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Chapter 1: Lessons from the Rouge
It is clear that the primordial intention of the universe is to produce variety in all things...
-- Thomas Berry He who would do good...must do it in Minute Particulars. General Good is the plea of the scoundrel, hypocrite, and flatterer.
-- William Blake
Managers of business organizations will find as a result of reading this book that they can no longer accept without question the conventional wisdom that says an organization will reach its bottom-line goals best if it drives its employees and suppliers to achieve financial targets in their work. Given this belief, a manager's primary task is to motivate people to reach and exceed quantitative targets defined by financial measures. If you are a manager who takes pride in your ability to cause people to reach quantitative targets, read on. This chapter and the next show that your success actually creates unseen and unnecessary inefficiency and instability. The new management thinking that will help you avoid such inefficiencies and instabilities is then discussed in succeeding chapters, where you learn how to lead your organization to profit beyond measure.
Managers who adopt the new thinking offered here will accept as second nature the idea that what decides an organization's long-term profitability is the way it organizes its work, not how well its members achieve financial targets. This chapter compares the long-term records of Toyota and the American "Big Three" automakers to demonstrate the truth of this proposition. It posits Toyota's principles as an example of new management thinking called "management by means." Managing by means is the antithesis of "managing by results," practices identified in this chapter with Toyota's American competitors. Those who manage by results focus on the bottom-line target and consider that achieving financial goals justifies inherently destructive practices. Those who manage by means consider that a desirable end will emerge naturally as a consequence of nurturing the activities of all employees and suppliers in a humane manner. Managing by means requires a profound change in thinking that is a bold alternative to conventional management thinking and practice.
The alternative to managing by results which this chapter advocates requires disciplined practices, sustained attention to how work is done, and nurturing every step of the work at every moment. Managing by means requires all managers in an organization to focus, as does nature, on minute particulars. Such attention to detail involves encouraging employees to cultivate their creative talents so they may best serve a customer's specific needs. This management behavior manifests the belief, not that the ends justify any means, as conventional twentieth-century management practice holds, but rather that the means are ends in the making. The job of managers who manage by means is to cultivate and nurture conditions that bond company talents and customer needs in a profitable union, not to drive work with destructive financial targets. Instead of a quest for relentless growth of quantitative targets that burns out companies before their time, managing by means, as this book shows, can enable a company to profit beyond measure for generation after generation.
To demonstrate what this change in thinking can mean for companies today, this opening chapter tells how differences in the way people think about work actually caused a significant difference in the long-term economic performance of real companies in recent decades. The story contrasts the consequences of acting on the belief that order must be externally imposed with the consequences of acting on the belief that order self-emerges from within. Specifically, the story tells how certain automobile manufacturers between the end of World War II and the 1980s responded differently to the problem of producing vehicles in varieties at low mass-production costs. One manufacturer is Toyota Motor Corporation of Japan and the others make up the group of American auto makers known collectively as the Big Three -- General Motors, Ford, and Chrysler. The three American companies' practices differed from one another in many respects. But they are grouped here to emphasize similarities in their thinking and in their consequent styles of manufacturing that contrasted markedly with the thinking and manufacturing style found at Toyota from the 1950s to the 1980s -- similarities and contrasts that persist more or less unchanged to the present day.
In the early 1950s Toyota and the American Big Three struggled independently with a problem that confronted virtually all manufacturers following World War II. How could they satisfy customer demand for an increasingly varied range of new products, yet do so at mass-production prices? Replicating mass quantities of one variety of a product -- as if each item had been stamped by the same "cookie cutter" -- was the way many early-twentieth-century manufacturers, including automobile makers, had provided an abundance of material goods at prices average people could afford. Indeed, the auto maker Henry Ford helped pioneer the concept of low-cost repetitive mass production before World War I. He then pushed that concept farther than anyone else before or since in the giant facility he opened in 1919 on the banks of the River Rouge in Dearborn, Michigan.
After World War II, it was obvious that great opportunities lay ahead for companies able to offer customers the widest range of styles and models at the lowest prices. The different ways that Toyota and the American Big Three addressed this opportunity between the 1950s and the 1980s epitomizes the essence of manufacturing history in the second half of the twentieth century. To understand this crucial history, and its lessons about the impact of management thinking, we must know how executives of Toyota and the Big Three after World War II perceived the remarkably low cost at which Henry Ford's River Rouge plant produced automobiles in the 1920s. But to understand those perceptions, one must know the conventional story about how work was organized at the Rouge in that decade.
Henry Ford's River Rouge Plant in the 1920s
Probably the quintessential example of successful mass production was the giant Ford Motor Company plant built during World War I at River Rouge near Dearborn, Michigan. That plant and Ford's Highland Park plant in Detroit together produced some 15 million Model T cars by 1927. Dedicated to making one model, the Rouge facility operated virtually around the clock year in and year out until it literally sated the public's first-time demand for a basic automobile. The high profits Ford earned in that setting are usually attributed to the plant's remarkable efficiency, where "efficient" is equated with low cost per unit. The principle Ford ostensibly followed to achieve low cost was to build a facility to produce one variant of a product and then run it without interruption at full capacity until demand was sated. If the variant is referred to as A, then the most efficient and most profitable schedule for producing A is AAAAAAAA etc., where each A is assembled in a continuous flow, one at a time.
A way to organize work to meet that schedule is shown in Figure 1-1, a highly simplified schematic of the flow of work in Ford's River Rouge plant in the early 1920s. An important point to observe in that figure is that the work more or less paced itself. Indeed, the schedule pushed material at a relentless pace that was sustained by having machines and workers -- the people themselves being little more than "cogs in the gears" of the system -- perform repetitive tasks as fast as possible. Given the simplicity of the flow and the repetitive nature of tasks at each work station it was not necessary to spend extra resources on activities to control and expedite the flow of material. In effect, the flow was dictated by the plant's initial design -- a design that promoted efficiency by allowing work to flow continuously from beginning to end and by having it consume at every point only the resources needed to advance one unit of output one step further toward completion. The River Rouge plant in 1925 produced about one vehicle per minute in a total lead time of about three days and nine hours from steel making to finished vehicle.
A sign of the mechanistic roots supporting this mass-production system is the relation between information and the flow of work. The primary information influencing the flow of work originates outside the process, in the schedule and in the layout of the plant. Neither the material nor the workers who transform it supply any information to guide the process. Both material and workers respond only to outside influences, literally being "pushed" by external information. Underlying that information is a design, or abstract model, that defines the laws governing the motion of material and workers in the plant. The mass-production model features homogeneity of inputs and outputs (such as uniform material and interchangeable parts transformed by endlessly repetitive steps into identical black Model Ts), large scale, high speed of throughput, and uninterrupted flow of work. The design of the work process and the quality of incoming material insures an acceptable level of quality. The uninterrupted flow of homogeneous units at a rate as fast as possible insures the lowest possible cost per unit of output. The primary rule suggested by this mechanistic model of production -- a rule enshrined in the phrase "economies of scale" -- is that costs per unit fall as the speed and volume of output rise.
How Perceptions of Low Cost at the Rouge Shaped the Quest for Variety after World War II
Until the mid-1920s, Americans delighted in Ford's Model T, a private, enclosed, gasoline-powered alternative to bicycles and horse-drawn buggies. Few buyers expected or sought a variety of designs. The Model T's low price, sustained by the low costs Ford achieved at the Rouge, offset strong desires for variety, at least into the mid-decade. As time passed, however, and the car-buying public grew more sophisticated, they wanted cars with more features and styles. General Motors responded after 1920 by coordinating activities among its several divisions so as to provide a car for "every purse and purpose." But on the whole, such efforts were thwarted first by the Great Depression and then by World War II. The solution to the problem of producing variety at low cost awaited the rise of the strong postwar consumer market.
After World War II, Toyota and the American Big Three addressed differently the problem of how to produce varieties of automobiles at low cost. Their distinctive responses to that problem reflected adherence -- although perhaps unacknowledged -- to basic differences in thinking. To appreciate the starkly different kinds of thinking that characterize Toyota and the American Big Three, consider the following meeting in 1982 between Eiji Toyoda, then head of Toyota Motor Corporation, and Philip Caldwell, then head of the Ford Motor Company. At that time, Toyota was emerging as the lowest-cost producer of the highest quality automobiles in the world. Ford and its Big Three partners were then plagued by falling market share, rising customer dissatisfaction with the quality of their vehicles, and unprecedented financial losses. Presumably, Caldwell visited Toyota in Japan in 1982 seeking new ideas. During Caldwell's visit, his host, Mr. Toyoda, is said to have toasted Mr. Caldwell by saying, "There is no secret to how we learned to do what we do, Mr. Caldwell. We learned it at the Rouge."
It must have been obvious to Mr. Caldwell in 1982 that he and his colleagues at Ford, as well as his counterparts in the other Big Three companies, had definitely not viewed the operations at Henry Ford's Rouge River plant in the same way as had Toyota. As Caldwell surely observed, 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. Why did the Big Three apparently not discover the same key to success at the Rouge that Toyota claimed it did? When Toyota's managers considered that facility, what did they perceive? When executives at the Big Three companies contemplated that facility, what perceptions did they share? To understand the differences in how Toyota and the Big Three interpreted operations at the River Rouge plant is to understand the difference between Toyota's distinctive thinking and the thinking that has dominated management practice in most of the world's other businesses during the past five decades. How different methods of thinking affect long-term performance is the lesson to be learned from what follows.
What the American Big Three Saw at the Rouge
The AAAAAAAA mass-production schedule and the way to organize work shown in Figure 1-1 faced a challenge when companies realized that their economic survival demanded making products in more than one variety. By 1950, the growth of markets, and the even faster growth in demand for varieties of products, was convincing more and more companies that they could profit most by selling products in increasing varieties. One way to meet these demands was to build a new plant dedicated to each new variant. But the idea of replicating a plant as large and complex as the River Rouge facility for each variant seemed impractical, especially as the number of varieties increased. Therefore, companies searched for ways to make two or more variants of a product in the same plant, but do so efficiently and profitably.
In the past fifty years, most manufacturers who have strived to produce output in varieties have remained committed to the mass-production thinking that says high profits depend, ultimately, on producing at low costs by running operations without interruption at full capacity for as long as possible. But in the context of making products in varieties, they discovered that "running without interruption" and "running at full capacity" are not necessarily achieved as simply as they are when the production schedule is AAAAAAAA and work is organized in a continuous flow that consumes resources at the rate needed to produce one order at a time.
Look first at the effect variety has on the production schedule. Whereas the mass producer of one variety, A, can simply "turn on the faucet" and watch product flow at a steady pace such as AAAAAAAAA, that same producer must consider what to do about the time it takes to change from A to other varieties of product, if a decision is made to produce varieties. Were it possible to change instantaneously from A to B to C, then a flow such as AAABCCAACBB etc. could be achieved without "turning off the faucet." However, if changing from one variety to another takes time, then one cannot produce a second and third variant, say B and C, in the same plant as A without "turning off the faucet" from time to time to change from A to B to C. The key to understanding how the Big Three automakers and most American manufacturers addressed the issue of variety after World War II is to realize that they all took for granted the times it took to change over the various types of equipment used in their plants in the late 1940s and early 1950s. They apparently saw no benefit to reducing the time it took to do individual changeovers. Instead, as they increased the variety of output, they took steps to reduce the total amount of time spent changing over. They did so by separating the various processes through which material flowed continuously in the early River Rouge plant. With processes separated, material for different varieties could be batched and processed "efficiently" in long runs that economized on changeovers.
The System the Big Three Created in Response to What They Saw at the Rouge
As noted above, if changeover time is not reduced it causes delay, and the more so as varieties increase. Hence, variety is not produced by taking the daily production schedule from AAAAAAAAA, where every A potentially is produced to customer order, to something like AABAAABBCCCAAA, where each A, B, and C is also produced to customer order. Instead, following the same sequence, the daily production schedule becomes AA(delay)B(delay)AAA(delay)BB(delay) CCC(delay)AAA. Each transition from A to B to C requires stopping to change something, and often very many things.
Such delays are problematic to a mass producer whose rule is to "run without interruption at full capacity" as much as possible. Each delay not only requires extra work and cost, their number can extend the production schedule into another shift or another day -- prompting yet more cost and delay. The general solution to this problem favored by most American manufacturers who regarded variety as necessary to survival after 1950 was to schedule production so that each variety could be batched separately and run without interruption as long as possible. Continuing the above example, batching each different variant would generate a schedule AAAAAAAA(delay)BBB(delay)CCC. This schedule reduces the number of interruptions and increases the percentage of time that the facility is up and running product, all of which reduces cost and, presumably, increases profitability.
However, producing varieties in long-running batches creates new costs because the mix of varieties produced does not automatically mesh with the mix of varieties that customers wish to purchase. Producing in batches means producing out of step with the flow of customer orders. Thus, to avoid having production deviate too much from consumption, time and resources must be spent on forecasting demand or, alternatively, on stimulating demand so that it fits what you are producing. Market forecasting and advertising become expensive necessities for achieving the low costs promised by batch-producing varieties of output. Even so, there is still a chance of being wrong much of the time. Sometimes a batch will contain more of a variety than customers ultimately want, which is a costly waste. At times, a batch will tie up capacity and prevent making something else that customers do want, which can lead to a costly loss of sales.
Most mass-production manufacturers addressed these added costs of batching varieties by speeding up the flow of output for each batch. More output in a given amount of time meant lower costs per unit, including the costs caused by batch production. Thus, manufacturers who reduced the total amount of time lost changing from one variety to another by producing varieties in batches adhered to the mass-production principle of "running without interruption as fast as possible," at least during the time each batch was running. By speeding up production and increasing output, thereby reducing costs per unit, they attempted to control the costs of forecasting demand, discounting prices on unwanted output, and losing sales. In this way they honored the mechanistic concept of "economies of scale."
Making varieties in batches led to new ways of organizing work that generated additional costs, besides those costs caused because batched production is invariably out of step with customer demand. In principle, material flows without interruption as one batch of components is being produced. However, all the batches of components that go into making one variant of a product do not flow continuously from start to finish, like the flow that occurs when work is organized as it is in Figure 1-1. Because of the widely different changeover times among operations such as stamping, painting, casting, component building, and final assembly, work on each variety of component will occur in separate batches in each operation. Thus, while the components needed to make each variant of a product eventually travel from raw material to final assembly, they do so by lurching through the operations in discontinuous fits and starts. In practice, components from each operation are produced in a separate department or plant and then sent to staging areas, such as warehouses, from which they are shipped in the appropriate order to separate final assembly departments or plants. While batch-produced materials may flow ultimately into varieties of finished products through a final assembly operation that resembles the pattern in Figure 1-1, the continuous flow in machining and component making seen at River Rouge in the 1920s did not exist in a typical American automobile final assembly plant by the 1970s.
To deal with the realities of batch production, mass producers who wished to manufacture automobiles (and other products) in varieties after World War II reorganized their operations in a completely different way than Henry Ford had done at River Rouge. As variety proliferated after 1950, most large manufacturing organizations in America and Europe separated their otherwise linked operations into separate departments, and allowed each operation to perform according to its own changeover rhythm. This "decoupled" batch production approach to mass-producing variety featured uninterrupted work only in each separate operation, followed by transit to a central staging area, or warehouse, where material waited until a schedule directed it to flow in varieties to a final assembly plant (Figure 1-2).
Making all the pieces in this complicated "flow" come together in the right places at the right times required people and equipment not employed in the actual making of the products themselves. These resources, referred to as "overhead," were employed in activities such as scheduling, controlling, expediting, storing, inspecting, transporting, and reworking. Particularly noteworthy was the investment of resources needed to profitably handle the material flows shown by solid lines and arrows in Figure 1-2. Those resources were invested in sophisticated scheduling and control systems, increasingly computer-based, shown by the dotted lines and arrows in that figure. One could say that all these resources represented an "information factory" that was separate from but alongside the material-flow factory. Ironically, this "information factory" was needed to impose order on a batch-driven system that had been created to minimize the costs of producing output in varieties. Eventually, the "information factory" in most companies would employ more workers than the real factory would employ to actually transform material into finished products.
However, company leaders believed that they could control the added costs of the "information factory" by applying the same mass-production logic of economies of scale and speed that says that cost per unit falls the more units you produce in a period. According to this logic, profitability is always assured if enough output is produced to reduce unit costs below the prices customers will pay. So, the answer to the added costs of building an information factory was to increase the speed and amount of output (i.e., "throughput") even more, and then engage in advertising or other incentives to stimulate customer demand.
Most companies attributed the activities associated with batch production to complexity caused by producing varieties of product, not to complications caused by the way they organized work to produce that variety. Those activities were virtually absent from a continuously flowing mass-production system such as that shown in Figure 1-1. They were utterly essential, however, to the smooth working of batch-production systems that produced varieties of products as shown in Figure 1-2. The following list describes only a few examples of such added activities:
As variety and volume of output grow, the practice of separating the flow of work into segments -- decoupling -- creates increasing delays, and therefore increasing costs, in the overall system. Changing over for more varieties generates delay, as does the time needed to inspect and rework parts, to schedule flows of work, to sort and store parts, and to move parts and material over longer distances. As an example of this impact, the overall lead time to make a vehicle went from three days and nine hours at Ford's River Rouge plant in the mid-1920s (Figure 1-1) to several weeks in most auto-making organizations by the 1970s (Figure 1-2).
Similar increases in lead times caused most American manufacturers after the 1950s to experience painful increases in total costs. These increases usually appeared in the accounting ledgers under headings such as "overhead" or "indirect costs." Most accountants before the late 1980s did not have, for various reasons, proper tools with which to analyze and explain costs that fell under those headings. Traditional cost accounting practices simply allocated such costs to departments, products, and other cost objects, and gave little or no regard to what caused the costs. Thus, accountants could show when, and by how much, costs rose, but they could not explain why costs rose, especially not overhead costs. Nor did it seem to occur either to accountants or to those managers using their numbers that the way work was being organized might itself be the primary cause of rising costs.
As noted above, executives in most manufacturing companies, following mechanistic principles of scale economy and mass production, believed they could address these costs, and keep unit cost (i.e., cost ÷ unit) in line, by increasing the scale and speed of output in each one of the various operations of the decoupled work system. In that regard, cost accounting and production planning became essential tools to help determine the necessary scale and speed to keep costs in line with targets. This scale-and-speed model enabled executives to further rationalize the decision to separate the system into parts. Moreover, this model encouraged subordinating the issue of how work is done in the parts. Instead, the model placed emphasis on the perceived need to get products out the door, without regard to any imbalance in the rates at which the various parts of the system operated. In other words, while great attention was paid to meeting output targets, slight attention was paid to how work was done to produce output.
A comparison of Figure 1-1 with Figure 1-2 suggests that the shift from mass production without variety to mass production with variety created a complicated and messy pattern of work in which it was difficult, if not impossible, to perceive any sense of order. Systems resembling the flow of work in Figure 1-2 were designed according to the same mechanistic principles as the continuous flow systems in Figure 1-1 -- that is, run without interruption and at full capacity -- but they did not present the same appearance of order. Order seemed to be introduced, eventually, by computer-oriented production control, scheduling, and cost accounting systems. Production schedules (e.g., MRP) and standard cost budget variances, for example, provided managers with a sense of what should be done at any time, and how far actual results deviated from targets.
At first the abstract information compiled and transmitted by these computer systems merely supplemented the perspectives of managers who were already familiar with concrete details of the operations they managed, no matter how complicated and confused those operations became. Such individuals, prevalent in top management ranks before 1970, had a clear sense of the difference between "the map" created by abstract computer calculations and "the territory" that people inhabited in the workplace. Increasingly after 1
Library of Congress subject headings for this publication: Industrial management, Production management, Managerial accounting, Cost control, Profit, Automobile industry and trade Management Case studies