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Lessons from Henry Ford about today's supply chain mess

Ford bought his own coal mines in Kentucky and Virginia, along with railroads to carry their output to his factories. He amassed a fleet of ships that plied the Great Lakes, bearing a steady supply of iron ore and lumber harvested from Michigan's Upper Peninsula. And he erected an enormous plant outside Detroit on the River Rouge, a complex of factories engineered to handle every stage of turning raw materials into a finished automobile

By Peter S. Goodman
Published: Jun 11, 2022

Lessons from Henry Ford about today's supply chain messThe assembly line for the F-150 Lightning, the electric version of Ford’s popular pickup, in production in Dearborn, Mich. on Jan. 25, 2022. With computer chips scarce throughout the global economy, Ford and other automakers have been forced to intermittently halt production. Image: Brittany Greeson/The New York Times

DEARBORN, Mich. — Henry Ford, the godfather of mass production, was tormented by the possibility of running out of parts and raw materials. Suspicious of financiers — a spirit that animated his fervent antisemitism — he was especially distrustful of his suppliers. He was consumed with stockpiling enough materials to ensure that his assembly lines could continue operating without debilitating shortages.

He bought his own coal mines in Kentucky and Virginia, along with railroads to carry their output to his factories. He amassed a fleet of ships that plied the Great Lakes, bearing a steady supply of iron ore and lumber harvested from Michigan’s Upper Peninsula. And he erected an enormous plant outside Detroit on the River Rouge, a complex of factories engineered to handle every stage of turning raw materials into a finished automobile.

A century later, the Rouge plant remains in operation, yet it is bedeviled by a shortage of a crucial component that would have horrified Ford. The company he founded cannot buy enough semiconductors, the computer chips that are the brains of the modern-day car.
Ford is heavily dependent on a single supplier of chips located more than 7,000 miles away, in Taiwan. With chips scarce throughout the global economy, Ford and other automakers have been forced to intermittently halt production.

Popularly celebrated in his own era, Henry Ford’s legacy prompts condemnation today. He espoused white supremacist sentiments, along with strident antisemitism. He unleashed brutal violence on the labor movement that eventually organized his plants. He seized a monopolistic hold on the market for affordable automobiles.

Yet his management philosophy — and especially his vigilance against getting pinched by suppliers — yields powerful insights about the culprits and lessons of the Great Supply Chain Disruption, which has become a leading source of inflation and product shortages.
Ford grasped keenly that supply chains were fragile, necessitating constant scrutiny and backup plans. Despite his hostility toward labor unions, he understood the value of generous wages in motivating workers. And he warned that the demands of investors for short-term gains could threaten longer-term resilience.

“He recognized that the supply chain even then was full of risks,” said Mike Skinner, a founder of the Henry Ford Heritage Association. If he were around today, “Ford would have been making their own chips,” Skinner added. “There’s no doubt about that.”

The people running Ford say that’s an oversimplification. The F-150 pickup produced at the Rouge uses more than 800 types of chips, requiring dependence on specialists. And chips have limited shelf lives, making them difficult to stockpile.

“It’s a lot of complexity,” Ford’s chief industrial platform officer, Hau Thai-Tang, said during a recent interview. For Ford, making its own chips, or even limiting its suppliers to North America, would pose “a herculean task that would be very asset- and capital-intensive, and just not realistic,” he added.

Yet Ford’s strategy in sourcing chips, Thai-Tang acknowledged, has been guided by the interests of a party that the company’s founder disdained as a potential threat to the vitality of his business — the shareholder.

Ford’s embrace of so-called just in time inventory — in which warehouses are kept lean to minimize costs — “has been driven by the capital markets and is focused on return on invested capital,” Thai-Tang said.

Henry Ford frequently staved off demands for dividends — payments that enrich investors — while preferring to apply his profits toward expansion.

“We are against the kind of banker who regards a business as a melon to be cut,” Ford declared in his memoir.

That tension burst into public view in 1916, when Ford clashed with some of his first investors, the Dodge brothers, who were themselves early innovators in the emerging auto industry.

Ford’s profits the previous year had reached $16 million, and the company had more than $50 million in cash stashed in the bank. Ford was adamant that the money be directed toward building out his new factory, the Rouge.

The Dodge brothers insisted on dividends, and they filed a lawsuit in pursuit. They petitioned a court for an injunction that would freeze Ford’s expansion plans at the Rouge.
The court obliged, enraging Ford: The Dodge brothers were imperiling not only his plans for the Rouge, but also the central organizing principle of his company.

“I do not believe that we should make such an awful profit on our cars,” he said on the witness stand during the ensuing trial. “It has been my policy to force the price of the car down as fast as production would permit, and give the benefits to users and laborers.”

The conflict was fueled partly by Ford’s decision nearly two years earlier to roughly double the pay of his workers to a then-unheard-of $5 per day. Other business leaders accused him of imperiling their companies by pushing up wages throughout American industry.

Ford insisted that he was simply being pragmatic. The advent of the assembly line had routinized the labor of making cars. Many workers chafed at what felt like a demotion to robotic and repetitive tasks, and they quit in droves. Ford cast higher pay — aimed partly at preempting a union drive — as the means to attract enough hands to produce growing volumes of cars.

“A low-wage business is always insecure,” he declared.

Under withering cross-examination during the Dodge brothers lawsuit, Ford declared that the very point of his business was to provide jobs and build affordable cars, with money merely an incidental result, according to an account in Richard Snow’s biography “I Invented the Modern Age.”

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

The Michigan Supreme Court ultimately rejected that conception. “A business corporation is organized and carried on primarily for the profit of the stockholders,” the court decreed.
That decision now stands as a landmark on the march of the American shareholder toward primacy.

The court ruled for the Dodge brothers and ordered Ford to distribute roughly $25 million in dividends, though — via an appeal — Ford secured the right to go ahead with building the Rouge.

Ford later squeezed out the Dodge brothers, purchasing their shares, and taking control of his company.

Ford would not have accepted the shortages resulting from undue dependence on a supplier that could not satisfy his company’s demands.

“He’d probably go fire whoever did that,” said Willy C. Shih, an international trade expert at Harvard Business School. “He knew he had to get control of the company before he could deliver the car for the masses.”

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©2019 New York Times News Service

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