The Evolution of Inbound Logistics--The Ford and Toyota Legacy: Origin of the Species

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Today, lean manufacturing and demand-driven strategies are considered innovative and sophisticated competencies. But their origins are neither novel nor complex.

One century ago, matching supply to demand was business as usual in rural agricultural areas. Production and consumption existed within closed-loop supply chains and goods were largely manufactured and consumed as needed, suggests Godfrey Linge, an economist at the Australian National University.

"In essence, just-in-time (JIT) manufacturing represents a return to the kind of relationship between producers and consumers—such as blacksmiths and farmers—that existed before the Industrial Revolution: people specified what they wanted and craftsmen met these individual requirements," Linge says.

Henry Ford, the pioneer of assembly-line JIT manufacturing and founder of the Ford Motor Company, was well aware of this type of rural reciprocity, having grown up in a small agricultural community outside Detroit, Mich.

What the small town couldn't supply or produce within its own means and bounds, it sourced and transported through the local post office.

Small business, and then big business, grew up around points of consumption and transportation, Ford recalls in his seminal book, Today and Tomorrow (1926).

"In earlier times, the market spot was necessarily the manufacturing spot. Most of the stuff was made in town. All the trades grew up around the post office. The blacksmith made most of the farming implements. The weaver made most of the textiles that the kitchen industry did not cover. A town was almost a self-supporting community," Ford writes.

Increased industrialization, however, altered this dynamic. The development of more efficient and sophisticated communication and transportation technologies spurred the growth of major cities while connecting the urban with the rural.

The U.S. railroad and the emerging acceptance of "railroad time" similarly created a standard by which service and reliability could be measured and benchmarked. Inevitably, market opportunities opened up for producers to source product from and sell to, creating a more competitive, consumer-driven business environment.

But mass consumption also radically changed the local supply chain as demand began to outpace supply, forcing businesses to grow in a different trajectory.

Product had to be manufactured and marketed in such a way as to target a broader and more generalized buying population, and the internal structure of the enterprise began to fracture and stratify.

"The staff responsible for design, production, and sales became organizationally separated," notes Linge. "As a consequence, the emphasis shifted away from customer service and satisfaction."

This shift toward functional silos created a manufacturing paradigm where cost and service efficiency began to diverge. But the idea of a self-supporting, vertically integrated community was not lost on Ford, and this model inevitably served as the prototype for the Ford Motor Company during its boom years.

The Process of Enlightened Manufacturing

The genesis of Ford's economic business philosophy, and by extension his vision for JIT manufacturing, was largely driven by his recognition that paying higher wages to factory workers would incent greater productivity.

This practice served Ford well and the company's success predictably coincided with the decision to double wages to five dollars a day in 1914. But, as necessity was the mother of invention, Ford learned this lesson through the company's own growing pains.

Prior to the emergence of the assembly line and the five-dollars-a-day wage, Ford Motor Company relied on skilled labor to essentially make automobiles fit to the specification of available components. This resulted in numerous time and cost inefficiencies, observe Daniel Raff and Lawrence Summers in their paper, Did Henry Ford Pay Efficiency Wages?

"Ford was not manufacturing, but merely assembling, cars. The parts were produced by outside machine shops and were not made to any particularly high tolerances. A great deal of shaping and fitting was required to get them together properly," they write.

What was lacking was control—over the quality and standard of parts and components in the supply stream, and over the inbound flow of materials coming from outside sources. No checks and balances were in place to mediate discrepancies within the manufacturing and assembly process—and it showed.

In 1908, five years into its existence, Ford Motor Company's annual yield of 10,607 automobiles represented only 9.8 percent of the total market, according to Raff and Summers.

The introduction of Ford's Model T soon thereafter, and a new strategy for streamlining the production process and creating wage incentives for workers, shifted this balance immeasurably.

Simply focusing on building one car—the Model T—Ford created higher standards for manufacturing parts. In turn, the company was able to engineer a repetitive process for assembling these components, reducing lead times, eliminating the need for skilled labor, and creating a blueprint for mass production on an entirely new scale.

By 1913, Ford Motor Company was producing more than 248,000 automobiles each year and by the 1920s its annual output had surpassed two million units.

As manufacturing demand began to dictate the flow of supply, the company's Highland Park, Detroit, plant emerged as the center of this new productivity revolution, writes Bruce Pietrykowski, professor of economics at the University of Michigan-Dearborn.

"There, unlike the older vertical production structures marked by skilled workers assembling cars in teams by hand, a modern horizontal plant layout allowed workers to remain stationary while the parts and components moved around them," he observes.

"Borrowed from the meat-packing industry, the assembly line facilitated both the division of labor and increased flow of product."

Ford didn't stop there. Instead, he diversified the company's business interests to include a number of village industries to gain better control over supply.

Not only was Ford Motor Company producing a revolutionary vehicle for transport, and in the process controlling the means of production, the manufacturer also became its own supply line, acquiring raw materials, energy resources, and transportation assets necessary to support the entire enterprise.

The idea of controlling such a vast breadth of resources, rather than relying on suppliers who invariably spiked their prices, fueled Ford's business philosophy to create the best product at the lowest cost to the consumer, while still paying employees a high wage.

It also presented a revolutionary productivity paradigm that, at its core, depended on the seamless integration of inbound and outbound transportation processes and product flows.

Given Ford Motor Company's unprecedented scope and scale of sourcing and manufacturing activities, the importance of managing workflows and controlling inbound transportation was substantial.

Compared to his analysis of labor productivity, and perhaps reflecting the times, Ford's writings are less explicit about the role of transport within the broader fabric of his company's supply chain. Pietrykowski addresses this sticking point in terms of the production shift to a more decentralized network and consequent cost drivers.

"Given the need to coordinate parts supplies with assembly schedules at the Highland Park, Rouge, and, later, branch assembly plants, it is not clear how the transfer of production from vertically integrated plants to company-owned plants outside Dearborn/Detroit would economize on transportation or coordination costs," he writes.

Smaller is Better

Ford, however, was quite clear in lauding the economies of tasking smaller facilities with specific production tasks, rather than relying on larger facilities capable of producing multiple parts.

While larger, vertically integrated factories could produce greater quantities, they also held greater inventories. A network of smaller, assimilated manufacturing facilities were better suited to feed and withdraw parts and components as demand dictated.

In turn, transportation became a key integrating force in this new "just-in-time" manufacturing environment.

The fact that Ford Motor Company owned interests across all modes—rail, ocean, and even air—eschewed outside suppliers when possible, and dictated inbound protocol when it wasn't possible, reveals some underlying tenets of inbound logistics—and perhaps a business case for this change in facility utilization.

Whether Ford conceptually understood the importance of inbound transportation, or whether it was simply derivative of operating a lean manufacturing process, is unclear. What is evident is that Ford recognized both the merits and challenges of managing transportation in an increasingly industrial and global world.

"The real limit to the size of a corporation is transportation," he writes. "If it has to transport its commodity too far, then it cannot give service—and it limits its own size. There is far too much transportation anyway—too much useless carting of goods to central points from there to be distributed to points of consumption."

It's little wonder that Ford appreciated "time" as much as he did the "division of labor" and the "application of power;" and valued a production and distribution network that eliminated warehousing of spare inventory—a fact he was quite proud of.

But the cost and time efficiencies of this differentiated production model were unavoidably contingent on inbound and outbound transportation.

"Our finished product, in the way we ship and assemble, goes out with a minimum transportation charge," Ford observes. "But if Fordson [the River Rouge plant] did not deal in heavy, bulky raw materials it would not pay. It pays because it combines quick transportation both inward and outward...The cost of power and transportation is controlling."

Leaning Toward Lean

In this manner, and with this level of control in aligning demand to supply, Ford Motor Company mass manufactured product without undue time or cost.

Accordingly, Ford's philosophy on time—"the easiest of all wastes and the hardest to correct"—corresponded with the progression of the company's lean manufacturing ideology and practice.

But Ford was also a realist, and identified the inherent risks of running too lean, as well as the role transportation might play in creating necessary lead times.

"It is a waste to carry so small a stock of materials that an accident will tie up production. The balance has to be found, and that balance largely depends on the ease of transportation," he writes.

Ford's dualistic indictment of industry's demand for, and dependence on, transportation fed the company line for creating a more efficient process within the enterprise—from supply to manufacturing to market.

In spite of his penchant for micromanaging productivity and quality control within the factory, he was also astute enough to see beyond the four walls and recognize the emerging importance of speed: "Modern business—modern life—cannot afford slow transportation."

A New Model T: The Toyota Production System

As transportation became faster and more reliable through the mid-20th century, and consumerism's grip on society tightened, businesses were tasked with the recurring challenge of creating a workflow that could match marketplace velocity and expectations.

Ford, despite his otherwise clairvoyant approach to engineering a cross-enterprise manufacturing setup that satisfied mass-market interest in the automobile, became a victim of his own design. The speed of transport, the pace of technological change, and shifting consumer discretions and demands inevitably outdistanced the "man and his model."

Ford saw the bigger picture within the development of his company's enterprise—its diversification and control over the means and resources of production and transportation.

But as time progressed, the Ford production model grew too rigid in addressing and accommodating design and manufacturing flexibility, the empowerment of the laborer, and the invariable need to scale fluctuating demand to supply.

Where Ford left off, Taiichi Ohno and the Toyota Production System picked up in both theory and execution.

The production philosophy that Ohno and others at Toyota Motor Corporation pioneered in post-World War II Japan was born of Ford Motor Company's ideology as well as its inevitable inflexibility and obsolescence.

Ohno's influential work, The Toyota Production System: Beyond Large-Scale Production (1978), shares his admiration of Ford's world-changing vision and specifically his idea of standards and their application across and beyond the manufacturing facility.

"Tracing the conception and evolution of work flow by Ford and his associates, I think their true intention was to extend a work flow from the final assembly line to all other processes—from machine processing to the die press that corresponds to the earlier processes in our Toyota system," Ohno writes.

But his conjectures of how Ford's theory and practice might have evolved are merely that—conjectures.

After Ford's death, the company remained fixed to the company line—the assembly line—and increasing competition from U.S. automotive manufacturers such as General Motors, then Toyota, brought to the surface problems inherent in the Ford production model.

As candid as Ohno was in crediting Ford's vision and business philosophy, he was equally critical of the path Ford Motor Company followed after its meteoric rise.

One problem he cited was the company's myopic compulsion to push the manufacturing and assembly flow to accommodate larger lot sizes and meet increasing demand.

"Ford's successors misinterpreted the work flow system," Ohno writes. "The final process is indeed a work flow, but in other production lines, I think they were forcing the work to flow."

In addition to not having the operational flexibility to accommodate part and product variation within its manufacturing process, Ford Motor Company didn't have the conceptual understanding of how it might address these stopgaps and input human intelligence into the automation process—an idea that Ohno picked up on and pioneered himself.

In fact, when Toyota executives visited the United States in the early 1950s to tour and observe automotive manufacturing facilities and operations, they were less than impressed.

Instead, it was the U.S. supermarket phenomenon that caught their attention and served as inspiration for a new JIT model.

Ford's ideas on time and waste became the underlying influence of Ohno's own attempt to devise a system that would strive for "the absolute elimination of waste"—in terms of inventory, time, and cost. But he approached this task from a vastly different cultural and business objectivity.

Following World War II, Japan was very much a mirror of U.S. manufacturing ideology. The United States served as a model for Japanese industry to study and adopt as it projected a new economic reckoning following the war's devastating circumstances.

The president of Toyota at the time, Kiichiro Toyoda, challenged employees to "catch up with America in three years."

This motivation served as the impetus for Ohno and his colleagues to shop around American automotive manufacturing facilities—and supermarkets—for ideas they could extract to rebuild the company and the country's prospects.

At that time, Toyota was in the midst of a financial crisis, so change was welcome and necessary.

"The company and its bankers believed that the answer was to reenter the car market," observes Linge. "Its options, like those of other Japanese vehicle manufacturers, were constrained by the fact that the domestic market, although very small in the early 1950s, was nonetheless demanding an increasing variety of vehicle types and optional extras.

"The solution was to turn away from the 'just-in-case' approach that had been adopted in U.S. car plants because this necessitated holding large inventories of all components to allow for breakdowns, defects, or an unexpected demand for a particular model," he notes.

From Crisis to Advantage

Toyota's executives, and Ohno in particular, recognized that changing consumer dynamics within Japan required a system that was scalable, flexible, and markedly different from the manufacturing status quo. In some ways, Toyota's crisis presented an advantage.

"Taiichi Ohno, when creating the Toyota Production System, took a different point of view," says John Seddon, a UK management consultant. "The 'make or buy' debate among American manufacturers struck Ohno as irrelevant.

"The real question, he thought, was how suppliers and assemblers could work together. If they could work in a smooth, cooperative way, costs would reduce and quality would improve. His approach was that the parties should not 'trade on cost' but instead work together on 'the causes of cost.'"

While much of Japanese industry continued to implement Ford's "few SKU" mass production model, Toyota began moving in an entirely different direction—and the U.S. supermarket presented an unlikely model to follow.

Toyota executives drew inspiration from watching how U.S. supermarkets restocked inventory to match consumer buying habits and frequencies. These methods served as an appropriate design for the type of pull process Ohno envisioned to enhance and facilitate real workflow.

"A supermarket is where a customer can get what is needed, at the time needed, in the amount needed," Ohno writes. "Sometimes, of course, customers may buy more than they need.

"In principle, however, the supermarket is a place where we buy according to need. Supermarket operators must make certain that customers can buy what they need at any time."

The supermarket inventory system presented a perfect example of the convergence of supply and demand. From this, Ohno conceptualized the customer in different stages of the manufacturing process, and therefore addressed shifts in demand, observes Mark Spearman, former professor of industrial engineering and management sciences at Northwestern University and current CEO of Factory Physics, a Bryan, Texas-based management consulting company.

"At Toyota, each process became both a supermarket for downstream processes and a customer to preceding processes. Consequently, the lead time in a pull system is zero. Either the item is available or it is not," he writes.

In this manner, automobile parts and components throughout the manufacturing network could essentially be withdrawn and replenished according to sequential demand.

This pull system enabled Toyota and Ohno to reevaluate, then reengineer the work flow process to accommodate the manufacturer's expanding product profile and growing demand for different types of automobiles.

Kanban: Personifying Demand Visibility

The anchor for Ohno's JIT system was the utilization of kanban or "tag," which he described as a "simple or direct form of communication always located at the point of where it was needed."

To ensure that product flow remained fluid, kanban essentially became a demand signal—often in the form of cards and later used with carts and bins—that included information about what parts were needed and which parts should be assembled.

"In the just-in-time method, a later process goes to an earlier process to withdraw needed goods, when and in the quantity needed. The earlier process then produces the quantity withdrawn. In this case when the later process goes to the earlier process to pick up, they are connected by the withdrawal or transport information, called withdrawal kanban and transport kanban, respectively," Ohno writes.

Quite simply, kanban was used to communicate and forecast demand, on demand—from the final assembly line all the way back through the supply line to raw material procurement.

One inevitable challenge of this reengineered work flow, however, was figuring out how to handle inventory spikes later in the manufacturing process that would invariably throw earlier processes out of sync.

Toyota's practice of "production leveling" helped alleviate some of these problems by creating a more manageable and continuous flow—preventing sudden fluctuations in demand and batching of inventory.

Instead of manufacturing one model successively, the plant would spread out production of different models over a longer period of time, and flatten demand and inventory spikes throughout the entire manufacturing, assembly, and procurement setup.

"Toyota's final assembly line never assembles the same automobile model in a batch. Production is leveled by making first one model, then another model, then yet another," writes Ohno.

By producing smaller lot sizes over longer periods of time, Toyota could proactively control upstream inventory flow. But this sophistication, by necessity, required a different approach to setting up manufacturing dies and presses to quickly switch from one product to another.

In the 1940s it took Toyota two to three hours to change setups; by the 1970s it was down to mere minutes. The key to building flexibility into the automation process, Ohno discovered, was injecting human intelligence.

Automation with a Human Touch

While JIT (kanban and production leveling) became one pillar of Ohno's vision, the empowerment of the factory employee, or what he termed autonomation (automation with a human touch) evolved as the second critical component.

In this regard, Ohno's and Ford's thinking were completely at loggerheads. Ford employees existed as primarily automatons in low-skill roles, tasked with producing mass quantities of high-volume parts.

By contrast, Toyota empowered its employees to be more flexible, creative, and adaptive—working in teams and monitoring multiple production processes of low-volume, highly customized components. This conception of labor management provided the layer of quality assurance that came to typify the Toyota Production System.

"The link between quality management and JIT is well understood," write Barbara B. Flynn, Sadao Sakakibara, and Roger G. Schroeder in their paper, Relationship between JIT and TQM: Practices and Performance.

"Quality management activities provide support for JIT through establishment of a process that is in control," they continue. "This facilitates the development of an unhampered flow of goods through the process, and allows buffer inventory reduction.

"The provision of accurate and timely feedback about the manufacturing process permits shop floor personnel to detect, diagnose, and remedy process problems as they occur."

Diverging from Ford's wage motive, Ohno required Toyota plant workers to manage several processes at once. This transition, like the implementation of the kanban system, took time to test, adapt, and roll out within Toyota's manufacturing facilities.

It also met resistance from workers who felt threatened by potential downsizing, a reality Ohno reflectively acknowledged would have made the Toyota Production System incompatible with American labor unions of that time.

Even at Toyota, it took nearly 15 years to fine-tune both the kanban system and the autonomated line to where it could be exported to supplier facilities.

While Ohno developed autonomation of his own accord, the operational technology necessary to implement such a scheme was developed by Toyota's textile operations—where Ohno worked earlier in his career.

The idea of intelligent machining came from the auto-activated weaving machine, which was invented by Sakichi Toyoda, the founder of Toyota Motor Corporation.

"The loom stopped instantly if any one of the warp or weft threads broke. Because a device that could distinguish between normal and abnormal conditions was built into the machine, defective products were not produced," writes Ohno.

Over time these technological modifications were applied to the manufacturing and assembly line processes to create automatic control mechanisms that could address problems and errors immediately, without impacting workflow and productivity.

In this manner, the Toyota Production System and its two primary pillars—JIT and autonomation—evolved as both a means and an end. They were inherently linked within the process and the very process itself ensured continuous flow (kaizen) and defect elimination (baka-yoke).

When the system matured to the point where Toyota could take it to suppliers, it presented a revolutionary model for how demand-driven logistics might evolve.

Where Henry Ford consciously created standards that could be transferred within his own manufacturing facilities to mass-produce parts and automobiles, Ohno took it one step further by creating a workflow process that could transcend the manufacturing plant—and ultimately the supply chain.

Breaking the Mold

Henry Ford and Taiichi Ohno's conceptions of JIT and lean inventory strategies defined the manufacturing paradigms of their times. More importantly, their respective visions opened new vistas for where demand-driven logistics could evolve and grow.

The context of when and where Ford Motor Company and Toyota brought these ideas to the factory floor limited how far they could go.

Both worked closely with their suppliers, streamlined their networks, and created altruistic relationships with partners to drive their JIT systems and control the flow of products through the manufacturing process.

But Ford owned and controlled many of these sources. His strategy, according to Seddon, was "effectively controlling the market in as much as it controlled business-to-business relationships."

Taiichi Ohno went one level deeper by purposefully reaching out to suppliers and giving them incentives to work more collaboratively—within the parameters defined by the Toyota Production System.

But Toyota, too, was largely confined by its vertically integrated business relationships (keiretsu) with suppliers.

Consequently, neither Ford Motor Company nor Toyota had to tackle transportation to the extent that businesses today do. Managing inbound processes within these finite loops was relatively easy to accomplish once management bought into the idea. With Ford this was a given; for Taiichi Ohno it took a little more time.

A New Perspective

By the late 1970s and early 1980s, U.S. businesses began looking at what Ford and Ohno envisioned through the lens of a new scope. Increasing globalization, emerging transportation sophistication, and the pervasive impact of communication technology expanded trade opportunities beyond existing thresholds.

The idea of a "supply chain" comprising myriad points of supply, many more points of consumption, and an infinite number of touchpoints in between, required a new way of looking at managing global transportation—and matching demand to supply.

Within this emerging dynamic, the Ford JIT model and the Toyota Production System sparked new ideas and justifications for following demand signals and managing inbound transportation. But it wasn't a linear process.

For some companies it was purely driven by cost economies; others saw it as a means to dig deeper into their supply chains to reduce inventory; fewer still saw an opportunity to create a nexus for change by breaking down silos and integrating functions across and beyond the enterprise. In a variety of ways, businesses embraced these ideas and ran.

Together, Ford and Ohno broke the mold for demand-driven logistics. But, they did not break the barrier. Rather, they positioned themselves and others to take the next leap.

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