THE ORGANIZATION OF MODERN BUSINESS WILLIAM.R.BASSET MAIN LlBF7A^v,Ar5R IC DFP1 THE ORGANIZATION OF MODERN BUSINESS THE ORGANIZATION OF MODERN BUSINESS BY WILLIAM R. BASSET 14 Author of When the Workmen Help You Manage," Accounting as an Aid to Business Profits, ' ' etc. NEW YORK DODD, MEAD AND COMPANY 1921 COFTRIQHT 1920, 1921 BY MILLER, FRANKLIN, BASSET AND COMPANY Copyright 1920-1921, By McGraw-Hill Company Copyright 1920, By Romer Publishing Company Copyright 1921, By Engineering Magazine Copyright 1921, By A. W. Shaw Company >^'-?AWY-A<3RCUl_TURe DEPT. IBoben Companp BOOK MANUFACTURERS RAHWAY NEW JERSEY FOREWORD A DEFINITE trend in business methods has de- veloped during the past few years. To succeed permanently, an enterprise must move in har- mony with this trend; to resist it is to insure ultimate failure. The communist's dream of production for use can never succeed until human nature is remade. Profit is the only spur to production. But the concern which looks first to profits is a beach-comber existing only from day to day. When, temporarily, as in a depression, the op- portunities fail, such a business also fails. The permanently successful business must first serve the customer, the workman and the community. Under reasonably good manage- ment the profits will surely follow and will be a direct measure of the value of the service ren- dered. This service does not consist of willing- ness to admit that "the customer is always right, " nor promptly to send out a man to re- pair a product that should have been better made in the first place. It consists of making a product best fitted to its use, at a price to attract purchasers, at the same time enabling 520748 Foreword proper wages to be paid to the workmen and to leave a sufficient profit for capital. To do this requires a degree of standardiza- tion, and production in large quantities. There- fore, the plant must be a tool carefully designed to produce that product and, as a rule, nothing else. Having decided what product to make, that product must be made as well and as cheaply as possible and then sold. There will be no room for the concern which is ready to sell whatever the whim of the purchaser dic- tates, and then make it. The author of this book looks at business with the cold eye of the industrial engineer whose sole test is continuous profits. His experience has been gained in consultation with more than a thousand clients. He does not favor any panacea, but he does lay down in detail eleven rules for managing a business which his experience has shown are essential to permanency and profit. CONTENTS CHAPTER PAGE I How BUSINESS MUST DEVELOP . 1 ^il FIRST MAKE THEN SELL . . 18 III FINANCING A BUSINESS FROM THE INSIDE 41 IV WHAT Is A FAIR PROFIT? . . . 62 V CASHING IN ON THE PLANT You HAVE . i 82 l/ Vl FALLACIES OF MANAGEMENT . . 103 VII CHOOSING A LABOR POLICY . . 124 VIII GETTING EXECUTIVE LEADERSHIP . 152 IX THE USE OF MONEY IN BUSINESS . 175 X PUTTING A BUSINESS IN BALANCE . 199 XI CONTROLLING YOUR SOURCES OF SUPPLY 225 XH. THE ESSENTIALS OF A SOUND BUSI- NESS . 249 THE ORGANIZATION OF MODERN BUSINESS THE ORGANIZATION OF MODERN BUSINESS CHAPTER I HOW BUSINESS MUST DEVELOP A WOMAN bought a spool of cotton at a big de- partment store and asked that it be sent. The merchant did not complain; he duly delivered the spool of cotton. But he delivered it in state in a five-ton truck manned by three men just as though it were a large and costly piece of furniture. He made the demonstration that he was after; he got plenty of publicity and he smashed the habit of having tiny articles de- livered. Yet in the business of to-day, if only the relations could be dramatized, we should find no end of ridiculously great powers moving tiny weights without attracting comment. The com- parisons would be astonishing. We should find large and enthusiastic sales forces selling large .; The Qrgam~ation of Modern Business .orders which the factory filled at a tiny profit or at & loss simply because it was not geared to make the articles that had been sold. We should find expensive machinery groping for its wage through scarcely one-quarter of its possible productive hours. We should find that it often costs three times as much to sell as to make. In short we should turn up no end of cases of the grossest profiteering by that great- est and most cunning of all profiteers waste. Waste ! That is an old story. Just pick up a nut or a bolt here and there, use two inches less string per bundle, stop dotting the "i's" and crossing the "t's" and you save $50,000 a year! Yes, we do waste a deal of material. Every dunce knows that. But the big wastes are not of material. The big wastes are rarely those of labor. The factory that uses every ounce of material and has the most conscientious work- ers in the world may be the greatest wastrel. The important wastes arise through defec- tive organization through a lack of balance between the parts of a business and between the business and its markets. They are hard to detect. They may more easily arise through mistaken zeal than through carelessness. Many a "born salesman" has thus wrecked his com- 2 How Business Must Develop pany. I have in mind a specialty manufacturer who took unto himself a sales manager noted for "ginger"; that manager was an energetic and really good salesman. He tested the mar- kets and found that several of the articles which the company had not pushed could be sold in large quantities. He made a drive and the orders welled in. All of which seemed splendid, for that particular article carried, according to the cost sheets, a fair profit at the sales price. The orders came so easily that the manufac- ture of the new leaders had to be reformed. The company began to make them in quantity with rosy prospects; their other lines fell off. At the end of the first year the company profit was smaller than had been expected. At the end of the second year the red figures ar- rived. Then the president had an expert inves- tigation made and it turned out that although the fast-selling articles could be made in small quantities at a profit, they could not be so handled as principal lines because the former low cost had been gained by the undue distribu- tion of the factory overhead to a more expen- sive line. The factory manager insisted upon a revision of costs that brought up the price of the new leaders, the sales manager left in a huff, and every one was unhappy. And yet no 3 The Organization of Modern Business one was to blame. The company simply had not been organized for business. In this case the organization was palpably bad. The bigger wastes are hidden by a super- ficial efficiency that is hard to penetrate. They are fundamental and they are of the highest importance because upon the elimination of them depends tfoe structure of society. A con- vincing argument can be made that Socialism grows out of waste. Let us take a lesson from the social revolu- tionist. That sounds like an absurd sort of a thing to do, for about all that one ever hears of revo- lutionary socialism are the resounding shouts of those who would destroy. Indeed, I believe that a considerable campaign has been waged against revolutionaries on the ground that they steal pianos, have bad barbers, and are rude to women at least I have seen quite a number of posters and articles developing these themes. I can easily conceive of a strong movement, especially in apartment houses, against pianos. A revolt against barbers is not unthinkable (it is a splendid tribute to the peaceful qualities of our citizens that they kill so few barbers), but the unshaven, plunging beast of the car- toons is no more typical of even the most ex- 4 How Business Must Develop treme social revolutionaries than is the fat, be-whiskered gentleman with the swollen paunch typical of the capitalist, or the up- standing gentleman wearing a square paper cap typical of the workman. The odd part of it all is that while the hench- men noisily row, our real leaders of industry the men who have the management of great affairs are trying, in their way, to achieve exactly the same result as are the real social- istic leaders. That is an extraordinary fact which very few people realize, and which still fewer will grant even if they do realize it, for the terms that the two movements use are very different. They do not speak the same lan- guage and each is surrounded with what might be called the " lunatic fringe." The employing class has deployed about it a number of stupid people who always insist that whatever is, must be. They are the men who want ever-lowering wages, who are the last to put in any sort of mechanical improvement, and who pride themselves upon being " hard- headed. " The other lunatic fringe is composed of those who yell of the rights of man, who are forever on the street corners talking about doing less work for more money, who are fond of waving red flags and of starting riots. 5 The Organization of Modern Business The lunatic fringes talk incessantly and think sparingly, and together they tend to conceal that goods, not money, forms the basis of our life. The largest contributing cause to reduced buying power of money is that the war took out of the world a stupendous amount of pre- viously accumulated value, and then demanded the production of great quantities of goods to be at once destroyed. The new goods were pro- duced at prices that had little relation to for- mer values that is, workmen, owners, agents, everybody, reveled in a fool's orgy of high profits under the delusion that money, not goods, represented purchasing power. When only a single group profiteers the results are satisfactory enough unless that group happens to control a basic industry such as steel, or coal, or transportation, for then it takes a long time for the rest of the community to adjust its values to the single new value set up and the process is so gradual that no one notices it. But when every one starts hilariously after the big money and gets it then the buying power of that big money shrinks like a $10 "all-wool" suit. Economic truths such as these never get across in words. The stomach is the only 6 How Business Must Develop teacher. No one will be convinced that serving for five hours at $20 is not better than serving for ten hours at $10 until he discovers that al- though the five hours of service are rewarded by a bunch of paper which is said to be worth $20 those same five hours do not produce $20 worth of value relating the value to the amount of food, clothing, and shelter the money will buy. He at once decides that $20 is not enough for him; he does not examine the service he is rendering for $20 for he is not accustomed to think in such fashion. It is only that $20 does not buy sufficient food, clothing, and shelter. He then arranges that instead of $20, he shall have $40 for his five hours. Within a little while the $40 is not enough; he insists upon more and more money until finally comes the time when he cannot exchange a truckload of money for a pittance of food, clothing, and shelter. After he has trotted his big wad of money around enough the idea begins to trickle through that perhaps after all something is queer about this money idea and that what he is really working for is not to get just speci- mens of the governmental art of engraving but for goods that he can consume or save and that the money was interposed merely to facilitate the exchange and not as an end in itself. 7 The Organization of Modern Business It does not take a genius to calculate that 3% on an investment is just as good as 6% if $30 will buy as much as $60, hut it seems to take pretty nearly a genius to comprehend the result of this not uncommonly abstruse calcu- lation. Because we have distorted the expression of values, and because we have turned things up- side down, out of it all is emerging the lesson which the Bolsheviki started out to teach and which, indeed, they might have taught had they not got lost on the way trying to prove that all men are equal. The controlling thought of the social revolu- tion is that a gross inequality exists in the dis- tribution of the world's goods because produc- tion is adjusted to a standard of money instead of need. That the real purpose of production is to provide things to use, that there can be no other purpose, and that the capitalistic world has been trying to produce not for use but according to an arbitrary and wholly arti- ficial standard of money. Therefore, they would right this condition by abolishing all pri- vate property, giving to each man the right to use that is, they would pay for production in kind and thus only enough would be produced 8 How Business Must Develop to supply a standardized need of the com- munity. They say that under the present system, a manufacturer produces a certain number of articles at a certain price and without regard to the needs of the community, that he sells those articles at that price as long as the com- munity will buy. When the community slacks its buying he shuts down his factory until the community has bought up his stock. Then he again begins to manufacture. When he shuts down, his workers starve and the articles he made are held for sale on an arbitrary scale of price and are thus always beyond the possibility of acquisition by the average worker. Under the Communist program the whole organiza- tion of society would change. Instead of hav- ing John Smith make hosiery and sell it through a chain of agents, jobbers, and retail merchants to, let us say, the employees of John Jones, who are making shoes and selling them through a chain of agents, jobbers, and retail merchants to the employees of John Smith, your social reformer would have these two fac- tories owned by the State, would have them make for the State, and have the State dis- tribute their products directly to those who 9 The Organization of Modern Business need them and not merely to those who could buy them. Every one would be certain always of having enough socks and shoes but never too many, and the employees of the respective fac- tories would no longer be employees but would be merely members of the community helping to serve the needs of the community which, when you finally analyze it, is all that they do anyway. The "r evolutionary " part arises through the attempt to abolish a certain desire on the part of many individuals to hang on to their property. The whole scheme, though perfect in theory, involves a greater faith in the un- selfishness of society than the study of human- ity justifies. We are trained to gage our re- spective worths in the world more or less by the size of our respective pocketbooks rather than by the acclaim that we receive. This is true only to a degree, however ; many men pre- fer eminence to wealth and many men after they have gained wealth try to achieve emi- nence. Men never gain real acclaim through the possession of money. There has never been a multi-millionaire who attained the posi- tion of Colonel Eoosevelt. The more money a man has the less he cares for it, and a friend who has closely studied the working of the 10 How Business Must Develop radicals tells me that whenever a so-called "Red" is brought before a jury his lawyers always try for a jury of rich men on the ground that the rich man is willing to judge fairly the propaganda to redistribute wealth while the comparatively poor man is not. But because we are what we are and have deeply ingrained in us the desire to acquire and to hold prop- erty, it is the dollar that will be used to score the business game, and especially since, with- out changing the method of scoring, the results in the way of general happiness can be the more quickly achieved than by any radical, revolu- tionary play. Bolshevism as a term of violence will pass. One cannot keep on "raising Cain" forever, but the underlying principles of the social re- form are gaining ground from year to year, and they must and will prevail, for the thought is gradually, through study, being brought home that we have not, generally speaking, any greater realization of what the sub-division of labor and the application of power have done to our social life than Watt had of the steam engine or Galileo of electricity. Take a few glaring instances as shown by our very terms of expression. The words "overhead," "burden," or "expense" are ap- 11 The Organization of Modern Business plied to the charges that go into a product be- cause of other than the actually consumed labor and material. The terms that we use connote that they were considered superfluous, that the product properly should carry only direct costs, and that everything else arose through some fault which it was the duty of management somehow or other to overcome. Yet to-day we are learning that actually cheaper production is often to be gained by vastly increasing this very expense which was once thought to be un- necessary for the reason, among others, that into this expense goes management, and man- agement is the biggest thing in industry. We may find that the most expensive way of doing work is that in which the smallest possible charges for overhead enter. Take another shutting down the plant. Your old time manufacturer prided himself on never having a man on the payroll who was not producing, and he insisted that men in- stantly be laid off when work slackened, and that if the work became too low the plant be shut down. This was his idea of economy the obvious economy. It is still the idea in cer- tain industries which are celebrated for labor disorder and shifting product prices, as coal and iron. Now, however, a few of the more 12 How Business Must Develop astute manufacturers know that laying off peo- ple or shutting down a plant is an invitation to bankruptcy and that if they hope legitimately to come out on the right side of the ledger, they must fight with all that is in them to keep the wheels turning with new orders even if those orders have to be taken at less than cost. They know that they will lose less, manufacturing at somewhat less than cost, than by shutting down altogether. Take salesmanship. Years ago we did not sell. We provided things and people came and bought them. Then it was discovered that very frequently people either did not know what they wanted or were careless of their needs. They would not buy they had to be sold to. Thus evolved salesmanship. In the further course of its evolution it was discovered that people might systematically be induced to buy that which they neither needed nor wanted, and then developed the type of smart salesman who prided himself upon being able to "sell any- thing. " For a time salesmanship was the thing if one only evolved a great selling or- ganization then everything else would care for itself. The " experts " made a ritual of sales- manship. If the salesman only made the proper hand and face movements at the same time re- 13 The Organization of Modern Business citing thoroughly tested and recommended in- cantations then his victim had to buy. But trouble came. The more successful sorcerers would sell more than their factories could de- liver. The dejected individuals who had been hibernating in the factories modestly suggested that perhaps selling was not a thing in itself but a method of disposing of the factory product. During, and right after the War the cry was for production engineers for people who would get the goods out, who would fulfil the sales promises. The next phase of the cycle is always one where concerns find themselves producing more than they can sell. I shall revert to these subjects again in de- tail. I am now giving these illustrations only to demonstrate how little regard and how little true comprehension we have of the need for coordinating industry how we have been, in a way, monkeying with the buzz-saw. I am not expressing a lone and individual opinion generated amidst philosophical calm. My opinion has been formed from a close per- sonal and organization contact with more than fifteen hundred factories. The American So- ciety of Mechanical Engineers has stated simi- lar conclusions in a set of principles : 1. Social and industrial unrest results from 14 How Business Must Develop the fact that human relations have not kept step with economic evolution. 2. Sharp social or industrial disputes are no longer private. Society is affected, there- fore such cases must be subject to the de- cision of authorities based upon intrinsic, not arbitrary, law. 3. Every important enterprise must adopt competent productive management, un- biased by special privilege of capital or of labor, and disputes must be submitted to authorities based upon intrinsic law. Well, what of it! What difference does it make to me! I have been getting by through these years, why can't I keep right on getting by! It makes just this difference. The highest business thought is rapidly becoming scientific. The conviction has entered into the minds of nearly all students that whereas we have been fooling along, manufacturing for money, we must really manufacture for service, that the true selling price is not what the traffic will bear but is based upon cost, and that the man who does not realize this and does not so shape his business that its various sections will exactly coordinate cannot possibly compete with the man who puts the scientific idea into practise. 15 The Organization of Modern Business Or, in terms of money, profit succeeds service. And no service, no profit! Let me qualify this word " service. " It has been hideously abused and cheapened. Fre- quently it is used to describe palaver, and bun- combe, and costly furniture, and servile clerks, and the other scenery that commonly surrounds putting over something at a high price; or again it may mean the free repairing of an article during a certain period, most of which repairing would not be necessary had the ar- ticle been made right in the first place. Eeal service consists in giving the best pos- sible article to the community at the fairest pos- sible price, at the same time providing adequate and adequately paid labor and a proper portion of profit for the capital invested. There is nothing contradictory between a low price to the public, a fair wage to the workers, and a fair profit to the owners. If the bal- ance wheel of a business is properly adjusted these several wholly desirable results will be achieved. If it is not adjusted they will not be achieved. Only skilled planning and fore- sight can make the adjustment. Any one who does not care whether or not he reaches all of these several goals might as well get out of 16 How Business Must Develop business and save money. For eventually lie must lose. The man who has coordinated to produce values is the man who will stay in business. For real values do not change. A pair of shoes, for instance, has a definite economic value; so has a piece of land that will produce a certain crop. A man with a ham is better off than a man with a van of paper money that will not buy it. No financial legerdemain can grow wheat on an acre of greenbacks. The man who has values who has a farm that will produce, a factory that will produce has something which renders him independ- ent of financial changes, for then he is able to exchange goods for goods which is what we are going to get around to, although hardly in such an obvious fashion as I have stated. Now, it may seem that we are wandering from our thought of service, and from our thought of coordination, and getting into the speculative realms. We are doing nothing of the kind. I am merely trying to sketch in the background to show the reason for business, to show why and how business must develop. I say must develop because it is so developing. 17 CHAPTER II FIRST MAKE THEN SELL You can walk into any first-class tailoring establishment in London at any time before noon, order any kind of a suit, and if you are in a hurry you can have it fitted during the afternoon and delivered, complete and ready to wear, before eight o'clock in the evening. Is not this a rare combination of speed and effi- ciency that should shame an American? No matter what the emergency, an American tailor will not even in the dullest times agree to make and deliver under three or four days. The English shop has its men on the second floor; they do the major part of their work by hand, and if you are in a hurry it is only a mat- ter of shifting the men from whatever they hap- pen to be doing to your work. In the American tailor shop very few of the workmen would be on the premises probably none other than the cutters and fitters. The cut materials would be sent out to be sewn together. Some two or three men would work on the trousers, several 18 First Make Then Sell more on the coat, and still others on the waist- coat. The finished suit would represent the combined operations of probably fifteen people. Most of these people would work by hand or with easily adjusted machines. These fifteen would turn out among them in a day many more suits than would the English tailors working a man or two to a suit. But the American tailor could not, without extraordinary diffi- culty get a single suit through all of them in the one day and the cost of such an emergency mobilization would exceed the price that he could legitimately ask for the garment. Now, instead of the small American tailor, take a large factory making standardized ready-to-wear clothing. They turn out the fin- ished suit assembled in perhaps less than an hour in the aggregate though the time may have been put in, in fractions. They have expert cutters and fitters, and as far as personnel is concerned are better equipped to complete a special suit in a hurry than the English shop could hope to be. Their buying capacity is large, they do much machine work, and they can sell a suit for less than the cost of the ma- terial to the ordinary tailor. Suppose I walk into the factory and ask for a suit cut accord- ing to some fancy of my own but out of mate- 19 The Organization of Modern Business rial which the factory already has in stock. I want that suit by evening. Suppose the manager were fool enough to grant my request. What would happen? This suit of mine would have to be routed through specially. Whenever it came to a department at least one machine in that department would have to be taken from the work on which it was engaged, readjusted, and the operator instructed. When the adjust- ments had been made and instructions deliv- ered the particular operation required on my suit would take but a few minutes or seconds, and then the machine would be readjusted and go on with the volume work on which it had been engaged. This procedure would have to be repeated through perhaps a score or more of operations and by the time the suit was done the mere making would have cost the firm any- where up to a thousand dollars! The Englishman could have made that suit at his regular price and at a profit. The Ameri- can tailor might have made it at three times his regular price but without a profit, while the American company, highly organized for work and capable of giving the highest quality of service at the least possible cost, could not have made that suit at any price within reason. On the other hand the English tailor would 20 First Make Then Sell have been at sea if some one had ordered from him 5,000 size 40 sack suits. It would have taken him months to turn them out and al- though he might buy his cloth much cheaper than the American and pay his tailors less he could not seriously compete with the American clothing manufacturer. To the one it would have been an epochal order ; to the other a mere incident. Comparing these three examples we have before us in a crude way the development of manufacturing and a hint of what a new and extraordinary force is contained in the applica- tion of power arid the sub-division of labor, and especially the new role as assumed by manage- ment. In the case of the hand workers, management meant merely providing them with work and keeping them in general order. Their only co- operation was in not getting in one another's way. With the American custom tailor, man- agement grew apace for the garments had to be assigned to the several workers on some basis by which the various operations would be done more or less sequentially, in order that one man might not be too busy and another idle. In either case, however, if there were no garments to make then there was no one to 21 The Organization of Modern Business pay that is, the labor cost ceased with the work and what little machinery might be em- ployed was so inexpensive that its idleness could not cut any considerable figure. But with the big clothing manufacturer a new and very important element enters. That company has a plant representing much money. It has a deal of machinery and although the individual ma- chines may not be of a very expensive charac- ter their aggregate value is large. If that com- pany stops work for lack of orders, their charges do not cease. Only the wages cease. The interest on the plant keeps right along and so do the salaries of the managers and of the foremen. The skilled direction cannot be picked up off the street whenever needed. It must be trained and kept. Idleness does not represent only a loss of profit ; it calls for out- of-pocket payment. The charges of idleness are positive, not negative. And another very great difference is noted. The individualistic shop can do what it pleases, but the factory is limited in scope. The ma- chinery has been attuned, so nicely attuned, to a certain kind of work that even a compara- tively slight change in operations will destroy the profit for the time being while an emergency suit of clothing such as I mentioned can hardly 22 First Make Then Sell be undertaken at any price. The adjustments are more expensive than the product. Thus we begin to grasp what is becoming a cardinal principle of industry that one cannot profitably sell and then make, but one must so coordinate the making and selling as to form a production scheme for the establishment. This is the gospel of volume production ; when real- ized in its fulness it will be discovered to mark out the metes and bounds of selling, the kind of machinery, the kind of labor employed, the planning and location of the building, and, if one cared to accept some current theories, it would determine the shape of the nose of the office boy who ought to be employed. The old manufacturing was opportunist. When the plant investment was small and every worker was skilled it did not make much dif- ference what kind of an order came in so long as it was within the general scope of the firm's experience. A certain universality became a matter of pride as, for instance, the English tailor I have mentioned would have been in- sulted if any one had suggested that perhaps he did not know how to make a pair of riding breeches, while the great clothing factory would just as promptly answer that it could not make a pair of riding breeches but it might make five 23 The Organization of Modern Business or ten thousand pairs which would be a touch of the same pride, for probably that clothing factory could not learn to make riding breeches at a profit unless it made many more than ten thousand. If the sales manager of that factory sold ten thousand pairs of riding breeches and the production manager suggested that al- though the price seemed high enough to be profitable he was very doubtful if he could make them at a profit, there would be a tre- mendous rumpus throughout that establish- ment, and if the president happened to be a salesman, as probably he would be, that pro- duction manager would be informed that it was his business to get out what the sales depart- ment sold and not to indulge in cost specula- tions. And probably that sales manager would get his way and keep right on getting his way until a competitor appeared who made but one thing, or at the most a few things, and stuck to his standards. Then the sales manager would dis- cover that he could not compete against the newcomers on certain articles and would stop making them and at the end of the year it would be discovered that the place had been run at a loss. For more than likely the company, hav- ing given itself up to the selling side, would 24 First Make Then Sell have been counting the gross profit of the year and would not have investigated the profit per line. A striking case of this occurred with a spe- cialty manufacturer making a large line. On a certain type of article which we may call " A" they took old machines of other makers in ex- change. Some of the second-hand stuff they sold but the most of it they junked, for they thought their profits were so high that they could make the allowance with profit. On another line "B" they had no exchanges and that line they sold at what they thought was a good profit. But "A" was the leader. Another company came into the field and cut out the market on the "B" goods by offering some- thing which was not only better but much lower in price. At the end of the year the "A" sales were record-breaking but the com- pany had lost money ! A cost accountant made an examination; he found that every sale on the "A" line with an exchange had been made at a loss and that the company had come through previously only because they had taken an exorbitant profit on the "B" goods. The moment a business-like competitor came into the field they were beaten on the "B" stuff. The Organization of Modern Business Or take a rubber company doing an enormous business. They maintained branches every- where and insisted that their dealers carry full lines. The dealers took the full lines but in- stead of stocking they found that it was much cheaper to carry only small quantities and re- place them as sold. Some dealers would order three or four times a day; one dealer with a bill on an average of $4,000 a month bought on an average of 600 times a month. It cost $1.28 to put an order through the books. That is not high; it costs the best of the savings banks about a dollar to make a deposit or withdrawal entry. But having so many small orders loaded with bookkeeping charges ate into the com- pany's profits. They found that because they had encouraged the idea that a dealer should order with a view to keeping his stock at a pre- determined figure, that they lost money on 40% of all their orders. It is not what you can sell that counts but what you can sell at a profit. That profit can- not be found by lumped figures but only through detailed costs in connection with time studies. These costs and scientific studies will not merely show the costs but they will also point out ways for improvement, and highly spe- cialized machinery and modes of work will be 26 First Make Then Sell evolved. And when you have attained this spe- cialization you will discover that the whole sell- ing plan must be changed, because to make at the least cost involves the smallest possible number of articles repetitively manufactured to a standardized design. Therefore to go back to the sales manager of the clothing factory, it is unlikely that those riding breeches, if the factory were well organized, could be taken at a profit unless a department were opened for them that is, unless another division were to be established for riding breeches. And I say this in the full knowledge that clothing estab- lishments do not commonly attain a very high degree of specialization and that they have not fully grasped the meaning of modern manufac- ture. We introduce machinery for only one pur- pose to make more cheaply than is possible by hand. An American road contractor finds a steam shovel cheap ; he would not find it cheap in China because he could employ some thou- sands of hand workers at next to nothing a day. To-day, in America especially, and to a degree all over the world, the worker is expen- sive and demands certain rights. That will cause even more machinery to be introduced into our life for the way to overcome high 27 The Organization of Modern Business wages is to get more out of a man and the way to get more out of him is to help him with the best tools which mean power tools. The most efficient tool is one especially made or adjusted for the work in hand. The most efficient worker is the one who masters all of one sub- ject or operation. The specialized tool is but an expense unless it be employed upon the work for which it was designed. It is a great expense indeed if left idle. Therefore it has not only to be kept continuously employed but employed at the work for which it is best suited which in turn means standardized production. Thus, without knowing it, Nature is forcing us to the "twelve months " work idea. The natural progress of industry makes impossible the intermittent work against which the Bol- sheviki and other social reformers complain and which is at the very root of the objections to that capitalistic scheme of affairs under which we live. When shutting down fell largely upon the workers, they had cause to complain; now shutting down falls just as severely upon the owner. The owner cannot generally make and then hold for a price because by the time he has sold off his stock the interest charges and depreciation upon the plant and the con- tinuing expense of his organization have com- 28 First Make Then Sell bined to eat up more than the profit he hoped to get. Thus it is to the common advantage of the worker and the owner to keep the plant in operation. The great wastes of idle capital are just be- ginning to be realized. Extensive researches made by industrial engineers and which are confirmed by my own experience are to the effect that because of the inexpert selling of a product which usually means trying to sell at too high a price or selling that for which the factory is not equipped to make, thereby neces- sitating changes in arrangements of work, or faulty arrangements by which some machines have too much and others too little to do the average machine in a factory is not working more than one-third of its time. If the capital which bought that machine expects to get a fair return it must get it at the expense of the worker and of the public taking the near view. Taking the far view, it gets it at its own ex- pense. The worker who receives less than a full wage has a decreased buying power. The public that gets an article at a high price qan- not buy much of it and it must pass the higher price around the circle and thus eventually rob the capitalist's money of a part of its buying power. 29 The Organization of Modern Business Nobody gains out of waste. Nobody gains out of restriction of production which is a form of waste. The manufacturer may think that he makes more money by restricting pro- duction and holding up the price. That is the controlling delusion of the steel and coal trades but it takes only the most elementary economic thought to discover that although by restricted production the number of dollars received in proportion to the work may be increased those dollars are very promptly robbed of their buy- ing power. Production with the idea of mak- ing a large profit on a few articles is a vicious illusion. It is really not so odd that the social revolutionaries protest against it as it is that those who practise it believe that they are ac- tually accomplishing what they think they are. In the iron and steel industries, for instance, 40% of the capital invested is idle all of the time. If we utilized all of our coal resources to the utmost we could get all of the coal we needed by eliminating, it is estimated, about 80% of our mines and 80% of our miners whose productive capacities could then be thrown into other branches of industry or agri- culture. This would relieve the railroads of their single biggest burden which is the trans- port of coal, would require a smaller invest- 30 First Make Then Sell ment in rails, and permit a freer and cheaper transport of other commodities, and in the end we should all of us, steel operators, coal miners, and railroad men, have the capacity to buy much more than we buy to-day even though we might not use so many counters in the buy- ing process. That increased buying power would flow through every avenue of industry, everywhere increasing the demand. That which is called standardization, then, is not a mere whim. The use of automatic ma- chinery, the sub-division of labor, and the ap- plication of power are only narrowly to be regarded as manifestations of ingenuity. In their larger view they are parts of a social de- velopment in the way of making more things with fewer men. They are part of the transi- tion of the man from the purely beast stage into the higher levels and there can be no stop- ping the progress, even if any one were so thick- headed as to desire to stop progress. The steady progression was interrupted by the war and now with the redistribution of wealth brought about by the war, the progress will go on with many times the former speed. This is not philosophic imagining. The pro- gression must be apparent to any one who views the signs of the times. You have only 31 The Organization of Modern Business to look at a Ford automobile passing to know that it is true. You have only to look at a type- writer to know that it is true. You have only to look at an adding machine to know that it is true. And the point is that the man who grasps this progression, who understands what is going on about him, is the man who will be equipped to prosper and go forward. The man who cannot see beyond the wart on his nose will be left by the wayside waving his arms like a windmill and protesting that things are not what once they were, which, by the way, is a protest that started some time before the Egyptian kings were good enough to live in order that the cigarette makers of to-day might have a nomenclature. Or, to express the entire matter in a more concrete fashion, the larger money in manu- facturing to-day is to be made through stand- ardization, and standardization involves a nicety which we have not previously known in the planning of our operations. The selling, the production problems, and the labor prob- lems are so cunningly interwoven in this new scheme of things that they cannot possibly be separated. The reaction to standardization is at the first not wholly agreeable. The term brings to mind 32 First Make Then Sell a dull, drab world clothed in what amounts to a uniform, living all in the same sort of houses filled with impersonal standardized furniture and eventually reading standardized books and newspapers. Only a Teutonic mind could find joy in such a picture. But no such result need flow from standardization unless the standards are fixed by the State in a socialistic era. If instead of " standard" we say "style" the picture is the less offensive. And when you examine styles you will find that they do not differ much ; this woman whom you pass seems to be dressed quite differently from the next one but if you compare both of them with a fashion plate of 1800 you will find that they are nearer in style to each other (however different they may look) than they are to the old draw- ing. It does not follow from standardization that we should all take on a certain sameness; arti- cles of luxury will hardly be standardized. There is no reason that they should be for they will come under the art heading. But it is otherwise with the common utilities of the day. No one insists upon a distinctive design in fry- ing pans ; what is wanted is a good pan, and it does not sear the heart of Gotrocks to think that this scrubwoman may in her home have The Organization of Modern Business an exact counterpart of the frying pan that graces his kitchen. No owner of a high-grade car objects to any one else in the world owning a car with an identical motor. It offends no one to have steel rails much alike. And neither do we insist upon distinctive styles in type- writers. We are content to choose a brand and are glad to know that we shall not have to go to the further trouble of picking out a first- class specimen. And neither does standardization mean year after year uniformity and inflexibility of de- sign, but it does connote that changes will be made only after thorough study and experiment and not to suit passing whims. For instance, a firm in Birmingham making builders ' hardware had, before the war, a large trade with the Colonies and the Orient. They had in their catalogue more than 20,000 items. Through more than a century they had held themselves open to make anything in the way of builders' hardware that perversity might demand and consequently they had accumu- lated a multitude of designs. In one style of door bolt they carried forty sizes; six would have answered all reasonable needs, but be- cause a Calcutta merchant's grandfather had bought a certain style, he continued to order 34 First Make Then Sell that style. Practically every order was special and the lots rarely exceeded four or five gross. This prevented the introduction of automatic machinery or the development of repetitive methods even had the unions consented to any labor-saving arrangements. After the war that company was faced with high wages. They had on hand a quantity of automatic machinery left over from munitions work. They could not well go back to their old plan of manufacturing for, according to their old costs, the labor charges would be prohibitive. Instead they took to heart their war lessons and embarked upon a program of repetitive operations. They cut their catalogue list down to about a thou- sand items without sacrificing a single essen- tial design or size. And even with this still large variety of articles they have already suc- ceeded in absorbing practically all of the in- creased labor cost. They intend, just as soon as their customers become accustomed to the limited range of sizes, to make another drastic cut until eventually they hope to have their fac- tory divided into a number of departments each of which will make but one thing. That is a remarkable example of a present-day transition from practically the era of hand work to that of machine work and demon- 35 The Organization of Modern Business strates the new factor of standardization that has to be present wherever machines are ex- tensively employed. The immediate fundamental change then be- tween the old and the new style of manufac- turing is that in the former one first sold and then made, and in the latter one makes and then sells. This seems simple enough in statement but in practise it involves a complete departure from the ancient method of selling along the lines of least resistance. We should not expect a coal salesman discov- ering a demand for tin on his route to take orders for tin and then insist that the coal mine produce tin. We should quickly arrange for a psychopathic study of that man, but unfortu- nately the distinctions are not always so plain. A glove salesman, let us say, in the course of time develops a large acquaintance among haberdashery stores which sell many articles in addition to gloves. The shop that sells only gloves is something of a rarity. The glove salesman could, at practically the same selling expense, dispose of a line of scarfs, handker- chiefs, walking-sticks, belts, or any of the large number of articles that a haberdashery carries, yet it is fairly obvious that a glove-making con- cern is in no manner fitted to make up scarfs 3<3 First Make Then Sell unless it establishes a neckwear factory which may or may not be in the same building as the glove making. The salesman can handle a number of articles (the number depending wholly upon the per- sonality of the man) and it has, indeed, some- times been found advisable to have a salesman handle several lines in order to prevent him from overselling on a single line. A conspicu- ous example of this occurred in the career of a packing establishment. This establishment in addition to fresh meat, packed many kinds of tinned meat, conserves, and collateral foods. Being efficient manufacturers they rig- idly separated their various products into de- partments and conducted the manufacture of each on an independent basis, but they went further in this independence and set up depart- mental sales managers and departmental sales staffs. Their sales were to retail grocers. The average retailer in groceries is held down to a strict credit limit. Consequently this large and diversified selling staff, each salesman selling only one product, nearly ruined the business of the company, for if the tinned meat salesman first struck the retailer he filled that man up on tinned meat to his credit limit and until that bill was paid the conserve man, or whoever else 37 The Organization of Modern Business happened to come along, was absolutely barred. Instead of a retailer having a complete line, he would usually be over-stocked in one branch and without a stock of any kind in the others. The remedy here was simple. Instead of hav- ing specialty salesmen covering a wide terri- tory the company narrowed the territories and put a representative in each to handle the whole line. Then the company had its products dis- tributed. That is a case of efficient segregation in manufacturing offset by inefficient selling. They were trying to get the salesman to spe- cialize but their markets would not permit of such specialization. Usually, however, the trouble will be in the other direction and a concern will find itself insensibly yielding to the importunities of the selling staff. If the glove-making concern that I referred to could not find a glove salesman and instead had to take a man experienced in the selling of shoes, it is quite obvious that they would teach him to sell gloves and not undertake the manufac- ture of shoes. But take a closer case. Take the case of a company manufacturing syrups for soda foun- tains and which is located in a good tomato- growing region. It would be entirely reason- 38 First Make Then Sell able that they would take on a wholesale gro- cery salesman if they could not find a soda fountain man and it is not unreasonable that in the course of his travels this salesman would be impressed by the remarkable market for a good brand of canned tomatoes. The company could put up tomatoes as well as fruits without a very large change in equipment and if the president of the company happened to be a salesman he would probably listen with great interest to the opening for tomatoes. But here is the production side. The canning season for tomatoes coincides with that of peaches and would add to the peak of manufacturing in- stead of filling the valley, and also the tomatoes would require a can-filling and soldering outfit with leak test-tanks and the like which the fruit plant did not possess. The net result of en- gaging in tomato canning would be to increase the plant business at the very time when no increase was desired and to cause an additional investment that would have to get its wage in a short season. There is no reason in the world why this com- pany should not go in for vegetables as well as for fruits, but the point that I am trying to make is that ii would be exceedingly uneco- nomical to engage on an opportunist basis. The 39 The Organization of Modern Business vegetable engagement would have to be made deliberately with the proper and planned addi- tions to the plant so that the vegetables might be canned with the utmost economy and with the thought of fitting them into any idle floor space, shipping or receiving facilities. That is, the vegetables should not be canned simply be- cause a salesman found that he could get or- ders. That is only a single cosideration. For the modern plant should manufacture what it is best fitted to manufacture; and then sell that product. If the product is not salable the plant should be carefully revamped. No plant will long survive if it sells regardless, and its factory, like the tail of a kite, twists and squirms to the rear, its product the design of a momentary whim. 40 CHAPTER HI FINANCING A BUSINESS FEOM THE INSIDE NEARLY every man in a manufacturing way is some time forced to reconsider his old align- ment of selling and manufacture by that most forceful of all arguments money. In the old wasteful way of operating with frequent shuttings-down and startings-up, with some of the machinery even in the busiest times partially idle, even with low wages, money was, indeed, sufficiently important. But when wages are high and raw materials expensive, a con- dition which recurs every few years, the busi- ness that could carry on with a capital of $500,000 finds that it needs at least a million, and that without taking into account future production plans which, based upon the old methods, call for the investment of a further million. Not a few men retain the ancient view of manufacturing and provide funds for exten- sions and for further development without a thought as to whether under a more scientific 41 The Organization of Modern Business mode of manufacture they would really need the money. There are others who hold the same views, who are firmly convinced that they need money, but who hold back either because of the high price of money or because they cannot get it at any price. The latter class is forced to consider whether or no those principles of manufacturing which I have outlined in the foregoing chapters; they have to find a way out. If a man can easily get all of the money he needs, he will extend on the well-recognized financial principles by which assets are assets and business is business, which hold that if a machine is turning out one hundred of an arti- cle to-day the only way to get two hundred of those articles is to install a second machine. It was common practise but not common sense, except in an emergency, to add greatly to equipment at the high prices of 1919. The com- mon thought was: "I can get anything I ask for my goods. Why worry about the cost of new equipment f" A very few men so completely lost their bear- ings in those days as to carry a machine which they could have bought for $5,000 in 1914 and which in 1919 cost $10,000 permanently at the larger price. There were few such men, how- 42 Financing a Business from the Inside ever. But beyond the cost another factor was apparent to far-seeing men. They saw that any considerable increase in the world's pro- ductive capacity would serve to check the tend- ency to inflation and therefore to stabilize prices. The moment buying and selling at any old price stopped marked the commercial doom of those who did not recognize the certain bal- ance between sales and production. The bur- den of useless money became crushing. Very few concerns need as much money as they think they need and the wise man will not tie up money in such grossly high-priced bricks, mortar, and machinery unless he can charge them off almost at once. Yet without a co- ordination of production and sales no man can know the amount of money that he may require. He can only guess and his guess will be large. The unthinking way is to pass up the problem and seek more money; the hard, thinking way is to get more out of what you have. The more money you have in business in proportion to volume the greater are the maintenance charges and the smaller is the possibility of attaining cheap production. Money is often a deterrent to efficiency. Let us look at money in relation to the plant. Is a plant a building or a tool? Most plants 43 The Organization of Modern Business are buildings. Indeed, I have read no end of articles on proper plant design which consider not at all the work to be done (excepting a cer- tain distinction between heavy and light manu- facturing) but dwell at length upon the archi- tectural design. I recall one general plan in which the emphasized feature was the location of the administrative offices. According to the writer, a man of some distinction, the big thing was to locate the offices in the center and radi- ate the various buildings from it like the spokes of a wheel. The idea was that the administra- tive officers could then most easily get from place to place or could even survey operations from a central conning tower somewhat after the model prison in which the guards are grouped in a central gallery from which the cell blocks radiate. But the executive function is not to watch workmen but to see that the work goes through easily. The wheel design would involve the maximum of avoidable trucking and just because an automatic conveyor will satis- factorily transport through a considerable dis- tance is no reason for providing that distance if by any possibility it can be avoided. It is the work, not the administration, that controls, and whenever I am called in to advise upon factory construction my first thought is the 44 Financing a Business from the Inside work. I lay the work out on paper to provide a continuous stream which has its source at x the receipt of the raw materials and its end with the finished product at the freight-car door. The important points are that the product must not retrace its course or move through an un- necessary inch of space. Having mapped the course of the product the next step is to plan a building to house those sequential operations. The building is but a cover it is the case of the machine. But, it will be objected at once, every one is not erecting a new building. Every one has not unlimited ground at hand. This does not affect the situation. We can always approach, even if we do not attain, the ideal. It is not neces- sary that the product should flow always in a straight line thereby forming the consequent building into a great pipe, into one end of which you pour raw materials and out of the other end debouches the finished article. You can curve a pipe on itself without any considerable waste. If the products are small you can use any num- ber of floors. There is always a satisfactory compromise possible provided the work con- trols. If you cannot do the best, try the next best; don't abandon an effort because the task appears hard. 45 The Organization of Modern Business The problem is not at all an impossible one with even an old building, for although the maximum of economy of movement may not be attained in the older building the way is open to a reasonable rearrangement which will save many times the cost of the rearranging. The reason that the first step is to plan the work rather than the building is because in nearly every manufacturing operation there turns up that which is known as the "neck of the bottle " which is a point where the equip- ment is out of balance. For instance, take a company making automobile gears. A tend- ency arose in the trade to favor the helical as against the straight cut gears, and the sales de- partment, following the line of least resistance, brought in a large number of orders for the helical cut. The company had more orders on its books than ever before, but it was not able to produce more than ever before because the shop had been at least partially designed for the straight cut and concentration on the helical cut threw upon certain machines more work than they could handle, while other very val- uable machinery gradually fell into disuse. The machines for the preliminary work were very busy, a number of machines required in a sub- sequent operation were choked and threatening 46 ^Financing a Business from the Inside to become a dam in the current of production, while other machines necessary in the making of straight cut gears were almost idle. This is the familiar "neck of the bottle " situation. The company's planning department saw what was going to happen and they so informed the sales department. The salesmen then went out and got orders for a new kind of work to employ the idle machinery while the "neck of the bottle " was cleared by the addition of a sufficient number of new machines to coordinate their work with the work which went before it. There was a case of intelligent cooperation. In ninety-nine plants out of a hundred the ma- chinery not required for the new orders would have been allowed to remain idle while, under the impression that perhaps the helical cut gears would soon cease, the "neck of the bot- tle ' ' would have been so completely choked that the preliminary operations would have been slowed down and that concern would have lost money on its big, new business. They managed to attain the maximum profit by keeping every invested penny working and they added only that small portion of machinery necessary to maintain a balance of equipment. In a plant making underwear, it was thought that additional machinery had to be installed 47 The Organization of Modern Business to take care of new business. The plant was turning out approximately a thousand gar- ments a day. They were working under a piece rate scale with what they thought was a scien- tifically set bonus. The management had intel- ligently tried to grapple with their problems. They saw no way to increase production other than by adding machinery, but the machinery they needed was not only high in price but no promise of delivery could be had under six months. A considerable doubt also existed as to whether, if they did have the machinery, the additional workers could be found. A thorough study of the methods then in vogue, a re- routing of the work, and a readjustment of the wage scales brought about within two months an increase of 26%. That company looked for- ward to a readjustment of prices with equa- nimity which most certainly they could not have done had they taken wholly for granted that their previous equipment and personnel were exerting 100% of energy. At the time these changes were made an ad- dition of 26% to the equipment would have cost at least half as much as the whole plant did some years ago. A certain difficulty in procuring machinery or in procuring money is to be looked upon as 48 Financing a Business from the Inside a blessing, for not otherwise is made that inten- sive study of conditions which is so necessary. This whole subject of finance is fundamental, but I do not care to consider it as a subject apart. I think that it may be the more intelli- gently comprehended if we look upon each idle portion of the plant that is, each idle square foot, each idle machine as a capital waste, and regard always the procuring of new capital not as the first step in an extension of facilities but as the last step, and that a new foot of space is not to be added until we are quite certain that all of the space already there is doing its full work. A plant is a machine a tool. If a merchant decides to buy a motor truck, almost as a mat- ter of course he will select a truck with a mind to that which he intends to move. If he intends to do heavy trucking he will buy a four-ton truck, but if he intends to make light deliveries he will buy a one-ton truck. He should load whatever truck he buys to capacity. He should know that it costs just as much per mile if it be loaded to the guards or loaded only with a steamer-trunk. He knows that if he loads only one ton on a four-ton truck that he has not re- duced the cost of operation to that of a one-ton truck. He knows that his big truck is eco- 49 The Organization of Modern Business nomical only when loaded at or near capacity; that, in effect, it is a tool rather narrowly lim- ited in true usefulness and that to use it for small operations is equivalent to employing a sledge-hammer to drive a carpet-tack. But while it is patently ridiculous to heave a sledge- hammer at a carpet-tack, moving a small load with a big power is not so self-evidently silly and it is only latently silly to put an "A" plant on "B" work. I know a company that spe- cializes in high-grade cooking utensils such as percolators and chafing-dishes, but which also makes a cheap line of galvanized buckets and wash-boilers. There is no reason on earth for combining these very different lines; one does not absorb the waste of the other, and in a large part they require different equipment. Another plant making cooking utensils also rolls and draws tubing which is a wholly different line and their diversion does not even possess the merit of being able to utilize the services of a single set of salesmen. There can be no objection to one company engaging in several kinds of work. Indeed, something may be said in favor of the mobiliza- tion of purchasing power, but each of the sev- eral products should stand on its own feet and be wholly segregated in manufacturing and in 50 Financing a Business from the Inside accounting. Then what we really have is a number of plants under a single ownership we do not mix products. The great difficulty with this sort of operating is the constant invi- tation further to extend into the making of things for which the place is not fitted. A plant is in like case with the truck. It is built for a purpose. It is in a way a rigid mass and only by so considering it can the utmost be gained from operation. A plant which is nicely geared for the making of an automobile motor at the rate of, say, 400 a day at 100% capacity could without question turn to the making of aeroplane engines, tur- bines, or even machine tools. But it could not make even the aeroplane engines economically without a transformation from the rigidity that formed the automobile motors so nicely to another rigidity calculated to produce the aero- plane engines. To make turbines would require another series of transformations and still another would be required for the machine tools. The change from automobile to aero- plane motors is apparently a slight one and if the president of an automobile company were a salesman and his plant were not working to capacity on automobiles, he might give ear to an attractive offer to make aeroplane engines, 51 The Organization of Modern Business but unless he calculated the cost of the trans- formation of machinery and process to adapt the plant to aeroplane motors and also the cost of adapting it back again to automobile motors, he would probably lose money on the aircraft venture. In the neatly balanced plant, job work is im- possible. Take a machine tool plant which has been turning out standard lathes. Suppose they decide to accept a special order for lathes which are just a few inches longer than the standard. If that plant has been properly bal- anced for the production of the standard lathe and is operating at 100% of its efficiency, then the new order will throw the arrangements far more out of joint than any but the most far- seeing of managers will realize. In building the larger lathe there may not be any materially greater number of hours of lathe work, there may be no more than the standard drill press work, for the design may closely follow that of the standard. But the new lathes are larger and hence more planning will have to be done. Let us, to make our point, say that the only added work required is planing. If the plant had been properly balanced for the standard then the planers would be working at their maximum. They cannot do more than that 52 Financing a Business from the Inside work. The new job requires additional plan- ing. What was 100% plant activity of the equipment as a whole on the standard design becomes 80% or 90% on the new design. The planers must have 10% or 20% more time per unit. Therefore the planers choke the progress of the work and pass on to the subsequent ma- chines, instead of the 100% to which they are accustomed, only 80% or 90%. They are shy on work and we have an ill-balanced plant with partially idle equipment. The early operations are going through at the old 100% ; they quickly flood the planers and have to slack down. The whole plant drops to the planer's capacity and thus by a very simple change in product a change which might seem inconsequent that plant's efficiency has been reduced by 10% or 20%. The overhead expense does not diminish; therefore instead of distributing the overhead among 100 units we distribute it among 80 or 90 units, and away flashes the profit on the new, interesting contract. This overhead, or expense, is necessarily high when the planning is efficient. It will not uncommonly amount to 200% on the "produc- tive" labor. As I shall in a later article demon- strate, it is rarely wise to cut down overhead although it must, of course, be closely watched 53 The Organization of Modern Business to see that it is an effective expense and not merely an expense. But generally the overhead in an efficient plant will be high and the eco- nomical way to cut it down is to distribute it over a large product. It is through such economy and not through little special jobs at a fancy price that the highest efficiency is to be achieved. The point is to keep all of the machinery working at 100%. This is not an easy task. In some kinds of plants it is all but impossible. In making safes, notably the large manganese safes, huge boring mills have to be used and these often have to remain idle. To keep them constantly at work requires a more consider- able plant capacity than other than a very large safe company can distribute. Yet the big ma- chines are essential. A large company can so balance its plant as to keep busy even the great- est and most expensive of machines, but the small plant sometimes finds it necessary to have machines needed for certain operations without at the same time being able to provide a suf- ficient number of machines on preceding opera- tions to keep the big capacity tools working. The smaller plant, thus situated, can, however, with proper planning take on special jobs of a nature entirely different from the regular work 54 Financing a Business from the Inside but designed to absorb the otherwise idle ma- chine hours. Naturally these jobs have to be arranged so as not to interfere with the regu- lar work. The ideal of manufacturing is first to decide exactly what you are going to make and then determine how you are going to make it laying out each operation and each machine capacity so that an exact balance will be possible, and then charting the operations to insure the preservation of this balance. Theoretically the various parts should arrive upon the assembly floor at exactly the same time so that the as- sembly workers will not be delayed and so, also, that capital will not be tied up in finished parts waiting around for their complementary parts to come through. In this theoretical way of doing business the production and the sales departments decide together on what and how much is to be sold and then go ahead with the producing and the selling. Such nicety is sel- dom possible. One rarely starts business in quite so clean-cut a fashion. Now and again a group of men will have sufficient capital and sufficient experience thus deliberately to em- bark upon a commercial adventure but more commonly business is a growth in which acci- dent plays a certain part, and it is probably 55 The Organization of Modern Business only after some years of experience that the owners learn what they can best make and therefore what they can best sell. Then it will rarely be economical for them to take a fresh start unless it be that their requirements are such that a new building in a new location is expedient. More often one must compromise and by fre- quent experiment and close supervision get all of the machines and departments in balance. Take the situation of a large manufacturer of somewhat bulky machines of a special nature. The number of parts is considerable; some of them are manufactured in the plant and some are bought from the outside. The company made money but it was continually in difficulty. Customers were continually complaining of the delays in the filling of their orders. The finan- cial department was continually complaining of the amount of money tied up in the inventory of parts, and although every one was busy the assembly floor was always cluttered with ma- chines partly finished and awaiting the pro- cessing of some needed part. A machine might lack for completion only one small and inex- pensive piece, but nevertheless it would have to hang about the floor until a special order was procured and the missing part brought 56 Financing a Business from the Inside through. In the meantime the interest on the idle dollars was evaporating. The departmental costs of production in this plant were not high. Indeed, as far as fabrica- tion was concerned the record was something more than creditable, but what the company gained in fabricating was totally lost in a lack of coordination. We found an easy remedy. First we scheduled the number of machines to be built. We could not immediately examine into every part of the plant to determine how to keep every department at full capacity and coordinated with every other department. That was a subsequent development. The first step had to be a satisfactory filling of the orders which were then on hand or in prospect. We then analyzed a complete machine product into component parts. Some of the parts were made outside ; for them we gave to the purchas- ing department a schedule which set out the dates when required and the amounts. The parts manufactured in the plant varied in time of making from nearly a month to a few hours. The proper time for making each was calcu- lated by time study. Having finally got all of these facts in hand we set the assembly date for each machine and worked back from that. If a machine were to 57 The Organization of Modern Business be assembled on the 10th of January this meant that part C2-244 would have to be put in process on December 19th, while part C-105 would not have to be started until the 8th of January, and so on through all of the parts. The results were remarkable. Within a few months production was so coordinated that all of the varied parts going into a finished ma- chine turned up on the floor of the assembly room not on the day before or the day after that set for assembling but on the morning of the very day. Previously all of the parts of an ordered machine had been put into process at the same time and they would then gradually arrive on the assembly floor through a period of six or seven weeks. Naturally that company required less capital. They very considerably lessened the raw mate- rial inventory, the purchased parts inventory, and the completed parts inventory. A dollar in an idle part is in like case with the dollar in idle machinery. Under the old condition not only was a large amount of money tied up in inventories, but because work went through haphazardly instead of on schedule, some de- partments were commonly under-active and others too busy. This was not a large company 58 Financing a Business from the Inside but the mere matter of scheduling and co- ordinating added $50,000 a year to the profits. And they made an end to the continual com- plaints from customers about delivery. Take another case. This company was not in a financial position to invest heavily in addi- tions to plant or equipment to enable it most efficiently to handle a line in which it had more or less experimentally engaged. It endeavored to make the best of the situation. The engi- neers adapted their equipment most ingeni- ously and although they did not expect to attain a maximum of efficiency, they were decidedly puzzled to find that after some months of opera- tion they had attained only 60% of the low standard they had fixed. Here is the situation which we found. The new work was rather heavy and the lighter equipment of the shop hence was idle. Some sturdy automatic machines were being used most efficiently and to full capacity. A wage incentive was in force and this had increased production but the larger production had jammed and was ineffective. Ten heavy ma- chines held up the even flow. These averaged 630 pieces a day and each performed four operations. The first three were turning opera- 59 The Organization of Modern Business tions and the last threading. The turning needed the heavy machines but the threading did not, and this gave us our opportunity. The operation time on the heavy machine was 570 seconds of which the threading consumed 130 seconds. If we could withdraw the thread- ing we should increase the machine capacity by about 30%. We found that the lighter ma- chines could do the threading very well and in 150 seconds. The increase of 30% in the ca- pacity of the "neck" machines brought them up to 819 pieces a day. The operators before and after this "neck" operation were easily able to increase their output to correspond. And thus by a simple study of operations and a perfectly obvious rearrangement of a small portion of the work we got a 30% increase in the capacity of the plant. If the company had made an additional investment capable of creating a 30% increase in production, the cost of the new money and the interest on it would have absorbed all of the profit they might rea- sonably have hoped to gain on the contract. Truly money makes the wheels go round. But too much money clutters them. Modern business puts into plant and equipment the smallest sum possible per unit of production. Note that I say unit of production, for other- 60 Financing a Business from the Inside wise the impression might be gained that I ad- vocate a penny-wise and pound-foolish policy. Quite the reverse; it may be greater economy to spend a million dollars than ten thousand dollars, for with the larger sum the unit cost may be reduced. The point is that each expen- diture is but the part of a whole and should not be made until conclusive testimony is in hand that only by spending can the additional output be had in an economical way. And the only manner in which to obtain that conclusive tes- timony is to so align the plant with production as to make sure that it will be a surely cutting tool. 61 CHAPTER IV WHAT IS A FAIR PROFIT? No question at all exists as to what is an un- fair profit. An unfair profit is the profit which the other fellow makes. The profit which you make cannot be unfair and you will explain exactly why it is not unfair as long as any one will listen. In fact, if you are allowed to talk long enough, you will make out a case against yourself even if none in the first place existed. But what is a fair profit? And who should determine the profit? Are we really talking about profit or about price? Does a high price mean a high profit, and does a low price mean a low profit? Is there any connection at all between price and profit? Does the buyer or the seller make the price, or is the price made by an outside force over