Ford Motor Co - Product Costing
Discussion
Mused on posting in the Business Section but figured perhaps a wider audiance here who might answer.
My question is regarding the costing method used on the Cortina / Cardinal Project.
Many years ago I was in a lecture discussing process and batch costing methods.
The lecturer said that Ford Motor Co used a "Blue Book" (Red Book?) to calculate manufacturing costs of the Ford Cortina (Bishop/Cardinal era)
He went onto say that they used their costing methods to conduct VA / VE on the Austin Mini and Morris 1100 and concluded that the Mini was being sold at a loss and that "Ford were so concerned and puzzled, that they contacted Austin/Morris to let them know their findings"
Now, you can pick the bones out of the above, dismiss the artistic licence in presenting a lecture and that's without discounting my own advancing years and fading memory, however the tenet of the story has always remained with me and carries a degree of validity.
My question is does anyone know if this is true or if there is a book published and if so where could I get it?
Thank you.
Carsie
In all seriousness, I don't think there's an answer to your question.
The world has moved on a long way from when a car company used to make most of the bits themselves, just buying-in tyres, batteries etc. These days the manufacturer mainly "assembles" and relies on an army of just-in-time sub-contractors sending in complete sections of the car. Easy examples are the wiring loom or the whole dashboard assembly or the seat assemblies or the gearbox. The sub-contractor quotes a price against the background of the manufacturer's volume estimates but there won't necessarily be any guaranteed volumes at all. If sales slump it's not just the manufacturer who gets hit, the sub-contractors may well find they've lost money.
Regarding your point about the Mini the catch with small cars is they cost almost as much to build as large cars. They still need all the same bits and still take just as long to screw together. Compare, for instance, a Cayman and a 911. The cost of building them will be very similar but one retails at a much higher price than the other. But the manufacturer needs a well-priced entry model to attract customers and so accepts a lower margin.
For an example of losing money on every car you need look no further than Lotus. Various owners have poured £billions into the company over the past four decades but the cars have never sold in numbers sufficient to make financial sense. Various write-offs and accounting tricks can be used to show some "profit" from time to time but it's all smoke and mirrors. Meanwhile the sub-contractors have learnt from experience that there's no point believing the sales forecasts so they have to make money on every part supplied, further driving up the cost to lotus of building its cars.
Another relevant point in any factory process is that once the factory is running at 100% capacity you can't build any more cars without building another factory. The cost of the first car which leaves that new factory is absolutely humungous and things only make sense if/when forecast volumes and margins are achieved.
All of this adds up to why European government policies on EVs have been so disastrous. Manufacturers have wasted £billions trying to hit an EV target which has now evaporated into the ether and they have to start all over again.
The world has moved on a long way from when a car company used to make most of the bits themselves, just buying-in tyres, batteries etc. These days the manufacturer mainly "assembles" and relies on an army of just-in-time sub-contractors sending in complete sections of the car. Easy examples are the wiring loom or the whole dashboard assembly or the seat assemblies or the gearbox. The sub-contractor quotes a price against the background of the manufacturer's volume estimates but there won't necessarily be any guaranteed volumes at all. If sales slump it's not just the manufacturer who gets hit, the sub-contractors may well find they've lost money.
Regarding your point about the Mini the catch with small cars is they cost almost as much to build as large cars. They still need all the same bits and still take just as long to screw together. Compare, for instance, a Cayman and a 911. The cost of building them will be very similar but one retails at a much higher price than the other. But the manufacturer needs a well-priced entry model to attract customers and so accepts a lower margin.
For an example of losing money on every car you need look no further than Lotus. Various owners have poured £billions into the company over the past four decades but the cars have never sold in numbers sufficient to make financial sense. Various write-offs and accounting tricks can be used to show some "profit" from time to time but it's all smoke and mirrors. Meanwhile the sub-contractors have learnt from experience that there's no point believing the sales forecasts so they have to make money on every part supplied, further driving up the cost to lotus of building its cars.
Another relevant point in any factory process is that once the factory is running at 100% capacity you can't build any more cars without building another factory. The cost of the first car which leaves that new factory is absolutely humungous and things only make sense if/when forecast volumes and margins are achieved.
All of this adds up to why European government policies on EVs have been so disastrous. Manufacturers have wasted £billions trying to hit an EV target which has now evaporated into the ether and they have to start all over again.
Just to add, back in the days of Mini and other UK cars the component suppliers didn't mind making break-even or a loss on selling to the manufacturer for OEM because so long as lots of cars got out on the road there was a very profitable after-market for replacement parts. The lifespan of things like exhausts, clutches and wheel cylinders was so short that parts suppliers could milk the after-market. This set-up meant the industry profited from the short life of cars and their parts. Then the Japanese rolled up with reliable cars and the whole business model had to change. Next the Germans persuaded people to spend more money on higher quality cars and UK's motor industry was headed for deep trouble.
Bear in mind cars used to be good for about 3 years/30,000 miles whereas 10 years/100,000 miles has been standard for a long time now. That longer life presents new opportunities for the after-market parts business and specialists who are competent with the modern electronic systems.
Bear in mind cars used to be good for about 3 years/30,000 miles whereas 10 years/100,000 miles has been standard for a long time now. That longer life presents new opportunities for the after-market parts business and specialists who are competent with the modern electronic systems.
I wouldn't be at all surprised if Ford had such a book, someone I work with did a stint at JLR about 10 years ago in Cost Engineering, they have a JLR Cost Engineering book, black in this case, and he brought a copy of it with him when he came to us.
Christ, even NASA have a Cost Engineering handbook!
Christ, even NASA have a Cost Engineering handbook!
Carsie said:
My question is does anyone know if this is true or if there is a book published and if so where could I get it?
On the first point, the ever-excellent AR Online has the story (do explore the rest of the site)https://www.aronline.co.uk/facts-and-figures/when-...
AR Online said:
The Mini tear-down explained
One of the legends about the Mini is how Ford bought an example and took it apart down to the spot welds to see how BMC could sell it for such a low price – it has, though, never been stated whether the car Ford took apart was the basic or De Luxe model.
Terry Beckett recalled: ‘We then determined how much it would cost us to build it. On our cost analysis, which we thought was ahead of their’s, we really didn’t see how the car could be produced in this way to make a profit.’
According to Beckett, Ford calculated that BMC was losing £30 on every Mini it made. He added: ‘I could see ways in which we could take cost out of the Mini without in any way reducing its sales appeal… BMC could have priced it at £30 more, and not lost any sales at all. You can track the decline of BMC from that single product: it took up a huge amount of resources, it sterilised cash flow and it was a pretty disastrous venture.’
The Ford tear-down is a widely reported story and I'm sure I've read it in a book somewhere too.One of the legends about the Mini is how Ford bought an example and took it apart down to the spot welds to see how BMC could sell it for such a low price – it has, though, never been stated whether the car Ford took apart was the basic or De Luxe model.
Terry Beckett recalled: ‘We then determined how much it would cost us to build it. On our cost analysis, which we thought was ahead of their’s, we really didn’t see how the car could be produced in this way to make a profit.’
According to Beckett, Ford calculated that BMC was losing £30 on every Mini it made. He added: ‘I could see ways in which we could take cost out of the Mini without in any way reducing its sales appeal… BMC could have priced it at £30 more, and not lost any sales at all. You can track the decline of BMC from that single product: it took up a huge amount of resources, it sterilised cash flow and it was a pretty disastrous venture.’
In terms of getting hold of the actual internal Ford documents they used to define how they calculated manufacturing process costs in the 60s, no idea. I suspect that nowadays textbooks in 'Cost Engineering' would include a superset of whatever Ford was doing back then, eg https://www.amazon.co.uk/Cost-Engineering-Sustaina... perhaps?
Guys,
Thank you for your detailed replies, really appreciated.
In terms of modus operandi, for sure I wouldn't expect less of the manufacturers, albeit the NASA comment was left field (thnx Megaflow lol!).
My enquiry was more around if I could source the book that related the story than accounting principles et al per se.
I did find find this, which I found really interesting
https://ateupwithmotor.com/model-histories/compact...
The story regarding the VA/VE of the Mini as doumented in AROnline, was probably in my subconcious library, but thank you for the refresh Samoht, and thank you for the Amazon link.
Panomax - interesting feedback and comment which went wider into economics. The backdrop of JLR and Lotus, resonate, I recall commenting, many a time that there was no entry model for the Jaguar brand, thus the finance model didn't work and all that was left was a buyer pool of geriatrics who wouldn't spend pension money on a new model anyway.
Ian Callum commented in one of his videos that the cost of the rear suspension on the XE reduced it's market margin and then when BMW moved significantly on their discounts the XE had no where to go on price.
However, back to point.- thanks everone for your comments ; appreciated.
Thank you for your detailed replies, really appreciated.
In terms of modus operandi, for sure I wouldn't expect less of the manufacturers, albeit the NASA comment was left field (thnx Megaflow lol!).
My enquiry was more around if I could source the book that related the story than accounting principles et al per se.
I did find find this, which I found really interesting
https://ateupwithmotor.com/model-histories/compact...
The story regarding the VA/VE of the Mini as doumented in AROnline, was probably in my subconcious library, but thank you for the refresh Samoht, and thank you for the Amazon link.
Panomax - interesting feedback and comment which went wider into economics. The backdrop of JLR and Lotus, resonate, I recall commenting, many a time that there was no entry model for the Jaguar brand, thus the finance model didn't work and all that was left was a buyer pool of geriatrics who wouldn't spend pension money on a new model anyway.
Ian Callum commented in one of his videos that the cost of the rear suspension on the XE reduced it's market margin and then when BMW moved significantly on their discounts the XE had no where to go on price.
However, back to point.- thanks everone for your comments ; appreciated.
Fascinating thread , a discussion which could continue for a long time. Concerning the Mini basic versus deluxe theme does any one have insider info on how the ‘ Special Edition’ ploy works? Porsche are past masters of the art, but the infinitely cute Fiat 500 must be a definitive text book example, being actually a very basic and simple car if you ignore the Twin Air. Like Cleopatra ‘ custom cannot stale its infinite variety.’ The cheaper Panda is actually more useful, with few ‘ specials’. Ford did well with the Capri, too.
Bench marking teardowns still happen. Theres a fairly famous case in the US where Mercedes hired a Tesla tore it down, half assed threw it back together and returned it, ruined to the owner.
Every company will have varying labour rates, idle plant, planned vehicle productions ending, parts in stock and supply availability, market demand etc. so the variables that make a product worth making for companies can be huge.
Every company will have varying labour rates, idle plant, planned vehicle productions ending, parts in stock and supply availability, market demand etc. so the variables that make a product worth making for companies can be huge.
The book "Across the Airless Wilds" is about the development of the Lunar Rover. It takes into account the tendering process and sales pitches and goes on to describe the b
hing and back stabbing of internal departments. The costing side of everything escalates as NASA keep changing the brief and the engineers struggle with designing something for use on the moon. It's a very enjoyable read and I'm sure much of it applies to any big companies or contracts!
https://www.amazon.co.uk/Across-Airless-Wilds-Triu...
hing and back stabbing of internal departments. The costing side of everything escalates as NASA keep changing the brief and the engineers struggle with designing something for use on the moon. It's a very enjoyable read and I'm sure much of it applies to any big companies or contracts!https://www.amazon.co.uk/Across-Airless-Wilds-Triu...
samoht said:
Carsie said:
My question is does anyone know if this is true or if there is a book published and if so where could I get it?
On the first point, the ever-excellent AR Online has the story (do explore the rest of the site)https://www.aronline.co.uk/facts-and-figures/when-...
AR Online said:
The Mini tear-down explained
One of the legends about the Mini is how Ford bought an example and took it apart down to the spot welds to see how BMC could sell it for such a low price it has, though, never been stated whether the car Ford took apart was the basic or De Luxe model.
Terry Beckett recalled: We then determined how much it would cost us to build it. On our cost analysis, which we thought was ahead of their s, we really didn t see how the car could be produced in this way to make a profit.
According to Beckett, Ford calculated that BMC was losing £30 on every Mini it made. He added: I could see ways in which we could take cost out of the Mini without in any way reducing its sales appeal BMC could have priced it at £30 more, and not lost any sales at all. You can track the decline of BMC from that single product: it took up a huge amount of resources, it sterilised cash flow and it was a pretty disastrous venture.
The Ford tear-down is a widely reported story and I'm sure I've read it in a book somewhere too.One of the legends about the Mini is how Ford bought an example and took it apart down to the spot welds to see how BMC could sell it for such a low price it has, though, never been stated whether the car Ford took apart was the basic or De Luxe model.
Terry Beckett recalled: We then determined how much it would cost us to build it. On our cost analysis, which we thought was ahead of their s, we really didn t see how the car could be produced in this way to make a profit.
According to Beckett, Ford calculated that BMC was losing £30 on every Mini it made. He added: I could see ways in which we could take cost out of the Mini without in any way reducing its sales appeal BMC could have priced it at £30 more, and not lost any sales at all. You can track the decline of BMC from that single product: it took up a huge amount of resources, it sterilised cash flow and it was a pretty disastrous venture.
In terms of getting hold of the actual internal Ford documents they used to define how they calculated manufacturing process costs in the 60s, no idea. I suspect that nowadays textbooks in 'Cost Engineering' would include a superset of whatever Ford was doing back then, eg https://www.amazon.co.uk/Cost-Engineering-Sustaina... perhaps?
Carsie said:
My enquiry was more around if I could source the book that related the story than accounting principles et al per se.
The problem with these sorts of anecdotes is that the truth is probably much less interesting than how it is presented now.The way it is told, it sounds like some big official meeting between the boards of two industrial powerhouses where senior executives engaged on this most serious of matters.
If it happened, it would have been a couple of industry colleagues having a chat over beers after a trade event, each trying to out-clever the other. Ford bloke tells Austin bloke, Austin bloke then mentions it to his boss, and it promptly gets dismissed.
Years later, Ford or Austin bloke (now retired) tells a heavily embellished version that people like and it ends up in a book.
Just read a chunk of the detailed article posted on Ford. Some of the content was in Casey’s book but I was reminded how cross Old Henry was reported to be when Model T production had to stop. A major reason for its success was the ladder chassis ‘ Mecano’ construction which enabled huge numbers of variants to be created, adapted and even re- created before the Greens were thought of. Full integrated monocoque construction put paid to this. By the time the Mini was on the road it was thus expensive to adapt basic structures to economise. When BMW acquired Mini they were ( anecdotally) surprised how slipshod the bodywork was.
Gassing Station | General Gassing | Top of Page | What's New | My Stuff