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 production leads to economies of scale. A correlation between economies and scale does exist. However, the reality on the shop floor, in Japanese, “gemba,” in actual manufacturing is that productivity 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 mass production). For example, expansion of production volumes occurs simultaneously as productivity increases due to a succession of standardizations such as the standardization 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 Yamada 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 factory 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 200 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 Steel, and Ford Motor Company, which emerged during the latter half of the 19th century to the first half of the 20th century, 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 Yamada 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 vehicles per year during the golden age of 1923, with a cumulative total production of 15 million cars 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 Spurious correlation between economies and scale 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 vehicle assembly line 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 machine tools, jigs, fixtures, and gauges is necessary to manufacture such highly precise interchangeable components. The synchronization