Several years ago I was invited to speak on Lean and Lean Accounting at a national financial executive conference in Philadelphia. I was hesitant to accept this invitation. I knew in advance that the attendees of this conference would be all CPA's and very, very financial types. Worse yet, the organizers of this conference had asked me to go on "first" that morning. How would my managerial presentation on Change in accounting go over with a financial group that had not wanted change in over 70 years?
Henry Ford, Father of Lean
I had, as did all speakers that day, just 45 minutes to get my message on Lean Accounting across to every financial type at the conference. Forty-five minutes isn�t really enough time to bring everyone forward from 1921 when Henry Ford fathered the business philosophy of Lean. Much to my amazement, none of the attendees threw eggs or tomatoes! Instead, they sat very quietly, listening attentively to what I had to say. They even applauded when I finished within my allotted 45 minutes. Perhaps they were applauding because I was finished _the only managerial speaker in this totally financial conference.
Eli Goldratt Repeated Ford's Message
The second speaker up that day at the conference was an Investment Banker. He, too, had to have felt (as I did) that 45 minutes was not enough time to plead his case. Even so, he took the first 5 of his 45 minutes to applaud my talk! In so doing, he told everyone what a shame it was that Eli Goldratt had spoken the same message as me twenty years ago and that for twenty years no one has listened. Now, ten more years later, still no one is listening, and our economy is in yet another recession _this one the worst recession ever! What I had to say that day Mr. Goldratt had said before, and Toyota had said it before him, and Henry Ford had said the same thing in the early 1900's. Why has everyone failed to see the wisdom in the philosophy of business that Henry Ford probably called "common sense?" And why are government leaders today reading Abe Lincoln and not Henry Ford? After all, Henry Ford made this country the wealthiest and most profitable country in the world in the early 1900's!
Henry Ford's Common Sense Principles
Let us examine Henry Ford's principles of business, from his first Model A to his Model T, and also take a look at some statistics on Ford's sales and pricing. Then, how can we, as Lean accountants, apply what we should have learned from Henry Ford to our economic crisis today?
First of all, Henry Ford said that the focus today should be on manufacturing_ not banking and government. Only manufacturing, agriculture, and transportation industries can fix the economic problem today_ not government. Henry Ford tells us we should replace politicians with engineers! He tells us that we should be watching the hole (waste) as well as the donut (product.) Ford's philosophy of business all starts with a Vision Statement (ie, a Future Value Stream Map) and how the product will satisfy the Customer's need.
Ford said (1930) that, during 19 years of production, the Model T was directly responsible for the generation of $7 billion of wages and income_ more than the estimated wealth of 35 of this country's 48 states at that time in history. His achievements changed the course of history! Henry Ford's four (4) principles of business were, and still are, as follows:
- Absence of fear of the future: There is no disgrace in honest failure; failure is an opportunity to begin again.
- Service before profit: Profit is the result of service. Profit comes as a reward for good service.
- Manufacturing is not buying low and selling high: Manufacturing is buying materials fairly, with the least addition of cost, transforming those materials into a consumer product, and distributing that product.
- Disregard of competition: Manufacturers should try to gain business by offering a better product or service.
Ford went on to tell us that "...business which just swells and becomes cumbersome... and thought to be big business...is only little business suffering from elephantiasis."
Let's look at how and why Ford's business truly "swelled."
- In his very first year, he produced and sold the Model A. He priced the Model A at $850 and sold 1708 cars.
- In his second year, he scattered his energy, raised prices, and had to pay for advertising. He made and priced the Model B at $2000, the Model C at $900, and the Model F at $1000. He sold a total of 1695 cars that year.
- The next year he made only 2 models: the Model C priced at $2000 and the Model F priced at $1000. He sold 1599 cars total. Was this decline in sales due to no new models or too high a price?
- The next year he made 3 models of cars, priced from $600 to $750, and sold 8,423 cars.
- The next year he continued making 2 small models and one BIG car. Sales dropped to 6,398 cars.
- The next year he made only the Model T, and sold 10,000 cars!
- The next year he made only the Model T and dropped the price, and sold 11,664 cars.
- The following year he cut prices again and sold 34,528 cars!
Ford was not just creating something to sell (something that did not add value for the customer), but rather something that would help people_ a service. Ford defined service as "...the low cost production of high-grade goods, made by well-paid labor, and manufactured and distributed at a profit." In this same line of thinking, Henry Ford tells us that "the cure of business depression is through purchasing power, and the source of purchasing power is wages. The way to check a depression is to cut the price and increase the wage." Why? Only with higher wages and lower costs can your employees become your best customers!
Henry Ford's Recipe for Success in Hard Times
Henry Ford told us years ago that any business is better off when its money comes from the buyers of its products. "Wealth is not increased by stock activity; at best, it only changes hands." To repeat: "Our recipe for hard times is to lower prices and increase wages." And Ford also states that "most harmful of all is the thought that the economic machine can ever be replaced by the Government." Ford's slogan was "less Government in business, and more business in Government." Ford also said, "Industry exists to make things people use. But when managed by men who know nothing of the factory, and whose interest is confined to the Balance Sheet, its principle product becomes dividends." Is that not what has happened today? Ford said, "Business never fails; only men do that."
So money comes naturally as the result of Service, and "...waste and greed block the delivery of true service." In 1902 there was great attention to finance, and small attention to service. Bankers got into industry. The plan was to float stocks and bonds at high prices. The overall effect of all of this financing was to pay poor managers to keep up bad management. The time right after WWI was the most depressed time in history (1920-1921.) Yet Ford sold 1.25 million cars, or 5 times as many as in a normal year (1913-1914.)
Ford also showed that his principles would apply to ALL other industries! Ford designed and built tractors that kept people in Europe and Russia from starving to death. He purchased and made profitable the only railroad system. He built and operated a hospital on his basic principles, as well as a trade school. Ford told us that manufacturing, agriculture, and transportation create wealth. Investment bankers and financiers can only deal in the wealth that others have created. He proved to us that manufacturing was, and still is, assuring national prosperity. More taxes and more Government are the disease, according to Ford. He told us that we must look to industry, not Government, to abolish poverty, create jobs and wealth, and remedy economic problems.
Watch the "Hole," Not Just the "Donut"
So how does all of this relate to Lean Accounting? As I mentioned in past newsletters, we accountants are the leaders in corporate change management. Why? Because we touch every single function and department in the enterprise, and our associates look to us for information in decision making, in increasing revenues and profits, and in making the business more productive. If we take heed to what Ford told us, we will encourage others in the business to focus on the customer! We will encourage others to watch the "hole," and not just the "donut." We should remind our associates that the place to finance the business is in the shop_ not a bank. Decreasing inventory increases cash!
We need a vision and a plan (ie, a Future State Value Stream Map) for the products and services we offer our customers. We need to use Ford's "wage motive" and not the "profit motive." Continuous price reductions increase sales. Target Costing makes advertising (a large expense in consumer products) unnecessary, and ensures a win-win situation for both the enterprise and the customer. We need to give Labor equal importance with materials. We would not ever think of purchasing the lowest priced / poorest quality material. So why would we even consider laying-off the highest quality labor and moving production off-shore? Remember that Ford told us our best customers are our employees.
Henry Ford on Management Accounting / Lean Accounting
Management Accounting came on strong in the early twentieth century as the pioneers of the Industrial Revolution challenged "financial" accounting. Corporations, such as Henry Ford's company, wanted and needed budgeting, capital investment analysis, performance measurements, and metrics and cost analyses. Ford stated that we should not let Cost Accounting run the business! (Levinson, 2002) Cost Accounting involves transactions, cost standards, and "command and control" by the accounting group. Cost Accounting is a data dump! Cost Management, on the other hand, involves target costing, planning our costs, and "soft" skills such as organizational and change management behavior. Cost Management is "information."
Ford said that financial information signals us that something is wrong, but tells us not what is wrong. He stated that Cost Accounting has two, and only two, purposes: tax accounting and financial statements. He even went on to say that accounting book values "...are meaningless as the machines are worth only what we can do with them." (Ford, Today & Tomorrow, 1926)
Every Recession is a Challenge to Put More Brains into the Business
Today we are more and more replacing manufacturing jobs with service jobs, and they have nothing to sell! I have seen my hometown/state of Hartford, CT go from riches to rags. This just underscores the need to re-adopt the principles of Henry Ford. We also need to be careful as half or more of a manufacturing price consists of non-value added. This is yet another call to Lean Accountants to "sell" the philosophy of Lean "thinking" (Womack, LEI) to all associates in our businesses. "Every recession is a challenge to every manufacturer to put more brains into the business." Let we Lean Accountants be the brains and the leadership to bring Lean Change Management to our business enterprises today. And be sure to look for the hole (Waste)_ not just the donut!
All Henry Ford quotes are from his best known two books:
"My Life and Work: An Autobiography of Henry Ford" (1922)
"Today and Tomorrow" (1926)
