When Finance Runs the Factory | William Levinson | Industry Week

“Henry Ford achieved world-class results with three key performance indicators (KPIs), none of which were financial. His successors’ changeover to financial metrics, on the other hand, caused the company to forget what we now call the Toyota production system.”

Source: www.industryweek.com

Michel Baudin‘s comments:

Yes, giving power over manufacturing companies to accountants, as American industry massively did in the 1950s yielded disastrous results. The summary given in this article’s lead paragraph, however, does not match the historical record from other sources.

First, Ford did not “forget what we now call the Toyota production system.” Instead, Ford’s people developed in the 1910s a system later called “mass production,” that was the best of its day and was copied worldwide in many industries. But anyone who seriously studies mass production and the Toyota Production System (TPS) can tell the difference.

Second, Ford lost its position as the world’s largest car maker long before accountants were put in charge. It was taken over in the 1920s by GM, not decades later by Toyota, while still led by Henry Ford. Historians blame this loss of competitive position on his dictatorial approach and on his failure to put in place the kind of management systems Alfred P. Sloan did at GM. Blaming the Whiz Kids of the 1950s is a misleading shortcut.

Third, the article seems confused about accounting. By definition, everything you own is an asset, whether desirable or not. In fact, when you produce as much as before with less inventory, you boost your return on assets by reducing assets.

Allocating overhead to products based on labor is simply a legacy of an era in which manufacturing was primarily manual and information technology was a paper ledger. It makes no sense today, and accountants trained in the last 50 years know it. But many large companies still have systems in place that keep doing it.

It is simply wrong economic thinking, and so is making decisions based on “unit costs” when you not making individual units but a flow of, say, 30,000 units/month. What really matters is the flow of revenue from this flow of goods, and what you have to spend to sustain it. And a flow may not just be of one product but of a family that includes free samples, entry-level, premium, and luxury versions.

All you can legitimately do with a unit cost is multiply it back by the size of your flow. Otherwise, looking at unit costs leads you to think of your product as you do of a carton of milk you buy at the supermarket, and to believe that its unit cost is money you will not spend if you don’t make it. This king of thinking what leads you to outsource production to the latest cheap labor country and starts companies down death spirals.

Fourth, time, energy, and materials are not Key Performance Indicators (KPIs) but dimensions of performance. Order-fulfillment lead time, inventory dwell time, kilowatt-hours of electricity, percentage of materials recycled as scrap… are performance indicator. Going from identifying a dimension to having a good metric for it is not a simple step.

Wasted time, energy and materials are clearly important, but are those all the dimensions that need to be considered? What about equipment and facilities, for example?

See on Scoop.itlean manufacturing

3 comments on “When Finance Runs the Factory | William Levinson | Industry Week

  1. North American and many European business have been devastated by wrong headed accounting, but they are also being killed by finance majors that spend their days worrying about what the stock market wants from them. GM killed itself by playing to shareholders interest more than anything else. Their claim of excess capacity that resulted in closing plants was in fact nothing more than poor utilization of their capacity. It was just quicker and easier to layoff workers than actually develop products consumers’ wanted and improve the processes in their plants.

    It has always been the case that every major economic collapse was in fact created by poor accounting practices and the financial industry chasing after a quick buck. How western companies perform is entirely dependent upon the demands of their shareholders. And if the majority of shareholders want short-term gains executives will supply them and finance majors and accountants will run those companies. Only companies with stable long-term minded ownership ever actually hire the type of executives that deliver long-term success and growth and create the culture of continuous improvement. And I find it surprising, but those types of long-term minded executive often work for far less than the greed driven quick buck artists.

  2. Actually, Ford did invent most of what we now call the Toyota production system, and Taiichi Ohno even credited Ford for most of the system. My Life and Work (1922) describes Just In Time manufacturing, and its advantages, very explicitly.

    “We have found in buying materials that it is not worth while to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time. If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials. With bad transportation one has to carry larger stocks.”

    Ford also recognized (as Eli Goldratt did decades later) that cycle time and inventory are driven by variation in processing and material transfer times: ” With bad transportation one has to carry larger stocks.” On the other hand, with perfect transportation (no variation), no safety stock whatsoever would be needed.

    It also turns out that workers at the River Rouge plant were empowered to stop the line in the event of trouble–a practice for which Toyota is best known.

    Per Norman Bodek, “I was first introduced to the concepts of just-in-time (JIT) and the Toyota production system in 1980. Subsequently I had the opportunity to witness its actual application at Toyota on one of our numerous Japanese study missions. There I met Mr. Taiichi Ohno, the system’s creator. When bombarded with questions from our group on what inspired his thinking, he just laughed and said he learned it all from Henry Ford’s book ” (Introduction to Today and Tomorrow, Productivity Press edition)

    • Just because the Toyota people learned from Ford, Germany’s DKW and Junkers, and other sources does not mean that “most of what we now call the Toyota Production System” was present at Ford in the 1920s. The bulk of Toyota’s learning from abroad took place before 1955. It means that none of the developments of the past 60 years are borrowed from abroad.

      GM’s Alfred P. Sloan was as aware as Ford of the evils of inventory, and spoke about it in speeches to suppliers in the 1920s. Being aware of a problem is one thing; solving it, another.

      For Taiichi Ohno to credit Ford in front of Americans was courtesy. He was humoring his visitors. He was allowing them to save face. We should not read more into it.

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