Lessons from Henry Ford on today’s supply chain chaos, Auto News, ET Auto

DEARBORN, MICH: Henry Ford, the godfather of mass production, was tormented by the prospect of running out of parts and raw materials. Suspicious of financiers — the spirit that animates his strong antisemitism — he has deep distrust of his suppliers. He was preoccupied with stockpiling enough material to ensure that his assembly line could continue to operate without weakening the shortage.

He purchased his own coal mines in Kentucky and Virginia, along with railroads to bring the produce to his factories. He assembled a fleet of ships that filled the Great Lakes, carrying supplies of iron ore and timber harvested from Michigan’s Upper Peninsula. And he founded a large factory outside Detroit in River Rouge, a manufacturing complex designed to handle every step of turning raw materials into finished cars.

A century later, the Rouge plant remains operational, but is plagued by a shortage of critical components that would frighten Ford. The company he founded couldn’t buy enough semiconductors, the computer chips that are the brains of modern cars.

Ford relies heavily on a single chip supplier located more than 7,000 miles away, in Taiwan. With chips scarce across the global economy, Ford and other automakers have been forced to halt production intermittently.

On a recent afternoon at the Rouge, hundreds of workers held the tools to put together parts of Ford’s most popular vehicle, the F-150 pickup truck. But in recent months, Ford has been forced to stockpile thousands of finished vehicles in places scattered throughout Dearborn — Henry Ford’s hometown — awaiting the arrival of the chip that can power them.

“This is exactly what Henry Ford feared,” says Matt Anderson, curator of transportation at Henry Ford, a museum in Dearborn that explores his heritage and America’s history of innovation. “He became increasingly obsessed with controlling every aspect of the production process.”

Popularly celebrated in his own era, Henry Ford’s legacy sparks criticism today. He supported white supremacist sentiment, along with vehement antisemitism. He unleashed brutal violence on the labor movement which eventually organized his factory. He took over the monopoly in the market for affordable cars.

But his management philosophy — and especially his vigilance against being squeezed by suppliers — yields powerful insights into the causes and lessons learned from Major Supply Chain Disruptions, which have become a major source of inflation and product shortages.

Ford understands very well that supply chains are fragile, requiring constant monitoring and contingency plans. Despite his hostility to unions, he understood the value of generous wages in motivating workers. And he warned that investors’ demands for short-term gains could threaten long-term resilience.
“He realized that the supply chain even then was fraught with risk,” said Mike Skinner, founder of the Henry Ford Heritage Association. If he were around today, “Ford would be making their own chips,” added Skinner. “There’s no doubt about that.”

The folks who run Ford say it’s an oversimplification. The F-150 pickups manufactured at Rouge use more than 800 types of chips, requiring reliance on specialists. And chips have a limited shelf life, making them difficult to stockpile.

“It’s very complicated,” said Ford’s Chief Industrial Platform Officer, Hau Thai-Tang, in a recent interview. For Ford, making its own chips, or even limiting its suppliers to North America, would pose a “huge task that would be very asset and capital intensive, and unrealistic,” he added.

But Ford’s strategy for chip procurement, Thai-Tang admits, has been guided by the interests of those who belittled by the company’s founders as a potential threat to the vitality of its business — its shareholders.

Ford’s embrace of so-called on-time inventory — where warehouses are kept lean to minimize costs — “has been capital market driven and focused on return on invested capital,” says Thai-Tang.

Henry Ford often turned down requests for dividends — payments that enrich investors — while preferring to apply his profits to expansion.

“We’re against the kind of banker who thinks business is like a melon that has to be cut,” Ford said in his memoir.

These tensions came to the public in 1916, when Ford clashed with some of its first investors, the Dodge brothers, who were early innovators in the burgeoning automotive industry.

Ford’s profit the previous year had reached $16 million, and the company had more than $50 million in cash held in the bank. Ford insisted that the money would go toward building its new factory, Rouge.

The Dodge brothers insisted on dividends, and they filed a lawsuit in pursuit. They petitioned the court for an injunction that would freeze Ford’s expansion plans in Rouge.

The court obliged, infuriating Ford: The Dodge brothers jeopardized not only his plans for the Rouge, but also his company’s central organizing principles.

“I don’t believe that we should make such a terrible profit on our cars,” he said on the witness stand during his subsequent trial. “It’s my policy to force the price of cars to drop as fast as production allows, and provide benefits to users and workers alike.”

The conflict was fueled in part by Ford’s decision nearly two years earlier to roughly double the wages of its workers to an unprecedented $5 a day. Other business leaders accused him of jeopardizing their companies by raising wages across American industries.

Ford insisted he was just being pragmatic. The advent of the assembly line has routinized the labor force making cars. Many workers were irritated by what felt like demotion to a repetitive, robotic task, and they quit in droves. Ford provided the higher salaries – partly intended to preempt the union push – as a means of attracting enough hands to produce ever-growing volumes of cars.

“Low-wage businesses are always unsafe,” he said.
Given the immense success of the Model T, Ford dominated the market for popularly priced cars. Paying higher wages is thus a means of protecting his dominance, says Mark J. Roe, a professor at Harvard Law School.

More broadly, Ford describes generous wages as key to fueling the consumer economy he champions, with affordable cars as a means of pushing the contours of the city, opening up new forms of housing, office and recreation.

“The vast majority of people in this country live on wages,” Ford wrote in his memoirs. “Their scale of life – their level of wages – determines the prosperity of the country.”

Under painful cross-examination during the Dodge brothers lawsuit, Ford stated that the core of his business was providing jobs and building affordable cars, with money only incidental proceeds, according to an account in Richard Snow’s biography “I Invented the Modern Age.”

“Business is a service, not a bonanza,” says Ford.

The Michigan Supreme Court eventually rejected the conception. “A business enterprise is organized and operated primarily for the benefit of the shareholders,” the court ruled.

The decision is now a milestone on America’s shareholder journey to excellence.

The court ruled against the Dodge brothers and ordered Ford to distribute a dividend of about $25 million, even though – on appeal – Ford was granted the right to continue building the Rouge.

Ford then blackmailed the Dodge brothers, bought their shares, and took over the company.

But today more than half of Ford Motor’s shares are controlled by Wall Street institutions such as Vanguard, a mutual fund company, and BlackRock, the world’s largest asset management firm, which now oversees more than $10 trillion.

In the three years leading up to the pandemic, Ford paid out $7.9 billion in dividends to shareholders, or 70% of its profits, according to data tabulated by William Lazonick, an economist at the University of Massachusetts Lowell.

Compared to other publicly traded companies, Ford has shown a greater tendency to limit dividends and retain capital in the face of challenges, Lazonick said.

But chip companies have largely served their investors by limiting their capacity — a strategy to keep prices high. Shortages of truck drivers and warehouse workers are often the result of downgrading such jobs, with pay cuts as a way of rewarding shareholders.

Ford will not accept shortages resulting from undue reliance on suppliers who cannot meet the company’s demands.

“He would probably be fired whoever did that,” said Willy C. Shih, an international trade expert at Harvard Business School. “He knew he had to take control of the company before he could deliver cars for the masses.”

The parking lot that now houses an F-150 pickup truck waiting for chips lies in the shadow of Ford’s corporate headquarters in Dearborn. One sits across the street from Henry Ford Elementary School.

Late last year, the company announced a partnership geared toward making chips in the United States.

“We certainly reflect on the last two years,” said Thai-Tang, Ford executive.


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