Ford Motor Co. is shifting the cost of tooling at its Cologne, Germany, assembly operation through a ``pay on production'' model that frees up the automaker's finances and forces suppliers to take on more upfront costs.
Suppliers will pay for and own tooling and other equipment that Ford normally would have bought in the past. Ford then will repay the cost through production, with payments credited as each car rolls off the line. That reduction in machinery costs will help finance Ford's $500 million improvement at Cologne and $60 million worth of infrastructure to create a supplier park at the site, which will produce the new Fiesta.
``This close partnership represents the first application of this new form of risk sharing in the automotive industry,'' the company stated in a July 4 news release.
Suppliers, meanwhile, must recalculate their costs and payment price based on the purchases that Ford would have assumed previously.
``Obviously, it affects [suppliers'] margins,'' said auto consultant Karl Ludvigsen, founder of London-based Ludvigsen Associates Ltd. ``The supplier has to see the way of earning back the investment. That's going to affect the piece cost of the price. [Ford is] asking the supplier to be the bank, in a way.
``I don't think [suppliers will] be jumping to sign up for this. It's a carrot-and-stick approach that seems more stick than carrot to me.''
One potential advantage to parts suppliers, however, is that the plan will marry them with the automaker in a longer-term contract.
Carmakers typically pay for tooling and other equipment so they can ship the work to another manufacturer if there are problems getting quality parts on time. If the supplier owns the tool, Ford cannot re-source that work as easily.
``Clearly, their concern about cost and cash flow is higher than their concerns about the predictability of the supply of parts,'' said Mike Flynn of the Office for the Study of Automotive Transportation at the University of Michigan in Ann Arbor, Mich.
While this payment model is limited to one German operation for now, analysts expect it to spread to other sites and other companies.
``Is this saying this system is coming? Yes, it's coming,'' Flynn said. ``My guess is you'll see more of it than less in the future.''
Changes at the Cologne plant are designed to reduce overall manufacturing costs for the Fiesta.
``After its renovation, the Ford plant in Cologne will be one of the most modern automotive production facilities in Europe,'' said David Thursfield, president and chief executive officer of Ford of Europe. ``We will also be the leader in flexibility, enabling us to respond quickly to customer needs.''
Daily capacity at the plant will increase to 1,800 vehicles per day from the current rate of 555.
Europe's auto industry has bucked the tradition of tooling ownership in the past but only on a case-by-case basis, Ludvigsen said. The Cologne operation will be a wider shift in that scale.
Not every parts supplier has the financial capacity to take part in the pay-on-production concept, but those that do may benefit in the long term through their stronger ties to the automaker, said consultant Jeff Mengel, a partner with Plante & Moran LLP of Auburn Hills, Mich.
The 11 module producers in the new supplier park will be wedded to Ford - through good and bad.
``What Ford's doing here is that they've made the supplier relationship a longer-term approach,'' Mengel said. ``They're saying that it's not just a mix-and-match of components with everyone out there.''
The automaker is less likely to seek out a new supplier if the producer of a door panel, for instance, owns all the machinery and tools needed to make that system.
``Given that, they can't be as ruthless as they might have been in the past,'' he said. ``They can't just low-ball a bid and go to the guy down the street.''
