Henry Ford, the godfather of mass production, was tormented by the possibility of seeing his stocks of components and raw materials depleted. Suspicious of financiers — a spirit that fueled his fervent anti-Semitism — he was especially suspicious of his suppliers.
Ford was obsessively preoccupied with stockpiling enough supplies so that his assembly lines could continue to operate without any debilitating shortages.
He bought coal mines in Kentucky and Virginia, and railroads that transported the product from those mines to his factories. He assembled a fleet of ships that plied the Great Lakes, carrying a steady supply of lumber and iron ore sourced from Michigan’s Upper Peninsula.
And he built a massive complex in River Rouge, near Detroit, a cluster of factories designed to handle every step of transforming raw materials into finished automobiles.
A century later, the River Rouge complex is still in operation but has been suffering from a shortage of a component that would have horrified Ford. The company he founded cannot acquire enough semiconductors, the computer chips that serve as the brains of modern cars.
Ford relies heavily on a single chip supplier located more than 11,000 kilometers away in Taiwan. Given the shortage of chips in the world economy, Ford and other automakers have been forced to suspend operations, intermittently.
Henry Ford was a popularly celebrated man in his era, but today his legacy breeds condemnation. He advocated white supremacy and preached strident anti-Semitism. He resorted to brutal violence against the labor movement that eventually managed to unionize its factories. And he gained monopolistic control over the affordable car market.
Still, its management philosophy—and especially its vigilance against being pressured by suppliers—offers strong insights into the clutter in supply chains, which has become a major cause of inflation and product shortages.
Ford understood that supply chains were fragile, and that they needed constant scrutiny 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 pose a threat to long-term resilience.
If he were alive today, “Ford would undoubtedly make the chips used in his cars,” says Mike Skinner, founder of the Henry Ford Heritage Association.
The people who run Ford say this is an oversimplification. The F-150 pickup produced in River Rouge uses more than 800 types of chips, and this makes it necessary to depend on specialized companies.
And chips don’t last long in storage, making it difficult to build up inventories of this component.
Ford’s adoption of “just in time” inventories — which involves keeping inventories to a minimum to minimize costs — “has been driven by capital markets and its focus is on return on invested capital,” says Hau Thai-Tang, vice president of -President of Industrial Platforms at Ford.
In other words, Ford’s strategy for obtaining its chips was guided by the interests of a category of stakeholders that the company’s founder disdained and saw as a potential threat to the vitality of its business – shareholders.
Ford fought with its shareholders
Henry Ford often resisted the demand that he pay dividends – which enriches investors – and preferred to apply his profits to expanding the business.
This tension was publicly exposed in 1916, when Ford clashed with some of its early investors, the Dodge brothers, who were also among the automobile industry’s early innovators.
Ford’s profit for the previous year had been $16 million, and the company had more than $50 million in cash sitting in banks. Ford insisted that the money go toward building his new plant in River Rouge.
The Dodge brothers insisted on the payment of dividends, and filed a lawsuit against the company seeking to obtain them.
They appealed to a court for an injunction freezing Ford’s River Rouge expansion plans.
The court granted the request, which angered Ford: the Dodge brothers were jeopardizing not only their expansion plans but the central organizing principle of their company.
“I don’t believe we should make such a gross profit on our cars,” he said on the witness stand at the trial of the case. “My policy has always been to force the price of cars down as fast as production would allow, and to transfer the benefits of that to users and workers.”
The conflict was fueled in part by Ford’s decision two years earlier to basically double its workers’ pay to a then-unprecedented $5 a day. Other business leaders have accused him of putting their companies at risk by forcing up wages across American industry.
Ford insisted he was simply being pragmatic. The advent of the assembly line had made car manufacturing routine, robotic and repetitive, and this was leading to massive layoffs.
Ford used the higher salary — also intended in part to fight unionization efforts — as a way of attracting enough staff to produce an ever-increasing volume of cars.
“A low-wage business is always unsafe,” he declared.
Under severe questioning, during the Dodge brothers’ trial, Ford declared that the real purpose of his business was to create jobs and produce affordable cars, and that the money was only an incidental result, according to Richard Snow’s account. in “I Invented the Modern Age”, his biography of Henry Ford.
“Business is a service, not a bonanza,” said Ford.
Michigan’s superior court ultimately rejected this concept. “A business corporation is organized and operated primarily for the profit of its shareholders,” the judges ruled.
This decision became one of the milestones in the US shareholders’ advance towards primacy.
The court ruled in favor of the Dodge brothers and ordered Ford to pay about $25 million in dividends, although he appealed and won the right to proceed with construction of the River Rouge complex.
Ford later forced the Dodge brothers out of his company, acquiring their shares and taking control of their company.
He would not have accepted a shortage that results from undue dependence on a supplier unable to satisfy his company’s demand.
“He would probably fire whoever made that decision,” said Willy Shih, an expert on international trade at Harvard University’s school of business. “He knew he needed to take control of the company before he could produce a car for the masses.”
Translation by Paulo Migliacci
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