In 1982 between Eiji Toyoda, then head of Toyota Motor Corporation, and Philip Caldwell, then head of the Ford Motor Company, had a meeting. Toyota was, at that time, emerging as the lowest-cost producer of the highest quality automobiles in the world. Ford and the rest of the Big Three were bogged down by rapidly declining market shares, ever-increasing levels of customer dissatisfaction with the quality of their vehicles, and huge financial losses.DDMRP House.jpg

 

Caldwell was visiting Toyota in Japan, supposedly seeking new ideas. During Caldwell's visit, Mr. Toyoda, toasted Mr. Caldwell (or, so the story goes) by saying, "There is no secret to how we learned to do what we do, Mr. Caldwell. We learned it at the Rouge." [1]

 

Henry Ford had built the River Rouge plant, but…

Henry Ford had built the River Rouge plant, and it was stunning in its size, scope and capabilities.

 

“Construction [at the River Rouge plant] began in 1918, portions of the plant began operating in early 1920, and by November the River Rouge assembly line was rolling out 800 cars per day. The Rouge plant became the next of Henry Ford's marvels as it produced finished cars as well as millions of parts to be shipped to the company's network of branch assembly plants.” [2]

 

Yes, Henry Ford’s vision built the plant, but what Kaiichi and Eiji Toyoda saw at River Rouge was an entirely different vision from what Henry Ford and his theory of scientific management led Ford’s executives and managers to see.

 

The differences in what these two groups of managers saw—when looking at exactly the same things--resulted in huge differences in results over the life of the two companies (e.g., Ford Motor Company and Toyota).

 

“Toyota by the early 1980s was using stunningly simple means to successfully produce a diverse array of vehicles at mass-production costs, while maintaining the highest quality and earning gratifying profits. Meanwhile, Chrysler, General Motors, and Ford, from the 1950s to the 1980s produced an increasing variety of vehicles by using complicated means, generated products of variable quality, and often suffered disappointing financial results.” [3]

 

Efficiency versus Flow

Henry Ford’s vision for improving efficiencies led the need for larger inventories and the facilities to store the inventories, and the capital equipment to move and move again the inventories from place to place. Ford’s management system demanded more middle management in the form of controllers and schedulers in order to coordinate the movement of materials between stages and from inventory through to finished goods.

 

In theory, over long periods of time, output from all the separate operations were expected, in Ford’s mind, to “balance out” with customer demand. But, instead, it resulted all too frequently in building inventories, scrapping excess output, and spending more and more on advertising and sales promotions—and, finally, reducing prices to liquidate excess stocks of cars. Defect rates went undetected for years as there was almost always enough “good stock” to keep things moving.

 

In the end, as worldwide production capacities grew beyond market demand, profits tumbled. This was the end result of an empire built on a vision of improving “efficiencies.”

 

On the other hand, Kaiichi and Eiji Toyoda saw something completely different in Henry Ford’s operations at River Rouge during their visits in 1929 and 1950. They had a vision of flow.

 

Producing variety in a continuous flow

“[W]hat Toyota had perceived about operations at the Rouge was very different [from] what Caldwell and his Ford colleagues or their counterparts in the other Big Three auto companies had seen. [The Toyota managers] seemed to perceive a holistic pattern permeating every minute particular of the system. On one level, the pattern that caught Toyota's attention was the overall continuous flow of work in the Rouge as a whole. But at a much deeper level, they observed that work flowed continuously through each part of the system—literally through each individual workstation—at the same rate, the rate that finished units flow off the line.

 

“It is not difficult to see that this pattern has the potential to produce the superior costs, quality, and flexibility for which Toyota became so famous by the 1980s. If every step in the continuous flow works at the same rate, then at any moment each step consumes only the resources required to advance on customer's order one step closer to completion....

 

“Indeed, to Toyota's people, Henry Ford's River Rouge system achieved low costs because balancing every step in a continuous flow conserves resources.... Moreover, Toyota people perceived that if each work could design and control the steps he or she performed, then workers could perform different steps on each unit that passed by them in every time interval. Thus, variety could be achieved at no greater cost than if all units were identical.

 

“Toyota people saw low cost at the Rouge as a property of the system that emerged spontaneously from the relationships among the parts--the individual workers and the steps they performed to meet customers' needs--and the pattern that was implicit in those relationships. Low cost was not forced by manipulating the speed at which individual workers performed their tasks. It was achieved by nurturing in each work station the conditions that maintained a balanced flow overall--the pattern that defined the whole system. Thus, perceiving the key feature of Henry Ford's system to be its ability to pace every step of the work at the same rate that finished units flowed off the line convinced Toyota executives after World War II that variety had to be achieved in the context of continuous flow if it was to be achieved at the lowest possible cost and highest quality....” [4]

 

Ironic paradox

It is, indeed, an ironic paradox that Ford Motor Company put all its eggs in the “efficiency” basket, and ended up getting neither real efficiency nor profits, in the long run.

 

On the other hand, Toyota put all its eggs in the “continuous flow” basket and ended up getting both flow and efficiency in producing long-term profits. That’s what really counts, is it not?

 

The same thing is true today in thousands—even tens of thousands—of supply chains serving the small to midsized business enterprises with which we come in contact: they struggle valiantly for “efficiencies” and find profits elusive. Perhaps, as we try to tell them, it is time to try something different—like focusing on “flow.” Flow is the natural path to both real efficiencies and better profits.

 

************************************************

 

So, what are you seeking in your supply chain—efficiencies or flow? What are your bottom-line results? How do you feel about it?

 

Please leave comments or questions below. We would be delighted to hear from you.

 

************************************************

NOTES:

[1] "The Rouge" here being a reference to Henry Ford's River Rouge complex near Dearborn, Michigan, which both Kaiichi Toyoda and Eiji Toyoda visited. Kaiichi visited ‘the Rouge’ in 1929 and his nephew, Eiji Toyoda, visited it again in 1950, to study Henry Ford's methods.

[2] http://fordmotorhistory.com/factories/river_rouge/index.php

[3] Johnson, H. Thomas, and Anders Bröms. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. New York: Free, 2000. Print.

[4] Johnson and Bröms, ibid

 

Follow us on Twitter: @RKLeSolutions and @RDCushing
LIKE us on Facebook: RKL eSolutions and GeeWhiz2ROI