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Annals of Business Administrative Science 13 (2014) 199–214 Available at www.gbrc.jp http://dx.doi.org/10.7880/abas.13.199 Online ISSN 1347-4456 Print ISSN 1347-4464 ©2014 Global Business Research Center

Spurious Correlation between Economies and Scale: Model T Ford Revisited

Koji YAMADAa)

Abstract: It is common knowledge that expansion in the scale of leads to . A correlation between economies and scale does exist. However, the reality on the shop floor, in Japanese, “gemba,” in actual is that increases and that there is expansion of production volumes through “flow creation” for the entire production process. Previous studies demonstrated how flow creation has led to increased productivity and expansion of production volumes even in relation to the production system for the Model T Ford, which is considered as a typical example of a large range cost reduction (i.e., an increase in productivity that was achieved through ). For example, expansion of production volumes occurs simultaneously as productivity increases due to a succession of standardizations such as the of components, production processes, and operations. That is, there is highly likely a spurious correlation between productivity and production volumes. Increased production does not guarantee increased productivity. In fact, that was the case with the Model T Ford. a) School of Business Administration, Senshu University, 2-1-1, Higashimita, Tama-ku, Kawasaki-shi, Kanagawa, Japan, [email protected] A version of this paper was presented at the ABAS Conference 2014 Winter (Yamada, 2014) 199

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Keywords: standardization, creating a production flow, economies of scale, mass production, spurious correlation, Model T Ford

Introduction

Economies of scale are not necessarily achieved because an organization becomes larger either within the internal or external boundaries of the firm. Economies of scale are not achieved even with expansion of the size through mass production or an increase in the size of the business through various corporate acquisitions and mergers, including those with other industry types (i.e., even if internal production is chosen rather than outsourcing) by increasing the standalone production volumes of relevant individuals, divisions, and businesses. Economies of scale are only achieved if there is coordination of the activities of the relevant individuals, divisions and businesses, and appropriate management of the overall flow of activities (Fujimoto, 2004; Miyazoe, 2006). Organizations can be viewed as systems operating through the interaction of various elements (Takahashi, 1995/2003/2006, 2014). A system is generally defined as a complex of interacting elements (von Bertalanffy, 1968). An organization is a concept that indicates linkages and relationships, and its main feature is the individual relations among elements. A feature of an overall organization is that it cannot be comprehended by summing the features of each individual element. Even in the case of organizations that have brought together similar elements, any difference in the method of interaction among elements leads to a difference in overall performance. The manner in which the elements of composition interact is the essence of the organization. Even in relation to manufacturing, it is more important to have

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Spurious correlation between economies and scale overall optimization as a system than the optimization of individual elements of composition of the production system to achieve the objective, whether that is the expansion of production volumes or increased productivity. A basic issue when pursuing such overall optimization is the creation of relationships between elements, that is, the creation of flows for each process and division, as well as for the supply chain that includes external component manufacturers and distributors. The appropriate coordination of such flows allowed for major U.S. companies such as Standard Oil Company, US , and , which emerged during the latter half of the 19th century to the first half of the , to benefit from economies of scale through mass production. For example, what was merely a loose federation of the U.S. Standard Oil Alliance rationalized into a large-scale business in 1882 by unifying business operations with the formation of Standard Oil Trust. This trust made it possible to reorganize the production process through consolidation of the affiliated refineries simultaneously constructing new refineries. It also allowed for the coordination of the flow of raw materials and products through the production process for kerosene, and by managing the supply chain from the oil fields to the oil refineries and to the consumer. This rationalization led to the concentration of close to one-quarter production of global kerosene in the Trust’s three refineries. Each refinery was large with a mean daily production competence of 6,500 barrels, and the mean cost per unit was substantially lower than its competitors, which contributed greatly to the expansion of the Trust’s profits (Chandler, 1977). Nevertheless, the fixed costs of large-scale production facilities are high, and the size of refinery operations required high-level maintenance to reduce the mean cost per unit. Achieving economies of scale required not only the expansion of production competence. 201

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The management of flows of raw materials, which passed through production and distribution processes, and products as well as trading volumes were all vital conditions.

Creating a Production Flow

A pioneering successful example of such a system in the assembly processing industry was the Ford system developed by Ford Motor Company (hereinafter, Ford). The Ford system is well known as a 20th century model of a mass production system. Production of the Model T Ford under this system commenced in 1908, and production rose to as high as 200,000 per year during the golden age of 1923, with a cumulative total production of 15 million when production ceased in 1927. The price of the Model T Ford also fell almost constantly in line with the increase in production volumes, from US$ 850 in 1908 to as low as US$ 290 by 1924 (Chandler, 1964). That is behind the general awareness of the legend of the Model T Ford being produced for 20 years “with no change to the T model” and with close to 15 million vehicles produced (Takahashi, 2013a). While there is also awareness that this model provided a typical successful example of large range cost reduction and lower pricing through the mass production of a single product. Nevertheless, the success of this Model T Ford was not that the large-scale production of this single product continued for a long time. Continuation of large-scale production of the same product does not lead to increased productivity (Takahashi，2013c). The large-scale production of the same product is not a simple matter. The Ford system was a revolutionary one that simultaneously achieved high productivity and mass production by facilitating the flow of production processes with system management as the linchpin. 202

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Automobile production systems comprise various activities such as the acquisition of raw materials, production of components, component assembly, and sale of finished vehicles. While the production of individual components use individual processes such as casting, heat treatment, forging, and machining. In addition, component assembly comprises the assembly of unit components and finished to install the unit components. The creation of a good flow is indispensable to facilitate the flow of goods in process and products between each of these processes. The creation of flows in the Ford system often brings to mind the moving assembling method using a conveyor. This production method of assembly that involves workers being still and the movement of goods to be processed along a conveyor was created by Ford, taking hints from the disassembly lines for processed meat companies in Chicago and Cincinnati. The improvements to this method of delivery, whether it is by conveyor or gravity slides, improved the layout of the production facilities while also facilitating the flow of the overall production process. In particular, the moving assembling method using the conveyor was a groundbreaking process innovation that greatly contributed to the synchronization of the operations for each process (Abernathy, 1978). Nevertheless, implementation of the moving assembling method independently does not increase productivity. Standardization is a vital prerequisite when creating flows.

Interchangeability of Parts

To utilize the features of the moving assembling method and synchronize the entire production process, the operation time for each operational process needs to be identical. This requires the subdivision of the operational processes as much as possible and attempts for standardization of operations. In addition, to make the 203

Yamada operation time identical, the uncertain and wasted time such as is required to modify components needs to be eliminated. The establishment of uniformity of quality and interchangeability of components is required to eliminate such wasteful operations. Furthermore, standardization of , jigs, fixtures, and gauges is necessary to manufacture such highly precise interchangeable components. The synchronization of the production process through the moving assembly method can only be achieved after this series of standardization has occurred. In particular, interchangeability through the standardization of components is fundamental and the most important condition for mass production of products such as cars, having many components. Until the establishment of production of interchangeable components, fine adjustments and “filing” are required to be made to each individual component when assembling parts. The process requires the finishing touches of skilled workers known as “fitters,” who coordinated and made fine adjustments and “filed” each individual component (Hounshell, 1984). Consequently, assembling took time and effort, while the operational time varied. For that reason, it was effectively impossible to efficiently and systematically mass produce such machine shop products. The fruition of interchangeability of components was the origin of the mass production method and a long-term theme commencing from the era of the American system of manufactures during the 19th century. The American system of manufactures refers to the production method to manufacture interchangeable products using special machine tools (i.e., machine tools designed and manufactured to create specific components) (Fujimoto, 2001). An English observation team visiting the New York Crystal Palace Exhibition and American in 1853 were amazed at the sight of American manufacturing shop floors, in Japanese, “gemba,” which were producing interchangeable components using special machine 204

Spurious correlation between economies and scale tools, and they coined this production method as the American manufacturing method. The notion of interchangeability of components is believed to have come from 18th century French Lieutenant General Jean-Baptiste Vaquette de Gribeauval (Hashimoto, 2002). From 1765, Lieutenant General Gribeauval experimented with the manufacture of artillery through interchangeable components to rationalize the military preparations for the French army. The idea was that if there was interchangeability of components, even if weapons were damaged on the battlefield, the broken components could be discarded and replaced with new components allowing for prompt restoration. Subsequently, Thomas Jefferson also introduced the idea of interchangeable components to America at the end of the 18th century, and the production of interchangeable components occurred for the production of small arms such as muskets from the early part of the 19th century at , which was the Federal government’s weapons factory. The aforementioned English observation team also visited Springfield Armory. However, there was limited production volume of interchangeable components even at Springfield Armory, and it was not at the level of mass production that would provide lower costs. The American system of manufactures began from the weapons industry, and subsequently spread to the private sector industry such as sewing , typewriters, and automobiles through the movement of technicians and intermediation of the machine tools industry. However, ultimately mass production of interchangeable components and substantial reductions in manufacturing costs were not achieved regardless of the industry or company.

Standardization in the Ford System

Mass production of interchangeable components and assembly of 205

Yamada such components was a complex issue at the time, even for the production of automobiles that comprised more than 5,000 components. Ford is known as the first company in the world to achieve such success, and standardization of manufactured goods was a major contributing factor (Fujimoto, 2012). The Model T Ford, which commenced production in 1908, was the ultimate standardized vehicle that emerged from the development of eight prior models that were sold as Model A (1903), Model B (1905), Model C (1904), Model F (1905), Model K (1905), Model N (1906), Model R (1907), and Model S (1908) (Sorensen, 1956). The founder, , also referred to this model as a “real product,” and a “universal ” that was the result of many years of trial and error (Ford, 1922). Fixing the product design led to progress in standardization in areas such as the company’s components, jigs， gauge, and machine tools. Regarding the standardization of the production process, developments were occurring from about 1906 under the direction of Walter E. Flanders and Max F. Wollering, who were mechanics with a of experience, while concurrent progress was being made in standardization of products. The deployment of machine tools was not done by type (for example drilling machines were not located together in a single area), but located in the processing order of the component. In addition, to improving the accuracy and speed of machining, special or single-purpose machine tools were developed, manufactured, and sourced. That is, there was steady progress toward standardization. There were more systematic standardization activities following the commencement of the Model T Ford production. Such policy was under the guidance of P. E. Martin and Charles Sorensen with operation sheets created by Ford’s heads of production. These operation sheets were filled in with the machining processes and necessary amount of material inputs for various components and 206

Spurious correlation between economies and scale details of the required machine tools, fixtures, and gauges. Rather than these operation sheets being immutable, absolute designs, they became guidelines to develop and improve the production (Hounshell, 1984). Furthermore, standardization of the production process and components also progressed following the proclamation in 1909 by Henry Ford that the Model T Ford would be the only car produced in future with the runabout, touring car, town car, and delivery car all having identical chassis. The subdivision of the production process and development of special and single-purpose machine tools implied that the important components for the Model T Ford were processed using the standardized jigs and fixtures, while post processing inspection also used such standardized gauges. In addition, the metallurgical development at the time led to harder metal materials and made a significant contribution to improving the accuracy of machining components. As a result, the interchangeability of components considerably increased in about 1913. That led to the improvement in the quality of components (Hounshell, 1984; Takahashi, 2013a; Wada, 2009). In addition, although there was said to be “no change” in the Model T Ford, however, there were frequent model changes. Such design changes were often made to improve the product functionality, but there were also many changes that considered manufacturability to facilitate the manufacturing processes for components and improved the flow of the assembly (Ford, 1926; Takahashi, 2013a). Furthermore, such standardization of the various elements of production also coincided with the careful standardization of the detailed operations of workers. Analysis of operation processes, the subdivision and specialization of processes, and the time study to confirm the details of each operation are required before there can be optimal operational processes that address the standardization of 207

Yamada production . Ford stated that beginning about 1913 the company had time studies made of all the thousands of operations in the shops (Ford, 1922). The standardization of the entire production system as the peak of the standardization of products led to substantial cost reduction, and became the foundation to support the mass production system. At Ford, the standardization of machine tools and production process unified the mechanics and skilled workers on the shop floor, in Japanese, “gemba,” and led to constant examinations and ongoing improvements. Such standardization of participation on the shop floor was later implemented on the moving assembly line (Hounshell, 1984). This series of standardization activities implied that Ford was achieving high productivity and increased production before the implementation of the moving assembly method. In addition, before the implementation, the final assembly of the Model T Ford was conducted using the stationary assembly method; this refers to a method of keeping the chassis stationary on the assembling platform, with multiple operational groups repeatedly moving to the assembling platform to undertake specific processes and attach components to assemble the chassis. For three continuous months from April to June 1913, Ford demonstrated an outstanding level of production of more than 20,000 vehicles per month using this stationary assembly method. For reference, Japanese automaker Toyota broke through the 20,000 per-year level in 1954. The yearly production volumes achieved by Toyota had been achieved by Ford in just one month almost 40 years earlier (Wada, 2009). However, using this stationary assembly method reached its limitations in terms of production capacity, and increased production using that method was becoming difficult. In the spring of 1913, each operational group was assembling while being crowded together in 208

Spurious correlation between economies and scale the same location where chassis were being assembled. The stationary assembly method conducted while people moved, which should have increased productivity due to the input of further workers, was having the opposite effect of lowering productivity (Wada, 2009). The moving assembly method was introduced to overcome the limitations of the stationary assembly method under such circumstances and to lead to further increase in the number of units produced. The moving assembly method was implemented in April 1913 or earlier for the manufacturer of components, and was also implemented for the final assembly line in August 1913 (Hounshell, 1984). This moving assembly method was unmistakably a groundbreaking process innovation that rapidly improved the production processing flows, but this moving assembly method was also merely one of the elements that supported the smooth flow of production processes. The increase in production of the Model T Ford and substantial reduction in production cost were also the result of the creation of flows for the entire production process based on a series of standardizations such as the standardization of products, components, and machine tools and instruments. In addition, it was not as though Model T Ford was integrated with centralized production at the major factories such as Highland Park Factory and River Rouge Factory. In fact, not a single Model T Ford was produced at the River Rouge Factory, which is symbolic of an enormous, vertically integrated factory with a steel plant, lumber mill, glass plant, as well as a power plant, in addition to a component plant. The assembly of the Model T Ford was conducted at Highland Park Factory, as well as at many domestic and overseas sub-assembly factories (assembly factories that were established to handle portions of the work of major factories). Such sub-assembly factories were 209

Yamada present in 28 locations in 1914 and 37 locations in 1923 (Wada, 2009). A major reason why Ford developed sub-assembly factories from an early stage was to reduce costs. Ford said in his 1926 book that seven bodies for touring cars would fill up a standard 36-foot freight two or three years prior to the writing of the book. At the time of the writing, the bodies were shipped knock down to be assembled and completed in the sub-assembly factories. The same size freight car could transport the equivalent of 130 touring cars in this way and what previously required 18 freight cars now only carried one freight car (Ford, 1926). There was a substantial reduction in transportation costs achieved using the knock down method (the method of transporting components and half-finished products for assembly on location) to produce the Model T Ford (Wada, 2009). Model T Ford was mass produced by a divided labor network through domestic and overseas sub-assembly factories. In fact， annual production of the Model T Ford peaked at 2 million in 1923, of which 120,000 Model T Fords were assembled at the Highland Park Factory, which was a mere 6% of the total (Hounshell, 1984; Wada, 2009). The assembly of the more than 90% remaining was undertaken at other sub-assembly factories, but close to half of such sub-assembly factories were small and could not even assemble 25,000 vehicles per year. The ability for Ford to develop a system for division of labor in production using many sub-assembly factories was due to the interchangeability of components that was completely achieved at the time. The standardization of components made it possible to supply each sub-assembly factory with the same quality components, which implied that it was possible to assemble an identical quality Model T Ford at any of the sub-assembly factories. Highland Park Factory was Ford’s “major factory,” not because of 210

Spurious correlation between economies and scale the large quantity of vehicles assembled, but because it was the “mother factory” supplying almost all the components to the sub-assembly factories that were spread across domestic and overseas locations. The superior product design of the Model T Ford made mass production of the Model T Ford possible with the division of operations that were connected between the component production base at the Highland Park Factory and sub-assembly factories in each location.

Conclusion

The mass production of the Model T Ford and the improvement in productivity was not simply because of expansion of production facilities and increased production. In addition, an increase in cumulative number of units produced due to the so-called experience effect does not necessarily imply that there will be an automatic improvement in production efficiency (Abernathy & Wayne, 1974; Akiike, 2013; Takahashi, 2013b, 2013c). Increases in productivity and production volumes were due to appropriate control of the entire production process, that is, the management of flows through standardization. Standardization ensured the development of efficient and unyielding flows not only within the processes and factories, but also in relation to the division of labor at sub-assembly factories that were geographically separated. Ford was successful in efficiently increasing the production of the Model T Ford and mass sales domestically and overseas. This paper discussed only one example. Therefore, it may be difficult to make a definitive conclusion from this example. However, it is highly likely that there is spurious correlation between production volumes and productivity for a manufacturer. Whether it is the Ford system or the Toyota production system, which is frequently raised as a contrasting production method, companies 211

Yamada that pursue the essence of mass production can achieve ongoing benefits from increased productivity and production volume, by optimizing and reviewing the entire system. There is no end to system improvements; companies that stop improving will be unable to maintain such competence and could degenerate. In fact, at Ford, the fascination with the rapid increase in production of the Model T Ford and success of cost cutting implied that the meaning of production synchronization through systems was quickly completely forgotten. Chasing the vision of the mass production effect, production was based on the forecast that there would be an increase in production volume for each process and this led to toleration of some defective goods and a buildup in inventories. The progress in subdivision of assembly by a conveyor meant that there was an overwhelming increase in the ratio of single-purpose operators. In addition, there was a large outflow of veteran technicians and master mechanics that had previously continued to support the developments and improvements of the Ford system. Consequently, the gemba, which had been characterized by a participatory style production management, was left to a management class and specialists (Shimokawa, 1972; Fujimoto, 2001). The Ford System lost sight of the essence of the system, and there was no longer revisions and sustained improvements to the production processes. That led to the degeneration into an ossified production system.

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Received March 2, 2014; accepted March 25, 2014

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