Ford Crises of 1920-1921

In the autumn of 1920, Henry Ford was in trouble. He owed money to Eastern bankers, sales were plummeting and Ford Motor Company was losing twenty dollars on each car produced. This crisis inspired a key element of Lean Manufacturing, paid off the debt and enabled Ford to survive the recession.

Background

By 1919 the Model T Ford was phenomenally successful and held 40% of the domestic market. Combined with the moving assembly line and other Ford production methods, it enabled Ford Motor Company to reap huge profits. Henry Ford cared little for personal wealth and reinvested most of the company's profits. He had spent $60 million dollars at River Rouge and at least $15 million for coal and iron mines. The company also had built plants and facilities throughout the country.

While Henry Ford held a controlling interest in Ford Motor, there were other shareholders who thought profits should be distributed. The Dodge Brothers, in particular, wanted dividends to start their own automobile company and had sued Ford and The Ford Motor Company. The dispute was bitter and the ethical behavior of all parties was questionable at best. The final result was Ford's buyout of other shareholders in 1919 for about $20 million, most of which he borrowed from Eastern bankers.

The Recession of 1920-1921

Ford Motor Company entered the recession of 1920-1921 with considerable debt and when sales dropped precipitously a crises ensued. Robert Lacey describes the recession as follows:

It was not difficult to sell cars in America in the months that followed the First World War, since automobile production had been cut back severely as the manufacturers had turned their factories over to war production. With peace, the national waiting list for new cars soon came to number in the hundreds of thousands. As a general economic boom intensified this demand, Detroit discovered how pleasant life can be when America has money to spend.

But the boom ran out abruptly in the summer of 1920. Worried by inflation, the federal government cut its budget, pulling $6 billion out of the economy. Suddenly the Motor City discovered the down side. For it is amazing, when times get hard, how easy it becomes to live with the rust and rattles of the automobile that you had once been intent on trading in. Forgoing the new car is the most obvious economy to make in a time of recession, and recession gripped America. In the autumn of 1920, the cyclical nature of the car business was revealed for the first time: scaling the heights in time of prosperity, but almost at a standstill when the economy slowed.

Ford Responds

A crisis always seemed to galvanize Henry Ford and bring out the stubbornness and imagination in him. He had steered through several such crises in the past.

Ford's first reaction was to cut prices with the largest reduction in automotive history (It had worked before). But, dominant as Ford Motor Company was, it could not stave off a national recession alone. Sales plummeted again and the situation looked increasingly desperate. Henry Ford even organized a gigantic rummage sale that included desks, cabinets and pencil sharpeners.

The general opinion was that Ford would lose control of his company to the bankers. This was especially galling to Ford who had a low opinion of bankers in general and East coast bankers in particular. Now, he owed them $60 million and bankruptcy seemed imminent.

Ernest Kanzler had run the Fordson tractor operations during the Great War. He had been highly successful at reducing inventory and freeing up plant space by scheduling deliveries and shipments exactly when needed. In 1919, Ford brought Kanzler to the Highland Park plant to do the same. Kanzler was just getting started when the recession hit.

When Ford's price reductions failed to maintain sales volume, Ford and Kanzler realized that the inventory strategy might just save the day. Highland Park was awash with inventory and spare parts, perhaps $88 million worth. Kanzler went to work and Just-In-Time delivery was born.

By the spring of 1921 Ford had paid all his debts and the company had a cash surplus of $20 million. Productivity also improved. Prior to the recession, Highland Park required about 15 men per car per day. Afterwards, the factory operated with about 9.0 men per car per day. This was a 40% reduction in labor cost. To top it off, Henry Ford was also in a position to resume his rants about Eastern bankers.

Other aspects of Ford's tactics were more controversial. Ford dealers were required to pay cash on delivery so Ford and Kanzler began sending them cars, along with a huge number of spare parts, whether the dealers had ordered them or not. Owning a Ford dealership was the next best thing to owning a gold mine. So the dealers took the cars and the parts and then borrowed to pay for them. Their only other choice was to relinquish the franchise. (As a side note, the author's great grandfather had been a Ford dealer in Fitzgerald, Georgia at this time. To the end of his life he never forgave Henry Ford for this ploy.)

Ford's suppliers were also squeezed. Price reductions were made arbitrarily by Ford and payment was unilaterally extended from 60 days to 90 days. The suppliers, like the dealers, had little choice but to go along.

Epilogue

Henry Ford's company survived the crisis of 1920-1921 and the lessens learned served Ford well for a period of time. After world War II, Toyota studied Ford's operations and adopted many Ford methods. While Toyota saw the wisdom of Just-In-Time delivery, they also know that taking advantage of dealers and suppliers would have negative long-term consequences. Hence, they adapted just-in-time methods but coupled them with assistance and a true partnership relationship.

Ford Motor Company has weather several additional crises, in the years since 1921, most notably the introduction of Model A, the death of Edsel Ford and resurrection by Henry Ford II. It has been a remarkably resilient company. It now appears that Ford has not only avoided the bailout of 2008 but may be in a position to once again prosper.