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 In
the autumn of 1920, Henry Ford was in trouble. He owed money to
Eastern bankers, sales were plummeting and Ford Motor Company was
losing twenty dollars on each car produced.
This crisis inspired a
key element of Lean Manufacturing, paid off the debt and enabled
Ford to survive the recession.
Background
By 1919 the Model T Ford was
phenomenally successful and held 40% of the domestic market. Combined with the moving assembly line and
other Ford production methods, it enabled Ford Motor Company to reap
huge profits. Henry Ford cared little for personal wealth and
reinvested most of the company's profits. He had spent $60 million
dollars at River Rouge and at least $15 million for coal and iron
mines. The company also had built plants and facilities throughout
the country.
While Henry Ford held a controlling interest
in Ford Motor, there were other shareholders who thought
profits should be distributed. The Dodge Brothers, in particular,
wanted dividends to start their own automobile company and had sued
Ford and The Ford Motor Company. The dispute was bitter and the
ethical behavior of all parties was questionable at best.
The final
result was Ford's buyout of other shareholders in 1919 for about $20
million, most of which he borrowed from Eastern bankers.
The Recession of 1920-1921
Ford Motor Company entered the recession
of 1920-1921 with considerable debt and when sales dropped
precipitously a crises ensued. Robert Lacey describes the recession as follows:
It was not difficult to sell cars in
America in the months that followed the First World War, since
automobile production had been cut back severely as the
manufacturers had turned their factories over to war production.
With peace, the national waiting list for new cars soon came to
number in the hundreds of thousands. As a a general economic boom
intensified this demand, Detroit discovered how pleasant life can be
when America has money to spend.
But the boom ran out abruptly in the
summer of 1920. Worried by inflation, the federal government cut its
budget, pulling $6 billion out of the economy. Suddenly the Motor
City discovered the down side. For it is amazing, when times get
hard, how easy it becomes to live with the rust and rattles of the
automobile that you had once been intent on trading in. Forgoing the
new car is the most obvious economy to make in a time of recession,
and recession gripped America. In the autumn of 1920, the cyclical nature of the car business was
revealed for the first time: scaling the heights in time of
prosperity, but almost at a standstill when the economy slowed.
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Ford Responds
A crisis always seemed to galvanize
Henry Ford and bring out the stubbornness and imagination in him. He
had steered through several such crises in the past.
Ford's first reaction was to cut
prices with the largest reduction in automotive history (It had
worked before). But,
dominant as Ford Motor Company was, it could not stave off a
national recession alone. Sales plummeted again and the situation
looked increasingly desperate. Henry Ford even organized a gigantic
rummage sale that included desks, cabinets and pencil sharpeners. The general opinion was that
Ford
would lose control of his company to the bankers. This was especially galling to Ford
who had a low opinion of bankers in general and East coast bankers
in particular. Now, he owed them $60 million and bankruptcy seemed
imminent.
 Ernest
Kanzler had run the Fordson tractor operations during the Great War.
He had been highly successful at reducing inventory and freeing up
plant space by scheduling deliveries and shipments exactly when
needed. In 1919, Ford brought Kanzler to the
Highland Park plant to do the same. Kanzler was just
getting started when the recession hit.
When Ford's price reductions failed to
maintain sales volume, Ford and Kanzler realized that the inventory
strategy might just save the day. Highland Park was awash with
inventory and spare parts, perhaps $88 million worth.
Kanzler went
to work and Just-In-Time delivery was born.
By the spring of 1921 Ford had paid all
his debts and the company had a cash surplus of $20 million.
Productivity also improved. Prior to the recession, Highland Park
required about 15 men per car per day. Afterwards, the factory
operated with about 9.0 men per car per day.
This was a 40% reduction in labor cost.
To top it off, Henry Ford was also
in a position to resume his rants about Eastern bankers.
Other aspects of Ford's tactics were
more controversial. Ford dealers were required to pay cash
on delivery so Ford and Kanzler began sending them cars, along with
a huge number of spare parts, whether the dealers had ordered them
or not. Owning a Ford dealership was the next best thing to owning a
gold mine. So the dealers took the cars and the parts and then borrowed
to pay for
them. Their only other choice was to relinquish the franchise.
(As a side note, the author's great grandfather had been a Ford
dealer in Fitzgerald, Georgia at this time. To the end of his life
he never forgave Henry Ford for this ploy.)
Ford's suppliers were also squeezed.
Price reductions were made arbitrarily by Ford and payment was
unilaterally extended from 60 days to 90 days. The suppliers, like
the dealers, had little choice but to go along.
Epilogue
Henry Ford's company survived the crisis
of 1920-1921 and the lessens learned served Ford well for a period
of time. After
world War II, Toyota studied Ford's operations and adopted many
Ford methods. While Toyota saw the wisdom of
Just-In-Time delivery, they also know that taking advantage of
dealers and suppliers would have negative long-term consequences.
Hence, they adapted just-in-time methods but coupled them with
assistance and a true partnership relationship.
Ford Motor Company has weather several
additional crises, in the years since 1921, most notably the
introduction of Model A, the death of Edsel Ford and resurrection
by Henry Ford II. It has been a remarkably resilient company. It
remains to be seen whether Ford will survive the current 2008
crisis.
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