For lots of reasons Henry Ford has been written off as a not-too-bright, mean-spirited guy whose only claim to greatness is the assembly line, and even that is quite often trashed as demeaning to workers and the heart of an out-dated ‘mass production’ concept. Make no mistake, Ford gave his critics plenty of ammunition, but the simple fact remains: Taichi Ohno, one of the core architects of the Toyota Production System, wrote:
“We see that automation and the work-flow system invented and developed by Ford and his collaborators was never intended to cause workers to work harder and harder, to feel driven by their machines and alienated from their work … Ford’s successors, however, did not make production flow as Ford intended.”
And he wrote: “I, for one, am in awe of Ford’s greatness. I think that if the American king of cars were still alive, he would be headed in the same direction as Toyota.”
Ninety eight years ago today, on January 5, 1914, Ford announced the $5 day. Four days prior to that, on New Years Day, Ford met with his key reports and they played with numbers. Wages in the plant ranged from 26 to 54 cents per hour, or an average of about $3.10 a day. The $5 per day rate that came out of that meeting and was approved by the directors on January 5 was not a flat rate, but the new average, with almost all employees receiving proportionate increases. The $5 average was about twice the average rate for manufacturing work in Detroit at the time.
Why Ford did it is complicated, but one thing is certain – it was not done to combat high employee turnover resulting from the grueling nature of assembly line work. That is a latter day myth and pure hogwash. the company had implemented sweeping reforms in just about every aspect of employee relations and the pay system earlier in 1913 – including an across-the-board 13% pay increase just three months before the $5 day announcement,and employee turnover had dropped from around 48% to about 6%. There was no turnover problem to address, especially one that would justify doubling the payroll.
The impetus seems to have come from four sources. First is the little known but hugely significant experience of Ford’s assembly plant director in Manchester, England, Percival Perry. He had recently doubled the wages of his employees to a rate he calculated as a basic ‘living wage’ – a rate at which people could live a decent life, rather than the least wage possible. Perry realized a substantial improvement in production and quality as a result.
Second, John Lee, Ford’s first real HR manager was urging him to do the same thing based on the conviction that if people did not have to worry about financial pressures at home they would be much more productive.
Third, Ford’s wife Clara read all of the mail Henry received from employees and, more important, from many of their wives. She put a great deal of pressure on Ford to make the work he was doing more meaningful and to be more driven by “social justice”.
Finally, there was Ford himself. In 1913 the company had paid $11.2 million in dividends out of an after-tax profit of $27 million. The suppliers were enormously profitable. Car prices had been reduced for the 5th year in a row and a Model T could be had for $500. All of the stakeholders were benefiting, except the employees. That seemed to be the straw that broke the camel’s back in his thinking and the $5 day was hatched.
After the near doubling of pay, total Ford payroll costs – not just direct labor – were 11% of sales in 1914. The $5 day clearly meant a lot more to the employees who received it than it did to the company that paid it. Profits in 1914 went up to $33 million, dividends increased to $12.2 million, and the price of the car dropped again – to $440.
It seems fitting to give the thinking behind the $5 day some serious thought, to consider the results, and to see how our thinking stacks up against Ford’s. There is a reason Ohno and Toyota were so impressed by Ford. Given their track records, the snubs of Ford on the part of ‘serious’ business professionals on Wall Street and the great minds of academia should be taken as all the more reason to take him and the $5 day seriously.
Original: http://idatix.com/manufacturing-leadership/a-momentous-anniversary/
Steve H says
That is some interesting writing right there!
One thing that always bothers me and I hear it all the time is the quote about having any color car you want as long as its black. I think it is a complete shame that people remember Mr. Ford for that quote.
So I made sure to put on the bottom of my email that “Profit is the inevitable conclusion of work well done” – Henry Ford; with the hopes that people read it and get a different idea of the man.
Rick Bohan says
Wow….am I at Evolving Excellence or did I type the URL in wrong and get to one of my liberal blogs instead?
Nicely written. Ford went kind of nuts after this but, you’re right…he was an innovator and a good one in his earlier days.
Bill Waddell says
Thanks Rick- compliments from you are rare things to be cherished.
Paul Todd says
I have long been a fan of Mr. Ford, and enjoyed learning more about how the $5 day happened. If you read his 1926 book Today and Tomorrow and compare it to The Toyota Way, it is easy to see the parallels in areas like value creation, waste reduction, and the role of the corporation in society.
In spite of his flaws, he was named Businessman of the 20th Century by Fortune magazine. That accolade lost a little shine however, when I checked to discover that the same publication named Jack Welch as the Manager of the Century.
John Blake says
I think you may have missed the most important point of the $5/day wage increase: it was not just a way for Ford to “share the success of the company,” it almost overnight made it possible for his own work force to own the product they produced.
Bill Waddell says
John,
You certainly hear that quite often but it really doesn’t hold up. There is no evidence that it was part of the thinking at the time. It seems to be something Ford added to the explanation long after the fact to make himself sound a bit wiser and more benevolent, and it wasn’t part of the decision for a very good reason.
Ford had 12,880 employees at Highland Park that were eligible for the $5 day. During the fiscal year in which the $5 day went into effect they sold 248,307 cars. If every employee bought a Model T it would have increased sales by a mere 5%. But it wasn’t even needed. Another little known aspect of the $5 day decision was to reduce the hours per day from 10 to 8. So daily pay doubled while daily hours worked were reduced by 20%. The reason for reducing the hours was to enable the Highland Park plant to go from 20 hours of production per day – two 10 hour shifts – to 24 hours per day – three 8 hour shifts. Ford was selling all the cars they could make and needed more capacity. There was no need to give an additional $625 per year to each employee in order to get them to pay $440 for a car when Ford was already selling all the cars it could produce.
Bill
Jack Parsons says
There is a cost to the extra training, the loss of quality and productivity that turnover causes. This can be quantified, but rarely is. There is a practical side to paying a decent wage that minimizes turnover. It’s not all about altruism or social justice.