Ford-ism, Toyota-ism, and Tesla-ism

If you’ve taken a management course, you’ll of course be aware of the idea of Taylorism. Simply described it’s a scientific management method in which work is broken down into simple steps or stages that allows low-skilled employees to undertake work quickly and efficiently.?

Henry Ford created one of the first production line using scientific management techniques. Work passed down a moving production line through various stages to employees who cycled through the same piece of work dozens of times per shift. The cycle time of the work determined the output: a key managerial task was to keep the line running and to balance the work along the line to reduce losses.

The benefits of scientific management are that you deskill the work, create standard processes, reduce the time taken to manufacture, create efficiencies and reduce quality defects. However, to do run a line well, you need a constant supply of inventory to feed the line.?

The need for security of supply resulted in high inventory holdings, particularly in Western automotive companies which until the 1980’s typically held several weeks of inventory. However, in the (now iconic) book, ‘The Machine that Changed the World’, the authors Womack and Jones identified a company (Toyota) that managed to run efficient processes with very little inventory. The differences in inventory holdings were phenomenal – several weeks inventory in US automotive factories versus several hours inventory in equivalent Japanese factories.

They set out to discover why, and the first thing that they noticed was that the process technology was the samel this meant that the differences were down to management. In Western factories inventory was seen as an asset and a buffer against disruptions in supply chains or because of breakdowns. Toyota however argued that inventory not only tied up working capital, but meant that there was no incentive to solve the underlying problems that caused disruption. So, whereas in the West a machine might run until it broke, Toyota instigated TPM or total productive maintenance to ensure that the machine never broke down.?

In the same way that the Ford production method was revolutionary, Womack and Jones’ findings changed the way that the automotive industry operated globally, creating the phenomenon that we now call ‘lean’ that extended out of the factory into whole supply chains which were run using a ‘Just in Time’ mindset.?

Step forward Volvo, who in the late 1980’s tried to reinvent the way that cars were built. On the premise that Fordism is not good for worker satisfaction and morale, they took a humanist approach, going back to the craft-based automotive production methods. This meant that workers wouldn’t spend 30 seconds on each cycle of work but would see the production of a car from start to finish. The experiment failed – there were much higher defect rates and significantly lower productivity.?

Notwithstanding the Volvo experiment, the automotive industry has been working around a set of key principals for some time. There have been some tweaks - the previously mentioned ‘cycle time’ is now commonly referred to as ‘takt time’ from the German word pulse or beat. The takt time sets the work rhythm and speed at which a factory works. A modern high-volume factory has a takt time of 30-something seconds, meaning a new car rolls of the line at intervals of less than a minute. Perhaps it is no coincidence that a German word is used to describe the efficient heartbeat of a factory; the German automotive sector is after all considered world-leaders across a range of metrics.

Indeed, the last several decades has seen an increased emphasis on efficiency and as a result outsourcing has become the normal way to acquire components. On a typical car, 70% or more components are bought in, meaning the automotive companies resemble assembly shops more than manufacturing outfits. This supply chain configuration reduces capital costs, allows companies to focus on their core business, and provides components from specialists located anywhere in the world.?

However, the industry is once again being disrupted. Step forward Tesla. To quote Elon Musk, his company is ‘absurdly vertically integrated’. Examples of vertical integration abound in Tesla. Key raw materials needed for batteries such as lithium and nickel are acquired directly from mining companies. Tesla designs its own chips on which runs Tesla-designed computer architecture. The company makes motors and other electronic components. Integration also occurs on the downstream side: rather than relying on franchised dealers, it has its own stores.?

Whilst it would be easy to dismiss Tesla as an outlier, if you look at the biggest 10 automotive companies in the world, the market cap of Tesla is roughly the same as the next nine companies combined: they’re successful because they are doing something different.?

The challenge we increasingly face in our economy is how to successfully manage supply chain risk: the approach taken by Tesla is an example of a company that is radically different. Aside from securing supply, Tesla's approach to supply chain management creates a wall behind which to hide your intellectual property, making it harder to appropriate. Tesla is a great example of a company that is creating competitive advantage through superior operations performance, creating assets which are valuable, rare, inimitable and which it can operationalise to its advantage. The challenge for the other players in the field is how to compete with Tesla.?