Creating a Sustainable Supply Chain: Strong Relationships, Shared Commitment, and Capacity Building

The automotive supply chain is one of the most complicated of any industry. Automakers like us rely on thousands of suppliers to provide the materials, parts and services to make our final products. (See Supply Chain Profile.) Many suppliers serve numerous automakers. And each of those suppliers, in turn, has multiple suppliers. There are often six to 10 levels of suppliers between an automaker and the source of raw materials that eventually enter the manufacturing process. The breadth, depth and interconnectedness of the automotive supply chain make it challenging to effectively manage business and sustainability issues.

Ford and its suppliers must work jointly to deliver great products, have a strong business and make a better future. In today’s economic environment, achieving lower costs, improving quality and meeting sustainability goals require an unprecedented level of cooperation with suppliers and strong supplier relationships.

Our efforts to manage supply chain sustainability issues are based on building strong relationships with suppliers, developing a shared commitment to sustainability throughout our supply chain, and helping our suppliers build the capacity needed to manage sustainability issues internally and throughout their supply chain.

Building Strong Supplier Relationships

Building strong relationships with suppliers is central to our ability to create a sustainable supply chain. Without strong supplier relationships, we lessen our ability to encourage and influence the sustainability goals and management processes of our suppliers. We believe that strong relationships with our suppliers must be based on open communication, clear expectations and consistent requirements and processes. We work to maintain strong relationships with our suppliers by:

• Deploying a single, global product-creation process that combines aggressive execution of product plans with minimal variances
• Enhancing process stability, commonality and reusability
• Improving communication by providing real-time performance data to the supply base
• Providing suppliers with greater access to senior Ford managers in small-group settings
• Establishing organizational stability models in manufacturing, product development and purchasing
• Improving order fulfillment
• Engaging the supply base in discussions about process stability, incoming quality and corporate responsibility, and involving suppliers in coalitions to create awareness of industry issues

Building Shared Commitment and Capacity to Manage Sustainability Throughout Our Supply Chain

It is equally important that our suppliers share our commitment to environmental and social responsibility. Shared commitment improves the flow and quality of information critical to continuity of supply and compliance with regulations. It also helps to ensure efficiency and quality throughout the supply chain. Shared commitment helps us avoid risks to our operations and reputation that can arise due to substandard practices in our supply chain.

We encourage our suppliers to manage sustainability issues and risks within their own operations and supply chains. We are also committed to providing suppliers with a range of support and assistance to develop their capacity to manage sustainability issues, based on our experience in this area. We have developed in-depth resource guides and coordinated presentations by subject matter experts to give suppliers information and background on human rights and greenhouse gas emissions estimation. We have provided tools such as worksheets for emissions tracking and reporting and code of conduct development. We are also sharing the training materials we have developed, as well as information and guidance on our compliance and training processes. Finally, we have committed to working with suppliers to help resolve issues and concerns.

Many of Ford’s Tier 1 suppliers are major multinational companies that already have the capacity to implement and manage sustainability initiatives for their own operations and their own supply chains. We encourage all of our suppliers to develop their own systems for managing sustainability throughout their supply chain. Ford’s ability to assess and influence the sustainability performance of our supply chain decreases the further removed suppliers are from us in our supply chain. For example, we have less ability to influence and assess our Tier 1 supplier’s third- and fourth-tier suppliers. As a result, we work hard to align our Tier 1 suppliers to our sustainability goals and rely on them to help us maintain a clear and consistent message as far up our supply chain as possible. Our Aligned Business Framework program, described below, is the primary way we work with Tier 1 suppliers to help them develop the capacity to manage their own supply chain sustainability issues.

Creating a Sustainable Supply Chain through Our Aligned Business Framework

In 2005, we introduced an Aligned Business Framework (ABF) with our strategic suppliers to increase mutual profitability, improve quality and drive innovation, and to help us encourage shared commitment to sustainability goals.

We sign bilateral agreements with our ABF suppliers that comprehensively and formally spell out business commitments. One element of the ABF agreement is the commitment by suppliers to manage and assure proper working conditions and responsible environmental management in their facilities and in their supply chain. (ABF suppliers must also adhere to our Global Terms and Conditions.) This commitment is important for several reasons. Beyond the simple fact that it is the right thing to do, there are specific business benefits to Ford and suppliers in reducing the risk of operational or reputational issues that could affect production. The commitment also provides an opportunity for joint action by Ford and its suppliers to ensure responsible behavior throughout the automotive supply chain.

The Ford Supply Chain Sustainability staff have implemented a robust process of review at each of the three phases, or milestones, thus ensuring that suppliers meet our expectations. We are making good progress in this developmental work with our ABF suppliers. Twenty-four percent of our strategic suppliers have met all three Ford milestones – that is, they have codes of conduct in place that are aligned with international standards and supported by robust management systems governing their own operations and their supply chain. The intent is for our ABF suppliers to wholly own responsibility for sustainability expectations and performance in their supply chain. As of 2011, ABF suppliers still participate in our factory-level Working Conditions Program if requested by Ford, but over time, we expect the need for their participation to decline.

Through our work with ABF suppliers to date, we have found key success factors that have enabled companies to make notable progress, including: (1) the identification of executive decision makers to coordinate cross-functional efforts; (2) the support of executive management and/or the Board of Directors; and (3) facilitation by Ford of discussions and implementation support through individual or regional in-person meetings. In general, companies that have been able to make progress in aligning with these ABF expectations have been those that may already have aligned values, but had not necessarily institutionalized those values through comprehensive policies and programs. Many of these companies approach responsible working conditions and environmental management in a systemic manner with implementation and supporting management systems in mind.

The extension of working conditions and environmental expectations to the ABF companies’ own supply base has proven to be the biggest challenge, given resource constraints and general lack of expertise and knowledge of the issues. The creation of tools and guidance by workgroups at the AIAG, and by the United Nations Global Compact, have been useful to our ABF suppliers in their development of sustainable supply chain systems.

During the first quarter of 2012, we held our annual production ABF supplier sustainability meeting in Southeast Michigan. The meeting included sessions on the value of collaboration in pursuing supply chain sustainability, updates on the Ford and AIAG supply chain greenhouse gas management initiatives, and an overview of emerging expectations regarding regulatory requirements and industry activity related to conflict minerals and supply chain transparency.

Ford is making strides in improving its working relationships with suppliers on a global basis. We are particularly excited about our sustainability work with our ABF suppliers, as it leverages our efforts to manage human rights and environmental responsibility issues in our supply chain in a more collaborative, in-depth, integrated and aligned manner. In our view, it will help embed ownership for social and environmental issues throughout our value chain, and lead to the development of more robust sustainable management systems across the automotive supply chain.