Dec 5 2014
“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.”
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?