Pioneering Operational Strategies of the US Automobile Industry
Posted in Operations & IT Articles, Total Reads: 1725
, Published on 01 January 2015
Operations management forms a major part of any manufacturing unit. The operations strategies undertaken in a production utility form essentially the core of any manufacturing firm. It has been observed that operational strategies are best understood through real life examples of already established firms who have inculcated innovative and rational operational ideas into production environments. In this regard, a detailed analysis covering the most important events of the US automobile industry would help to unravel major operational concepts.
Events shaping the US Automobile Industry
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Ford's pioneering works
The US automobile industry as we view today was in its nascent form at the beginning of the 20th century. It was Henry Ford who impacted Operations management in this industry and thus innovated a whole new gamut of operational excellence.
Incorporated in 1903, the Ford Motor Company illustrated Henry Ford's most valuable traits - his ability to identify and retain talent. He hired a bunch of highly competent people who would be Ford Motor Company's valuable assets for years to come. The new company’s first car was called the Model A. In 1906, Ford’s 4-cylinder, Model N became the best-selling car in the country priced at $600. But by this time, Ford had a vision of an even better and cheaper motorcar. Working with a small group of employees, he came up with the Model T, introduced on October 1, 1908.
The Model T's flexible suspension system was designed to handle the dreadful roads that were then typical in the United States. The skilled designers utilized vanadium alloy steel that was stronger for its weight than standard carbon steel. The Model T was lighter than its competitors, allowing its 20-horsepower engine to give it the performance equal to that of more expensive cars. All these functional advantages of Model T made Ford cars very popular among the general mass.
Along with the functional benefits, the operational management too formed the core of the Model T production system. Catering to the huge demands for Model T, Ford and his engineers realised the need to raise the rate of Model T production and also simultaneously reduce the cost of production. This was in line with Mr. Ford's vision of a "better and cheaper motorcar for the great multitude".
Keeping this in mind, Ford moved into a huge new factory in Highland Park, a city just north of Detroit in 1909. Borrowing ideas from varied businesses, in 1913, Ford Motor Company developed a moving assembly line for developing automobiles. Rather than one worker assembling the entire system himself, each worker put on one or two parts and passed the item on to the next person in line, who put on another one or two parts until at the end of the line the whole system was assembled. This proved so efficient that by July 1914 assembly line for a complete car had dropped from 150 minutes in 1913 to 26.50 minutes. It effectively minimised a lot of non value added time on the shop floor. The moving assembly line was truly revolutionary. It increased productivity and lowered production cost at the same time.
But there rose one labour problem. The introduction of assembly line resulted in repetitive and relentless work and thus many workers objected to mundane work. Then came another bold idea from Mr. Ford. He doubled the wages of workers to $5 per day. With that one move, he effectively stabilised the workforce and enabled the workers to buy the very cars they made.
The Ford success story went all till the mid 1920's after which stiff market competition from General Motors brought about their downfall. No intention to bring about newer products and not being able to gauge the changing needs of the market caused Model T's sales to drop, and thus General Motors emerged as the next success story in the US automobile industry.
Emergence of Sloan and General Motors
When Sloan took charge of General Motors in 1921, GM's market share in US was a poor 13 percent, while market leader Ford had 56 percent. In 1927, after Sloan had fully introduced the multidimensional operating management structure, the numbers were simply reversed. Sloan was a realist, he understood the changing times. He seamlessly synchronised decentralised responsibility with centralised control. He revamped the corporate structure to enhance interdepartmental coordination.
Sloan pioneered the idea of targeting "every purse and purpose" - a strategy to create cars of different prices in a range of colours, shapes and sizes, invariably targeting Ford's single product approach. Thus General Motors countered Ford's vehicle-for-everyone ideal with distinct brands such as Buick, Chevrolet, Oldsmobile and Cadillac. Sloan brought about the "Annual Model Change Game", which revolved around the strategy of bringing about new models of cars every year. GM could bring such an idea as it allowed "flow technology", i.e. rapid changing of a particular part or a system to achieve greater flexibility. This strategy convinced the customers that the newest model is in fashion and thus eliminated the smaller car producers which couldn't adapt to the changing system. This style-centred model change in 1927 impacted Ford's sales and it lost a major chunk of customer base.
Another radical strategic decision taken up by Sloan was the introduction of General Motors Acceptance Corporation (GMAC) financing plan. This was a auto financial plan which changed the meaning of price to the consumers. As bank financing was difficult to obtain keeping in view the continued skepticism about the industry, the institution of GMAC financing assisted the potential consumers to buy the GM cars on partial credit. And as anticipated, Ford's staunch opposition to go for any radical change helped make GMAC as a competitive plus for GM.
Gm scored over Ford on another important aspect, which Ford ignored for long. This was working on an intelligent and consistent advertising and promotion strategy. The most impressive aspect of GM's success in the latter half of 1920's was its ability to communicate via advertisements and promotions to reach out to the consumers.
The shrewd business acumen of Sloan turned the fortunes of GM for the good, while Ford's inability to adapt to the changing times costed it dearly. By 1930s, GM emerged as the market leader in the US automobile industry.
New Kid's Entry - TOYOTA Motors
The Toyota Production System (TPS) as conceived by Taiichi Ohno and few others in the 1950s is the integrated socio-technical system that comprises Toyota's management philosophy and practices. The main objectives are to design out overburden and inconsistency and eliminate non value added work (called waste).
Just in Time (JIT) production formed the basis of the TPS. JIT is a production strategy that strives to improve a business by proper inventory management. This refers to the strategy of maintaining and supplying product components to the production floor whenever the need arises.
Another feature of the TPS or the Toyota way was to eliminate or reduce Muda or the waste generation which could be in the form of reduction of over production (to produce only when the demand arises, no prior production), reduction of waiting time (by following JIT concept), reduction of transportation time (a non value addition time), reduction of production time (by improving productivity), reduction of stock in hand (minimising excess inventory) and reduction of producing defective products (learning through relentless reflection or Hansei).
The Toyota Way thus followed the Lean manufacturing methodology, which relied on the production practice that considered resource utilization solely targeted towards creation of value for the end customer and rest all considered as wasteful. Thus the Toyota Way philosophy was a clear differentiator in the automobile market scenario.
In the year 1973, the oil crisis changed the way US market perceived the imported cars. Consumers began turning towards smaller cars with better fuel efficiency. In 1984, Toyota entered into a joint venture with struggling General Motors forming the New United Motor Manufacturing, Inc, NUMMI. At the end of the 1980s, Toyota started to establish new brands with the launch of their luxury division Lexus in 1989. In a few years time, Toyota became a force to reckon with in the US automobile industry competing with the likes of established players such as Ford and General Motors.
Thus, the detailed analysis of the business strategies undertaken by Ford, General Motors and the Toyota in different times over the last century to shape and guide the US automobile industry provides us with ample knowledge regarding operations management in the manufacturing domain. The assembly line pioneering concept from Ford, the organizational brilliance displayed by GM under the guidance of Sloan and the Toyota Way conceived by Toyota in the latter half of the century shows various management styles, which one should try to understand and utilize in our fields of work and attain operational excellence.
This article has been authored by Debarka Chakraborty from XLRI