The Assembly Line
One of the “jobs” of the firm is the transformation of inputs into outputs. For most of us that means taking some amount of capital mixing it with some amount of labor and producing clean garments. The cost of producing a given level of output depends on the level of technology available to the firm, and input costs. If the prices of the inputs or technology changes differing production methods may be chosen to reduce average unit costs. I have heard many calls for increased investment in R & D as it applies to the Drycleaning industry. Unfortunately, I am certain that our industry is not lucrative enough to support this function, but I notice that “knowledge leaks” as it applies to adaptation of technological innovations from other industries.
Probably the most significant innovation in industrial production was the development of the assembly line. Henry Ford, and great inventor and great businessperson according to friend and mentor Thomas Edison, who employed him early in his career, would be the driving force. Henry Ford’s development of the assembly line began on April 1st 1913 in the flywheel magneto department where the project reduced the person-hours to finish the flywheel – magneto from 20 minutes to five. The concept spread from flywheel, to engine, to transmission and finally chassis, where it finished the auto entirely. Ford loved machinery and technology and believed that he was revolutionizing society (American) for the better.
The transforming power of the assembly line changed not only the availability of the automobile but also the perception of it in society. During this time of the assembly lines development, the price of the Model T actually dropped from $525 in 1913 to $345 in 1916. Most cars in the period cost from $600-$1000 for Buicks and Studebakers to $1000-$2000 for a Chalmers or Cadillac. Ford has been quoted as saying that “since there are more poor people than rich, they should just make one model for the poor.” Of course, the price competition was a major factor of the success, and fully 1/3 of all the cars on the road were Fords. Ford would say of the success that “this raising the automobile out of the list of luxuries, and bringing it to the point that the average citizen may own and enjoy hours automobile.” Today, we can hardly imagine life without the automobile.
Fords inspiration is said to have come from a visit to Gustavo Swift’s meat packing plant in Chicago, where he observed an overhead trolley carrying carcasses thru the plant. Swift had noted that a major cost (input) for the processed meat business was shipping and that shipping animals “on the hoof” caused shipping costs 60% higher than already butchered meat. Swift would also be responsible for the development of the refrigerated rail car to complete his contribution to “the era of cheap meat”. Here he would first imagine work moving to men, rather than men moving to the work. Thus, the concept of “knowledge leaks” (William Easterly concept) reminds us of what we can learn not only from each other, but other industries as well.
I should say a few words about the strange paradox that was Henry Ford, an anti-Semite and a social reformer, whose policies although ultimately valuable in the end, were for his own benefit in the short run. The five-dollar day was said by Ford publicists an attempt to create additional customers for his Model T, but this is more of a spillover effect than its true purpose. The five-dollar day was created in 1914 to help alleviate labor shortages caused by the success of the burgeoning automobile industry. Shortages in labor were the result of numerous firms’ entrance into the auto manufacturing industry “bidding up” labor wages and the poor quality of the American workforce of the time. Keep in mind clean water was not available in much of the nation at the time and the average worker had beer with lunch and dinner. Again, we find this difficult to imagine. The Degas painting from 1884 called the Ironers shows two women hand ironing shirts. The first time I saw the painting and noticed one of the women yawning with a bottle of wine in her hand, I assumed drunk at work. After a history lesson, I realized fatigue and dehydration was a greater part of the story. Fords Five-Dollar Day called “an economic blunder if not crimes” by the Wall Street Journal, was designed to allow Ford to chose more carefully from the worker pool. The wage of 5 dollars was actually broken into two parts a $2.34 daily wage (average of the day) plus a $2.66 profit sharing feature. The profit sharing contained some of the social engineering that Ford is famous for. Ford’s Sociology Department would investigate workers moral standing. Workers were to avoid saloons, prove savings account participation, not smoke or gamble and show support of family. It is also worth noting that an employee could fail his profit sharing portion while still receiving his base wage. While this still sounds noble, Ford was trying to fix a 370% turnover problem with its estimated $1.8 million costs. The five-dollar day was discontinued in 1917 and a distant memory by the time Ford’s security people beat labor organizers in 1937 at The Battle of the Overpass.
That brings us to our industry and today. Although we cannot and should not split the process of pressing a garment into segments to increase specialization, some automation has visited the Drycleaning industry recently, in the form of assembly conveyors.
It all began in 1978 when a recently laid off engineer Augusto Santicchi went to a Drycleaning show in Milan with his brother-in-law. The two men wondered around, enjoying the equipment when Augusto pondered why only American conveyers were for sale, and that no European firms were meeting local demand. As the men rode the escalator from one floor to another, Santicchi saw his inspiration for how his product would be different. His would be based on a moving belt base and a continuous piece of stainless steel on top. In 1994, Metal Progetti mated computer software POS systems with the conveyer to bring computerized assembly to the “average” Drycleaner.
Today, White Conveyor and HMC have both added their own and economical models to the marketplace. I would suspect that more firms would fill the market until saturation level, much like POS computer systems have. As to exactly how a computerized assembly improves productivity I suppose it is a function of opportunity costs. In other words , the energy required in walking to and from in a large assembly bay with a garment (S) in one’s hand and numbers on ones mind must be converted, to the next best use (definition of opportunity cost) which hopefully would be actual inspection of the garment.
If a firms “job” is to convert inputs into outputs; (inputs like labor and capital and outputs like clean garments) then the true cost of production depends on the available technology and the price of the inputs. Ford may or may not have been right that technology would improve the lives of every American but if we as small businesspersons can share knowledge among the industry, we can insure each participant’s success against the tyranny of the status quo.
Wednesday, February 04, 2009
“The World has changed, and not for the better.”
Tom Brokaw 10/7/08
The drycleaning industry has not been great lately. We have seen increasing supply and energy costs, we are still overbuilt, and we are still waiting to lower our labor costs. Profits have been acceptable at best for most of us.
Now we are officially in a recession at best, or a depression at the worst; but, what can we expect from the economy in the coming year? A little background: The current crisis has been caused largely by a mortgage failure and sinking home valuation problem. Years ago, whether through a sense of social justice or a genuine belief that make more people home-owners would improve the US economy, the government began encouraging home lending to new groups of people previously unable to own homes. Rational businessmen filled this market niche and began selling what would be known as sub-prime mortgages. Rational consumers took advantage of this new opportunity to live their part of the American dream.
Home developers responded by building more homes, and soon new communities sprung up all over America. Perhaps you live in one. Perhaps you have such a loan, a sub-prime mortgage. Not all, but some, of the loans had a feature where the loan payment increased over time. Sometimes the increase is sudden, like on the anniversary of the loan, and sometimes it was more gradual in transition. This too seemed manageable to many. Either the consumer would receive wage increases over time, or the consumer was advised that a new loan could be taken out especially if the home had appreciated in value a reasonable expectation based on historical data. Now we know that was a bit too much of a gamble. Most did not see wages rise enough, and as mortgages defaulted, more houses for sale flooded the market.
$
Supply1 Sorry about the lose of this graph....
Demand
Units
Graph 1: Supply & Demand Model.
Generic but it helps us illustrate principles.
and this one..............
$
Supply1
Demand
Units
Graph 2: As we add the second (greater) supply line, we see the value of the average home sold, drop. As the equilibrium of sold homes drops the average value of homes, even more families find themselves unable to refinance due to the loss of equity which was cased by the home value drop. This situation is a type of market failure and has not stopped occurring. My best information is that this will continue to occur through the entirety of 2009.
The good news is that our Federal Reserve and Treasury Department are actively working to minimize the damage that this market failure will bring. We have heard talk of the Great Depression. The differences between the past event and the present circumstances are worth noting. After the stock market crash of 1929, the government made many strategic errors in policy making. Tax rates rose, tariffs rose (reflecting special interest groups attempting to protect domestic producers from foreign competition), and both presidents Hoover and Roosevelt strongly promoted industry-labor cartels that were designed to stifle competition. None of these mistakes will be repeated today. The body of knowledge in macro-economics has increases exponentially since 1929, and I can with great confidence state that only newer problems will be visited upon the world economy.
A note about macro-economics. The total stock-market losses as of the date of the writing will probably not last long. However, some significant market losses will remain for some time. These stock market losses represent loss of market capitalization or for our purposes loss of owner equity. We know that this loss of equity represents a corresponding loss of production capacity and therefore employment.
Let’s discuss how we as businesses will be affected. After all, if we do not act in our own self interest (remember the Invisible Hand?), the economy fails anyway.
- Our customers: are going to have a bad time. Many will find themselves unemployed or under-employed.
- Lenders: Banks are going to be hard pressed to loan much money, especially to marginal applicants. There will be less capital for acquisitions or startups.
- Landlords: will find business failures provide them with ample property to rent. Some opportunities may present themselves for dry stores.
- Employees: will suffer along with us, although mostly household costs will not inflate. Their family members will be out of work, though, lessening household income. I don’t see the reserve army of the unemployed forcing wages down much. Only the lower end of our industry will benefit from this.
- Equipment sales: Equipment will still be sold, often leased. But again, fewer start up plants will lessen this.
- Suppliers: will still be selling supplies, but most likely fewer of them, and collections will be challenging.
Bottom line: There will be fewer of us, due to failures and bankruptcies, at the end of 2009. Many will not be able to sell our businesses. Note the difference between the first supply and demand model and the second one. More of us would want to sell as compared to the banks that would want to loan, so the selling price would drop to a level where most would not be willing to sell. I look for more owner financing and store lease arrangements. If the consumer allows it, dry stores may rise in number because of an increase in available space (due to other business failures and the firm’s ability to self finance). In short, I expect a year of mixed opportunities, and a market correction that has been overdue. This would be an opportune time to get back to the basics of customer service and quality. Take care of the business, and the business will take care of you.
Tom Brokaw 10/7/08
The drycleaning industry has not been great lately. We have seen increasing supply and energy costs, we are still overbuilt, and we are still waiting to lower our labor costs. Profits have been acceptable at best for most of us.
Now we are officially in a recession at best, or a depression at the worst; but, what can we expect from the economy in the coming year? A little background: The current crisis has been caused largely by a mortgage failure and sinking home valuation problem. Years ago, whether through a sense of social justice or a genuine belief that make more people home-owners would improve the US economy, the government began encouraging home lending to new groups of people previously unable to own homes. Rational businessmen filled this market niche and began selling what would be known as sub-prime mortgages. Rational consumers took advantage of this new opportunity to live their part of the American dream.
Home developers responded by building more homes, and soon new communities sprung up all over America. Perhaps you live in one. Perhaps you have such a loan, a sub-prime mortgage. Not all, but some, of the loans had a feature where the loan payment increased over time. Sometimes the increase is sudden, like on the anniversary of the loan, and sometimes it was more gradual in transition. This too seemed manageable to many. Either the consumer would receive wage increases over time, or the consumer was advised that a new loan could be taken out especially if the home had appreciated in value a reasonable expectation based on historical data. Now we know that was a bit too much of a gamble. Most did not see wages rise enough, and as mortgages defaulted, more houses for sale flooded the market.
$
Supply1 Sorry about the lose of this graph....
Demand
Units
Graph 1: Supply & Demand Model.
Generic but it helps us illustrate principles.
and this one..............
$
Supply1
Demand
Units
Graph 2: As we add the second (greater) supply line, we see the value of the average home sold, drop. As the equilibrium of sold homes drops the average value of homes, even more families find themselves unable to refinance due to the loss of equity which was cased by the home value drop. This situation is a type of market failure and has not stopped occurring. My best information is that this will continue to occur through the entirety of 2009.
The good news is that our Federal Reserve and Treasury Department are actively working to minimize the damage that this market failure will bring. We have heard talk of the Great Depression. The differences between the past event and the present circumstances are worth noting. After the stock market crash of 1929, the government made many strategic errors in policy making. Tax rates rose, tariffs rose (reflecting special interest groups attempting to protect domestic producers from foreign competition), and both presidents Hoover and Roosevelt strongly promoted industry-labor cartels that were designed to stifle competition. None of these mistakes will be repeated today. The body of knowledge in macro-economics has increases exponentially since 1929, and I can with great confidence state that only newer problems will be visited upon the world economy.
A note about macro-economics. The total stock-market losses as of the date of the writing will probably not last long. However, some significant market losses will remain for some time. These stock market losses represent loss of market capitalization or for our purposes loss of owner equity. We know that this loss of equity represents a corresponding loss of production capacity and therefore employment.
Let’s discuss how we as businesses will be affected. After all, if we do not act in our own self interest (remember the Invisible Hand?), the economy fails anyway.
- Our customers: are going to have a bad time. Many will find themselves unemployed or under-employed.
- Lenders: Banks are going to be hard pressed to loan much money, especially to marginal applicants. There will be less capital for acquisitions or startups.
- Landlords: will find business failures provide them with ample property to rent. Some opportunities may present themselves for dry stores.
- Employees: will suffer along with us, although mostly household costs will not inflate. Their family members will be out of work, though, lessening household income. I don’t see the reserve army of the unemployed forcing wages down much. Only the lower end of our industry will benefit from this.
- Equipment sales: Equipment will still be sold, often leased. But again, fewer start up plants will lessen this.
- Suppliers: will still be selling supplies, but most likely fewer of them, and collections will be challenging.
Bottom line: There will be fewer of us, due to failures and bankruptcies, at the end of 2009. Many will not be able to sell our businesses. Note the difference between the first supply and demand model and the second one. More of us would want to sell as compared to the banks that would want to loan, so the selling price would drop to a level where most would not be willing to sell. I look for more owner financing and store lease arrangements. If the consumer allows it, dry stores may rise in number because of an increase in available space (due to other business failures and the firm’s ability to self finance). In short, I expect a year of mixed opportunities, and a market correction that has been overdue. This would be an opportune time to get back to the basics of customer service and quality. Take care of the business, and the business will take care of you.
Subscribe to:
Posts (Atom)
