The Expanded and Annotated My Life and Work

HOW TO ACHIEVE ZERO INVENTORY
The first part of this discussion is simply common sense because a business 
organization cannot achieve zero inventory if it buys ahead of its needs. 
The second part is particularly instructive because it shows exactly how 
Ford did what Goldratt and Fox’s (1992) matchsticks and dice simulation 
shows to be impossible—run a balanced factory at close to 100% capacity 
without the accumulation of inventory.
Ford cited Benjamin Franklin as a major influence on his own business 
philosophy, and Franklin (1986, pp. 20–21) had this to say about the pur-
chase of cheap, but unnecessary, raw materials or stock:
You call them goods; but, if you do not take care, they will prove evils to 
some of you. You expect they will be sold cheap, and, perhaps, they may [be 
bought] for less than they cost; but, if you have no occasion for them, they 
must be dear to you. Remember what Poor Richard says, “Buy what thou 
hast no need of, and ere long thou shalt sell thy necessaries.” And again, “At 
a great penny worth pause a while:” He means, that perhaps the cheapest 
is apparent only, and not real; or the bargain, by straightening thee in thy 
business, may do thee more harm than good. For in another place he says, 
“Many have been ruined by buying good penny worth.”
This statement exemplifies the dysfunctional effect of “purchasing cost 
variances.” The variance is the difference between the standard cost and 
the actual cost, and it is sometimes possible to get a favorable variance by 
buying excessive quantities of the commodity or raw material in question. 
An immediate effect is to tie up capital (“straighten thee in thy business” 

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128  •  The Expanded and Annotated My Life and Work
as Franklin put it), which results in cash flow problems that can destroy 
even a profitable business.
A legitimate purpose of inventory, however, is to serve as a buffer against 
variation in the process itself, and this includes transportation (both inter-
nal and external) as well as product transformation. This book has already 
shown that Ford worked explicitly to remove all such variation from his 
processes through subdivision of labor and single-unit instead of batch flow.
The following statement, “If transportation were perfect and an even 
flow of materials could be assured, it would not be necessary to carry any 
stock whatsoever,” proves unequivocally that Ford recognized the benefits 
of eliminating all such variation. The subsequent statement, “With bad 
transportation one has to carry larger stocks,” shows that unreliable trans-
portation, or by implication variation in material transfer times, makes 
inventory buffers necessary.
* * *
We have found in buying materials that it is not worth while to buy for other 
than immediate needs. We buy only enough to fit into the plan of production, 
taking into consideration the state of transportation at the time. If transpor-
tation were perfect and an even flow of materials could be assured, it would 
not be necessary to carry any stock whatsoever. The carloads of raw materials 
would arrive on schedule and in the planned order and amounts, and go from 
the railway cars into production. That would save a great deal of money, for 
it would give a very rapid turnover and thus decrease the amount of money 
tied up in materials. With bad transportation one has to carry larger stocks. 
At the time of revaluing the inventory in 1921 the stock was unduly high 
because transportation had been so bad. But we learned long ago never to 
buy ahead for speculative purposes. When prices are going up it is considered 
good business to buy far ahead, and when prices are up to buy as little as pos-
sible. It needs no argument to demonstrate that, if you buy materials at ten 
cents a pound and the material goes later to twenty cents a pound you will 
have a distinct advantage over the man who is compelled to buy at twenty 
cents. But we have found that thus buying ahead does not pay. It is entering 
into a guessing contest. It is not business. If a man buys a large stock at ten 
cents, he is in a fine position as long as the other man is paying twenty cents. 
Then he later gets a chance to buy more of the material at twenty cents, and 
it seems to be a good buy because everything points to the price going to thirty 
cents. Having great satisfaction in his previous judgment, on which he made 
money, he of course makes the new purchase. Then the price drops and he is 
just where he started. We have carefully figured, over the years, that buying 
ahead of requirements does not pay—that the gains on one purchase will be 

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How Cheaply Can Things Be Made?  •  129
offset by the losses on another, and in the end we have gone to a great deal 
of trouble without any corresponding benefit. Therefore in our buying we 
simply get the best price we can for the quantity that we require. We do not 
buy less if the price be high and we do not buy more if the price be low. We 
carefully avoid bargain lots in excess of requirements. It was not easy to reach 
that decision. But in the end speculation will kill any manufacturer. Give 
him a couple of good purchases on which he makes money and before long 
he will be thinking more about making money out of buying and selling than 
out of his legitimate business, and he will smash. The only way to keep out of 
trouble is to buy what one needs—no more and no less. That course removes 
one hazard from business.
This buying experience is given at length because it explains our selling 
policy. Instead of giving attention to competitors or to demand, our prices 
are based on an estimate of what the largest possible number of people will 
want to pay, or can pay, for what we have to sell. And what has resulted from 
that policy is best evidenced by comparing the price of the touring car and 
the production.