HOW CHEAPLY CAN THINGS BE MADE?
No one will deny that if prices are sufficiently low, buyers will always
be found, no matter what are supposed to be the business conditions.
That is one of the elemental facts of business. Sometimes raw materials
will not move, no matter how low the price. We have seen something of
that during the last year, but that is because the manufacturers and the
distributors were trying to dispose of high-cost stocks before making
new engagements. The markets were stagnant, but not "saturated" with
goods. What is called a "saturated" market is only one in which the
prices are above the purchasing power.
Unduly high prices are always a sign of unsound business, because they
are always due to some abnormal condition. A healthy patient has a
normal temperature; a healthy market has normal prices. High prices come
about commonly by reason of speculation following the report of a
shortage. Although there is never a shortage in everything, a shortage
in just a few important commodities, or even in one, serves to start
speculation. Or again, goods may not be short at all. An inflation of
currency or credit will cause a quick bulge in apparent buying power and
the consequent opportunity to speculate. There may be a combination of
actual shortages and a currency inflation--as frequently happens during
war. But in any condition of unduly high prices, no matter what the real
cause, the people pay the high prices because they think there is going
to be a shortage. They may buy bread ahead of their own needs, so as not
to be left later in the lurch, or they may buy in the hope of reselling
at a profit. When there was talk of a sugar shortage, housewives who had
never in their lives bought more than ten pounds of sugar at once tried
to get stocks of one hundred or two hundred pounds, and while they were
doing this, speculators were buying sugar to store in warehouses. Nearly
all our war shortages were caused by speculation or buying ahead of
need.
No matter how short the supply of an article is supposed to be, no
matter if the Government takes control and seizes every ounce of that
article, a man who is willing to pay the money can always get whatever
supply he is willing to pay for. No one ever knows actually how great or
how small is the national stock of any commodity. The very best figures
are not more than guesses; estimates of the world's stock of a commodity
are still wilder. We may think we know how much of a commodity is
produced on a certain day or in a certain month, but that does not tell
us how much will be produced the next day or the next month. Likewise we
do not know how much is consumed. By spending a great deal of money we
might, in the course of time, get at fairly accurate figures on how much
of a particular commodity was consumed over a period, but by the time
those figures were compiled they would be utterly useless except for
historical purposes, because in the next period the consumption might be
double or half as much. People do not stay put. That is the trouble with
all the framers of Socialistic and Communistic, and of all other plans
for the ideal regulation of society. They all presume that people will
stay put. The reactionary has the same idea. He insists that everyone
ought to stay put. Nobody does, and for that I am thankful.
Consumption varies according to the price and the quality, and nobody
knows or can figure out what future consumption will amount to, because
every time a price is lowered a new stratum of buying power is reached.
Everyone knows that, but many refuse to recognize it by their acts. When
a storekeeper buys goods at a wrong price and finds they will not move,
he reduces the price by degrees until they do move. If he is wise,
instead of nibbling at the price and encouraging in his customers the
hope of even lower prices, he takes a great big bite out of the price
and gets the stuff out of his place. Everyone takes a loss on some
proposition of sales. The common hope is that after the loss there may
be a big profit to make up for the loss. That is usually a delusion. The
profit out of which the loss has to be taken must be found in the
business preceding the cut. Any one who was foolish enough to regard the
high profits of the boom period as permanent profits got into financial
trouble when the drop came. However, there is a belief, and a very
strong one, that business consists of a series of profits and losses,
and good business is one in which the profits exceed the losses.
Therefore some men reason that the best price to sell at is the highest
price which may be had. That is supposed to be good business practice.
Is it? We have not found it so.
We have found in buying materials that it is not worth while to buy for
other than immediate needs. We buy only enough to fit into the plan of
production, taking into consideration the state of transportation at the
time. If transportation were perfect and an even flow of materials could
be assured, it would not be necessary to carry any stock whatsoever. The
carloads of raw materials would arrive on schedule and in the planned
order and amounts, and go from the railway cars into production. That
would save a great deal of money, for it would give a very rapid
turnover and thus decrease the amount of money tied up in materials.
With bad transportation one has to carry larger stocks. At the time of
revaluing the inventory in 1921 the stock was unduly high because
transportation had been so bad. But we learned long ago never to buy
ahead for speculative purposes. When prices are going up it is
considered good business to buy far ahead, and when prices are up to buy
as little as possible. It needs no argument to demonstrate that, if you
buy materials at ten cents a pound and the material goes later to twenty
cents a pound you will have a distinct advantage over the man who is
compelled to buy at twenty cents. But we have found that thus buying
ahead does not pay. It is entering into a guessing contest. It is not
business. If a man buys a large stock at ten cents, he is in a fine
position as long as the other man is paying twenty cents. Then he later
gets a chance to buy more of the material at twenty cents, and it seems
to be a good buy because everything points to the price going to thirty
cents. Having great satisfaction in his previous judgment, on which he
made money, he of course makes the new purchase. Then the price drops
and he is just where he started. We have carefully figured, over the
years, that buying ahead of requirements does not pay--that the gains on
one purchase will be offset by the losses on another, and in the end we
have gone to a great deal of trouble without any corresponding benefit.
Therefore in our buying we simply get the best price we can for the
quantity that we require. We do not buy less if the price be high and we
do not buy more if the price be low. We carefully avoid bargain lots in
excess of requirements. It was not easy to reach that decision. But in
the end speculation will kill any manufacturer. Give him a couple of
good purchases on which he makes money and before long he will be
thinking more about making money out of buying and selling than out of
his legitimate business, and he will smash. The only way to keep out of
trouble is to buy what one needs--no more and no less. That course
removes one hazard from business.
This buying experience is given at length because it explains our
selling policy. Instead of giving attention to competitors or to demand,
our prices are based on an estimate of what the largest possible number
of people will want to pay, or can pay, for what we have to sell. And
what has resulted from that policy is best evidenced by comparing the
price of the touring car and the production.
YEAR PRICE PRODUCTION
1909-10 $950 18,664 cars
1910-11 $780 34,528 "
1911-12 $690 78,440 "
1912-13 $600 168,220 "
1913-14 $550 248,307 "
1914-15 $490 308,213 "
1915-16 $440 533,921 "
1916-17 $360 785,432 "
1917-18 $450 706,584 "
1918-19 $525 533,706 "
(The above two years were war years and the factory was in war work).
1919-20 $575 to $440 996,660 "
1920-21 $440 to $355 1,250,000 "
The high prices of 1921 were, considering the financial inflation, not
really high. At the time of writing the price is $497. These prices are
actually lower than they appear to be, because improvements in quality
are being steadily made. We study every car in order to discover if it
has features that might be developed and adapted. If any one has
anything better than we have we want to know it, and for that reason we
buy one of every new car that comes out. Usually the car is used for a
while, put through a road test, taken apart, and studied as to how and
of what everything is made. Scattered about Dearborn there is probably
one of nearly every make of car on earth. Every little while when we buy
a new car it gets into the newspapers and somebody remarks that Ford
doesn't use the Ford. Last year we ordered a big Lanchester--which is
supposed to be the best car in England. It lay in our Long Island
factory for several months and then I decided to drive it to Detroit.
There were several of us and we had a little caravan--the Lanchester, a
Packard, and a Ford or two. I happened to be riding in the Lanchester
passing through a New York town and when the reporters came up they
wanted to know right away why I was not riding in a Ford.
"Well, you see, it is this way," I answered. "I am on a vacation now; I
am in no hurry, we do not care much when we get home. That is the reason
I am not in the Ford."
You know, we also have a line of "Ford stories"!
Our policy is to reduce the price, extend the operations, and improve
the article. You will notice that the reduction of price comes first. We
have never considered any costs as fixed. Therefore we first reduce the
price to a point where we believe more sales will result. Then we go
ahead and try to make the price. We do not bother about the costs. The
new price forces the costs down. The more usual way is to take the costs
and then determine the price, and although that method may be scientific
in the narrow sense, it is not scientific in the broad sense, because
what earthly use is it to know the cost if it tells you you cannot
manufacture at a price at which the article can be sold? But more to the
point is the fact that, although one may calculate what a cost is, and
of course all of our costs are carefully calculated, no one knows what a
cost ought to be. One of the ways of discovering what a cost ought to be
is to name a price so low as to force everybody in the place to the
highest point of efficiency. The low price makes everybody dig for
profits. We make more discoveries concerning manufacturing and selling
under this forced method than by any method of leisurely investigation.
The payment of high wages fortunately contributes to the low costs
because the men become steadily more efficient on account of being
relieved of outside worries. The payment of five dollars a day for an
eight-hour day was one of the finest cost-cutting moves we ever made,
and the six-dollar day wage is cheaper than the five. How far this will
go, we do not know.
We have always made a profit at the prices we have fixed and, just as we
have no idea how high wages will go, we also have no idea how low prices
will go, but there is no particular use in bothering on that point. The
tractor, for instance, was first sold for $750, then at $850, then at
$625, and the other day we cut it 37 per cent, to $395. The tractor is
not made in connection with the automobiles. No plant is large enough to
make two articles. A shop has to be devoted to exactly one product in
order to get the real economies.
For most purposes a man with a machine is better than a man without a
machine. By the ordering of design of product and of manufacturing
process we are able to provide that kind of a machine which most
multiplies the power of the hand, and therefore we give to that man a
larger role of service, which means that he is entitled to a larger
share of comfort.
Keeping that principle in mind we can attack waste with a definite
objective. We will not put into our establishment anything that is
useless. We will not put up elaborate buildings as monuments to our
success. The interest on the investment and the cost of their upkeep
only serve to add uselessly to the cost of what is produced--so these
monuments of success are apt to end as tombs. A great administration
building may be necessary. In me it arouses a suspicion that perhaps
there is too much administration. We have never found a need for
elaborate administration and would prefer to be advertised by our
product than by where we make our product.
The standardization that effects large economies for the consumer
results in profits of such gross magnitude to the producer that he can
scarcely know what to do with his money. But his effort must be sincere,
painstaking, and fearless. Cutting out a half-a-dozen models is not
standardizing. It may be, and usually is, only the limiting of business,
for if one is selling on the ordinary basis of profit--that is, on the
basis of taking as much money away from the consumer as he will give
up--then surely the consumer ought to have a wide range of choice.
Standardization, then, is the final stage of the process. We start with
consumer, work back through the design, and finally arrive at
manufacturing. The manufacturing becomes a means to the end of service.
It is important to bear this order in mind. As yet, the order is not
thoroughly understood. The price relation is not understood. The notion
persists that prices ought to be kept up. On the contrary, good
business--large consumption--depends on their going down.
And here is another point. The service must be the best you can give. It
is considered good manufacturing practice, and not bad ethics,
occasionally to change designs so that old models will become obsolete
and new ones will have to be bought either because repair parts for the
old cannot be had, or because the new model offers a new sales argument
which can be used to persuade a consumer to scrap what he has and buy
something new. We have been told that this is good business, that it is
clever business, that the object of business ought to be to get people
to buy frequently and that it is bad business to try to make anything
that will last forever, because when once a man is sold he will not buy
again.
Our principle of business is precisely to the contrary. We cannot
conceive how to serve the consumer unless we make for him something
that, as far as we can provide, will last forever. We want to construct
some kind of a machine that will last forever. It does not please us to
have a buyer's car wear out or become obsolete. We want the man who buys
one of our products never to have to buy another. We never make an
improvement that renders any previous model obsolete. The parts of a
specific model are not only interchangeable with all other cars of that
model, but they are interchangeable with similar parts on all the cars
that we have turned out. You can take a car of ten years ago and, buying
to-day's parts, make it with very little expense into a car of to-day.
Having these objectives the costs always come down under pressure. And
since we have the firm policy of steady price reduction, there is always
pressure. Sometimes it is just harder!
Take a few more instances of saving. The sweepings net six hundred
thousand dollars a year. Experiments are constantly going on in the
utilization of scrap. In one of the stamping operations six-inch circles
of sheet metal are cut out. These formerly went into scrap. The waste
worried the men. They worked to find uses for the discs. They found that
the plates were just the right size and shape to stamp into radiator
caps but the metal was not thick enough. They tried a double thickness
of plates, with the result that they made a cap which tests proved to be
stronger than one made out of a single sheet of metal. We get 150,000 of
those discs a day. We have now found a use for about 20,000 a day and
expect to find further uses for the remainder. We saved about ten
dollars each by making transmissions instead of buying them. We
experimented with bolts and produced a special bolt made on what is
called an "upsetting machine" with a rolled thread that was stronger
than any bolt we could buy, although in its making was used only about
one third of the material that the outside manufacturers used. The
saving on one style of bolt alone amounted to half a million dollars a
year. We used to assemble our cars at Detroit, and although by special
packing we managed to get five or six into a freight car, we needed many
hundreds of freight cars a day. Trains were moving in and out all the
time. Once a thousand freight cars were packed in a single day. A
certain amount of congestion was inevitable. It is very expensive to
knock down machines and crate them so that they cannot be injured in
transit--to say nothing of the transportation charges. Now, we assemble
only three or four hundred cars a day at Detroit--just enough for local
needs. We now ship the parts to our assembling stations all over the
United States and in fact pretty much all over the world, and the
machines are put together there. Wherever it is possible for a branch to
make a part more cheaply than we can make it in Detroit and ship it to
them, then the branch makes the part.
The plant at Manchester, England, is making nearly an entire car. The
tractor plant at Cork, Ireland, is making almost a complete tractor.
This is an enormous saving of expense and is only an indication of what
may be done throughout industry generally, when each part of a composite
article is made at the exact point where it may be made most
economically. We are constantly experimenting with every material that
enters into the car. We cut most of our own lumber from our own forests.
We are experimenting in the manufacture of artificial leather because we
use about forty thousand yards of artificial leather a day. A penny here
and a penny there runs into large amounts in the course of a year.
The greatest development of all, however, is the River Rouge plant,
which, when it is running to its full capacity, will cut deeply and in
many directions into the price of everything we make. The whole tractor
plant is now there. This plant is located on the river on the outskirts
of Detroit and the property covers six hundred and sixty-five
acres--enough for future development. It has a large slip and a turning
basin capable of accommodating any lake steamship; a short-cut canal and
some dredging will give a direct lake connection by way of the Detroit
River. We use a great deal of coal. This coal comes directly from our
mines over the Detroit, Toledo and Ironton Railway, which we control, to
the Highland Park plant and the River Rouge plant. Part of it goes for
steam purposes. Another part goes to the by-product coke ovens which we
have established at the River Rouge plant. Coke moves on from the ovens
by mechanical transmission to the blast furnaces. The low volatile gases
from the blast furnaces are piped to the power plant boilers where they
are joined by the sawdust and the shavings from the body plant--the
making of all our bodies has been shifted to this plant--and in addition
the coke "breeze" (the dust in the making of coke) is now also being
utilized for stoking. The steam power plant is thus fired almost
exclusively from what would otherwise be waste products. Immense steam
turbines directly coupled with dynamos transform this power into
electricity, and all of the machinery in the tractor and the body plants
is run by individual motors from this electricity. In the course of time
it is expected that there will be sufficient electricity to run
practically the whole Highland Park plant, and we shall then have cut
out our coal bill.
Among the by-products of the coke ovens is a gas. It is piped both to
the Rouge and Highland Park plants where it is used for heat-treat
purposes, for the enamelling ovens, for the car ovens, and the like. We
formerly had to buy this gas. The ammonium sulphate is used for
fertilizer. The benzol is a motor fuel. The small sizes of coke, not
suitable for the blast furnaces, are sold to the employees--delivered
free into their homes at much less than the ordinary market price. The
large-sized coke goes to the blast furnaces. There is no manual
handling. We run the melted iron directly from the blast furnaces into
great ladles. These ladles travel into the shops and the iron is poured
directly into the moulds without another heating. We thus not only get a
uniform quality of iron according to our own specifications and directly
under our control, but we save a melting of pig iron and in fact cut out
a whole process in manufacturing as well as making available all our own
scrap.
What all this will amount to in point of savings we do not know--that
is, we do not know how great will be the saving, because the plant has
not been running long enough to give more than an indication of what is
ahead, and we save in so many directions--in transportation, in the
generation of our power, in the generation of gas, in the expense in
casting, and then over and above that is the revenue from the
by-products and from the smaller sizes of coke. The investment to
accomplish these objects to date amounts to something over forty million
dollars.
How far we shall thus reach back to sources depends entirely on
circumstances. Nobody anywhere can really do more than guess about the
future costs of production. It is wiser to recognize that the future
holds more than the past--that every day holds within it an improvement
on the methods of the day before.
But how about production? If every necessary of life were produced so
cheaply and in such quantities, would not the world shortly be surfeited
with goods? Will there not come a point when, regardless of price,
people simply will not want anything more than what they already have?
And if in the process of manufacturing fewer and fewer men are used,
what is going to become of these men--how are they going to find jobs
and live?
Take the second point first. We mentioned many machines and many methods
that displaced great numbers of men and then someone asks:
"Yes, that is a very fine idea from the standpoint of the proprietor,
but how about these poor fellows whose jobs are taken away from them?"
The question is entirely reasonable, but it is a little curious that it
should be asked. For when were men ever really put out of work by the
bettering of industrial processes? The stage-coach drivers lost their
jobs with the coming of the railways. Should we have prohibited the
railways and kept the stage-coach drivers? Were there more men working
with the stage-coaches than are working on the railways? Should we have
prevented the taxicab because its coming took the bread out of the
mouths of the horse-cab drivers? How does the number of taxicabs compare
with the number of horse-cabs when the latter were in their prime? The
coming of shoe machinery closed most of the shops of those who made
shoes by hand. When shoes were made by hand, only the very well-to-do
could own more than a single pair of shoes, and most working people went
barefooted in summer. Now, hardly any one has only one pair of shoes,
and shoe making is a great industry. No, every time you can so arrange
that one man will do the work of two, you so add to the wealth of the
country that there will be a new and better job for the man who is
displaced. If whole industries changed overnight, then disposing of the
surplus men would be a problem, but these changes do not occur as
rapidly as that. They come gradually. In our own experience a new place
always opens for a man as soon as better processes have taken his old
job. And what happens in my shops happens everywhere in industry. There
are many times more men to-day employed in the steel industries than
there were in the days when every operation was by hand. It has to be
so. It always is so and always will be so. And if any man cannot see it,
it is because he will not look beyond his own nose.
Now as to saturation. We are continually asked:
"When will you get to the point of overproduction? When will there be
more cars than people to use them?"
We believe it is possible some day to reach the point where all goods
are produced so cheaply and in such quantities that overproduction will
be a reality. But as far as we are concerned, we do not look forward to
that condition with fear--we look forward to it with great satisfaction.
Nothing could be more splendid than a world in which everybody has all
that he wants. Our fear is that this condition will be too long
postponed. As to our own products, that condition is very far away. We
do not know how many motor cars a family will desire to use of the
particular kind that we make. We know that, as the price has come down,
the farmer, who at first used one car (and it must be remembered that it
is not so very long ago that the farm market for motor cars was
absolutely unknown--the limit of sales was at that time fixed by all the
wise statistical sharps at somewhere near the number of millionaires in
the country) now often uses two, and also he buys a truck. Perhaps,
instead of sending workmen out to scattered jobs in a single car, it
will be cheaper to send each worker out in a car of his own. That is
happening with salesmen. The public finds its own consumptive needs with
unerring accuracy, and since we no longer make motor cars or tractors,
but merely the parts which when assembled become motor cars and
tractors, the facilities as now provided would hardly be sufficient to
provide replacements for ten million cars. And it would be quite the
same with any business. We do not have to bother about overproduction
for some years to come, provided the prices are right. It is the refusal
of people to buy on account of price that really stimulates real
business. Then if we want to do business we have to get the prices down
without hurting the quality. Thus price reduction forces us to learn
improved and less wasteful methods of production. One big part of the
discovery of what is "normal" in industry depends on managerial genius
discovering better ways of doing things. If a man reduces his selling
price to a point where he is making no profit or incurring a loss, then
he simply is forced to discover how to make as good an article by a
better method--making his new method produce the profit, and not
producing a profit out of reduced wages or increased prices to the
public.
It is not good management to take profits out of the workers or the
buyers; make management produce the profits. Don't cheapen the product;
don't cheapen the wage; don't overcharge the public. Put brains into the
method, and more brains, and still more brains--do things better than
ever before; and by this means all parties to business are served and
benefited.
And all of this can always be done.