucks and if they