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Four Events that Shaped Supply Chain Management
The origins of contemporary SCM can be traced to four seminal events that took place in the first half of the 20th century. They are the perfection of mass production techniques, the introduction of product differentiation, the development of management techniques as science and the post-World War II arrival of Japan on the global stage. It should be pointed out that each of the four events to be discussed had its origins in the automotive industry and that the advent of both product differentiation and Japan's management approach was a direct descendent of the granddaddy of SCM, mass production. Given this pedigree, it is not an exaggeration to suggest that most industries have benchmarked and adopted tactics perfected in the automotive sector. For this reason, a detailed study of the automotive industry and its contributions to SCM is required reading for serious supply chain managers. While this volume touches on key aspects of the role of the auto sector in the evolution of SCM, it does not treat it in its entirety.
Mass Production
Allusions to the concept of mass production can be found in publications as early as 1776. In fact, it was Adam Smith in The Wealth of Nations who began the transition from cottage industry to factory life when he described his famous pin factory and how division of labor could increase output. Even with these early references, it was Henry Ford who perfected the concept of mass production when he melded market opportunity with machinery, manpower and methodology in the first decades of the 20th century. [1]
As any student of economics understands, mass production is driven by a variety of factors, but most notably by building standardized products that drive up the utilization of physical plant. Maximization of production capacity dominates the landscape, with all planning, resource allocation and enterprise-wide activities focused on getting the most out of the machinery in the factory. This mentality was certainly the case with Ford as he produced millions of Model Ts from the early 1900s well into the 1920s.
Of course, as utilization approaches 100%, costs go down due to economies of scale. As his costs plummeted, Ford was able to lower prices, thus creating more demand for his Model T. Viewed as a self-fulfilling prophecy of mass production, economies of scale and expanding markets were pursued by Ford in several ways. As the reader will note in subsequent passages, the supply chain ramifications of these practices were considerable and continue to have a telling impact on organizations 90 years later.
The most well-known achievement of Ford is, of course, the assembly line. Inspired by the need to maximize the utilization of assets and production output, the assembly line reduced cycle times in the plant to levels that were inconceivable prior to its introduction. This level of output was made possible not only by the speed of the line but also by the division of labor. Gone were the days of artisan production in which the same craftsman proudly perfected all phases of assembly. The new world order was characterized by thousands of employees executing specific tasks as cars moved down the production line.
Division of labor was a key component to Ford's vision of mass production, but it would not have been possible without the introduction of interchangeable parts and techniques that made assembly of a vehicle a relatively predictable process. Another innovation was that Ford engineers perfected the idea of measuring parts to specification, thus eliminating the variation innate to most craft-based business models. It was the combination of these practices that made it possible for Ford to produce 2.1 million Model T chassis in its apex year, 1923.
What should be clear to the reader is that the Ford model focused almost entirely on production output and left any customer-related issues in the hands of the dealer network. Ever-increasing output drove down costs, which allowed dealers to sell at cheaper prices, thus attracting more and more buyers. It was a model that worked extremely well in terms of its stated goals, but also left many supply chain questions unanswered. It was these fissures in the model that eventually opened the door for players more in tune with customer desires to capture market share.
Managing the Mass Production Supply Chain
It must be noted again that when Ford introduced the mass production system, manufacturing was driven not by demand planning but by plant capacity. In fact, during the early days of the auto industry, very little forecasting was carried out, with the manufacturer viewing its dealers as an outlet to move vehicles rather than a source of market information. Manufacturers pushed increasing amounts of finished good down dealer channels with little regard for the actual ups and downs of market demand. In this type of scenario, it is not hard to envision the potential buildup of raw materials, work in process and finished goods across the entire supply chain.
Beginning with raw materials, the steady-paced mass production environment of the 1900s required vast amounts of inventory to be held. Lead times, cost and quality controls were all tentative in the nescient auto industry, and for a factory not to have ample raw materials on hand was considered taboo. This buildup of inventories based on production rates created a slew of challenges for early auto executives.
The financial burden of acquiring raw materials before they are needed is obvious. While the rationale of the day deferred to the economies of scale gained through larger purchases, the netting out of carrying costs, storage, insurance, obsolescence and shrinkage has long since shot down that argument. In addition to these considerations, production-based inventories have much greater space and personnel requirements to receive, put away and deliver material to the production line. Both points imply more costs built into the supply chain and are a source of considerable waste.
Work in process is even more expensive to carry due to the value that has been added to the raw materials as they begin the transformation to finished goods. Bottlenecks, down lines and out-of-spec components all contributed to a buildup of work in process in the early days of the auto industry, with a glut of finished goods in cyclical markets only adding insult to injury.
Finished goods may have been the most visible of inventory issues for the auto manufacturers due to the fact that they had to look no further than the dealer's yard to see the results of their mass production efforts. With capacity driving production, it was common to see dealers with hundreds of cars on their lots waiting for buyers. Again, the carrying costs (for the dealers now), along with storage, insurance and obsolescence concerns, began to expose the softer underbelly of mass production.
Another issue that has plagued mass-production-based models over the years is the problem of product quality. Based on the very nature of mass production techniques, both component and finished goods quality carry serious supply chain consequences.
Because raw materials purchases are prioritized by cost and then quality, most mass producers tacitly recognized that a certain percentage of faulty materials would get onto the production floor. As long as defective merchandise was kept within a certain tolerance, manufacturers put up with the inconveniences. Even within acceptable limits, faulty raw materials can shut down production lines, inflate work in process and, more dangerously, spawn a corps of unhappy clients.
In addition to the raw materials quality issue, finished goods had their own challenges to deal with. Again due to the constant pace of the assembly line, quality issues only surfaced at the end of the production run. This meant that finished goods had to be reworked prior to final release, a scenario that required even more space and personnel. The combination of faulty raw materials along with production-related defects served to exacerbate an already challenged supply chain.
From a supply chain perspective, it is clear that the trade-off for maximized plant output was exorbitant amounts of waste. Supply chain waste comes in many forms, the least of which are defective products, rework, oversized work areas, additional personnel and extended wait times. The greatest legacy of waste from the mass production era, however, was excess inventories. As the auto industry began to mature, companies like Ford and General Motors labored vigorously to better manage their supply chains. The introduction of the new model year, product differentiation and the use of forecasts all contributed to modest improvements in this area.
Product Differentiation
Undoubtedly, it was Henry Ford who made the automobile affordable for the average consumer in the first decades of the 1900s. The only way he could have possibly achieved such a goal was to pursue a mass production model. It must also be noted that Ford was aware of at least some of the supply chain consequences of his business model and accepted the trade-off in waste for greater output. Finally, one must be cognizant of the fact that Ford was a pioneer in an industry that enhanced the human experience on a universal scale. Although he was always open to other companies benchmarking his operations, in the early years he had few opportunities to learn from others because he was the industry leader. In spite of the supply chain challenges Ford faced with the Model T, what he achieved was nothing short of remarkable.
While Ford continued to pursue the mass production model, other automotive companies perceived a shift in consumer attitudes, from viewing an auto as a means of transportation to an overall driving experience. In fact, Ford was so convinced of the future of his business that when asked about the possibility of offering different colors of the Model T, his response was that consumers could have any color they liked as long as it was black! This being said, market segmentation and, more important from a supply chain perspective, product differentiation became the domain of General Motors beginning in the early 1920s. [2]
When Alfred P. Sloan joined General Motors, it was well behind Ford in sales. However, instead of pursuing a game of volume catch-up, Sloan and the GM team devised a strategy based on market segmentation. It was at that time when brands like Chevy, Cadillac and Buick became household names in the United States. It was also during this period that GM introduced a market innovation of profound supply chain consequence: the new model year. Every year GM, and eventually all of its competitors, would offer a new model for the coming buying season. The confluence of the new model year with a wider variety of automobiles precipitated supply chain challenges not considered under the mass production model.
By no means did a strategy of product differentiation discourage GM from pursuing economies of scale; in fact, the pursuit of scale became even more intense. Because there were more models to produce and less time in which to produce them, management was fanatical in its pursuit of rapid engineering, improved tooling techniques, reduced setup times and use of common parts. As another function of the differentiation model, GM had to devise ways to reduce inventories across the board. Dealing with parts for an identical finished goods inventory was sufficiently risky, but having mountains of inventories laying about for a variety of models took risk to an entirely new level.
One notable advance by GM was the increased use of forecasts to aid production planning and inventory levels. While it was still reasonable to say that GM pursued economies of scale at every turn, it was also forced to be more in tune with market demands via its dealer network. Perhaps a first in large-scale production models, GM began to solicit historical and anticipated demand information from its dealers in order to better approximate their actual needs. Although far from optimal, this was a major step in the progression of early supply chain practices.
Management as a Science
Another important development for SCM occurred at GM, but this time far from the production floor. While GM can be credited with product innovations like the automatic transmission, it was also an innovator in organizational structure. Actually, Alfred P. Sloan is credited with "professionalizing" management as a science, taking traditional hierarchies to the frontier of organizational dynamics. Part of this organizational revamping involved the creation of entirely new Chapter 4, the need to communicate proliferates as organizations become more complex. The supply chain paradox lies in the fact that as entities become more and more fractionalized, they communicate less and less.
It is for the above reasons that many organizations in the first half of the 20th century had several forecasts instead of one. It may also be for this reason that purchasing departments still bought in quantities to achieve volume discounts regardless of what any forecast called for. Whatever the circumstance, while organization by function does offer certain benefits, the law of unintended circumstances always intervenes to create almost as many challenges as benefits.
The Japanese Get in the Game
Consistent with the comparison of governmental and commercial organization made in the Introduction to this book, it is not unreasonable to say that how companies operate is ultimately a reflection of the markets in which they find themselves. Ford saw a massive market for standardized transportation and developed a model that met that need. GM, on the other hand, anticipated the influence of human nature on automotive purchases and used product differentiation to its advantage. Each, as stated previously, implied its own set of supply chain challenges.
Following this line of reasoning, the sociopolitical circumstances in which Japan found itself after World War II had a profound effect on how industry was ultimately organized. Again borrowing from the automotive sector, the introduction of lean manufacturing techniques was very much related to the market realities the country confronted after 1945. While it is important to acknowledge that economic conditions in Japan helped to mold organizations and their supply chains, it must also be noted that the Japanese took advantage of the wartime devastation of their economy to develop a new philosophy on business. [3]
If necessity is the mother of invention, then the Japanese auto industry is the best 20th century example of this maxim. At the end of World War II, Japanese automakers found themselves under the political aegis of the U.S. government, custodian to an obliterated manufacturing base and with little foreign exchange to invest in technology. These conditions, coupled with a small domestic market and the government's explicit goal of rapid entry into global markets, forced industry heads to revamp the entire automotive supply chain. Clearly influenced by the circumstances in which they found themselves, Japanese automakers not only built their factories to suit their markets but also created a mental model that transcended the entire supply chain. The ensuing result has come to be known as lean manufacturing.
The fundamental tenets of lean manufacturing are as follows: [4]
A holistic view of supply chains, from product concept to final delivery to the customer
A team approach founded on a multi-skilled workforce and employee input
Commitment to continuous improvement of all processes
Elimination of waste throughout the supply chain
Even at this high level, the fissures between the mass production mentality and lean manufacturing come to the surface. Early Western models viewed manufacturing as the heart of the operation, while supporters of lean manufacturing view the manufacturing function within the context of the entire supply chain. Also, whereas Western models create division of labor at both a manufacturing and administrative level, lean broadens the skill sets of individual employees to enhance their contribution to the team's effort. Integral to this mentality is the requirement for employees to proactively build quality into processes and constantly seek ways to improve upon all aspects of the business.
Because the Japanese automakers had so much to do and so little time in which to do it, it is accurate to say that lean manufacturing is all about speed and the rationalization of resources. It is for these reasons that the elimination of waste mentioned in the fourth point above is the obsession of all practitioners of the discipline. For the lean manufacturer, waste includes excess inventory, wait time, rework, scrap and any non-value-adding activity included in the production process.
In the lean model, the quest for supply chain velocity begins with customer sensitivity; proceeds through product development; permeates all engineering aspects of product, process and manufacturing design; is fundamental to the management of suppliers and is incessantly pursued on the manufacturing floor. The proclaimed benefits of lean supply chains compared with more traditional models are:
Half the time for product development
Up to 50% less time required for engineering of products, processes and tools
Half the investment in physical plant
Half the space requirement in the factory
Gains in human productivity of up to 50% [5]
With such an emphasis on speed, quality and the elimination of waste, the importance of well-run supply chains cannot be overstated. Fewer inventories requires better understanding of market demand, interactive management of supplier relations, fanatical control of manufacturing processes and, more than anything, open communication. Beginning with the auto industry and later extending to other sectors, the Japanese have religiously developed, applied and enjoyed the financial rewards of lean manufacturing.
While acknowledging the recent malaise found in the Japanese economy, it would still be hard to dispute the success of Japan's industries since the end of World War II. Because the Japanese auto industry has been more in tune with consumer wants, it has been able to develop quality products faster and at a better price. As documented in business literature over the last 50 years, the commercial success of Japan has been attributed to everything from government intervention to protectionist policy, copycat engineering and cheap labor. There may be some truth to all of these points, but anyone who denies that the Japanese have progressed due to their ability to build better products at a cheaper price is living in denial.
U.S. and European automakers were certainly not in denial as they watched market share erode in favor of the Japanese producers beginning in the late 1950s and early 1960s. Although entrenched mentalities were still abundant, Chapter 3, Western companies still have an appreciation for the benefits of mass production while adopting techniques native to the lean environment.
An understanding of the modern history of Western techniques and how they have been melded with the demand for speed and flawless quality is essential to the study of SCM. This and other topics are the subject of Chapter 2. Upon completion of the analysis of Western supply chain thought, the story returns to a more detailed analysis of lean manufacturing and its impact on the post-World War II globalization of domestic economies.
[1]For a more detailed discussion of mass production in the United States, see Robert H. Hayes, Steven C. Wheelright and Kim B. Clark, Dynamic Manufacturing, The Free Press, 1988, pp. 31–60.
[2]A comprehensive treatment of the history of General Motors from the early 1920s through the end of World War II can be found in Alfred P. Sloan, Jr., My Years with General Motors, Doubleday, 1963.
[3]An excellent reference on the evolution of post-World War II Japanese industry is James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World: The Story of Lean Production, Harper Perennial, 1990.
[4]James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World: The Story of Lean Production, Harper Perennial, 1990.
[5]James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World: The Story of Lean Production, Harper Perennial, 1990.
