The concept, which involves suppliers of manufacturing equipment, could spread to Ford operations worldwide, company sources say.
Ford is using the next-generation Fiesta program in Cologne as a pilot for the concept.
German manufacturing equipment supplier Eisenmann will be paid for each Fiesta built on assembly lines it is installing at Cologne. Eisenmann makes assembly line and conveyor equipment. The contract is the first time Ford has used pay-on-production in the final assembly hall.
"Once we have had some experience with the concept, we will assess the lessons learned and how we should enlarge it," a Ford executive said.
Ford has scheduled a global review of pay-on-production for mid-2002, the executive said.
But the Dagenham engine plant may have pay-on-production contracts signed before the 2002 review. Bruce Swift, Ford of Europe vice president of purchasing, said Ford is studying ways to apply pay-on-production at the factory.
"The characteristics of powertrain parts are very different to vehicle parts," Swift said. "We think the solutions may be different. We will start making decisions early next year."
Both sides gainThe Dagenham plant will use a mix of machining centers and transfer lines to create flexible production capable of handling V-6 and V-8 engines. Insiders say Ford already has selected the company that will supply machinery for the engine blocks on a pay-on-production basis.
The supplier carries the burden of financing and could lose revenue if sales fail to meet Ford projections. These risks traditionally are assumed by automakers. But the incentive for a supplier is that it will get all of Ford's engine block business, one Ford source said.
Swift said pay-on-production is a new model for cultivating relationships with suppliers.
"You're leasing the equipment from these guys rather than owning it yourself," Swift said. "They will maintain the equipment."
Swift believes both sides gain. "The benefit for suppliers is they'll continue to have a relationship with Ford," he said. "The benefit for Ford is when we do the next major model change, the investment should be extremely small." Pay-on-production gives suppliers an investment in equipment performance, Swift said.
"They have the expertise with the equipment," he said. "We have better uptime, and the equipment will function at much better rate."
But not all equipment suppliers are enthusiastic about pay-on-production contracts. One German machine tool company consulted for the Dagenham project has flatly refused to negotiate.
"(Ford CEO) Jac Nasser's ideas on pay-on-production contracts are quite disgraceful," an executive for the supplier said. He identified two main supplier concerns: who is responsible for machinery breakdown and the accuracy of Ford's marketing forecasts. Both can affect a supplier's costs and revenue.
But Harry Miller, technical director at German machine tool maker Cross Huller, said suppliers have to change with the times. If a pay-on-production contract is what the customer wants, he said, then the supplier must deliver.
"It is a very sensitive area, and we do not do it lightly," he said.
Cross Huller has discussed alternative types of supply contracts with Ford and other car companies. No agreements have been made.
Jury out on new approachOther car manufacturers are looking at Ford's new approach to capital equipment with curiosity.
"It is an interesting approach, but we do not have anything like it at present," said Jochem Heizmann, Audi AG's board member for production.
He said Audi is looking at small areas where pay-on-production maintenance contracts could be used, such as the paint color mixing room.
"We are investigating it and comparing the cost and quality factors," Heizmann said.
But Karl-Guenter Buesching, Skoda Auto's manufacturing and logistics boss, is more skeptical.
"It is not the way we will go," he said. "As a producer of cars, we believe that there are critical operations that we should do ourselves in-house, using our own equipment that we maintain and keep control of internally."
Pay-on-production contracts have operated since the mid-1990s for tasks such as paint shop management. German supplier BASF Coatings, for example, manages five Volkswagen paint shops worldwide on a pay-on-production basis.
As a system supplier, BASF takes charge of the material supply, the paint process, its quality and logistics. Payment is per car produced rather than per kilogram of paint consumed. Both BASF and VW save money as a result, said Klaus Wittemann, head of the VW global account management at BASF.
"At the Mosel (Germany) plant, we have reduced the per-unit cost by more than $13, a savings that is shared 50-50 with VW," Wittemann said. "Each year, the savings we make on the previous year are shared between us."
Volkswagen will introduce the system in its plants worldwide.
BASF also operates similar practices for DaimlerChrysler at its Rastatt, Germany, and Graz, Austria, plants.
Automotive News Europe Staff Reporter Bradford Wernle contributed to this report