Ford Motor Company’s Finished Vehicle Distribution System April 2001

1. Ford Motor Company’s Finished Vehicle Distribution System April 2001 Ellen Ewing Project Director UPS Logistics Dr. John Vande Vate Exec. Director EMIL ISyE Georgia Tech

2. Objectives/Motivation • Importance of Pipeline Inventory • Pipeline Inventory and Network Design • Inventory at Cross Docks • Financial impact

3. The Need for Speed Financial Incentives: Capital Utilization • In 1996 • Ford produced 3.9 million vehicles in the US • Avg. transit time 15+ days • Avg. vehicle revenue $18,000 • Value of pipeline inventory: > $2.8 Billion • One day reduced transit time: • $190 Million reduction in pipeline inv. • 1,400 fewer railcars

4. The Need for Speed • Demand for land • 22 Plants • 54 Destination Ramps • ~1,200 Load lanes • ~8,400 vehicles waiting at plants • $166 Million in inventory

5. The Need for Speed • Other Incentives • Damage • Flexibility • Others?

6. Before 1996

8. The Price • Inventory at the cross dock • Added distance traveled • Handling at the cross dock • Capital costs of the cross dock

9. Mixing Centers

10. 1999 Vehicle Network Delivery Conditions • Record production levels • Demand shift from cars to trucks • Overburdened rail infrastructure • Deteriorating rail service • Shortage of transport capacity • Mixing centers • 15+ day transit time • High inventory cost • Dissatisfied customers

11. High 1999 Level Statistics • Assembly plants 22 • Mixing centers 5 • Destination rail ramps 54 • Dealer locations 6,000 • Production volume 4.4 Mil./Year • Freight expense $1.5 Bil. • Dec. ‘99 avg. transit time 16.8 Days • Pipeline Inventory $4.1 Bil.

12. Ford Goals • Speed • 1999: Average 15 days transit time • Goal: Maximum of 8 days transit time • Precision • 1998/1999: 37% on time within 1 week • Goal: 95% on time within 1 day • Visibility • 100 % Internet vehicle tracking from plant release to dealer delivery • Guide the flow of vehicles • Respond to variations • Inform customers

13. Design Process • Truck vs Rail delivery • Allocate Dealers (FIPS) • to Ramps • Route Flows through • Rail Network

14. Ford Locations Plant Mixing Center Origin Ramp Dest. Ramp MC Ramp

15. Old Ramp AllocationSouthern US Dealers sourced bymultiple ramps

16. New Ramp AllocationSouthern US Dealers sourced by single ramps

17. New Allocation of Dealers to RampsMainland US

18. Flows through the Rail Network • Objective is NOT Freight cost!

19. The Objective IS • Speed • Capital • Land

20. The Promise • Speed • Unit trains bypass hump yards

21. Laurel, Montana Orilla, Washington The Promise • Capital & Land Time

22. The Promise • Capital & Land • 22 Plants • 54 Destination Ramps • ~1,200 Load lanes • ~8,400 vehicles waiting at plants • $166 Million in inventory • Each Plant to One Mixing Center • ~22 Load lanes • ~154 vehicles waiting at plants • ~$3 Million in inventory

23. The Price • Inventory at the cross dock • Handling at the cross dock • Capital costs of the cross dock • Added distance traveled

24. Making the Trade-offs • Measuring Inventory In the rail network At the plants and Cross Docks • Load-driven system Railcars depart when full • Relationship between • Network Design and Inventory

25. Laurel, Montana Orilla, Washington Inventory at the Plants • Half a rail car full for each destination Time

26. Laurel, Montana Orilla, Washington Inventory at the Mixing Centers • Half a rail car full for each destination Assumes we can call up an empty rail car and dispatch it whenever we have a full load lane Time

27. Mira L. Orilla Laurel Benicia Denver Workload at the Mixing Centers • Unpredictable • Rail car holds 5 vehicles We’ll have to load 5 rail cars! Outbound volumes vary widely from day to day Orilla Benicia Mira Loma Laurel Denver

28. Mira L. Orilla Laurel Benicia Denver Workload at the Mixing Centers Load lanes can over fill … more than enough for a rail car. Inventory Impact? • Balanced: Only load cars you empty • Rail car holds 5 vehicles Orilla Benicia Mira Loma Laurel Denver Orilla

29. Effect on Inventory • Inventory at Mixing Center slowly grows to (ramps -1)(capacity -1) and remains there • Roughly twice the inventory of before • Still depends on the number of ramps the cross dock serves

30. Why (ramps –1)(capacity – 1)? • The pigeon-hole principle: • Suppose we have • (ramps –1)(capacity – 1) • = (ramps –1)*capacity – (ramps –1) vehicles in the mixing center. • A new rail car arrives with capacity more • Now we have • ramps * capacity – (ramps – 1) • = ramps*(capacity –1) + 1 But the most we accommodate without filling a load lane is ramps * (capacity – 1) Some load lane must have capacity vehicles in it.

31. Consolidation for Speed • Unit Trains of 15-20 rail cars don’t stop at mixing yards • Trade moving inventory for stationary inventory

32. Model • Variables • Flows on Routes • Binary Indicators • Constraints • Meet Demand • Enforce Logic • Objective • Transportation Cost + Pipeline Inventory + Waiting Inventory

33. Variables: Routes How many vehicles we send from Atlanta to Orilla via Kentucky and KC (may even distinguish modes, block train, single rail car) St Paul Canada Michigan Edison Chicago Ohio Costs: The transportation and pipeline inventory costs St Louis Norfolk Kentucky Kansas City Atlanta There can be very many! Mixing Center Origin Plant Groupings Destination Ramp Planned Ramp Closure

34. Variables: Binary Indicators Did we use ANY route that included this leg? Yes or No? St Paul Canada Michigan Edison Chicago Ohio St Louis Norfolk Kentucky Kansas City Atlanta Costs: Inventory costs at the origin. Either half the capacity of the mode (for min. inv. ops) or the full capacity of the mode (for balanced ops) Mixing Center Origin Plant Groupings Destination Ramp Planned Ramp Closure

35. Constraints • Satisfy Demand: The sum of flows on all routes between a plant and a ramp must meet demand • Observe Logic: Did any route use a given leg?

36. Satisfy Demand Total flow on these routes must meet the demand in Orilla for vehicles made in Atlanta. St Paul Canada Michigan Edison Chicago Ohio St Louis Norfolk Kentucky Kansas City Atlanta Mixing Center Origin Plant Groupings Destination Ramp Planned Ramp Closure

37. Observe Logic Total flow on these routes from Atlanta to Orilla that go from KC to Orilla must not exceed BINARY VARIABLE for this leg * Demand in Orilla for vehicles from Atlanta St Paul Canada Michigan Edison Chicago Ohio St Louis Norfolk Kentucky Kansas City Atlanta Mixing Center Origin Plant Groupings Destination Ramp Planned Ramp Closure

38. Model • Large Model • Lots of Variables: Many Routes • Lots of Constraints: Observe Logic • Bad news: The LP takes a while to solve • Good news: The LP nearly always gives an integral solution.

39. New Rail Lanes Reduced plant destinations

40. Final Outbound Rail Network with Carriers St Paul Canada Edison Michigan Chicago Ohio St Louis Norfolk Kentucky Kansas City Atlanta Mixing Centers Destination Ramps Union Pacific CSXT FEC BNSF Canadian Pacific Car Haul to Ramp Norfolk Southern Canadian National

41. Results • Cut vehicle transit time by 26% or 4 days • $1 billion savings in vehicle inventory • $125 million savings in inventory carrying costs • Avoid bottlenecks • Reduce assets in supply chain • Improved inventory turns at dealer

42. For Ford Ford reports record earnings of $7.2 billion in 1999 Ford Motor Company Closing Share Price 2000 - 2001 Ford sets all-time monthly U.S. sales record Firestone recalls tires after roll-over deaths Cut 5 days out of total inventories freeing $1.8 billion in capital Jacques Nasser appears before a Senate on Firestone tire recall Standard & Poor's cut debt ratings to junk status Jac Nasser retires as CEO of Ford Motor Company Ford Motor Company and UPS Logistics Group form Autogistics Cut 26% off vehicle delivery times releasing $1 billion from inventories