What Henry Could Teach Sam

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I have a love/hate relationship with Henry Ford. I tremendously admire the man for taking some enormous risks that changed the way we live. He designed a reliable car that used mass-produced, inter-changeable parts. The car was better-made and simpler to operate than its predecessors. Ford realized that with all those advantages, he could make his car available to a mass market.

Then he was confronted with a purely financial challenge. He needed to produce a car cheaply enough so the people who built the car would be able to afford it. The car was, of course, the Model T. When it was introduced in 1908, assembly time was 728 minutes, and the price was $950. After implementation of the assembly line production in 1913, the assembly time dropped to 93 minutes, and the sales price decreased to a low of $280.

However, the problem of the mass market remained. How could the factory worker earning $2.50/day afford the car? Ford solved the problem, much to the chagrin of his business peers, by doubling their pay to $5.00/day. This, combined with installment plan purchasing, allowed the common worker to be able to afford the fruits of his labor, and the consumer economy was born.

What’s not to love? The hate part comes from Ford’s disrespect of his workforce. There is a very telling quote from Henry Ford that has been largely misinterpreted. Ford said, “Why is it every time I ask for a pair of hands, they come with a brain attached?” This has often been interpreted as praise for the intelligence of the American worker. In fact, it was a complaint that the workers hired to function as interchangeable machines on the assembly line actually had ideas about how that work should be done.

Ford believed that the assembly line was a place for pure efficiency. The less energy people spent on any activity not directly devoted to production, the better. It was, therefore, Ford’s policy to fine anyone on the assembly line for the crime of laughing, talking, or whistlingall of which, Ford believed, diverted energy from production. Yes, he transformed America, along with the rest of the world, but at what human cost?

I have a love/hate relationship with Sam Walton. Walmart’s founder was a genius in his own right. He eliminated waste and shortened the supply chain to reduce cost. He was fanatical in introducing new technology and perfecting all processes. In the beginning, he even sought out American manufacturers to compete with foreign imports. He passed the savings on to the consumer.

He also created an empire that keeps employees living below the poverty line. He could take a lesson from Henry Ford – not about laughing, talking or whistling, but about doubling the income of Walmart’s workforce.

Harvard Business Review recently reported the following contrast between Walmart and Costco:

                                                            Walmart                                              Costco

     Average wage                                     $10.11/hour                                        $17.00/hour

     Employee health care contribution    33%                                                     8%

     Turnover rate                                      44%                                                     17%

     Operational profit per employee       $11,615                                               $21,805

     Growth since 2009                              4.5%                                                    13%

     Profit                                                   7%                                                       15%

My disappointment with Walmart is not simply that they have proven to be a poor corporate citizen. It is that they are also, quite obviously, not very good business people. Their short-sighted approach is having devastating effects on not only their workers, but the US economy in general.

Daily KOZ pointed out that if Walmart compensated their employees with wages similar to Costco ($45,000), it would cost the company an additional $4.5 billion. With 2013 gross profit estimated at just over $125 billion, we’re talking 3.6%.  What the article doesn’t mention is that a large part of the $4.5 billion would be returned to Walmart in additional sales to their own employees. At the lower end of the economy, every cent is immediately reinvested in the consumer economy.Sam Walton

It turns out that the average Walmart shopper has an annual income of $45,000. Today, if you want to shop at Walmart, you have to work at Costco. Except, of course, for food stamps, of which Walmart is the single largest redeemer. Walmart employees, unlike Henry Ford’s, can’t afford the fruits of their own labor. In an economy which is 67% based on consumer spending, it is simply not good business to pay employees starvation wages and short them on healthcare and retirement benefits.

I am not advocating a legislated solution. I would just like to see the progeny of an American business genius be considerably better at long-term business.

 

 

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