Henry Ford achieved world-class results with three key performance indicators (KPIs), none of which were financial. His successors’ changeover to financial metrics, on the other hand, caused the company to forget what we now call the Toyota production system.
In her recent editorial, Pat Panchak cites several ways in which financial performance metrics can undermine any manufacturing operation. Michael Sekora elaborates in Forbes, “The disease killing America’s economic health is financial-based planning, and one of the symptoms of this ongoing disease is the loss of the U.S. manufacturing base.” Industry is the foundation of military as well as economic power, so the resulting transfer of American manufacturing capability to China is extremely dangerous.
Panchak’s article underscores the very ancient principle, “Be careful what you wish, because you are likely to get it,” such as purchase price reductions at the expense of quality and lead time. The rest of this article will focus on why financial metrics that are mandatory for financial reports and tax returns have no place in operational decision making. In My Life and Work, Henry Ford and Samuel Crowther warned more than 90 years ago, “That finance is given a place ahead of work and therefore tends to kill the work and destroy the fundamental of service.” The reference is probably the best business book ever written, and it is also in the public domain.
Henry Ford’s creation of what we now call lean manufacturing is an excellent reason to listen to him today, and so is his company’s role in making the United States the wealthiest and most powerful nation on earth. Why, then, do we call his methods the Toyota production system instead of the Ford production system? When the so-called “Whiz Kids” applied financial metrics to the Ford Motor Co. after World War II, it declined to the point where it forgot the methods to which it owed its phenomenal success. In a 2001 Wall Street Journal article, Norihiko Shirouzu reported that a Ford vice president was “trying to entice assembly workers and engineers to abandon nearly all they know about the mass manufacturing system that Henry Ford brought to life about 90 years ago.” The rest of the article showed that the vice president was actually trying to teach the workforce exactly how Henry Ford made cars, but he apparently believed the methods to be Japanese.
When Inventory Is Not an Asset
Everybody knows, at least in the accounting world, that inventory is a current asset: one that can be converted into cash within a year. This means there is nothing wrong with purchasing extra materials to get a good deal or a price discount, as cited by Panchak. Benjamin Franklin, however, warned of the unintended consequences in The Way to Wealth:
“You call them goods; but, if you do not take care, they will prove evils to some of you. You expect they will be sold cheap, and, perhaps, they may for less than they cost; but, if you have no occasion for them, they must be dear to you. Remember what poor Richard says, “Buy what thou hast no need of, and ere long thou shalt sell thy necessaries.” And again, “At a great pennyworth pause a while:” he means, that perhaps the cheapness is apparent only, and not real; or the bargain, by straitening thee in thy business, may do thee more harm than good. For, in another place, he says, “Many have been ruined by buying good pennyworths.”
Ford cited Franklin as a major influence on his own practices, and his books paraphraseThe Way to Wealth extensively. This makes Franklin not only one of the country’s Founding Fathers, but also the true originator of what we now call lean manufacturing.
Read more: http://www.industryweek.com/leadership/when-finance-runs-factory?Issue=BF-08a_20141031_BF-08a_45&sfvc4enews=42&cl=article_2&YM_RID=CPG03000001667022&YM_MID=1687
By William Levinson, from: http://www.industryweek.com/leadership/when-finance-runs-factory?Issue=BF-08a_20141031_BF-08a_45&sfvc4enews=42&cl=article_2&YM_RID=CPG03000001667022&YM_MID=1687