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Digitized by the Internet Archive 
 in 2011 with funding from 
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 http://www.archive.org/details/investigatingindOOkent 
 
ORGANIZATION CHART 
 
 BOARD OF DIRECTORS 
 
 FUNCTIONAL COMMITTEES 
 
 Finance 
 
 Accounts 
 
 Statistics 
 
 Factory 
 
 Labor 
 
 Sales 
 
 New De- 
 velopment 
 
 Pres. 
 
 Gen.Mgr. 
 
 Adviser 
 
 V. Pres. 
 Treas. 
 Secy. 
 
 Secy. 
 V. Pres. 
 
 Gen.Mgr. 
 
 Adviser 
 
 SalesMgr. 
 
 Secy. 
 Gen.Mgr. 
 
 SalesMgr. 
 
 Gen.Mgr. 
 
 Secy. 
 
 SalesMgr. 
 
 Gen.Mgr. 
 
 Treas. 
 
 ADVISORY STAFF 
 
 Counsel 
 Auditor 
 
 Assistant to V. Pres. 
 (Leak Hunter) 
 
 Chief Engineer 
 Mechanical Expert 
 Chemist 
 
 Advertising Expert 
 Reporting to department executives or to functional committees. 
 
 DEPARTMENTS 
 
 
 ACCOUNTS 
 
 AND 
 STATISTICS 
 
 FACTORY 
 
 SALES 
 
 EXECUTIVES 
 
 Secretary 
 
 Gen. Mgr. 
 
 Sales Mgr. 
 
 UNDERSTUDIES 
 
 Ass't Secretary 
 
 Ass't G. Mgr. 
 
 Ass't S. Mgr. 
 
 OPERATING FORCE 
 
 Cashier 
 Clerks 
 
 Superintendent 
 
 Foremen 
 
 Workmen 
 
 Salesmen 
 
 Clerks 
 
 Warehousemen 
 
INVESTIGATING 
 AN INDUSTRY 
 
 A SCIENTIFIC DIAGNOSIS OF THE 
 DISEASES OF MANAGEMENT 
 
 BY 
 
 WILLIAM KENT 
 
 Consulting Engineer 
 
 AUTHOR OF "THE MECHANICAL ENGINEER'S POCKET BOOK* 
 AND OF "STEAM BOILER ECONOMY" 
 
 WITH AN- INTRODUCTION BY 
 
 HENRY L. GJNTT 
 
 AUTHOR OF " WORK, WAGES AND PROFITS" 
 
 FIRST EDITION 
 FIRST THOUSAND 
 
 NEW YORK 
 
 JOHN WILEY & SONS, Inc. 
 London: CHAPMAN & HALL, Limited 
 
 1914 
 
T58 
 .K4- 
 
 Copyright, 191 3, by 
 WILLIAM KENT 
 
 Publishers Printing Company 
 207-217 West Twenty-fifth Street, New York 
 
 DEC 24 !9! 3 
 
 ©ciA3fi1286 
 
CONTENTS 
 
 PAGE 
 
 Preface v 
 
 Introduction vii 
 
 CHAPTER 
 
 I. General Considerations i 
 
 II. A Business Diagnostician 15 
 
 III. The Diagnosis; The Factory 27 
 
 IV. The Accounting and Sales Departments ... 37 
 V. The Doctor's Preliminary Report .... 52 
 
 VI. The Salesmen's Conference 68 
 
 VII. The Doctor's Opinions and Recommendations . 82 
 VIII. Proposed Reorganization of the Board of 
 
 Directors 96 
 
 IX. Duties of the Functional Committees of the 
 
 Board of Directors 109 
 
 Appendix — A New Kind of Factory Expert — The 
 
 _^ Leak Hunter 117 
 
 Locating an Industry 121 
 
PREFACE 
 
 This book is a reprint, with a few slight alterations, 
 of a series of nine articles that appeared in Industrial 
 Engineering, February to October, 19 13. It relates 
 to the application of the principles of scientific 
 management to all industrial problems, including 
 those of distribution and selling, and incidentally 
 treats of some of the causes of the ^'high cost of 
 living.'' 
 
INTRODUCTION 
 
 Mr. Kent is not attempting to put before the 
 public a new idea; he is simply elaborating an old one. 
 In fact, his whole book is based on the old saying 
 ''Look before you leap." In other words, find out 
 all possible facts about an industry before making 
 up your mind about it. 
 
 Many intelligent people will tell you that they do 
 investigate thoroughly any enterprise before going 
 into it, yet not a few enterprises fail for reasons that 
 could have been known beforehand. 
 
 Everybody agrees that the prospects of a new enter- 
 prise should be very carefully investigated before it 
 is gone into, but the failures from causes that could 
 have been foreseen are sufficiently numerous to make 
 it clear that as yet such investigations have not 
 always included all the factors involved. The great 
 value of Mr. Kent's book is that he puts the subject 
 in concrete form, and shows clearly what may be ac- 
 compHshed by proper work in this field. It is not 
 to be expected that many readers will agree in detail 
 with all of Mr. Kent's suggestions, but they will set 
 people to thinking. The fact that he so strongly 
 insists on the application of the scientific method as 
 
Vin INTRODUCTION 
 
 far as possible to all business problems is of great 
 importance, for in the past too many questions have 
 been decided by "judgment," which is often another 
 word for guess. 
 
 Before, however, the use of the scientific method 
 can become universal, our leading men must appre- 
 ciate its value, which they do not to-day to any 
 great extent. 
 
 He also makes clear that it is not only the new 
 enterprise that needs to be investigated, but that in 
 every established business we should continually 
 know not only how well each one of its functions is 
 being performed, but exactly how it stands with refer- 
 ence to its competitors in the most important factors 
 affecting its welfare. A knowledge of the advan- 
 tages or disadvantages it possesses with regard to its 
 competitors should always be available if possible. 
 If this is not possible they should be studied care- 
 fully at frequent intervals. Among the heads under 
 which these comparisons should be made are location, 
 equipment, system of management, poHcy, and 
 selling methods. A careful comparison as far as 
 possible of each one of these subjects will often shed 
 light on the questions to what should be done to make 
 a company more prosperous. 
 
 Such investigations and comparisons only too fre- 
 quently show up defects that all will admit, but 
 which it takes heroic measures to correct. 
 
INTRODUCTION IX 
 
 If on account of changes of any kind the location 
 ceases to be desirable, it is extremely difficult to get up 
 sufficient courage to transfer the business bodily to a 
 new place better situated. Deficiencies in equipment 
 are the most easy to remedy, and a change in the 
 system of management to keep abreast of the times 
 does not to-day seem such a radical move as it did a 
 few years ago; but to get a board of directors to 
 change its policy, or a selling organization to reform 
 wasteful methods, is to-day almost impossible of ac- 
 compHshment. A few years ago the same thing 
 might have been said about the system of manage- 
 ment, so it is reasonable to expect that directors and 
 salesmen will as a class some day be guided by facts 
 rather than by "judgment." 
 
 With regard to the general subject of ''Investigat- 
 ing an Industry," whether it be one that is proposed 
 or one already in existence, the facts regarding the 
 effect of its location can be quite readily determined; 
 questions concerning equipment are being settled, and 
 the subject of management is being quite generally 
 studied. The first two of these subjects are dis- 
 tinctly tangible, and after a comparatively small 
 amount of study the third begins to assume a tangible 
 shape, hence it is only reasonable that these subjects 
 should be first given attention. The effect of the 
 poHcy as dictated by a board of directors is the 
 most difficult to measure. On this account and 
 
X INTRODUCTION 
 
 because the directors often know but little about the 
 business it is extremely difficult to get their consent 
 to desirable changes as long as they are making 
 money. 
 
 When, however, the balance-sheet begins to show 
 a loss, they are usually ready for changes that are 
 little short of revolutionary. By a proper set of 
 records, or by an investigation from time to time, in- 
 formation might be readily available which would 
 enable the factory to make its changes by evolution. 
 When losses come there is seldom any attempt to 
 find out what they are caused by, but it is generally 
 assumed that they are the fault of the shop. As a 
 matter of fact, it is quite frequent that they are the 
 result of a ruling of the board of directors, who have 
 not understood the effect of the order they gave. 
 
 The cost of selling is in most kinds of business ex- 
 tremely large, but that is rapidly coming under the 
 class of subjects to be studied, and the methods of 
 scientific, management applied to selling promise to 
 do much to reduce this cost, but, as intimated before, 
 salesmen as a rule are not in sympathy with these 
 methods. 
 
 Mr. Kent tells us to study these problems scien- 
 tifically, illustrates the subject with numerous ex- 
 amples of how such study may be conducted, and tells 
 us what we may expect to accomplish if the results 
 of the study are carried out. 
 
INTRODUCTION XI 
 
 So far what has been written on scientific manage- 
 ment covers only the shop, but Mr. Kent feels that 
 the term really includes everything concerning a 
 factory or an industry. 
 
 This broad conception of the meaning of the term 
 is undoubtedly correct, and the task of the future is 
 to get the scientific method applied to all industrial 
 problems of whatever kind. 
 
 Henry L. Gantt. 
 
INVESTIGATING AN INDUSTRY 
 
 CHAPTER I 
 General Considerations 
 
 The literature on Scientific Management which 
 has appeared in the last five years has laid so much 
 emphasis on matters relating to the efficiency of labor, 
 that many of its readers, and its writers as well, seem 
 to have lost sight of the fact that scientific manage- 
 ment relates to every element in industry, and that 
 labor saving is only one of many elements. Even 
 the authors of the report on "The Present Status of 
 the Art of Industrial Management," presented at the 
 annual meeting (191 2) of the American Society of 
 Mechanical Engineers, have failed to recognize this 
 fact, for they say ''the term 'scientific management' 
 has been generally and loosely applied to the new 
 system and methods. . . . The expression 'labor- 
 saving management' better conveys the meaning of 
 the movement." Throughout the report "the terms 
 'industrial management' and 'labor-saving manage- 
 ment' are used, the first to denote the subject broadly, 
 the second the newer attitude." 
 
 The true relation between industrial management 
 1 
 
INVESTIGATING AN INDUSTRY 
 
 and labor-saving management may be shown by a 
 chart, as follows: 
 
 CHART SHOW^ING TRUE RELATION BETWEEN 
 INDUSTRIAL MANAGEMENT AND LABOR- 
 SAVING MANAGEMENT 
 
 Industrial 
 
 Management 
 
 Kind 
 Traditional or 
 Unsystematized 
 
 Transitory or 
 Systematized 
 
 Scientific 
 
 f Characterized by Rule 
 <] of thumb; no cost sys- 
 [ tems, no statistics. 
 
 ( Cost systems, partial rec- 
 l ords, occasional investi- 
 [ gations. 
 
 Investigations of every 
 detail. Studies of prod- 
 uct, of process, of 
 machinery, of material, , 
 of labor, of burden, of 
 market conditions, etc. 
 
 Industrial management means broadly the manag- 
 ing of an industry; it may be good, bad or indifferent; 
 scientific management is both a science and an art; it 
 is the kind of industrial management that makes 
 studies and researches to discover laws and principles 
 in every branch of the business, and that carries on 
 the business in the light that these researches have 
 revealed. Labor saving is one of the objects of 
 scientific management, but not the only one, and 
 labor-saving management is not necessarily scientific 
 management; it may be unscientific. For example, 
 coal-handling machinery and automatic stokers save 
 labor in the boiler room, but under scientific manage- 
 ment they would not be installed until it is shown by 
 a careful study of all the conditions that their cost 
 
GENERAL CONSIDERATIONS 3 
 
 for repairs, interest on investment, etc., will not 
 exceed the saving in wages. A molding machine will 
 save labor in the foundry, provided there is enough 
 work for it to do, but it is poor management to pur- 
 chase one unless the market for its product is assured. 
 One writer, contributing to the report of the com- 
 mittee above mentioned, defines scientific manage- 
 ment as follows: 
 
 The critical observation, accurate description, 
 analysis and classification of all industrial and business 
 phenomena of a recurring nature, including all forms 
 of co-operative human effort, and the systematic appli- 
 cation of the resulting records to secure the most 
 economical and efficient production and regulation of 
 future phenomena. 
 
 The committee quotes the following from Mr. 
 Henry R. Towne's paper on ''The Engineer as an 
 Economist," written as long ago as 1886: 
 
 Executives must have a practical knowledge of 
 how to observe, record, analyze and compare essential 
 facts in relation to . . . all . . . that enters into or 
 affects the economy of production and the cost of the 
 product. 
 
 The report says further: 
 
 We conceive the prominent element in present-day 
 industrial management to be: the mental attitude 
 that consciously applies the transference of skill to 
 all the activities of industry. Here emphasis is placed 
 on the word all, for the restricted application of this 
 
4 INVESTIGATING AN INDUSTRY 
 
 principle to machines and tools has been highly 
 developed for a long period. But its conscious 
 apphcation in a broad way to the production de- 
 partments, and particularly to the workmen, we be- 
 Heve has been made during the last quarter of a 
 century. 
 
 The three quotations express fairly the general 
 understanding of the ablest writers as to what 
 scientific management is, but a critical examination 
 shows that each of them has limitations which it 
 would be well to remove in order to give the term 
 scientific management the broad significance to which 
 it is really entitled. Thus the first quotation may 
 be improved by omitting the words ''of a recurring 
 nature," and thereby broadening the meaning. The 
 second and third quotations seem to limit scientific 
 management to the four walls of a shop. They 
 should be expanded so as to cover all the business 
 phenomena that relate to the industry, whether they 
 are inside or outside of a shop. The end of the 
 second quotation might be changed so as to read ''all 
 that enters into or affects the economy of production, 
 the cost of the product, the present and prospective 
 market for the product, the selling department and 
 the possible profits." The second clause of the third 
 quotation might read "the mental attitude that 
 consciously applies the principles of scientific investi- 
 gation to all the phenomena of business and the 
 
GENERAL CONSIDERATIONS 5 
 
 transference of skill to all the activities of industry, 
 particularly to the workmen." 
 
 Scientific management in its broadest aspect is 
 not merely "labor-saving management/' it is not 
 even "shop management''; it is industrial manage- 
 ment by the scientific method. It is not limited to 
 cost of production, but extends to methods of dis- 
 tributing and marketing the product, to meeting the 
 changes in character or fashion of the product, to 
 questions of concentration or expansion, of relocation, 
 of finance, etc. Its most prominent element, as 
 stated in one of the above quotations, is a mental 
 attitude, and its result, which will come gradually 
 within the next twenty years, is nothing less than 
 an industrial revolution, comparable with that 
 which occurred when the factory system took the 
 place of the domestic workshop and when the loco- 
 motive supplanted the stage-coach. 
 
 ' It is fortunate, in many respects, that industrial 
 revolutions take place slowly. Twenty years after 
 Stephenson's success with the "Rocket," in 1829, the 
 locomotive had made but Httle progress in replacing 
 the stage-coach. It was more than twenty years 
 after the introduction of the Bessemer steel process 
 before iron rails ceased to be made. In 1870 there 
 were over 700 iron blast furnaces in the United States, 
 with an average capacity of about 5,000 tons per year 
 each; to-day there are about 400, with an average 
 
6 INVESTIGATING AN INDUSTRY 
 
 capacity approaching 100,000 tons each. The 700 
 old furnaces and most of the companies that owned 
 them are all gone, but they disappeared slowly and 
 with fewer bankruptcies than there would have been 
 if the building of the large furnaces had proceeded 
 more rapidly. The too rapid building of railroads 
 between 1866 and 1873 caused many receiverships 
 and reorganizations, and was one of the causes — if 
 not the principal cause — of the panic of 1873 ^^^ the 
 five years' business depression that followed. The 
 law of progress is the law of the survival of the fittest; 
 but the unfit survive a long time. Mental inertia 
 and conservatism are sometimes good qualities in 
 business men. When electric current began to take 
 the place of the mule for street-car service, the com- 
 panies that held to the mule for some years generally 
 fared better than those that adopted electricity, for 
 the latter found inside of five years that their machin- 
 ery was obsolete and had to be replaced. Those 
 that waited got the experience of the more progres- 
 sive without paying for it. 
 
 So it will be with scientific management. The 
 success already obtained with it by a few concerns, 
 showing results as stated by the A. S. M. E. com- 
 mittee, "a reduced cost of product; greater prompt- 
 ness in delivery with the ability to set and to meet 
 dates of shipment; a greater output per worker per 
 day with increased wages; and an improvement in 
 
GENERAL CONSIDERATIONS 7 
 
 the contentment of the workers" makes certain its 
 continued and more rapid progress, and, say, in 
 twenty years, its general introduction. 
 
 The committee's report enlarges on the necessity 
 of slow progress. It says: 
 
 The introduction of modern management in a 
 plant must be made slowly. The causes of most so- 
 called failures are principally two: a failure of the 
 executives to acquire the vital mental attitude, and 
 too great haste in appHcation. The latter seems to 
 be the dominant one. Your committee feels com- 
 pelled to emphasize the danger of attempting to hurry 
 any change in methods of management. Each step 
 of the work should be made more permanent before 
 the next is begun. . . . One of the unfortunate 
 features of this great movement has been the rise 
 of alleged experts who have been ready to promise 
 extravagant results if they are allowed to systematize 
 an industrial plant. The test which they cannot 
 meet is one of permanence. 
 
 Some of the causes that will retard the rapid 
 progress of scientific management are: the mental 
 inertia and conservatism of managers and owners; 
 the 4act that many of them are uneducated and 
 have never read the literature of the subject; 
 and the fact that as yet there are very few experts 
 competent to introduce the new system. One of 
 the correspondents of the committee writes: "The 
 trouble is that there are not enough managers with 
 
8 INVESTIGATING AN INDUSTRY 
 
 sufficient initiative to set the system moving 
 properly." 
 
 Probably few of the readers of Industrial Engineer- 
 ing are uninformed as to the general principles of 
 scientific management as related to the shop, and 
 most of them, we trust, have some of the principal 
 books on the subject, such as Taylor on Shop Manage- 
 ment, Gantt on Work, Wages and Profits, and Gil- 
 breth on Motion Study. We recommend them also 
 to read ''The New Industrial Day," by Wm. C. 
 Redfield, a book which gives no new information on 
 shop or business practice, but which shows in a most 
 entertaining and inspiring way the necessity of 
 scientific management in the business of the future 
 and of the tremendous effect it is bound to have upon 
 the prosperity of the nation and the welfare of hu- 
 manity. From a chapter on "The Days of the Rule 
 of Thumb" we make a few quotations showing how 
 a successful manufacturer and business man views 
 our present industrial condition: 
 
 The industries of the nation have not sprung within 
 a man's lifetime from childhood to heroic size without 
 showing signs of that disregard for details which 
 makes waste, and that strong striving after results 
 which often pushes to one side as a minor detail the 
 relative cost at which these results are had. So side 
 by side with the great achievements of our manu- 
 facturers we should normally look to find that the 
 profits arising from these achievements had been won 
 
GENERAL CONSIDERATIONS 9 
 
 at a higher price of waste of all kinds than it will be 
 longer possible to pay, and that the day has dawned 
 when a sober second thought must be taken and our 
 methods readjusted. For our industrial past has 
 truly passed not to return. . . . 
 
 The day of the ''rule of thumb 'Mn our factories is 
 not yet ended, though its sun is setting. Many 
 superintendents manage to-day as they managed of 
 yore — true offspring of the industrial conditions under 
 which they grew up. There is fearful waste of energy, 
 of human strength and thought, and even of life, and 
 waste also of time and of material and of attention 
 given to relatively trivial things while more serious 
 matters pass unnoticed. We have depended much 
 heretofore upon mere drive, or as we call it '' hustling" 
 — crowding into the compressed hours of busy days 
 more and more, and winning out by intensity of effort 
 and by dint of strenuous application rather than by 
 the scientific efficiency which saves all waste and 
 applies the principle of least effort to produce the 
 greater result. 
 
 Any radical change in factory management must 
 be a gradual evolution out of that which has preceded 
 it. The present systems or lack of systems, with their 
 good or bad points, are themselves the result of long 
 evolution. No drastic or radical change in them can 
 be suddenly or even rapidly made without causing 
 disturbance. Men have become accustomed alike to 
 the strong and the weak elements in the systems under 
 which they work, and they cling naturally to that 
 which they have been accustomed to do. A factory 
 manager is a busy man. From dawn to dark prob- 
 lems large and small press upon his thought. Questions 
 
10 INVESTIGATING AN INDUSTRY 
 
 of policy, of principle, of practice, of purchase in 
 every form crowd his hours. Amid these cares, often 
 while doing his best, he is conscious that there are 
 better ways, but having only one man's strength he 
 cannot take them up, especially if he has owners 
 above him who are content with anything so long as it 
 pays. 
 
 One more quotation: this is from a botanist, 
 Prof^ Charles E. Bessey, in an address on The Next 
 Steps in Botanical Science {Science, Jan. 3, 1913). 
 He is speaking of plants in the vegetable kingdom, 
 but the words might have been used by an engineer 
 in reference to industrial "plants." 
 
 It seems to one who carefully looks over the field 
 that there is often only the most vague notion of the 
 relative importance of the known facts in regard to 
 plants, those of trivial importance receiving as much 
 weight, perhaps, as those of profound significance. . . . 
 We have all heard the excusatory remark that ''it 
 makes little difference how or where we begin the 
 study of plants, and in what sequence we pursue it." 
 Yet none of us would admit such a contention in 
 regard to any other matter. The more we know of a 
 country, the more definite are our ideas as to what 
 are its most important mountains, rivers, cities and 
 institutions, and it is these that we feel that the travel- 
 ler should see. We particularize when we know; we 
 generalize and are vague when we do not. 
 
 "The factory manager is a busy man"; "he has 
 owners above him who are content with anything 
 
GENERAL CONSIDERATIONS 11 
 
 SO long as it pays." Therefore he has "only the 
 most vague notion of the relative importance of the 
 kno^vn facts." He particularizes when he knows, he 
 generalizes and is vague when he does not. He may 
 have introduced scientific management into the labor 
 department of his shop, and it pays; he and the 
 owners are content; he knows the labor question, he 
 particularizes on it; but he does not know the power 
 plant costs nor its wastes, the designing department, 
 the purchasing department, the selHng department, 
 nor the prospects of the market, and has only the 
 most vague notion of their relative importance. 
 
 In the beginning of this article we said that scientific 
 management relates to every element in industry 
 and that labor-saving management is only one of 
 many elements. It is the purpose of this article and 
 those that follow to consider those elements of in- 
 dustry which are not directly related to labor saving. 
 
 The foundation of scientific management is scientific 
 investigation, and by scientific investigation of an 
 industry we mean "the critical observation, accurate 
 description, analysis and classification of all industrial 
 and^usiness phenomena" relating to the industry, 
 systematic recording and plotting of data, drawing 
 conclusions from them, predicting future progress 
 under existing conditions and under proposed changed 
 conditions. 
 
 The importance of investigating other problems 
 
12 
 
 INVESTIGATING AN INDUSTRY 
 
 than those of labor saving and of wages may be 
 shown by the following hypothetical case, which is 
 based upon facts within the writer's experience. A 
 certain business showed the following statistics of 
 two years' business: 
 
 A. — Investment in land, building and equipment $100,000 
 
 B. — Working capital, cash, work in progress, stock in 
 
 trade, etc., less liabilities $100,000 
 
 First 
 Year 
 Interest, repairs, depreciation, taxes, 
 
 etc., on A $15,000 
 
 Interest on B, and on loans in second 
 
 year 5,ooo 
 
 Material 100,000 
 
 Labor 100,000 
 
 Superintendence 20,000 
 
 Fuel, light, water, etc 10,000 
 
 Designing, drafting, etc 10,000 
 
 Total factory cost $260,000 
 
 Billed to sales dept. at fixed per cent, of 
 
 list price 250,000 
 
 Second 
 Year 
 
 $16,000 
 
 8,000 
 
 190,000 
 
 190,000 
 
 25,000 
 
 12,000 
 
 15,000 
 
 $456,000 
 
 500,000 
 
 Apparent loss in factory. 
 Apparent gain in factory. 
 
 10,000 
 
 Sales 350,000 
 
 Cost of selling, advertising, storage, etc . 105,000 
 
 Net proceeds of sales $245,000 
 
 Billed from factory at 250,000 
 
 44,000 
 
 700,000 
 175,000 
 
 $525,000 
 500,000 
 
 Loss 
 Factory loss or gain " 
 
 Total loss or gain Loss 
 
 $5,000 
 10.000 
 
 Gain 
 
 525,000 
 44,000 
 
 000 
 
 $15,000 Gain 
 
 No account is given therein of value of unfinished 
 work or of unsold goods at the beginning and end of 
 each year, as these are supposed to balance. 
 
 The chief fact in the above statistics is that the 
 
GENERAL CONSIDERATIONS 13 
 
 product in the second year was twice as great as that 
 in the first year. The labor and material costs per 
 unit of product were practically the same in both 
 years, since most of the men were on piece work or 
 task and bonus. On account of the larger produc- 
 tion some economy was effected in the purchase 
 of material, making its cost $190,000 instead of 
 $200,000, and the increased production enabled some 
 saving of labor cost to be made by having fewer tool 
 makers, etc., in proportion to the product. The 
 doubling of the product involved the borrowing of 
 some money, a slight increase in repairs and in fuel 
 and light, and some increase in foremen and drafts- 
 men. The factory was well managed both years. 
 The sole cause that it made $44,000 gain the second 
 year as compared with $10,000 loss the first year is 
 that the sales department called for twice as many 
 goods. Whether this was due to the condition of 
 the market, to greater efficiency of the sales depart- 
 ment, or to the fact that in the second year the sales 
 increased on account of the increased reputation of 
 the goods, or on account of the advertising and other 
 effort made by the sales department in the first 
 year, the results not appearing until the second year, 
 has nothing to do with the management of the factory. 
 Increasing the production could not improve matters, 
 because the production was all that could be sold. 
 The stockholders receiving these statistics would 
 
14 INVESTIGATING AN INDUSTRY 
 
 naturally be well pleased with the second year's re- 
 port, and they would scout the idea of an investiga- 
 tion by a management expert. But suppose one of 
 them, farther-sighted than the others, discovers that 
 the business is in a very dangerous condition, that 
 a competitor is about to enter the field the following 
 year, and that there is likely to be a large cut in prices 
 and not enough business for all. What is to be done 
 in view of this prospect? The occasion calls for a 
 scientific investigation of a much broader scope than 
 one that relates only to labor-saving management. 
 What should be done under the circumstances may 
 well be the subject of another chapter, in which the 
 hypothetical case is treated in narrative form as if 
 it were an actual one. 
 
CHAPTER II 
 A Business Diagnostician 
 
 After further explanation of the impending com- 
 petition and the threatened lowering of prices, it 
 was conceded by all the directors that the business 
 would probably show a loss the following year unless 
 something radical were done to prevent it, but there 
 was no agreement as to the remedy. Among the 
 suggestions made were: Driving the rival out of 
 business by cut- throat competition; consoKdating 
 with him or buying him out (something was said 
 here about the Sherman law) ; extending the market 
 by more extensive advertising and by the employ- 
 ment of more agents and salesmen; trying to build 
 up a foreign market; cheapening the cost of manu- 
 facture; cutting down overhead expenses; facing 
 the probable loss in the coming year, hoping that it 
 would be made up the year after by the normal in- 
 crease in the demand; finding some other thing to 
 manufacture which would be more profitable. A 
 critical analysis of each suggestion showed that each 
 was open to objection; that not one was anything 
 more than a suggestion. Finally, one director pro- 
 posed that the discussion be suspended and that a 
 
 15 
 
16 INVESTIGATING AN INDUSTRY 
 
 committee be appointed to study all the suggestions 
 and report on them at the next meeting. 
 
 Another director made a different proposition. 
 He said, ''There is a man in this town who has be- 
 come a specialist in getting manufacturing concerns 
 out of difficulties. He is a stockholder in several 
 concerns that he has helped to make profitable. 
 Suppose we ask him to meet us and advise us what to 
 do. ^ His fees, I beHeve, are large, but it may pay us 
 to employ him." 
 
 The suggestion was debated awhile and then it 
 was agreed to ask him if he would visit them and have 
 a preliminary talk over the matter. He was soon 
 found by means of the telephone, and an automobile 
 brought him to the office in a few minutes. After 
 introductions the situation was explained to him 
 and he was asked if he was in position to study the 
 matter and find a proper remedy. The gist of his 
 reply was about as follows: 
 
 "My profession is that of doctor of medicine, but 
 I retired from active practice, in which I was engaged 
 for 30 years, about five years ago, and my son is my 
 successor. I had inherited a considerable interest 
 in the manufacturing concern of Blank & Co., In- 
 corporated, and in that way obtained some knowl- 
 edge of factory troubles. Five years ago, when the 
 concern was in financial straits, I was a director and 
 I had thrust on me the job of getting it again on a 
 
A BUSINESS DIAGNOSTICIAN 17 
 
 prosperous basis. When I was a doctor I had the 
 habit, when there was a difficult case on hand, never 
 to make a hasty diagnosis, but to keep the patient 
 quiet for a few days to give me a chance to study all 
 his symptoms. I made out a list of all the possible 
 things that might be the matter with him, and then 
 struck out one at a time each item which was nega- 
 tived by the absence of the symptoms pertaining to 
 it. In this way the list was narrowed to three or 
 four items. I then made a second examination of 
 the patient, using all of the most modern methods 
 and instruments, including chemical analysis and the 
 microscope. If by this time the diagnosis and 
 prognosis were incomplete, I called in one or two 
 speciaKsts in consultation, and in this way a conclusion 
 was reached as to the remedies to be applied. When 
 I tackled the job of Blank & Co., I did the same 
 thing. I made a list of all the possible diseases with 
 which the concern might be afflicted, struck out 
 from the list one disease after another as non- 
 existent, had statistical records and graphic charts 
 made of everything that might have a bearing on 
 the company's troubles, and called in a couple of 
 experts on certain specialties with which I was un- 
 familiar. The result you know. Without obtaining 
 any additional capital, the concern has paid good 
 dividends for the last three years. 
 
 "In answer to your question how I obtained the 
 
18 INVESTIGATING AN INDUSTRY 
 
 knowledge requisite to enable me to make a list of 
 industrial diseases, I may refer to another habit of 
 mine. During thirty years' travel on our suburban 
 railroads I have observed the new factories that were 
 built, and noticed that while some of them grew 
 from small beginnings to great concerns, others, and 
 the majority of them, either did not grow at all, or 
 else changed hands, or remained idle for a year or 
 two before finding new tenants. Many of my 
 patients were owners and managers of these factories, 
 and some of them I had to treat for nervous prostra- 
 tion caused by worry about their business. It 
 seemed to me that industrial concerns had about as 
 many different diseases and causes of disease as 
 human beings, and curiosity led me to inquire into 
 these causes. Some of these causes might be called 
 pure luck, or accident, which no human foresight could 
 have prevented, but even in these cases there was 
 no insurance provision against bad luck or accident. 
 We put up fire escapes on our buildings, we guard 
 our machinery, and we insure our factories and our 
 lives, but we take no insurance against a financial 
 crisis, against strikes, or against ruinous competition. 
 Besides luck and accident, I have found certain 
 microbes that affect industrial concerns. Some of 
 these are: (i) Conceit, the owner thinking that he 
 knows his own business and that no one else knows 
 it as well as he does. (2) Ambition, or too great 
 
A BUSINESS DIAGNOSTICIAN 19 
 
 progress! veness, trying to be the leader in new 
 things. (3) Inertia, or too little progressiveness, 
 waiting till your rivals succeed with a new thing 
 before investigating whether you ought not to have 
 it. (4) Recklessness, making changes in the busi- 
 ness without counting the cost. (5) Fickleness, the 
 lack of ' stick- to-ativeness.' The successful man 
 ^'like a postage stamp, sticks to a thing till he gets 
 there." (6) Stupidity, too great ' stick- to-ativeness.' 
 Sticking to a thing after it has proved a failure. (7) 
 Nepotism, putting one's relations into prominent 
 positions just because they are relations. 
 
 ''Now these seven microbes, and there may be 
 others, are not possessions of the business itself, but 
 of its owners or directors. Their investigation is 
 a study in psychology. Next in order is a psycho- 
 logical investigation of the general manager, and of 
 the superintendents of the sales department and of 
 the production department, and of the organization 
 that binds them together. 
 
 ''My method of investigating an industry thus 
 begins with a diagnosis of the possible diseases of 
 the human elements in charge of the industry. When 
 this is finished I then take up the material elements, 
 of which the general headings on the Hst are: Prod- 
 uct, location, process, buildings, machinery, power, 
 organization, statistics, finance. 
 
 "Besides my work with Blank & Co., I have 
 
20 INVESTIGATING AN INDUSTRY 
 
 been called in, as you have been informed, to help 
 four other concerns out of trouble, and in all four 
 cases I have been reasonably successful. 1 had no 
 special knowledge of any of these businesses. I 
 simply used the method of diagnosis that I have 
 described, called in specialists for advice when they 
 were needed, including skilled accountants and 
 statisticians, as well as machinery experts, and made 
 a written report of my conclusions and those of my 
 expert assistants. Now if you wish me to tackle 
 your concern in the same way, I am ready. I make 
 no guarantee or promise that I will be successful. 
 When I was a doctor of medicine, I did not cure all 
 my patients. But I warn you that my first work 
 will be a psychological investigation of the board of 
 directors, and after that of the general manager and 
 the superintendents. It will be a thorough hunt for 
 the microbes." 
 
 The chairman of the board repKed, ''I think we 
 are all favorably impressed with what you have told 
 us, but as one of the microbes that you have named, 
 recklessness, is one we especially wish to avoid, we 
 wish to get an idea of what this investigation is going 
 to cost. What are your fees and those of your 
 assistants?" 
 
 The "diagnoser" replied, ^'When I was a doctor, 
 I had the habit of charging what the market would 
 bear; that is, I charged rich patients more than poor 
 
A BUSINESS DIAGNOSTICIAN 21 
 
 ones; so before I answer your question, I would like 
 you to tell me at what price you value your stock." 
 The chairman rephed, ''We all paid par for our 
 stock, and on the basis of last year's report we think 
 it should be worth 120, but since the future market 
 conditions do not look favorable, perhaps it is not 
 worth over 80. In fact, I would be glad to sell out 
 at 80." To this the diagnoser answered, ''I cannot 
 fix a definite charge for my services because it is 
 impossible for me to know how much work I shall 
 have to do, nor can I form any idea of what the value 
 of my work will be to you when it is done. I do not 
 charge a per diem fee. When I was a doctor I some- 
 times got $2 for attending to a case three miles out 
 in the country, and I have got $500 for one hour's 
 time on a major surgical operation. I will make 
 the same proposition to you that I made to the last 
 three concerns that I treated. It is this: That 
 you contract to give me an option on 20 per cent of 
 your whole capital stock at 90 per cent of the par 
 value per share, the option to be exercised by me at 
 any time within two years. If I take the shares 
 and pay for them, my fee is the increased value of 
 these shares above 90 per cent at the time that I 
 take them. If I don't take the shares, then my fee 
 is nothing." 
 
 After some discussion of these terms, they were 
 accepted and the doctor said he would Hke to meet 
 
22 INVESTIGATING AN INDUSTRY 
 
 the directors on a certain day of the next week to 
 begin his psychological investigation. In the mean- 
 time he gave them a list of questions that he wished 
 them to answer concerning the '' microbes" that 
 might possibly affect the personnel of the concern. 
 He asked them to meet together before he met them 
 and agree upon written answers to these questions 
 so as to save time which might be taken up in vague 
 discussions. He also asked them to prepare a statis- 
 tical statement of the sales in each month of the last 
 two years of each branch of their product and a 
 statement from the sales manager as to the expected 
 sales in each month of the coming year (a) on the 
 basis of the rival not having entered the market, 
 and (b) on the basis of the rival having entered the 
 market and doing his best to make sales. 
 
 At the meeting the following week the written 
 statements were presented. The reports about the 
 microbes were as follows: (i) Conceit. — '*We don't 
 think we know our own business, in fact, we know 
 that we don't know it. The founder of the business, 
 who knew all about it, is dead. We got into the 
 business as investors, knowing approximately nothing 
 about it. We have had to depend on our general 
 manager for information." (2) Ambition. — "We do 
 not think we are aiHicted with that. We would be 
 satisfied with a reasonable growth of the business 
 and moderate dividends." (3) Inertia. — "We plead 
 
A BUSINESS DIAGNOSTICIAN 23 
 
 guilty. As long as the business seemed to be pro- 
 gressing steadily, we did not take the trouble to find 
 what our rivals were doing." (4) Recklessness. (5) 
 Fickleness. (6) Stupidity. (7) Nepotism. — "If we 
 have any of these microbes, we are not aware of it." 
 
 The diagnoser, after reading this report, said that 
 his psychological investigation of the directors was 
 now complete, and he believed that they had properly 
 diagnosed their own case and that the microbe was 
 inertia. "Now I want your opinion of the general 
 manager," said he. "The general manager," said the 
 chairman, "is a man whose mind runs on one track. 
 We beheve him to be an excellent man in everything 
 relating to the factory. He is careful about pur- 
 chasing; he has a thorough system of cost accounts; 
 he has, we believe, the most modern and best ma- 
 chinery and the latest notions about scientific man- 
 agement, such as the planning room and functional 
 foremanship. We had a scientific management expert 
 here recently who told us that everything was work- 
 ing admirably. We do not think the man could be 
 improved on as a factory man, and he gives us no 
 trouble whatever. His reports to us each month 
 are clear and precise and they check up with the 
 statistics of the accounting department, but the man 
 seems to have no notion of how to push the selling 
 department. He trusts entirely to his salesmen, 
 and we have never known him to originate a new 
 
24 INVESTIGATING AN INDUSTRY 
 
 selling idea." The general manager was then brought 
 into the conference, asked a lot of questions, and 
 proved himself to be just the kind of man the chairman 
 of the board had described him to be. He was then 
 asked the questions, ''Is your factory properly 
 adapted to the work that is done in it? Is it of 
 the right shape, size, arrangement of rooms? Is it 
 properly lighted and heated, and have you proper 
 facilities for moving materials around the factory?" 
 To all these questions he replied, ''Yes/' The 
 factory was new, built according to the latest ideas, 
 and he could not suggest any improvements that it 
 needed. The power plant and methods of trans- 
 mission of power were also all that could be desired. 
 The next question was, "Is the factory suitable for 
 any other kind of manufacturing business? " "Why," 
 said he, " it is suitable for almost anything. It is three 
 stories high, with 14 feet clear distance between 
 floors, unusually well lighted on all four sides, has 
 heavy and substantial floors, and almost any light 
 manufacturing business could be carried on in it." 
 He also reported that the machinery was all up-to- 
 date and was in good condition. The next question 
 was, "Have you any statistics of the load factor of 
 each of your machines?" He replied, "I don't 
 know what you mean by load factor." "By load 
 factor I mean this: Your working time is 10 hours 
 a day, say 250 hours per month. If a certain machine 
 
A BUSINESS DIAGNOSTICIAN 25 
 
 runs 250 hours in a month or lo hours every day in a 
 month, then its load factor is 100 per cent. If it 
 runs only 125 hours in a month of 250 working hours, 
 then its load factor is 50 per cent. I would like to 
 have a statement concerning each of your larger 
 machines as to what its load factor was each month 
 during the past year. Can you get me the figures?" 
 The manager repHed, "I have not got the figures in 
 just that shape, but they can be compiled from the 
 time cards, as each time card shows the number of 
 the machine and the number of hours it ran on each 
 job. By adding these figures together on an adding 
 machine we could, no doubt, get up a load factor 
 statement such as you desire." He was then instruct- 
 ed to get up this statement and have it ready within 
 a week. 
 
 The doctor then took up the question of the extent 
 of market of the product, and he found a lack of 
 systematic knowledge as to the total demand of the 
 country for the kinds of goods produced, and con- 
 sequently a lack of knowledge as to what prospects 
 the factory would have of increasing its sales if prices 
 were reduced or if greater activity was put into the 
 selling Apartment. He then told the directors that 
 as soon as they could give him any light on this 
 subject, he would start an independent investigation, 
 using outside business experts for the subject, so 
 that he could form an idea as to the market con- 
 
26 INVESTIGATING AN INDUSTRY 
 
 ditions, and appointed a day, two weeks removed, 
 for another meeting. "Meantime," said he, "I am 
 going to give you another Hst of questions for you 
 to answer. First, what is your product? Describe 
 its several varieties, shapes, etc. Second, why do 
 you make this product? Why not make something 
 else? Why do you not concentrate and make fewer 
 varieties? Why do you not expand and increase 
 the number of varieties? Why do you put so fine 
 a finish on your goods? Would not a cheaper finish 
 and lower price increase the sales so as to bring more 
 profits? Why do you not improve the quahty of the 
 products and get a higher price for them and a better 
 reputation in the market, which will increase the sales? 
 Have you considered what other kinds of products 
 might be made in your factory in order to increase 
 its load factor, especially in the seasons when it is 
 running light? Have you considered whether or 
 not the space available in your factory is fully utilized, 
 or whether or not from two to four times its present 
 product could not be turned out without increasing 
 either the floor space or the power plant? While 
 you are preparing the answers to these questions, I 
 will be studying such other matters relating to the 
 business as may occur to me, and prepare another 
 set of questions which I will give you at your next 
 meeting." 
 
 The meeting then adjourned. 
 
CHAPTER III 
 The Diagnosis; The Factory 
 
 The next day the ^^diagnoser" called the general 
 manager on the telephone and asked him when it 
 would be convenient for him to have an hour's con- 
 ference in regard to the factory. The conference was 
 held that afternoon. After some general conversa- 
 tion on the nature of the business, the reputation of 
 its products, its history and its prospects, the doctor 
 said: ''It appears to me that your condition is 
 about that of a famous athlete whom I treated some 
 years ago, who was preparing himself for a great 
 contest. Physically he was about 95 per cent per- 
 fect, and mentally about 90 per cent. It was neces- 
 sary to get him up to 98 per cent in both if he was to 
 beat the world's record. In examining him I took 
 nothing for granted. I assumed the possibility that 
 weakness might exist in any one of his muscles or 
 organs, and that any one of the hundreds of causes 
 ofdack of physical or mental perfection might also 
 exist. I sounded him from his scalp to his toes, I 
 took his pulse, blood-pressure, respiration, and re- 
 action time. I looked into his eating, sleeping, ex- 
 ercising, training, and all his habits. I got all the 
 
 27 
 
28 INVESTIGATING AN INDUSTRY 
 
 subjective as well as the objective symptoms, and I 
 applied to him all the psychiatric tests that are down 
 in the books. When I got through with the examina- 
 tion I had found very little that was wrong with 
 him; a little overtraining, some errors of diet, sKght 
 fatigue-poisoning and the like, and the mental or 
 psychical defects and subjective s^/mptoms, such as 
 alternations of fear and of overconfidence, nervous- 
 ness, lack of will-power to draw on .his reserve of 
 energy or "second wind," were all accounted for by 
 the fatigue-poisoning. I got him up to 98 per cent 
 and he beat the record. 
 
 "In my investigation of this business I wish to 
 take nothing for granted. There may be very little 
 wrong with it, but we must examine every organ of 
 every department, no matter how much confidence 
 you or the directors may have in its perfection, to 
 see if there may possibly be anything wrong with it. 
 From what I have already learned it seems probable 
 that I shall find little if anything wrong with the 
 factory or with the method of conducting operations 
 in it, but to remove all doubts on the subject I wish 
 to investigate both the factory and the methods of 
 operation. I have here in my notebook a list of over 
 a hundred separate items, some relating to the pro- 
 duction and some to the accounting and sales depart- 
 ments, each one of which I wish to consider before 
 the next meeting of the directors. I will take up the 
 
THE diagnosis; the factory 29 
 
 factory items now, and you will assist me greatly if 
 you can give me brief answers to the questions I shall 
 ask concerning these items. 
 
 ''First on the Hst is the location of the plant. Is 
 it a proper one, considering its nearness to and 
 facilities for getting the raw materials, the supply 
 of skilled and unskilled labor in the immediate 
 vicinity, good climate and comfortable homes and 
 cheap markets for the workmen, so that you can secure 
 and keep the best grade of workmen, nearness to 
 the market for your products and favorable freight 
 rates to more distant markets? Are any of your com- 
 petitors likely to find a better location?" 
 
 A few minutes' talk on these questions satisfied 
 the doctor that the location was an exceptionally good 
 one. 
 
 The next set of questions related to the buildings. 
 The general manager was asked to furnish a blue- 
 print showing the ground plan and sectional eleva- 
 tion of the buildings, with a statement of the floor 
 area of each department, and to answer some ques- 
 tions relating to the suitability of the buildings to 
 the work now done in them and to other kinds of work 
 which might be done in the future ; also as to the extent 
 of vacant space as yet unoccupied in the several rooms, 
 as to the prospect of utilizing this space, and as to 
 the possible need of extra space for future extensions. 
 Other questions related to the lighting, natural and 
 
30 INVESTIGATING AN INDUSTRY 
 
 artificial, of these rooms, the heating and ventilation, 
 protection against fire and other accidents, sanitary 
 appliances, first-aid hospital, rest-rooms for women, 
 etc. The answers to these questions led to the 
 conclusion that the buildings, their arrangement, 
 etc., were almost ideal for the purpose for which they 
 were now used, and suitable for almost any light 
 metal-goods business, but that at present they were 
 much larger than the present extent of the business 
 required, and on this account cost more for heating 
 in winter-time and involved a larger investment of 
 capital than would a building of a size better pro- 
 portioned to the present extent of the business. 
 They were, as the manager said, built with a view 
 to doing in them a much larger business, which was 
 expected in the near future. 
 
 ^'I understand," said the doctor, ^'from my con- 
 versation with the board of directors, that the business 
 is likely to meet a great deal of competition next 
 year and that prices will be lowered. In that case, 
 there is likely to be more idle time for machinery 
 and less call for utilization of the vacant spaces than 
 there now is." "That is exactly the case," replied 
 the general manager. "Well, what provision have 
 you made against that state of affairs? " "We have 
 made none as yet," said the manager; "that is what 
 we are now getting ready to consider." "Have you 
 
THE diagnosis; the factory 31 
 
 made any investigations in regard to finding out what 
 other lines of products the factory might engage in?" 
 ^'No, I have not," said the general manager. ''Well, 
 let us pass that subject for the present and we will 
 take it up at the directors' meeting. Let us now 
 consider some of the other things on my list. The 
 next is organization. I understand that you have the 
 usual organization of directors at the head, then 
 you as general manager in charge of the whole business 
 and reporting only to the board of directors; that 
 you are in charge of the selling and accounting de- 
 partments as well as of the factory, and that all 
 superintendents, foremen, sales agents and sales- 
 men are directly in your charge." "That is the 
 case," said the general manager. 
 
 "The next subject I have on my list is Material, 
 with these items under it: Purchasing department; 
 purchasing system; specifications, inspection and 
 tests; keeping track of markets and quotations; 
 scrap, disposition of; by-products, utilization or 
 disposal of; origin and handling of requisitions. 
 The next subject is Stores and Supplies, and under it 
 I have : Duties of stores clerk ; inventory of supplies ; 
 minimum quantity allowed before ordering new sup- 
 plies; bins, shelves, faciUties for handling." These 
 subjects were discussed at some length and the 
 doctor expressed his satisfaction with this branch 
 of the management. 
 
32 INVESTIGATING AN INDUSTRY 
 
 "The next subject on my list is Men, and with 
 the following items: Selection and hiring of men; 
 fitting men into the right places; promotion; training 
 of young workers; training of leaders; management 
 of green workers; incentive; discipline; accident 
 insurance; prevention of accidents; human wel- 
 fare." The manager showed that he was quite up- 
 to-date in all these matters and promised at the 
 next opportunity to take the doctor around and 
 show him in detail just what was being done in re- 
 gard to the treatment of men and the incentives 
 offered them to remain connected with the concern. 
 
 "The next subject on my list," said the doctor, 
 "is Scientific Management. What have you to say 
 about that?" "Why, that is my hobby," said the 
 general manager, "1 was with Fred, Taylor at Bethle- 
 hem and got a good training under him, and have 
 kept track of his work and with that of Gantt, Earth 
 and Hathaw^ay ever since. I meet them occasionally 
 and they post me as to their most recent ideas. We 
 had an advantage over most concerns in instalHng 
 scientific management, for we started it when the 
 first designs were made. W^e located on the original 
 plans the tool room, store room, and planning room, 
 laid out the course of material from the receiving 
 platform to the shipping room, and planned the 
 means of handling it by cars, cranes, elevators and 
 trucks so that it could be handled with a minimum 
 
THE diagnosis; the factory 33 
 
 of manual labor. If you wish to take the time now 
 I will go into detail in regard to the management of 
 the production end of the business." 
 
 "We will postpone that for the present," said the 
 doctor, ''but I wish to check off the items I have 
 listed under 'Scientific Management inside of the 
 shop' to see if you have all these items: Planning 
 room; tool room; tool grinders; messenger service; 
 standard shapes of tools; functional foremen; rout- 
 ing man; disciplinarian; time study; motion study; 
 instruction cards ; standardized operations ; mnemonic 
 symbols; fatigue study; task and bonus; statistics 
 and plotting of results, graphic daily balance." 
 
 '*We have all of these and a few more," said the 
 manager, ''but these are only the machinery of 
 scientific management; the real essence of it is a 
 mental attitude, a state of mind, a disposition which 
 is not satisfied with the possession of mere machinery 
 of a system, but is always watching to discover some- 
 thing that can be improved. There are two things 
 you had better add to your hst, doctor, the effect of 
 scientific management upon the earnings and upon 
 the general welfare of the men, and its effect upon the 
 cost of production. If it does not both increase the 
 men's earnings and decrease the total cost of produc- 
 tion at the same time, then it is not fulfilling its 
 function. I shall be glad to show you our plotted 
 results on these two items, and I think you will find 
 
34 INVESTIGATING AN INDUSTRY 
 
 that at least we are making progress in the right 
 direction, and I would like you to compare our 
 results with that of any of the manufacturing concerns 
 that you are interested in." "Well, you area 
 ^crack-a-jack' scientific manager," said the doctor. 
 "I am going to put you in touch with the managers 
 of the other concerns in which I am a stockholder, 
 and if you don't learn something from them, they, I 
 am sure, will learn something from you. 
 
 "The next subject on my list is Power Plant, 
 with the items: boilers, engines, condensers; electric 
 generators, heating system, Hghting system; cost of 
 fuel, efficiency of the plant and of its several items; 
 water evaporated per pound of fuel, pounds of steam 
 per horsepower per hour at minimum, peak and 
 average loads; load diagrams, summer and w^inter; 
 water and steam records; distribution of power by 
 belts, shafts, electric current; motor efficiency at 
 actual loads, lubrication, roller bearings, total cost 
 of power per year; items of possible saving. Will 
 you ask your chief engineer to give me a report on 
 these items, and also any criticism he may have to 
 make and any improvements he may suggest which 
 may reduce the cost of power or keep the machinery 
 running constantly at proper speeds?" 
 
 The manager said, "I will do so. No doubt you 
 will find many things that are wrong in our power 
 plant. It was the one thing in which the original 
 
THE diagnosis; the factory 35 
 
 owner of the plant tried to save money. We have a 
 non-condensing engine, an old-style boiler with too 
 small a combustion chamber, and are making lots 
 of smoke. I suppose if we had a condensing engine, 
 mechanical stokers, a CO2 apparatus, a steam meter, 
 and a coal weighing apparatus we might save 30 or 
 40 per cent of fuel, but we have postponed considera- 
 tion of these matters until we get other things straight- 
 ened out first, which seem to be of more importance. 
 If business is dull next year we may not feel like spend- 
 ing any money on improvements." ^' Quite right," 
 said the doctor. ''If your fuel bill is only a small 
 fraction of your total expenditure, and there is a 
 possibility that you may not need a power plant at 
 all if you can buy power and light cheaply enough 
 from a central station, which will also heat your 
 buildings with its exhaust steam, it is well to post- 
 pone the power plant question. 
 
 "The next thing on my list," said the doctor, "is 
 Designing and Drafting, with these items: Chief 
 draftsman, assistants; designing and drafting meth- 
 ods; photographing; recording and filing; statistics 
 of special orders; conferences on new designs and 
 improvement of old ones; cost of department; 
 results produced by it. What can you tell me about 
 this department?" "Well," said the manager, "it 
 is about like the factory, very good in its equipment, 
 plenty of system and red tape, records and methods 
 
36 INVESTIGATING AN INDUSTRY 
 
 all right, but the results we get from it are not pro- 
 portionate to its cost. The chief draftsman and 
 designer is a very able man, and he could handle a 
 large corps of assistants well, but we have not enough 
 new work on hand to keep many men busy in that 
 department, so he spends a great deal of his time 
 doing what a much cheaper man could do. We 
 cannot well dispense with him, for he is thoroughly 
 acquainted with our business, and we occasionally 
 need his high grade of skill on special orders. I wish 
 you would suggest some way of improving that 
 department so that it could be made to pay for its 
 keep." "I will make a memorandum of that," said 
 the doctor, "and look into it later." 
 
CHAPTER IV 
 The Accounting and Sales Departments 
 
 ''These are all the questions I have to ask at 
 present concerning the production departments," 
 said the doctor. "I have only one other memor- 
 andum on my list for today; it relates to the account- 
 ing department. Here it is." The doctor handed 
 the manager the paper, which read as follows: 
 
 Accounting system: Does it give the manager 
 the information he should have in regard to the 
 distribution of the active working capital among 
 the several items: cash; bills and accounts receivable; 
 finished goods in warehouse and on consignment; 
 raw material on hand; work in progress; also as 
 to advance insurance premiums; advance advertis- 
 ing for next year's business; proportion of this year's 
 expense chargeable against next year and succeeding 
 years; change in value of fixed capital due to deprecia- 
 tion and obsolescence? Are the books examined 
 and reported on yearly by a professional accountant? 
 Is there a chart with entries made each month 
 showing the expenditures for material, labor, general 
 factory expense, advertising and other expense of 
 the sales department, sales, cash receipts from sales, 
 cash on hand, bills and accounts receivable, bills and 
 
 37 
 
38 INVESTIGATING AN INDUSTRY 
 
 accounts payable, surplus available capital to meet 
 possible slackening of business or slow collections? 
 Is there a similar chart showing what is expected in 
 each of the above items for the next six to twelve 
 months, for the purpose of aiding in reaching a de- 
 cision as to whether expansion, with increasing ex- 
 penditure, ''standing pat," or ''shortening sail" is 
 the proper course to pursue? 
 
 In reply the manager showed the doctor the books 
 and monthly statistical records and charts covering 
 all the items asked for and some additional ones, 
 also the last report on the accounts by a firm of 
 chartered accountants, and two charts, one showing 
 the history of the business, month by month for two 
 years, and one showing the future prospects as well 
 as they could be prognosticated. In relation to the 
 last the manager said, "At the last meeting of the 
 directors we studied this chart and came to the con- 
 clusion to 'stand pat,' or 'let well enough alone.' 
 We saw no reason for either shortening sail or ex- 
 panding, and we have not enough capital to go into 
 any extensive experimenting. As we had to borrow 
 some money last year to meet the natural expansion 
 of the business, we concluded to let the whole of last 
 year's net earnings remain as working capital, and 
 not to declare a dividend." "A very wise conclusion," 
 said the doctor. 
 
 "At that meeting, however," continued the man- 
 
THE ACCOUNTING AND SALES DEPARTMENTS 39 
 
 ager, ''an unexpected situation arose — that of the 
 impending competition and consequent curtailment 
 of our market — and for that reason you were called 
 in as adviser. There is another matter that I wish 
 you would consider also, that is, what we shall do in 
 view of the threatened reduction of the tariff on our 
 product? Just now we have the whole domestic 
 market, but if we have to divide it with the Germans 
 as well as with our American rivals, I don't know 
 what is going to become of us." ''I am studying 
 these questions," said the doctor, "and I will have 
 something to say about them at the directors' meet- 
 ing. Now, before I go, I am going to leave with you 
 two papers containing a lot of questions which I 
 wish you would answer as well as you can to-morrow 
 afternoon, when I hope to have another talk with 
 you." The first paper contained the following: 
 
 Duties of the president and of the directors. How 
 do they fulfill their duties? 
 
 Relation of the directors to the manager. Are 
 they satisfactory? 
 
 Organization of the sales department. What are 
 the methods of distributing the product, and what is 
 the efficiency of each method? Wholesaling, jobbing, 
 retaihng; branch offices, local agents, exclusive 
 territorial agents; trade agreements and contracts; 
 re-sale prices, discounts, rebates. Advertising, cor- 
 respondence, bulletins, circulars; department stores, 
 mail orders. 
 
40 INVESTIGATING AN INDUSTRY 
 
 Statistics of sales and of costs of selling, by different 
 methods, by months, by districts, and by classes of 
 product. 
 
 How is the selling price, wholesale and retail, de- 
 termined? 
 
 Who or what determines the method of selling, 
 the selection and appointment of salesmen, the 
 salaries and commissions? 
 
 What system have you for training salesmen? 
 Do your salesmen stay with you, or do you frequently 
 have to get new ones? 
 
 What methods are in progress, or in prospect, for 
 increasing the efficiency of the selling department, 
 both as to increasing the volume of goods sold and 
 as to decreasing the cost of selling? 
 
 What are the limitations to the quantity of goods 
 that can be sold? Can the market be developed so 
 that it will be large enough to afford both yourselves 
 and your competitors a chance of doing a large and 
 growing business? 
 
 What proposal have you to make regarding ways of 
 meeting the expected competition next year, and what 
 for filling the factory with other kinds of work in 
 case the competition cuts down the volume of sales 
 of your present products? 
 
 The second paper was a printed one,^ which the 
 doctor had used in another factory, and it contained 
 the following: 
 
 1" Academic Efficiency," by William Kent, in Proc. Soc. for 
 Promotion of Engineering Education, 1912, vol. 22, part I; also 
 in Science^ Dec. 20, 1912. 
 
THE ACCOUNTING AND SALES DEPARTMENTS 41 
 
 When an efficiency expert begins his operations 
 in a factory his first questions are: What kind of 
 product is made? Why is it made? Why not abandon 
 it if it is not profitable? The next set of questions 
 covers the quahty. Is the quaHty too highly refined 
 and too costly, so that its market is hmited? Is it 
 too common and cheap, so that it has to be brought 
 into competition with the poorest goods on the 
 market? Is it out of date and unfashionable? Is the 
 quality what it ought to be, and if not what are the 
 reasons, and how can it be improved? 
 
 Next come questions as to quantity. Is the 
 factory turning out too much of one kind of goods, 
 so that the market is glutted and the price too low? 
 Is it turning out too little, so that it is not doing as 
 much business as it might do? Is it turning out 
 too much of one kind and not enough of another; 
 and if so, what changes should be made so as to 
 establish a proper balance? 
 
 After these questions of kind, quality, and quantity 
 of product are considered, then comes the question 
 of cost per unit of product and of possible methods of 
 reducing that cost. In the factory the solution of 
 these questions is one of great difficulty and complex- 
 ity. It includes the items of location, buildings, 
 machinery, system of organization, functional fore- 
 manship, statistics, accounting, planning of work, 
 routing it through the shop, methods of payment of 
 wages, keeping high-priced men only on high-priced 
 work and finally time study resolved into its elements, 
 that is, motion study. I quote from Frank B. 
 Gilbreth's new book on Motion Study. [The words 
 in brackets are not in the original] : 
 
42 INVESTIGATING AN INDUSTRY 
 
 ''There is no waste of any kind in the world that 
 equals the waste from needless, ill-directed, and in- 
 effective motions [true of the sales department]. . . . 
 Tremendous savings are possible in the work of 
 everybody — they are not for one class, they are not 
 for the trades only; they are for the officers, the 
 schools, the colleges, the stores, the household, and 
 the farms. ... It is obvious that these improvements 
 must and will come in time. But there is inestimable 
 loss m every hour of delay. The waste of energy 
 of the workers in the industries [and in the sales de- 
 partment] today is pitiful. ... In the meantime, 
 while we are waiting for the politicians and educators 
 to realize the importance of this subject and to create 
 the bureaus and societies to undertake and complete 
 the work, we need not be idle. There is work in 
 abundance to be done. Motion study must be 
 applied to all the industries [including the sales 
 department] : 
 
 "i. Observe the best work of the best workers. 
 
 "2. Photograph [and 'dictagraph'] the methods 
 used. 
 
 "3. Record the methods used. 
 
 "4. Record outputs. 
 
 "5. Record costs. 
 
 "6. Deduce laws. 
 
 "7. Establish laboratories [and tests] 'for trying 
 out laws.' 
 
 ""8. Embody laws in instructions. 
 
 "9. Publish bulletins [for salesmen]. 
 
 " 10. Co-operate to spread results and to train the 
 rising generation." 
 
 Mr. Gilbreth refers to motion study of the in- 
 
THE ACCOUNTING AND SALES DEPARTMENTS 43 
 
 dustries that are producing material wealth, but his 
 words may be applied to the industry of [distributing 
 and selling goods]. 
 
 Mr. Harrington Emerson has written a book en- 
 titled ''The Twelve Principles of Efhciency." He 
 wrote it with especial reference to the efficiency of 
 manufacturing establishments, but the principles 
 may be applied to [the sales departments]. They 
 are the following: (i) Clearly defined ideals. (2) 
 Common sense. (3) Competent counsel. (4) Dis- 
 cipline. (5) The fair deal. (6) Reliable, immediate 
 and exact records. (7) Despatching. (8) Standards 
 and schedules. (9) Standardized conditions. (10) 
 Standardized operations. (11) Written standard 
 practice instructions. (12) Efficiency reward. 
 
 The next day, an hour before the time appointed, 
 the doctor appeared at the factory with a companion, 
 whom he introduced as a mechanical expert whom, 
 he said, he wished to take through the factory. The 
 manager excused himself from accompanying them, on 
 account of the press of other matters, and said they 
 could go ahead without him. The doctor took the 
 expert first into the assembling room and then into 
 the finished stock room, explaining to him the differ- 
 ent products, and finally into the drafting room, where 
 he introduced him to the chief draftsman. ''Are 
 you," said the expert, addressing the draftsman, 
 "responsible for the design of these machines?" 
 "No," he replied, "the main designs were made before 
 
44 INVESTIGATING AN INDUSTRY 
 
 I came here, but I have designed some slight modi- 
 ficationSj and some special tools for the cheapening 
 of their manufacture, under the directions of the 
 general manager." ''It appears to me," said the ex- 
 pert, ''that the machines are admirably adapted for 
 their purpose, that they are strong, durable, with 
 bearings well proportioned, and with an excellent 
 system of lubrication, but that they are not designed 
 with reference to the cheapest system of manufacture. 
 Here are three castings, carefully fitted, doweled 
 and bolted together, that might better be made as a 
 single cored casting. Here are small castings that 
 need a great deal of work on them to get them true 
 to size, that might be replaced to advantage with 
 drop forgings. I noticed in the factory also that 
 many parts are being made on turret lathes, involving 
 great expense for such a variety of turning tools, 
 and necessitating frequent changes of setting, because 
 these parts are made in small quantities at a time. 
 Many of these parts could be purchased at low prices 
 in the market from manufacturers who have automatic 
 machines, as they are standard shapes that are used 
 for other purposes by the thousand. What do you 
 think about these matters?" 
 
 "You are entirely right about all of them.," replied 
 the chief draftsman, "and I have brought them to 
 the attention of the general manager, but he said, in 
 regard to the larger castings, that he did not want to 
 
THE ACCOUNTING AND SALES DEPARTMENTS 45 
 
 go to the expense of scrapping the old patterns and 
 making new ones with expensive core-boxes, and as 
 to replacing the smaller castings with drop forgings, 
 that would involve considerable expense for making 
 dies. It would look bad on the cost accounts, he 
 said, to charge off total depreciation of these patterns 
 after they had been in use such a short time, and to 
 increase the tool account by the cost of these dies. 
 As to the turret-lathe work, he said no doubt he could 
 buy parts made on automatic machines more cheaply 
 than the total cost of making them in the factory 
 if they were charged with their regular proportion of 
 burden or general factory expense, but if they were 
 not made in the factory, the turret lathes would be 
 idle, while the expense of keeping them idle would be 
 almost as much as that of keeping them at work." 
 
 On returning to the office the doctor and the expert 
 had a conversation with the general manager in regard 
 to the matters talked of in the drafting room, and he 
 confirmed what the chief draftsman had said. It 
 appeared further that the general manager had not 
 made any detailed study or estimate of the cost of 
 making new patterns and dies, or of the saving that 
 might be made by purchasing parts made on auto- 
 matic machines. His decision in regard to them was 
 based on his ''judgment," and was not the result of 
 investigation. 
 
 The expert then left, after being informed that his 
 
46 INVESTIGATING AN INDUSTRY 
 
 services for a detailed investigation might be called 
 for at an early date. The manager then said he was 
 ready to reply as best he could to the questions, 
 written and printed, that had been given to him the 
 previous day, but was sorry that he could not give 
 definite and satisfying answers to all of them. In 
 regard to the duties of the president and directors, 
 he said that nominally their duties were to have 
 general charge of the whole business and to direct 
 him what to do. Practically they fulfilled their duty 
 by telHng him to go ahead and run it and report at 
 each of the monthly meetings what was done or being 
 done. His relations with them were perfectly 
 satisfactory. They trusted him in everything and 
 only asked him for results. Not one of them had 
 any expert knowledge of the business, and each of 
 them had business enough of his own, grocer, real 
 estate man, insurance, and the Hke, so that he could 
 give but little time to the factory business. He would 
 Hke it better, he said, if one of them had been a manu- 
 facturer, or even a man in the wholesale or jobbing 
 business, so that he could get some points on the art 
 of selling, in which he confessed himself a novice. 
 
 As to the organization of the selling department, 
 he said it was quite simple, he hired the traveling 
 salesmen; there were three of them covering the 
 whole country, and he had an excellent chief sales 
 clerk and correspondent, who was practically a sales 
 
THE ACCOUNTING AND SALES DEPARTMENTS 47 
 
 manager in all but the name and in the power of 
 deciding on the policy of the sales department, which 
 he reserved to himself. His clerk kept complete 
 statistics and charts of sales and prospects. 
 
 As to wholesaling, jobbing and retailing he made 
 a statement as follows: "Here is a machine, on which 
 we have fixed the selhng price to the final purchaser 
 at $ioo, no discount, this being as high as we think 
 the market will bear. Our factory cost estimate for 
 this machine, based on 2000 made per year, is as 
 follows: material, $15; labor, $10; factory expense, 
 $15; total, $40; based on 1000 made per year: 
 material, $15; labor, $11; factory expense, $19; 
 total, $45. On making a canvass of the wholesale, 
 jobbing and retail trades concerning their handhng 
 these machines by buying a stock of them and selhng 
 them, here is what we found: The average retailer 
 thought he could not dispose of more than three a 
 year, and to pay him for carrying them in stock he 
 could not pay more than $75 for them, so that his 
 margin would be 33 K per cent, or $25. The jobber, 
 who would canvass the retail trade, wanted 25 per 
 centf^hich would make the cost to him $60. The 
 wholesaler selling to jobbers at $60 would want 20 
 per cent profit, making the cost to him only $50. 
 On being asked what they could do in the way of 
 advertising and pushing the goods, both wholesaler 
 and jobber said they would print cuts of the machine 
 
48 INVESTIGATING AN INDUSTRY 
 
 in their catalogs, and issue leaflets to their trade, and 
 their salesmen would have it on their hsts; but, said 
 they, 'You must create the demand, and pay for the 
 newspaper advertising. We handle staple and well- 
 known goods, and we sell what people demand, but 
 the manufacturer is the one who must give pubHcity 
 to his own goods.' As the machine would cost us 
 not Jess than $45 deHvered at the factory, if we 
 made 1000 of them a year, or $40 if we made 2000, 
 and it might cost us anywhere from $10 to $20 
 for expense of advertising, salesmen, and collec- 
 tions, there was no money in it for us if we dis- 
 tributed the goods through the regular channels. 
 Here is a point on the ' high cost of living ' : material, 
 $15; labor, $10; factory expense, $15; total, $40; 
 paid by the 'ultimate consumer,' $ioc; cost paid by 
 the consumer for getting the machine from the 
 factory into his hands, $60; profit to the factory, 
 nothing. On this account we concluded to offer the 
 machine to the wholesaler, jobber and retailer on 
 our terms and not on theirs, and to treat all of 
 them alike. If any of them sent us an order for one 
 machine we would bill it at 15 per cent discount, 20 
 per cent for two machines, 25 for three or more. 
 We have advertised extensively in the technical press, 
 and by circulars sent to a selected Hst of possible 
 customers, and our three travehng salesmen have 
 canvassed the country quite thoroughly. We have 
 
THE ACCOUNTING AND SALES DEPARTMENTS 49 
 
 no branch offices, and no local or territorial agents, 
 but are ready to establish agents when any one comes 
 along with sufficient inducements in the way of 
 capital. We sell the goods to any one who calls for 
 them, and we have nothing to do with re-sale prices, 
 trade agreements, special discounts or rebates. 
 We think the results of this method of handling the 
 business have been fairly satisfactory, and last year 
 we made a fair profit on these machines. As to the 
 other sizes of machine the story is practically the same. 
 
 "As to methods of training salesmen, we have 
 none; we were lucky enough to get good ones, we 
 pay them well, part salary and part commission, and 
 we have been able to hold them. I cannot say that 
 we have considered any method of improving their 
 efficiency. 
 
 "As to limitations of the quantity of goods that 
 can be sold, there certainly are narrow limitations. 
 Our machines are special ones, used only in certain 
 factories. They are not like automobiles, sewing 
 machines and typewriters, that appeal to the general 
 pubHc. We cannot count on there being more than 
 5000 possible consumers for our products in the 
 whole country, and we think we are reaching them 
 all by our salesmen, advertising, circulars and cor- 
 respondence. Unfortunately for us, our machines 
 do not wear out, and this fact restricts the demand for 
 them. I do not see any possibiHty of there being a 
 
50 INVESTIGATING AN INDUSTRY 
 
 big enough market for both ourselves and our ex- 
 pected competitors. I have no proposal to make as 
 yet, as to ways of meeting competition; in fact, I 
 did not expect it, and have not given thought to the 
 subject. I am looking to you and the directors for 
 proposals. 
 
 ''As to the questions on your printed paper, 'What 
 product is made?' That you have already seen. 
 'Why is it made?' Well, because we got started that 
 way and have just kept on. Why did we start that 
 way? Probably because of some one's judgment 
 that the business would be a good one. Perhaps too 
 much optimism, faith, confidence, enthusiasm, all 
 good quahties, and those upon which civilization and 
 prosperity advance. These are the qualities we must 
 continue to have if we are going to get out of the 
 difficulty that confronts us, but I see that they are 
 not enough. We must add to them knowledge and 
 foresight of business conditions. I see the drift of 
 your printed paper. It is not enough to have scientific 
 management inside of the factory, we must have it 
 outside, in the selling department; we must have 
 research and investigation not only as to how to sell 
 the goods that we make, but as to whether we ought 
 not to make and sell something else, and as to what 
 that something should be. Now I am going to confess 
 to you my limitations. I know a lot about factories, 
 and about scientific management of them. I have 
 
THE ACCOUNTING AND SALES DEPARTMENTS 51 
 
 had good luck, I call it nothing else, in getting sales- 
 men. I think I have made no mistake in our selling 
 policy, but when it comes to originating plans for a 
 new business, requiring foreknowledge of business 
 conditions, I am all at sea. That is out of my line. 
 I think it is your line, and I am looking to you to 
 get me out of this hole." 
 
 "I am very glad you told me all this," said the 
 doctor. Confession of ignorance is the beginning of 
 wisdom. It is a wise man who is aware of his ignor- 
 ance. Such a man is the born investigator, the man 
 who with proper training is fitted to become a scien- 
 tific manager, or at least a scientific manager of one 
 department of a business. No one man is such an 
 all-around genius that he can be a scientific manager 
 of everything. The conclusion of this preachment 
 I will postpone until I have had a talk with the 
 directors." 
 
CHAPTER V 
 The Doctor's Preliminary Report 
 
 The meeting of the directors was held on the 
 appointed day, and the doctor gave them a long talk 
 about what he had found out in his visits to the 
 factory and in his conversations with the manager, 
 the chief draftsman and the mechanical expert. 
 ^'To save your time," he said, ^'I will read from my 
 memorandum book a few brief notes on some of 
 the principal branches of my investigation which 
 appear to need no further consideration at the present 
 time, and then I will take up the symptoms that are 
 in need of treatment. 
 
 Location, ideal. 
 
 Buildings, ditto, but larger than needed for present 
 extent of business. 
 
 Equipment, excellent, suitable for a great range of 
 Hght metal products. 
 
 Machine load factor in month of maximum out- 
 put, 53 per cent based on number of machines, 42 
 per cent based on machine-hour rate. Average for 
 last 12 months, 44 and 32 per cent. 
 
 Power plant, good, but old style, underloaded, and 
 uneconomical. 
 
 Designing and drafting, high-priced man on low- 
 priced work; not enough new work for him. 
 
 52 
 
53 
 
 Management, inside the factory, thoroughly mod- 
 ern, Taylor system; outside, traditional, old-fash- 
 ioned. 
 
 Product, quahty excellent; demand restricted; 
 variety too large, smaller sizes of some styles might 
 be abandoned; design of some parts might be im- 
 proved so as to lessen manufacturing cost a little. 
 
 Accounting system, excellent; good charts of results. 
 
 Sales departments, suitable for present extent of 
 business, but not the best for enlarging the business. 
 
 " We will pass for the present all these items and 
 come to others which are of pressing importance: 
 
 Organization. Suitable for the present business 
 in good times; not adapted to cope with new prob- 
 lems. Manager a good autocrat, a benevolent despot, 
 a thorough factory man; his mind runs 'on a single 
 track,' inside of the factory. 
 
 Prospects, ruinous competition ahead, with no 
 plans for meeting it. 
 
 Finances, ample for a steady prosperous business; 
 some reserves to meet ordinary business depression, 
 but none to spare for revolutionary changes or 
 hazardous experiments. 
 
 ''Now," said the doctor, "I have diagnosed the 
 sympjjoms of the patient's disease. It is a case out- 
 side of the range of my previous experience as physi- 
 cian of lame businesses, and is not considered in the 
 books of Dr. Taylor or of any other writer on scientific 
 management. I have heard of many similar cases, 
 however, and I judge that the percentage of mortality 
 
54 INVESTIGATING AN INDUSTRY 
 
 in these cases was about 50. Of those that survived 
 the majority had a severe struggle, many of them with 
 assessments of stockholders, or issuing of bonds, 
 while others seemed to come through more by luck 
 than by good management. I know of no specific 
 or panacea for the trouble. The usual method of 
 treatment is for some one to guess at a remedy, and 
 then it is tried. It may work and it may not. 
 
 "When I was a doctor of medicine I used to keep 
 in my note book a Hst of old proverbs or maxims, 
 which often in times of doubt suggested an idea. 
 Such were, 'A burnt child dreads the fire.' 'Fire is 
 a good servant and a bad master.' 'What is medicine 
 for one man is poison for another; ten grains of blue 
 mass win cure a mason of fever — but will kill a tailor.' 
 When I became a diagnoser of sick businesses 1 col- 
 lected a lot of maxims which seemed appropriate. I 
 will read you some of them. You will notice that 
 some of them seem to contradict others." 
 
 Competition is the hfe of trade. 
 Competition leads to consolidation. 
 A penny saved is a penny earned. 
 Hold a penny too close to your eye and you fail 
 to see the dollar beyond it. 
 
 Save at the spigot and waste at the bung. 
 
 It never pays to milk mice. 
 
 Young men for action, old men for counsel. 
 
 In the multitude of counselors there is wisdom. 
 
 Too many cooks spoil the broth. 
 
55 
 
 "The last two maxims are not really in opposition, 
 although at first sight they appear to be. If you 
 want a good apple pie made, one good cook can 
 make it without any advice; but if you ask him to 
 make a mutton pie he may say that he has never 
 made one and that he wishes to take counsel of 
 other cooks before attempting it. Notice that he 
 wants the counsel of experts, not of any Tom, Dick 
 or Harry who may volunteer to give advice. The 
 counselors must be selected. Notice also that when 
 he gets the counsel he does not ask any other cook to 
 help him make the pie, he makes it himself. 
 
 ''So in this business you have one cook, the general 
 manager, but he has had no counselors. He is a 
 good cook, within his limitations, which are the four 
 walls of the factory, but he is not a good cook beyond 
 these walls, in the selling department, especially 
 when it is facing a dangerous situation. What we 
 need immediately is several expert counselors, and I 
 think I know where to get them. Call in from the 
 road your three chief salesmen and ask them for their 
 advice. We may find that one of them can give us 
 the correct solution of the problem, but if not, the 
 discussion with them may give one of us an idea 
 which may lead to the correct solution. In order 
 that they may come to us with matured thoughts 
 upon the subject, I have drafted a letter to them 
 which will set them thinking. I will read it to you." 
 
56 INVESTIGATING AN INDUSTRY 
 
 Dear Sir: We have called a joint meeting of our 
 directors and of our whole selling organization, to 
 be held on 20th and 21st inst., beginning at 10 A. M. 
 each day, for the purpose of considering the impending 
 competition in our business and deciding what steps 
 should be taken to meet it. Please be present without 
 fail, and come prepared to give us the benefit of your 
 advice, and we would prefer that you mail to us 
 your views in writing on or before 15th inst., so that 
 the -directors may discuss them in advance of the 
 meeting. 
 
 The facts of the case are as follows: The first 
 year after building the factory and installing the 
 present management, our total sales amounted to 
 $350,000; costs: factory, $260,000; sales department, 
 $105,000; net loss, $15,000. The second year the 
 sales were $700,000; factory cost, $456,000; selling 
 cost, $175,000; net gain, $69,000. The business the 
 first three months of this year indicates that the 
 results of the whole year's business will be about the 
 same as those of the past year unless sales decrease. 
 That they will decrease is practically certain. An- 
 other concern is going to make the same goods and 
 we will no longer have a monopoly. It can make 
 the goods at about the same factory cost as ours, 
 and it will have an advantage over us in cost of 
 selling, which advantage we estimate at about ten 
 per cent of the gross price, due to the fact that it 
 will handle the goods as a side Hne through its several 
 branch offices and will utiKze the newspaper space it 
 has already bought for its other lines. A few extra 
 leaves in its quarterly bulletin will soon inform all 
 our customers that it is competing with us. 
 
THE doctor's preliminary REPORT 57 
 
 Unless the demand for these goods can be increased, 
 this competition will probably cut our business down 
 one-half, and the result will be- to reduce our profits 
 to nothing, even if present prices are maintained. 
 If the prices are cut ten per cent, and selling expenses 
 are as high as they now are, our business will show a 
 loss. 
 
 The following suggestions have been made by some 
 of the directors merely for the purpose of discussion, 
 and we give them to you that you may think them 
 over and give us your views on them: 
 
 1. Discourage the rival by cutting below his prices. 
 
 2. Consolidate with him. 
 
 3. Offer to buy his patterns and have him agree 
 to keep out from our lines. 
 
 4. Extend the market by more advertising and by 
 the employment of more agents and salesmen. 
 
 5. Try to get a foreign market. 
 
 6. Cheapen the cost of manufacture; especially 
 reduce the overhead charges of the factory. 
 
 7. Keep on as we are, expecting that our reputation 
 will bring us the bulk of the trade. 
 
 8. Find some other thing to manufacture. 
 
 9. Reduce the fixed charges of the sales depart- 
 ment; this involves our dispensing with at least one 
 of our high-priced salesmen and appropriating less 
 money to advertising. 
 
 Please put m writing your views as to each of the 
 above suggestions, and if you have any suggestions 
 of your own to make we would like to have them in 
 advance of the meeting so that we may have time for 
 their consideration. 
 
 If you favor suggestion No. 8, that is, finding some 
 
58 INVESTIGATING AN INDUSTRY 
 
 other thing to manufacture, in addition to our present 
 product, please state what thing or things you would 
 advise us to make, and give any figures you may 
 have concerning the extent of the demand, the selHng 
 prices, discounts, costs of selhng, and methods you 
 would propose for handhng them. 
 
 Please acknowledge receipt by wire, stating when 
 you will start for home. 
 
 The letter was at once approved and ordered to 
 be typewritten and sent to each of the three salesmen. 
 The doctor then said: ''I have a lot of suggestions 
 of my own as to what had best be done to prepare for 
 the expected competition, but I prefer to withhold 
 them until I have met your salesmen and get ac- 
 quainted with them. In the meantime I have a 
 few other matters to discuss. I have been looking 
 over the figures of last year's business, and here 
 is what I find: > 
 
 Factory cost, labor and material 83 .4 
 
 Factory expense 16.6 100 . 
 
 Selling expense, per cent of factory cost 38.4 
 
 Selling expense, per cent of selling price 25.0 
 
 '' The factory expense, 16.6 per cent, is apparently 
 very low, but it is partly due to the fact that the 
 wages of the functional foremen and of all the fac- 
 tory clerks are included in the labor cost, and are 
 not charged to ''unproductive labor," as is the 
 custom with some accountants. I do not think that 
 
59 
 
 the total annual cost of either the so-called unpro- 
 ductive labor or of the factory expense is exces- 
 sive for so large a factory or for one doing such a 
 large variety of work, except that some saving might 
 be made in the cost of fuel if a more economical 
 engine were installed, and that the high-priced chief 
 draftsman is not turning out work of value pro- 
 portioned to his pay. 
 
 "The chief trouble with the factory is that it has 
 not enough work to do to utiKze to the fullest extent 
 either its space, its machinery, or the time of the 
 manager, the foremen and the chief clerk, all high- 
 priced men. The machinery may be working with 
 very high efficiency while it is running, but its average 
 load factor is only 44 per cent, and the average load 
 factor of the capital invested in it, including the 
 space it occupies and its share of the general expense, 
 making the 'machine-hour' cost, is only 32 per 
 cent, on account of the fact that it is the largest 
 and most expensive machines that have generally 
 the lowest load factor, while some of the smaller 
 machines are running from 70 to 95 per cent of the 
 time^ If a few more small machines were installed 
 in the vacant space that is waiting for them, the 
 product of the factory might be doubled provided, 
 of course, that the increased product could be market- 
 ed. This trouble would cure itself in a short time 
 if business conditions remained normal, with a steadily 
 
60 INVESTIGATING AN INDUSTRY 
 
 increasing demand for the product, but with the new 
 conditions of severe competition it is likely to become 
 more serious. 
 
 "The cost of selling is not high in comparison 
 with the cost in some other Knes of manufacture 
 under modern methods of doing business with ex- 
 pensive branch offices, whole-page and double-page 
 advertising, extravagant salaries and commissions 
 to agents, and the like, which bring the cost of selHng 
 often up to from two to four times the manufacturing 
 cost, but it is high enough to suggest the possibihty 
 that it can be considerably reduced. In other lines 
 of business the ratio of selKng cost to manufacturing 
 cost varies through an exceedingly wide range. For 
 example, I visited a factory in New England recently 
 and got the price of a special machine used in some 
 textile mills. I was surprised at what seemed to be 
 a remarkably low price, and asked what it cost to 
 sell them. 'Practically nothing,' was the reply. 
 'Every one that has a need for our machines knows 
 exactly what they are, and also the fixed price, and 
 if he wants any of them he sends us an order; so we 
 do neither soliciting nor advertising.' That is the 
 old way of doing business. If a man wanted a wagon, 
 he went to the wagon maker and bargained for it. 
 Now if he wants an automobile, he sees the flashy 
 advertisements of a dozen of them, writes for the 
 handsome catalogs, is called on by a dozen agents, 
 
THE doctor's preliminary REPORT 61 
 
 representing as many expensive offices on Broadway, 
 is treated to 'demonstrations' by all of them, and 
 finally buys one, paying in the purchase price not 
 only the factory cost plus a reasonable profit on it, 
 but also the cost of competition, which is the 'Hfe 
 of trade,' and which may be equal to or more than 
 the factory cost. This condition of business is all 
 right so long as the extraordinary demand keeps up, 
 but it will end in disaster to many of the makers 
 just as soon as the capacity of the factories is in- 
 creased to such a point that it is greater than the 
 demand. Then will come the struggle for the sur- 
 vival of the fittest, and the final survivors will be 
 only those who combine a high reputation with 
 facihties for manufacturing at the lowest cost and 
 ample capital to sustain the struggle until the weak 
 competitors are driven to the wall and costs of selling 
 are reduced to a reasonable figure. The history of 
 the sewing-machine business and of the bicycle 
 business will be repeated. There was a time when 
 the price of a sewing machine was $60, which was 
 made up of factory cost $10, cost of selHng $30, 
 prg:fit $20. When the price came down suddenly to 
 $30, the factory cost was still $10, and selling cost 
 and profits were reduced each to the same figure. 
 The price of a good bicycle was held for several 
 years at $ioo, of which $15 was factory cost, $65 
 cost of selling, including special discounts and allow- 
 
62 INVESTIGATING AN INDUSTRY 
 
 ances made for old machines; profit $20. The price 
 suddenly broke to $50, then to $40 and $30, and 
 three-quarters of the makers either went into bank- 
 ruptcy, or else raised more capital and went into the 
 automobile business. 
 
 ''Your business is in no immediate danger on 
 account either of poor factory facihties, high cost of 
 selling, or lack of capital to carry you through a 
 business depression, but if you are driven to extending 
 your busmess into other lines in order to get work 
 to keep the factory busy, it is of the greatest impor- 
 tance that you select the right thing to manufacture, 
 that you have facilities for making it at least as 
 cheaply as your strongest probable competitor, that it 
 is an article in large and regular demand, not subject 
 to changes in fasliion, and that your making it will 
 not tie up }'Our capital in such a way that you have 
 no resources in case of a struggle or financial depres- 
 sion. Your available working capital is not large 
 enough to warrant your embarking in any speculative 
 venture, no matter what may be its promises of 
 large profits, and in the present financial temper of 
 the country it is going to be very difiicult to raise 
 additional capital by selling new stock of a manu- 
 facturing company. 
 
 " I hope to get from our three salesmen some good 
 suggestions as to what other fine of manufacture to 
 engage in, but if they have nothing attractive to 
 
THE doctor's preliminary REPORT 63 
 
 offer, then we must start a systematic investigation 
 to find something. 
 
 "Your manager has asked me to give you my views 
 as to the probable effect of the threatened reduction 
 of the tariff. Frankly, I do not know what the 
 effect will be, and I think that no one else knows; 
 least of all the leaders of the majority in Congress. 
 The new tariff bill, if it passes in its present shape, 
 is a leap in the dark.^ It is opposed to the first law 
 of prudence, 4ook before you leap.' It appears to 
 be based purely on poHtics and on guesswork, and 
 not on any kind of scientific investigation. 
 
 "Here is what Hon. Wm. C. Redfield, now 
 Secretary of Commerce, wrote a year ago in his 
 'New Industrial Day,' concerning sudden changes 
 in business: 
 
 Any radical change in factory management must be 
 a gradual evolution out of that which has preceded 
 it. The present system, or lack of systems, with 
 their good or bad points, are themselves the result of 
 long evolution. No drastic or radical change in them 
 can be suddenly or even rapidly made without causing 
 disturbance. 
 
 "This same Mr. Redfield is now urging a drastic 
 
 1 This statement was printed in Industrial Engineering in 
 June, 19 1 3. The tariff bill has since been passed. The leap 
 in the dark has been taken, but at the present date, Dec. i, 
 19 13, no one knows what the result will be. 
 
64 INVESTIGATING AN INDUSTRY 
 
 and radical change, the reduction of the tariff, and he 
 insists that wages shall not be reduced, under penalty 
 of an investigation by his department. He wants 
 efficiency to be introduced not by gradual evolution 
 but immediately. He said in a recent speech (see 
 New York Times, May 15, 1913): 
 
 Operating with bad equipment, with unscientific 
 treatment of material, with antiquated methods, in 
 poor locations, with insufficient capital and generally 
 ineffective management, will not be esteemed a satis- 
 factory reason for reducing wages. . . . The stern 
 demand for efficiency as a duty which our industries 
 owe to the pubKc — these are all parts of the awakened 
 American manhood. ... I believe that a day of 
 freedom has just begun and that we are shaking off 
 the shackles of a real industrial slavery to enter upon 
 the arena of free competition, strong, athletic and 
 vigorous, in which our business will be stronger and 
 safer and in which we shall be happier than ever before. 
 
 "Here is eloquence indeed, the American eagle 
 screams, but neither eloquence nor investigations by 
 the Department of Commerce will avail to prevent 
 the reduction of wages if that is necessary to insure 
 that the workmen in our factories are not to be 
 thrown out of employment on account of their work 
 being given to workmen in foreign countries. If 
 the new tariff is low enough to enlarge greatly the 
 importation of goods that are now manufactured 
 here it means idleness for many of our workmen 
 
THE doctor's preliminary REPORT 65 
 
 until other work can be found for them, until they 
 emigrate to find work in foreign factories, or until 
 they accept wages sufficiently low here to enable 
 the goods again to be manufactured in this country. 
 ''Another writer (George F. Brett, in the Outlook, 
 May 17, 1913) says: 
 
 The effect of the reduction of the tariff, as, at any 
 rate, one business man sees it, will be first of all some 
 reduction in the cost of hving brought about by the 
 competition of the foreign producer— and this re- 
 duction of prices will not, in my opinion, reduce the 
 wages of factory workers at all, but by bringing about 
 economies in management, by reducing lavish and 
 unnecessary expenditures for exploitation, prove a 
 blessing to the manufacturers themselves. 
 
 "The 'high cost of living' has been the chief 
 excuse during the past ten or fifteen years for the 
 increase of wages, which have been steadily advancing 
 since 1898, not even being reduced during the de- 
 pression of 1907. If high cost of living sent wages 
 up, why should not a reduced cost of living bring 
 them_ down? 
 
 "^ far as your own business is concerned, I do 
 not think that the tariff will be reduced on your 
 products to below the protective point, or so low 
 as either to encourage some foreign manufacturer 
 to engage in the manufacture of your line of machin- 
 ery, or to make it profitable for you to abandon 
 
66 TMVKSTTOATTNO AN INDUSTRY 
 
 AOiir factory here aiul luivo your goods iiKulc abroad; 
 but what 1 do icAV is that the doniaud tor yoiu* 
 machines in this country will bo reduced, the tactories 
 that bu\ them from ) on not being likel)' to in\est 
 in new machinery when their prolits are tending 
 towards the vanishing point. 
 
 "Hoth on account of the threatened competition 
 (rom }our ri\al and on account of the threatened 
 reduction oi the tariff and its uncertain effects, we 
 must jM'cpare oursehes for the worst. I am going 
 to suggest certain changes in the management of 
 tlie sales department after we have had a conference 
 with the salesmen, but whatever we do in that 
 matter we must not act rashl)-. 1 ijuote the following 
 from the report of the committee on 'The Present 
 Status of Industrial Management' presented at the 
 iQ\2 annual meeting oi the American Societ)' of 
 Mechanical laigineers, and what is said about 
 management in a plant applies with equal force to 
 management outside of a plant, that is, in the sales 
 tlepartment : 
 
 The introduction of scientit'ic modern management 
 in a plant must be made slowl>-. The causes of most 
 so-called failures are principally two: a failure of 
 the executives to acquire the ^•ital mental attitude, 
 and too great haste in application. The latter seems 
 to be the dominant one. The conuuittee feels com- 
 pelled to emphasize the danger of attempting to 
 hurry any change in the management. 
 
TITTC doctor's I'RIOIJIVUNA R Y RKI'ORT ()7 
 
 ''I may say, however, withoiil. waiting for the 
 conference, that the change; I have in mind is that of 
 reh'eving the general manager from ;i.ll duties con- 
 nected with the sales department, (;xc(;j)t tfiat of 
 having a say in regard to whelhcr or not n(;w lines 
 of manufacture shall be undertaken. Of course, I 
 would not wish to make this change witliout his full 
 consent and approval, and I have not yet j)l;inn(:d 
 out the details. When I have I shall have a, talk 
 with him about it." 
 
 Considerable discussion followed the doctor's long 
 talk, but no fault was found with his views, and it 
 was agreed that no further confc^rence need be held 
 until after the salesmen had arrived. 
 
CHAPTER VI 
 The Salesmen's Conference 
 
 The conference of the directors with the three 
 salesrnen was held on the appointed day. Each had 
 previously sent a letter expressing his views. The 
 first was a long one from Mr. Brown, who had for 
 two years been covering western territory. It may 
 be condensed to the following: His first year's 
 work had been chiefly educational, bringing his 
 goods to the attention of prospective buyers and 
 placing some machines on trial for demonstration 
 purposes and to obtain records of performance. In 
 the second year business had been very good, and, 
 barring competition, he thought there would be 
 three or four years more of good business getting 
 the machines placed in nearly all the factories that 
 needed them. After that he expected that business 
 would fall off, on account of the factories being all 
 supplied, and additional sales would only be made 
 corresponding to the rate of growth of these factories 
 and to the building of new ones. In regard to the 
 expected competition, he said that if the rival house 
 put on the market a line of machines of equal quality 
 and prosecuted an active selling campaign, the 
 
 68 
 
THE salesmen's CONFERENCE 69 
 
 total yearly sales for the two houses together might 
 be 1 20 per cent of the present yearly rate, of which 
 he would expect that we should sell two-thirds, on 
 account of the good reputation the machines had 
 already made, leaving one-third to the rival house. 
 Two- thirds of 120 is 80 per cent; that is, the present 
 yearly sales would be cut down 20 per cent, with no 
 decrease in the total annual cost in the selling depart- 
 ment for salaries, traveling expenses and advertising. 
 
 ''Price-cutting," he said, "would be suicidal. 
 Purchasers are quite willing to pay the present 
 prices, which are not high, considering the quality 
 of the goods, provided they know that every other 
 purchaser has to pay the same price; but if price- 
 cutting is once started, there is no knowing where it 
 will stop, and customers will delay buying until 
 prices have touched bottom. By that time profits 
 will have vanished, and the best thing that could 
 be done then would be to liquidate the business, 
 selling the factory and stock in trade, including 
 good will, to your rival, who could afford to pay a 
 better price for them than anyone else could. 
 
 "The chief trouble with your western business 
 is the high cost of selling. Customers are far apart, 
 trav^eling expenses are high, and the amount of 
 sales that can be made per thousand miles of traveling 
 and per thousand dollars of other expenses is limited. 
 I could sell five times the amount of goods in this 
 
70 INVESTIGATING AN INDUSTRY 
 
 territory with no more effort than I now make, if 
 I had a great enough variety of goods to sell. 
 
 ^'My proposition in regard to the western country 
 is this: Cut down your expenses of selHng by 
 giving me the exclusive agency for all our products 
 west of the Mississippi River. Figure the percentage 
 that last year's selling cost in this territory, including 
 special discounts to dealers, salary, commissions, 
 traveling expenses, circulars, correspondence and 
 postage (but not including newspaper advertising), 
 bears to the Hst price less regular pubHshed discounts, 
 and bill the goods to me at a discount equal to two- 
 thirds of that percentage. That is, on a lot of 
 goods billed at $ioo (list less regular discount), if 
 the selling cost last year was $60, leaving $40 to the 
 factory, this year they will be billed to me at 40 per 
 cent discount, leaving $60 to the factory. I can 
 afford to do this because I intend to handle other 
 goods besides yours, which will not compete with 
 yours, of course, and. also because I shall watch 
 every item of selHng expense, and especially the 
 item of special discounts to jobbers and other dealers, 
 which is now, I beheve, extravagantly large. If my 
 proposition is favorably considered, I can go into 
 details concerning it at the conference." 
 
 The second salesman, Mr. Smith, whose territory 
 was the central part of the country, west of Buffalo 
 and east of St. Louis, and from the Canada border 
 
THE salesmen's CONFERENCE 71 
 
 to the Gulf of Mexico, wrote a very different kind of 
 letter. He said: 
 
 "The entrance of competition in our field will 
 bring about a situation like that of two gas com- 
 panies occupying the same streets with their pipes, or 
 two parallel railroads, each of which has facilities for 
 handling all the traffic. There will be two factories, 
 two selling organizations, a duplication of traveling 
 expenses, advertising and the like, to do an amount 
 of business that is scarcely large enough for a single 
 concern. It is an economic waste, a waste of cap- 
 ital and of human energy. It leads to the struggle 
 of the survival of the fittest, which impoverishes 
 both parties, and finally destroys one of them. Now 
 my human nature urges me to fight. I enjoy the 
 heat of the struggle more than I do the fruits of 
 victory, and if the directors decide on fighting and 
 proving that our concern is the fittest to survive, 
 count on me till the last stroke of the battle. But 
 I recognize the fact that the directors are trustees 
 for the stockholders and that they must not make 
 the decision with reference to any one's personal 
 feelings, but entirely with reference to the preserva- 
 tion of the stockholders' capital and the earning of 
 dividends. We must not go into battle unless we 
 know that we are stronger than the enemy and that 
 we are sure to win before our capital is exhausted. 
 
 ''Now, from what I can learn, the enemy is stronger 
 
72 INVESTIGATING AN INDUSTRY 
 
 than we are. We have a better and more modern 
 factory, and better management inside of the factory, 
 but he can modernize his factory and improve his 
 management as soon as he makes up his mind to 
 it; he has more reserve capital than we have, and 
 less expensive selling methods in proportion to the 
 extent of his business, which is two or three times as 
 great as ours. When he builds machinery like ours, 
 it is a matter of little consequence to him whether 
 he sells twenty or forty or sixty per cent of the total 
 demand, but it is a matter of Kfe and death to us. 
 We have followed Carnegie's motto, 'put all your 
 eggs in one basket and watch that basket,' ^ and that 
 is our weakness; we may not be able to keep all the 
 eggs from being broken; while our rival has followed 
 the opposite motto, 'have more than one string to 
 your bow,' and in that lies his strength. If one 
 branch of his business fails, he has others to fall back 
 upon. 
 
 ''Now, my advice is: stop this competition. Go 
 
 1 Mr. Carnegie did not follow his own motto. He became a 
 partner in the Union Iron Works, making iron bar and structural 
 shapes, and a stockholder in the Keystone Bridge Works; then 
 he, with his partners, built the Edgar Thomson Bessemer Steel 
 Works; then he built blast furnaces; bought the Homestead 
 W^orks and made it an open-hearth steel works; bought the 
 Frick Coke Works; made armor plate; built the Bessemer rail- 
 road to Lake Erie; made an ore deal and a steamship freighting 
 deal, and threatened to build a tube works on Lake Erie, and 
 would have built it if he had not been bought out by the U. S. 
 Steel Corporation. — Ed. 
 
73 
 
 to your rival and ask him to compare notes with you. 
 Put all your cards on the table, face up, and ask him 
 to do the same. Show him that if he really intends to 
 make and sell your machines, you can build your 
 machines more cheaply than he can his; that if he 
 will give you his patterns you can contract to build 
 his machines for him more cheaply than he can build 
 them himself, because you have a better factory for 
 the purpose, better machinery, and scientific manage- 
 ment, which he has not; that if he has a more ex- 
 tensive selHng organization and lower selling costs on 
 account of the greater magnitude of his business, you 
 can make your selHng costs still smaller by discharg- 
 ing your salesmen and getting rid of their expensive 
 methods of getting trade, advertising and sending 
 circulars to your prospective customers naming prices 
 which he cannot meet without loss. He will no 
 doubt tell you, if he is the average business man, that 
 he knows his own business, or at least he thinks he 
 does, and that he intends to proceed in the course 
 he has laid out, until he has tried it out for a year 
 or two, and that he does not care to enter into any 
 negotiations with you at present. Tell him you 
 are in no hurry, that he can think the matter over 
 for a week or two, and that then he may possibly 
 have some proposition to make to you, or you may 
 have one to make to him. 
 
 "In the meantime, prepare yourself for his final 
 
74 INVESTIGATING AN INDUSTRY 
 
 refusal to negotiate in any way. Find what products 
 he is making that are staples of large and universal 
 demand and in which there is an open market, not 
 controlled by a trust or 'gentlemen's agreement,' 
 and in which the entrance of one new producer will 
 not tend to a general cutting of prices. Such a 
 product is what is needed for your factory to keep 
 it running full time in case the demand for your 
 regular Hne is divided by competition. Then, if 
 he insists on competing with you in your special Hne, 
 you can compete with him in his staple line. 
 
 ''If, however, he is amenable to reason, he will 
 see that it is a foolish waste of resources for two 
 factories to be making similar products of Hmited 
 demand when one factory could make them much 
 more cheaply, and for two selling organizations to 
 be competing when one is easily able to do all the 
 business. He may be ready to make you a proposi- 
 tion to give you all the manufacturing of his machines 
 and for him to do the selling of your machines in 
 addition to his own, he taking over your salesmen, 
 who are acquainted with the trade, into his organiza- 
 tion. Your lawyers will be able to tell you whether 
 such an arrangement is a 'combination in restraint 
 of trade,' in violation of the Sherman Act. I do 
 not think it is. But if it is, there are no doubt plenty 
 of other ways, and legal ways, by which the economic 
 waste due to two factories doing the work of one 
 
THE salesmen's CONFERENCE 75 
 
 may be avoided. If the competition cannot be 
 avoided, ruin stares you in the face, and probably 
 the best thing then to be done is to sell the factory 
 and retire from business. The next best thing is 
 to find some other products to make. I cannot 
 suggest what to make at present, but I may possibly 
 think of some before the meeting." 
 
 The third salesman, Mr. Robinson, who had charge 
 of the eastern district, wrote to the effect that he 
 did not consider the situation at all serious. ''If 
 competition cuts the sale of our present line in half," 
 said he, ''let us get another line. There are plenty 
 of other things to be made in the world besides our 
 machines, and all we have to do is to hustle around 
 and find something which we can make with our 
 factory equipment and for which there is a large 
 and steady demand, and go ahead and make it. 
 For example, let us consider the making of small 
 gasoline engines of i to 6 horsepower, for motor 
 boats, pumps and farm purposes. There are perhaps 
 hundreds of concerns making them, but not over a 
 dozen making them at the same time of high quality 
 and low factory cost. Let us make a systematic 
 investigation of the smaller factories that are making 
 good engines but at a high cost, and of the factories 
 large and small that are making poor engines at all 
 kinds of costs, and see if we can find a set of patterns 
 and models that can be adopted as standard for a 
 
76 INVESTIGATING AN INDUSTRY 
 
 first-class engine. Let us standardize the bedplates, 
 cylinders, pistons, connecting rods, crank shafts and 
 all the minor details, and prepare to make every 
 part exactly right. Then we can offer to these 
 factories either complete engines or any part of an 
 engine. For some of them we can make and sell 
 them a whole engine at a lower cost than they can 
 make it themselves; for others we can make cylin- 
 ders or bedplates or pistons or small parts more 
 cheaply than they can make them, and they can do 
 the assembhng, adjusting, testing and selhng. We 
 need not attempt to sell the engines at retail; let 
 the present makers do the selling while we do the 
 manufacturing of engines and parts of engines. 
 
 ''I suggest only as an example the making of gaso- 
 line engines for other people to sell. There may be 
 a hundred other things that we can make which offer 
 an equal or better opportunity. I have another 
 suggestion as an alternative. Let each of our sales- 
 men when he visits a town to sell our present Hne 
 visit the manufacturers of metal goods in that town, 
 and find what part of their product they would rather 
 place contracts for outside than to make it them- 
 selves if they could find a contractor who would 
 make it for them at a low enough price. Few of 
 such manufacturers now make their own bolts and 
 nuts or taps and dies, or small gears; they can buy 
 them more cheaply than they can make them. They 
 
THE salesmen's CONFERENCE 77 
 
 would gladly buy shafts turned and ground to size, 
 and many other things if they were offered sufhcient 
 inducements. Let our salesmen get a list of such 
 things, their present cost, and the probable demand, 
 and then we can select such of them as seem to be 
 the most suitable for us and the most profitable, and 
 prepare to make them. We might also advertise 
 ourselves as being a general manufacturing shop for 
 light- and medium-weight metal products, giving a 
 list of our machine tools with their capacity, and let 
 it be known that we have the best facilities not only 
 for manufacturing in large quantity and at low cost, 
 but also for designing, drafting, model- and pattern- 
 making, testing, and in general assisting in develop- 
 ing new machines for inventors and others. I believe 
 there is a lot of this kind of work lying around waiting 
 for us to go and hunt for it." 
 
 Previous to the meeting the directors and the 
 doctor had read and discussed the salesmen's letters, 
 and each salesman as soon as he arrived was given 
 the letters of the other two to read, so that at the 
 conference he would be prepared to take part in the 
 discussion of all the proposals that had been made. 
 The doctor took the floor. "We have all been going 
 on the assumption," said he, ''that this competition 
 is going to be exceedingly severe, cutting the amount 
 of our sales in half and cutting prices to a point that 
 will leave us no profit, but we have not made sure of 
 
78 INVESTIGATING AN INDUSTRY 
 
 the facts. I therefore came to the conclusion before 
 Mr. Smith's letter arrived to call on our prospective 
 competitor and learn from him if possible just how 
 strong his competition is going to be. Mr. Smith's 
 letter gave me the idea to sound him at the same time 
 as to his views on some kind of an arrangement by 
 which we might build his machines as well as our 
 own, while he would do all the selling. I found the 
 president of the company a most agreeable and 
 genial gentleman, and he was quite willing, as Mr. 
 Smith suggested, to lay all his cards on the table, face 
 upwards. He showed me, in the first place, that his 
 competition was not going to be nearly as severe as 
 we had feared. It was always his poHcy, he said, 
 to have 'more than one string to his bow,' to make 
 in his factory a variety of different products, so that 
 when trade was dull in any one line he could put his 
 machinery and his men on another line for which 
 there was a more active demand. He was always on 
 the lookout for some new product to make, one on 
 which the experimental and development work had 
 already been done, which had already found some- 
 thing of a market, and on which the margin between 
 factory cost and selling price was large. He left to 
 others the expensive work and the risk of developing 
 new inventions and of educating the public to be- 
 Keve in them. What he wanted was to keep his 
 factory running full on products for which there 
 
THE salesmen's CONFERENCE 79 
 
 was a large and steady market, keeping prices fairly 
 low so as to hold his trade. By this means the fixed 
 charges of both the factory and the selling depart- 
 ment were kept low in proportion to the amount of 
 business done. When his rivals began cutting prices 
 on any article, he met them down to a certain point, 
 and then he stopped manufacturing that article, 
 letting the rivals have the trade, while he put his 
 factory on more profitable work. He is an old- 
 fashioned sort of man and has a stock of old-fashioned 
 maxims by which he runs his business, such as ' Quick 
 sales and small profits'; 'Live and let live'; 'Don't 
 be a hog; give the other man a chance'; 'Don't do 
 more business than your capital warrants'; 'A quick 
 turnover saves capital'; 'Hoe your own row'; 'No 
 entangling alHances.' He is entirely opposed to 
 monopoly and to business consoHdations of every 
 kind. He says that Mr. Smith's proposed agreement 
 is a proposal to maintain high prices by means of 
 a single selling organization, that it means monopoly 
 and nothing else, and is opposed not only to the letter 
 of the Sherman Act, but to its interpretation by the 
 'rule of reason' by the Supreme Court. The pubHc, 
 he says, is entitled to a share in the savings that 
 accrue to a factory by reason of its increasing volume 
 of business, for it is the pubHc that makes that in- 
 crease of volume. The public also, he says, is 
 entitled to the chance of getting the lower prices 
 
80 INVESTIGATING AN INDUSTRY 
 
 which are due to competition, and any combination 
 in restraint of trade, by which the pubKc is restrained 
 of its opportunity to get lower prices, is of the same 
 nature in morals as any other kind of 'hold-up game.' 
 It is only a question of time when either all such 
 combinations will be dissolved by the courts, or else 
 the public, through its power of constitution-making 
 as well as law-making, will have an interstate business 
 commission which will have the same control over 
 prices as the Interstate Commerce Commission now 
 has over freight rates. 
 
 '''Now,' says our gentlemanly rival, 'I prepared 
 to make your kind of machines for the same reason 
 that I might have prepared to make any other kind 
 of machines for which my factory is adapted. I saw 
 there was money in them, that you were charging a 
 very high price as compared with the cost of labor 
 and material that went into them, that you were 
 handicapped by heavy selling expenses and by heavy 
 fixed charges in your factory, which was running at 
 only half its capacity on account of your making 
 only a single line of goods. The only advantage 
 you had over me was lower labor cost, on account 
 of your improved machinery and scientific manage- 
 ment in your factory. To offset this I have the 
 advantages of low relative fixed charges in the factory, 
 on account of running the factory full on different 
 lines, and what I may call scientific management in 
 
THE salesmen's CONFERENCE 81 
 
 the selling department, by which every dollar spent 
 in that department is watched to see that it produces 
 a proper return. Suppose I had not undertaken to 
 make these machines. It was only a question of 
 time when some one else would make them. High 
 prices and large margins for profits always invite 
 competition ; and if we did combine it would not be 
 long until another competitor arose. 
 
 You need not be alarmed about my competing 
 with you on these machines. I don't expect to cut 
 your prices the first year more than about ten per 
 cent, and I don't expect that the business I shall do 
 will be a quarter of yours. You can easily recoup 
 yourselves and retaliate on my concern by making 
 and selHng some of our specialties. You are free to 
 make any of them except those that are protected by 
 patents. There is no need of our being enemies be- 
 cause we are rivals in business. When my factory 
 is so full of work that we have to buy some parts of 
 our product outside I shall be glad to contract with 
 you for any of these parts that you can make at a 
 reasonable price.'" 
 
CHAPTER VII 
 The Doctor's Opinions and Recommendations 
 
 The doctor concluded his recital of his conversa- 
 tion with the competitor, and said ''There is no use 
 of considering further any plan for stopping competi- 
 tion. We have to meet the facts that our volume of 
 sales is going to be diminished and that prices are 
 going to be reduced. 
 
 "I have been talking with our general manager 
 and find he is perfectly willing to be relieved of all 
 responsibility connected with the selling organization. 
 He recommends that a sales manager be appointed, 
 and that both he and the sales manager be made 
 directors of the company so as to bring them in 
 more complete co-operation than if each of them 
 was merely a servant of the board. Questions of 
 general poHcy both as to manufacturing and selling 
 should be discussed and decided in the meetings of 
 the board, but the factory manager and the sales 
 manager should each be supreme in his own depart- 
 ment in regard to details. I fully approve of this 
 plan. 
 
 "I am also entirely in accord with Mr. Robinson's 
 suggestion of a systematic investigation to discover 
 
 82 
 
THE doctor's opinions 83 
 
 what other lines of manufacture we had best engage 
 in, and also that we advertise for business as a general 
 jobbing shop. 
 
 "I think Mr. Smith is too pessimistic in regard to 
 the effects of competition. He writes: ' Two factories, 
 two selling organizations, a duplication of traveling 
 expenses, advertising and the like, to do an amount 
 of business that is scarcely large enough for a single 
 concern — economic waste — survival of the fittest.' 
 The fallacy in his argument lies in the words 'business 
 that is scarcely large enough for a single concern.' 
 The amount of business that we can do is not limited 
 by the total demand for our special machines, for 
 we can make other lines; it is not limited by the 
 capacity of our factory, for we can get a large part of 
 our work done by contract outside, or if we have 
 surplus cash capital available we can enlarge our 
 factory; it is limited only by our efficiency as sales- 
 men, by our ability to find things that the world 
 wants made and that we can make, and by the capital 
 we have, or can get, with which to enlarge our busi- 
 ness. As to the survival of the fittest, our factory 
 is the fittest ; it will survive even if the company that 
 owns it goes into bankruptcy. The machines that we 
 make are the fittest; they wall survive, even if we 
 cease to make them, for they will be made by others. 
 Our weak points have been inertia, or our failure to 
 get enough things to make to keep the factory full 
 
84 INVESTIGATING AN INDUSTRY 
 
 of work, and our failure to find cheaper ways of 
 marketing our goods. Both of these failures are going 
 to be remedied, the first by Mr. Robinson's plan of 
 getting other work to do, and the second by a change 
 in our selling methods, which includes the acceptance 
 of Mr. Brown's proposal, if we can agree on details, 
 to be our exclusive western agent, and the appoint- 
 ment of a new sales manager. I have investigated 
 Mr. Robinson's past career, as well as the work he 
 has done for this concern, and have obtained his 
 views as to the work of a sales manager, and as 
 the result I shall have the pleasure later, when we 
 come to formal business, of nominating him for the 
 position." 
 
 Mr. Robinson was then asked to give his views, 
 and after thanking the doctor for his kind words, 
 said: 
 
 "There are two things that I wish to speak of in 
 connection with the future of our business. The first 
 is the necessity of conserving our capital so as to be 
 able to meet the shock of hard times, of which there 
 are some symptoms in sight. While we must extend 
 our business into other lines, in order to get enough 
 work to keep the factory running, we must not run 
 into any speculative ventures that will tie up our 
 capital. We must not spend any large sum on new 
 patterns or special tools, or invest largely in the 
 manufacture of goods for which we have not orders 
 
THE doctor's opinions 85 
 
 in advance. I would make it a condition of our 
 manufacturing any new line that it does not involve 
 the use of any more of our capital than we feel per- 
 fectly able to afford. We must not rely on banks to 
 help us out of difficulties if hard times come. I have 
 in mind the failure of a firm with a half million of 
 capital, while doing a very profitable business. Its 
 assets were: Real estate and construction, $600,000; 
 stock in trade, bills and accounts receivable, $1,000,- 
 000; bonds, bills and accounts payable, $1,200,000. 
 Capital stock paid in, $500,000; debtor balance of 
 profit and loss account, $100,000. The assets were 
 $400,000 more than the liabilities, but while $500,000 
 cash capital had been paid in, $600,000 had been 
 spent in land, buildings and machinery, making the 
 working capital minus $100,000, which had been 
 further decreased by the losses of getting a new busi- 
 ness fairly started. It was at length doing a fine 
 business at a good profit, being carried along by its 
 bondholders, bankers and other creditors. When 
 hard times came the banks contracted its line of 
 credit, and it had to fail. It is a dangerous thing to 
 have^ a widely expanded business with no available 
 reserve capital when a depression is approaching. 
 
 "The second idea I have is that we must prepare 
 ourselves for great changes in methods of doing 
 mercantile business. Thirty years ago an iron works 
 owned one or two blast furnaces; it bought ore, coke 
 
86 INVESTIGATING AN INDUSTRY 
 
 and limestone from three different concerns; it made 
 pig iron and sold it to a rolling mill, the mill puddled 
 the iron and made it into muck bar, which it sold 
 to another mill that made it into nails, which went 
 through wholesaler, jobber and retailer to the final 
 consumer. Here are nine different selling transactions 
 between the material in the ground and the final 
 purchaser of a pound of nails. The day is near at 
 hand,, if it is not already here, when nails will be 
 bought in a hardware department store which is 
 owned by an iron and steel company that mines its 
 own ore, coal and limestone, makes its own pig 
 iron and carries it through all its transformations 
 until it is made into nails. On the other hand, we 
 have department stores that own factories and that 
 contract for the whole output of other factories. 
 Again we have mail-order concerns, like Sears, Roe- 
 buck ^^ Co., that sell the product of hundreds of 
 factories, and may, before long, own a large number 
 of them. Some day a department store or a mail- 
 order concern or some other kind of selHng organiza- 
 tion may come along and want to contract with us 
 to take our whole output, or ask us to act as general 
 manufacturers, making different things to their 
 order. We may find that it will pay us well to 
 divorce our factory from the selling organization 
 entirely, and to sell our output to a new company, 
 in which we may or may not be stockholders, which 
 
THE doctor's opinions 87 
 
 will guarantee to keep the factory full of orders and 
 furnish it enough capital to pay its material and labor 
 so that it will be relieved of the burden of financing. 
 We may find it advisable to organize a Machinery 
 Selling Co. ourselves, with our own and with outside 
 capital, to become the general sales agency of several 
 machinery concerns that are making different Knes, 
 and are, therefore, not in competition. This is not 
 a combination in restraint of trade, but it is a com- 
 bination for efficiency, making great savings in the 
 cost of selling, and resulting finally in the reduction 
 of prices to the consumer while giving a fair profit 
 to the manufacturer. Understand, I am not propos- 
 ing to organize any such concern at present. I am 
 only mentioning it as one of several methods of re- 
 ducing the cost of selling." 
 
 One of the directors then addressed the meeting 
 and said: ''There is one thing in the doctor's 
 method of diagnosing and prescribing for the diseases 
 of an industry that I am especially pleased with; 
 it is that he does not go off at half-cock and express 
 an opinion before he has carefully studied the facts, 
 and that when he wants an opinion from others he 
 writes out the questions and gives sufficient time for 
 them to be studied and the answer put in writing. 
 Following his example I have written out a question 
 as follows: 'What is your present opinion (subject 
 to revision after further study) of the existing status 
 
88 INVESTIGATING AN INDUSTRY 
 
 of the business, and what are the steps that you 
 recommend be taken immediately and those that 
 you recommend should be postponed for the present 
 but investigated with a view to future action?' I 
 would like the answer to be put in writing so that I 
 can take it home and think it over. Since the 
 question does not call for a final opinion or report, but 
 only for a provisional one, which the doctor can 
 amend^ to-morrow if he sees fit, I trust he may be will- 
 ing to dictate the answer at once, so that each one 
 of us may have a typewritten copy which may be 
 used as a basis for further consideration." The doctor 
 agreed to do this, but said that on account of no time 
 being given him for careful preparation of a written 
 opinion, what he would have to say would be frag- 
 mentary and disjointed, and it would be, as stated 
 in the question, ''subject to revision." He then 
 dictated the following : 
 
 First as to the present status: Factory. —Location, 
 buildings, machinery, labor supply, scientific manage- 
 ment of production, all excellent. Factory manager — 
 highly capable, as regards production, untrained as 
 regards management of sales and especially as to de- 
 vising future policy of the business. 
 
 Kind and Quality of Product. — Excellent, but too 
 many sizes of some kinds are made, making it neces- 
 sary to keep on hand too large a stock of machines 
 and of more or less finished parts. The design of 
 
THE doctor's opinions 89 
 
 some machines might be altered with a view to 
 greater economy in their manufacture. 
 
 Extent of the Market for Present Products of the 
 Factory. — Only large enough to keep the factory 
 running to from one-third to one-half of its maximum 
 capacity. Prospects that even this market may be 
 curtailed by competition and by possible general 
 depression of trade. 
 
 Sales Department. ^We\l managed according to 
 the prevailing methods, but costly, involving high 
 costs of distribution and high prices to the final 
 consumer. In the western part of the country the 
 cost of distribution will be lowered by the new con- 
 tract with the company's western representative. 
 In the rest of the country the ratio of cost of selling 
 to selling price will increase if the volume of sales is 
 reduced. 
 
 Plans for Future Development. — None have as 
 yet been made. 
 
 Capital. — Sufficient to keep the factory running 
 to its full capacity without large borrowing of money, 
 provided there is a quick turnover, so that the lapse 
 of time from purchase of raw material to the collec- 
 tion of bills for goods made of this material is from 
 three to six months; insufficient if there is a slow turn- 
 over, due to large amount of raw and partly finished 
 material, to large stocks of finished goods awaiting 
 sale and to slow collections; insufficient also to allow 
 
90 INVESTIGATING AN INDUSTRY 
 
 for any large expenditure of money to improve the 
 power plant and to change designs and patterns for 
 the purpose of cheapening cost of production. 
 
 Next, as to recommendations: 
 
 Factory and Product. — Make no changes either in 
 the equipment of the factory or in its system of ad- 
 ministration at present. Employ a power-plant 
 expert to make a preliminary report on what had best 
 be done to decrease the consumption of coal used by 
 the power, lighting and heating plant, and on what 
 advantage, if any, there would be in purchasing 
 current for power and light from the central station. 
 Have the chief draftsman report what benefits would 
 accrue from minor changes in design with a view to 
 cheapening cost of production.' Have the general 
 manager report what objections there are to abandon- 
 ing the making of the smaller sizes of some of the 
 products, and the advantage that would result from 
 this course. Have him report also on the desirabiHty 
 of purchasing from other manufacturers certain small 
 parts instead of making them in the factory, assum- 
 ing that the machine tools nov/ used for making 
 them could be employed for a large fraction of their 
 time in making other things. 
 
 Extent of the Market. — Have the sales manager 
 interview some manufacturers of machinery who 
 have estabHshed a foreign trade, export agents, and 
 others who may be posted on the export trade in 
 
THE doctor's opinions 91 
 
 American machines, and get some information as 
 to the possibihty of doing an export business in our 
 products and as to the ways and means of starting 
 such business. One of his clerks might examine the 
 files of consular reports to find if any of them contain 
 any useful information as to the prospects of a foreign 
 trade in our goods. He should also write to the 
 American Association of Commerce and Trade in 
 Berlin, 59-60 Friedrichstrasse, Geo. S. Atwood, 
 Secretary, asking for a copy of the Year Book of that 
 association for 191 2, in which will be found some 
 information on the subject of American exports to 
 Germany. The association has been in existence 
 since 1903, and one of its chief tasks is that of giving 
 assistance in the introduction of American goods into 
 Germany. 
 
 Sales Department. — This department should im- 
 mediately start investigations on two lines: first, the 
 possibility of diminishing the cost of distribution, so 
 that our selling price may be reduced without greatly 
 reducing our profits; and, second, to discover what 
 other products the factory can make that will meet 
 wit4i a large sale at a reasonably good profit. The 
 reputation of our present line of goods is now so well 
 established that it is probable that dealers may be 
 found in every large city who would be willing to 
 take agencies for them at a low discount. Care must 
 be taken, however, to insure that such agents are 
 
92 INVESTIGATING AN INDUSTRY 
 
 already noted for handling only goods of the highest 
 quality and for their enterprise in covering thoroughly 
 their respective districts. 
 
 For the purpose of discovering what other goods 
 may be profitably made a conference should be had 
 between the general manager and the mechanical 
 expert with whom we have already been in consulta- 
 tion, the sales manager and our other salesmen, with 
 a view of making a Kst of machines, and also of parts 
 of machines, which may be made with our present 
 equipment of machine tools, and which are in large 
 demand. This list should then be used by our 
 salesmen in making a thorough canvass of the country 
 for the purpose of securing information that may be 
 used as a basis for beginning negotiations with dealers 
 and with factory owners who may be induced to 
 purchase from us such machines or parts of machines. 
 We might prepare circulars and advertisements 
 reciting in plain language these facts: that we have 
 a large, modern factory equipped with the best 
 modern tools, planers, shapers, slotters, lathes, drills, 
 single and multiple milling machines of various 
 classes, boring machines, turret lathes, grinding 
 machines, etc. (naming the sizes and capacities of 
 each class of tools) , together with a capable engineer- 
 ing force, including designers and draftsmen, a forge 
 shop and a pattern shop; that we are now engaged 
 in building special machines the demand for which is 
 
THE doctor's opinions 93 
 
 not sufficient to keep the factory engaged for more 
 than half its time at full capacity; that we are pre- 
 pared to do a jobbing and contracting business rang- 
 ing from the design and pattern work for single 
 machines for special use up to manufacturing standard 
 articles on a large scale; that we are prepared to 
 make parts of machines, such as crank shafts, con- 
 necting rods, springs, bearings, hand wheels, gears, 
 etc., that are in general use, at lower cost than they 
 are made in most factories, and that we will guarantee 
 these parts to be of the highest class both in material 
 and workmanship. 
 
 We should establish standard dimensions for most 
 of these parts and do what we can to encourage the 
 use of such standards, so that we can manufacture 
 them in large quantities, and therefore at the lowest 
 cost. 
 
 Capital. — The working capital of the company is 
 sufficient for the present extent of the business and for 
 a moderate expansion not requiring any investment 
 for additional equipment. More concerns have gone 
 into bankruptcy for lack of sufficient capital to pro- 
 vide for extensions and to endure financial crises than 
 from any other one cause. We are now facing a 
 probable depression in trade, and it is therefore highly 
 important that we conserve our capital and do not 
 make any new ventures until the danger is past. It 
 is equally important, however, that we prepare for 
 
94 INVESTIGATING AN INDUSTRY 
 
 the next boom, which is certain to follow the depres- 
 sion, by getting such new equipment as may be 
 necessary to take care of the increased business, and 
 also either obtain the additional capital needed to 
 handle it or else to change our business methods so 
 as to utilize our present capital more efficiently. In 
 the manufacturing department this may be done by 
 a careful supervision of our purchases, so that raw 
 material is not purchased too long in advance, and by 
 such a planning of the passage of the material through 
 the shop that too much capital is not locked up in 
 partly finished product. In the selling department 
 we can utilize capital more efficiently by not giving 
 so long credits and by greater promptness in making 
 collections. 
 
 When the business increases to such an extent 
 that more working capital is needed to handle it, we 
 may get along for a time by using our credit, pur- 
 chasing material on longer time, or borrowing money 
 from the banks, but these methods are exceedingly 
 dangerous, involving not only the cost of interest, 
 but the risk of being squeezed by the banks or other 
 creditors when our credit is stretched beyond a safe 
 limit. The issuing of bonds is a safer way, but this 
 is apt to lead to disastrous results when the bonded 
 indebtedness amounts to a large fraction of the 
 total capital. The only safe way is to obtain increased 
 capital by the issue of new stock. This is easy to 
 
95 
 
 do when the times are good, when the business is 
 profitable and the surplus is regularly increasing, 
 but extremely difficult in times of depression, when 
 money for investment is scarce and when those who 
 have money are timid. We have seen in recent times 
 many examples of large concerns doing a highly 
 profitable business going into the hands of receivers 
 because the business had expanded beyond the point 
 justified by the available working capital. 
 
 The doctor then concluded his dictation by saying 
 that he had no more recommendations to make that 
 day, but that he might have something more to say 
 on the morrow, after he had read over the type- 
 written copy of what he had already said. The 
 meeting then adjourned. 
 
CHAPTER VIII 
 Proposed Reorganization of the Board of Directors 
 
 The next day the conference with the salesmen 
 was continued, but none of them had anything of 
 importance to contribute and the conference soon 
 adjourned, the salesmen retiring; the directors 
 asked the doctor if he had revised what he had 
 dictated the preceding day, and if he had any further 
 recommendations to make. He replied that he had 
 read it over, and had no alterations to make in it, 
 but he wished to say something more, but not for 
 record, as it was only a preliminary statement, which 
 would precede a proposal he had written out. He 
 said: 
 
 "When I was a practising physician I sometimes 
 had to use strong language to my patients in order to 
 give them a realizing sense of their ignorance or neglect 
 of the rules of health, and I think some strong language 
 is now needed in regard to your management of this 
 business. Why do you have directors who are mere 
 figureheads, who know nothing of any manufacturing 
 business and whose only function is to meet once a 
 month and hear your general manager tell you how 
 the business is running and to tell him to go ahead as 
 
 96 
 
PROPOSED REORGANIZATION 97 
 
 he is doing? You are not directing, you are merely 
 shifting your responsibihty to the stockholders onto 
 one man and giving him a load that is too heavy for 
 one man to carry. What you should do is to get a 
 board of directors who can become acquainted with 
 the business by having a working connection with it 
 and who thereby may qualify themselves to direct. 
 You are not a board of directors, you are only a 
 stockholders' committee, and you represent the 
 stockholders merely by attending meetings and re- 
 ceiving reports. Of course you will answer that the 
 stockholders must elect from their own number 
 directors who will represent them and watch the ex- 
 penditure of money. I will admit that you have done 
 this watching well, that is you have verified all the 
 vouchers and satisfied yourselves that the purchasing 
 has. been done honestly and wisely, that salaries have 
 not been extravagant, that labor has not been over- 
 paid, and that there is no graft in any part of the 
 business ; but all this could be done by a stockholders' 
 committee or by a paid auditor. Expenditure of 
 money is only one part of the business; you have 
 neglected the other and the greater part, which is 
 income. You have not planned ahead so as to in- 
 sure that you will have an income to meet the ex- 
 penditure. You have not only neglected this duty, 
 but you have never discovered that it is your duty." 
 The doctor stopped to take breath, and one of 
 
98 INVESTIGATING AN INDUSTRY 
 
 the directors interjected, '^It seems to me, doctor, 
 that you are forgetting one of your own mottoes, 
 'too many cooks spoil the broth,' and another one, 
 'never to do anything that you can hire another man 
 to do better than you can do it yourself.' We direct- 
 ors, a wholesale grocer, real estate operator, treasurer 
 of an insurance company, and the like, being aware 
 that we know nothing of manufacturing, thought we 
 were doing well in employing an able general man- 
 ager who was wilHng to assume the responsibility of 
 the whole work and trust him to run the business. 
 If we had interfered with him and nagged him we 
 would not have been able to keep him." 
 
 The doctor replied, ^'I thought I made it clear 
 when I spoke the other day of mottoes and maxims 
 that none of them can be taken without limitations, 
 and that there is an antidote available when any one 
 of them is taken in excess. To the first of your mot- 
 toes we have, 'in the multitude of counselors there is 
 wisdom,' and, to the second, 'never overwork a 
 willing horse.' I do not mean that you directors 
 should undertake to be counselors, for you are not 
 qualified to be; the counselors should be experts. 
 As for the 'willing horse,' the general manager, as 
 long as the business consisted in manufacturing a 
 single line of goods, and as long as he had the good 
 luck to get salesmen who knew how to dispose of 
 them, he was not overworked, but as you yourselves 
 
PROPOSED REORGANIZATION 99 
 
 have said, his mind 'runs on a single track,' and he 
 would be overworked if you had put on him the 
 responsibility of developing the business along new 
 lines. Fortunately, this extra responsibility has not 
 been placed on him, and no harm has yet been done, 
 but we have now reached the developing stage, and 
 we must now plan out for the future. 
 
 "What I now propose is a new organization, begin- 
 ning with a new board of directors, some of whom at 
 least shall be active officers of the corporation doing 
 actual work in one or more departments. Those 
 directors who retire because it is inconvenient for 
 them to take their share of the work may be con- 
 stituted a stockholders' committee, whose duty is to 
 meet from two to four times a year to receive and dis- 
 cuss reports made by the board of directors, and who 
 may, if they see fit, employ once a year an auditor to 
 examine the books, and a business expert to report 
 on the conduct and the prospects of the business. 
 
 "One of the elements of scientific management as 
 now employed in the production of manufactured 
 goods is the use of ' functionalized foremen.' I now 
 propose to functionalize the directors, giving each of 
 them the specific work to do for which he is best 
 fitted, and to have the whole business supervised by 
 functional committees, of each of which the chair- 
 man is the executive head of a department and the 
 other members are his advisers and assistants. I 
 
100 INVESTIGATING AN INDUSTRY 
 
 suggest that the few principal stockholders, who hold 
 a large majority of the stock, get together and select 
 from their number three directors, who are versed in 
 general finance, who will serve for nominal salaries as 
 president, vice-president, and treasurer, the duties 
 of their offices being so arranged as to take but a small 
 portion of their time; also four other directors, three 
 of whom, the general manager, the sales manager, 
 and the secretary, shall receive proper compensation 
 for their full time, and the fourth, whom I shall call 
 the ' adviser, ' shall serve without salary. If it may 
 please you, I nominate myself for this position, and 
 you may give me one share of stock to quaHfy me to 
 be a director. For the position of secretary I would 
 nominate our excellent chief clerk of the sales depart- 
 ment, who is a broad enough man to fill a more re- 
 sponsible position than the one he now holds. 
 
 ''The first work of the new board of directors will 
 be to plan the complete organization of the business, 
 to frame a new set of by-laws estabhshing functional 
 committees of the directors, and defining the duties 
 and authority of the committees and of the executive 
 officers. I have written out a plan of organization 
 which I will submit for discussion. 
 
 ''I divide the whole business into seven departments, 
 each of which is supervised by a functional committee, 
 as follows: (i) Finance; (2) Accounts; (3) Informa- 
 tion and Statistics; (4) Factory; (5) Labor; (6) 
 
PROPOSED REORGANIZATION 101 
 
 Sales, and (7) New Development. The committees 
 I would form as follows : 
 
 (i) Finance. — President, general manager, adviser. 
 
 (2) Accounts. — Vice-president, treasurer, secretary. 
 
 (3) Information and Statistics. — Secretary, vice- 
 president. 
 
 (4) Factory. — General manager, adviser, sales 
 manager. 
 
 (5) Labor. — Secretary, general manager. 
 
 (6) Sales. — Sales manager, general manager, 
 secretary. 
 
 (7) New Development. — Sales manager, general 
 manager, treasurer. 
 
 "The reasons for the assignment of the several 
 officers to their respective committees, and the func- 
 tions of each officer are as follows: 
 
 "(i) Finance. — The president, being one of the 
 largest stockholders, should be the leader in important 
 financial matters, such as banking, borrowing, issuing 
 of bonds and stock, expansion or contraction of the 
 business, and granting of credit. The general man- 
 ager should be in touch with him, to inform him of the 
 financial needs of the factory, and the adviser may be 
 of assistance in bringing financial information from 
 outside. This committee should if possible come 
 to an agreement before submitting financial proposi- 
 tions to the full board of directors. 
 
 "(2) Accounts. — The vice-president, being a large 
 
102 INVESTIGATING AN INDUSTRY 
 
 stockholder, will be interested in obtaining a proper 
 system of keeping accounts, and in studying the ac- 
 counts and drawing conclusions from them which he 
 may submit to the finance committee. The treasurer 
 will see that the accounts are so kept as to give him 
 the information he needs when questions come up 
 as to dividends, investment of money, delaying pur- 
 chases in order to conserve the bank balance, pur- 
 chasing ahead in order to get the advantage of low 
 prices, and the like. The actual work of keeping 
 the accounts is to be done by the secretary and 
 his clerks. 
 
 " (3) The whole system of fiHng of correspondence, 
 price lists, catalogs, etc., and the keeping of a bureau 
 of information for every department of the business 
 should be in charge of the secretary. He should also 
 compile monthly and annual statistics and charts of 
 all important facts that may be needed by any de- 
 partment. The vice-president is made a member of 
 this committee as well as that of the committee on 
 accounts so that he may have a say in deciding what 
 statistics and charts should be kept, and so that he 
 may have all facilities needed for drawing all the con- 
 clusions that may be drawn from statistics, which in 
 themselves are of no importance unless they lead to 
 conclusions. It is advisable also that the vice- 
 president add to the duties of his position the func- 
 tions of a 'leak hunter,' or if he is not able to perform 
 
PROPOSED REORGANIZATION 103 
 
 these functions himself, he may have them done by a 
 subordinate, who preferably should be an experienced 
 engineer, and who may be given the title of assistant 
 to the vice-president. (See editorial article on 
 The Leak Hunter, Industrial Engineering, March, 
 1910.)' 
 
 "(4) Factory. — The general manager should re- 
 tain his present position as autocrat of the factory, 
 but he should consult with the adviser, who may 
 bring him information as to what is being done in 
 other factories, and with the sales manager, who 
 can inform him as to prospective demand for the 
 different products, to enable him to prepare ahead to 
 meet the increased demand, or to delay the production 
 of some lines so as to avoid piling up stock. He 
 should consult with his committee in regard to im- 
 portant changes in equipment or manufacturing 
 methods, and obtain the approval of the committee 
 before making propositions to the board of directors. 
 
 "(5) The formation of a labor committee is for 
 the purpose of throwing upon the secretary, who has 
 statistics of labor costs, records of workmen and the 
 like, much of the burden with which general managers 
 are usually oppressed, of handling all questions re- 
 lating to wages, promotions, working conditions, 
 welfare work and the like. The general manager and 
 
 1 See Appendix. 
 
104 INVESTIGATING AN INDUSTRY 
 
 the secretary can agree upon a satisfactory division 
 of the work of this committee between them. 
 
 ''(6) Sales. — The sales manager is the autocrat of 
 the sales department in so far as handling the sales- 
 men is concerned, but he should consult with the 
 general manager as to the advisabihty of pushing 
 certain lines so as to keep certain parts of the factory 
 full -of work, and with the secretary as to statistics 
 of cost of production and of selling, so that he may 
 know which lines should be pushed the hardest in 
 order to obtain a maximum annual profit. Questions 
 of changes of prices and of important contracts 
 should be discussed by the full committee. 
 
 ''(7) New Development. — This committee should 
 have constantly before it the question of what to 
 make and what not to make, and the duty of dis- 
 covering new lines in which a good profit can be 
 made. The treasurer is made a member of this 
 committee as a check against its undertaking a new 
 line of work before the capital is available for it. 
 The secretary might be added to this committee if 
 it appears that his information bureau and his statistics 
 put him in position to be of service to the committee. 
 Such questions as the one now before us, that of 
 methods of meeting new competition, may be referred 
 to this committee for investigation and report to the 
 board of directors. The committee should prepare 
 annually a report giving the results of its work, and 
 
PROPOSED REORGANIZATION 105 
 
 recommending what new work should be undertaken 
 or what old lines modified or abandoned. 
 
 ''Foremen's Committee. — In addition to the com- 
 mittees of directors, I would recommend the formation 
 of a committee of three foremen, taken in rotation 
 from the whole body of foremen, each member serv- 
 ing one year, with one member entering and one 
 leaving the committee at the end of each four months. 
 The duties of this committee are: (a) Advisory, to 
 consider and report to the general manager on acci- 
 dents and their prevention; condition of machinery; 
 comfort and welfare of the workmen; old age and 
 disability pensions; apprenticeship system; improve- 
 ments of the factory or factory methods; complaints 
 by foremen or workingmen. (b) Executive. Author- 
 ity may be given by the board of directors to this 
 committee to take action on any matters that may 
 be referred to it by the board. A formal report of 
 its proceedings should be made by this committee 
 to the board three times a year, and special re- 
 ports whenever they are called for by the general 
 manager. 
 
 ''Understudies. — The three high-salaried officers, 
 the general manager, the sales manager and the 
 secretary, should each be provided with an assistant, 
 who should be trained to become so famihar with 
 all the details of the work of his chief that he would 
 be competent to fill his place during his temporary 
 
106 INVESTIGATING AN INDUSTRY 
 
 absence and finally to succeed him in the event of 
 his retirement." 
 
 The doctor finished his reading, and proceeded 
 orally as follows: 
 
 ''I have typewritten copies of this document for 
 each of you. I wish you would study it to-night at 
 home and come prepared to discuss it to-morrow. I 
 do not think it will be profitable to discuss it now. I 
 wish to call particular attention to the fact that the 
 principal element in my proposition is a re-constitu- 
 tion of the board of directors, making it a working 
 body instead of a stockholders' committee. It does 
 not need to meet as a board in formal session oftener 
 than four times a year, but its members should be 
 always working either as executive officers or as 
 members of functional committees. All the other 
 suggestions I have made are subordinate to this one, 
 and, if thought best, their consideration may be 
 postponed until the first meeting of the new board. 
 The titles and composition of the several committees 
 may be left to the board, and special committees may 
 be formed for either temporary or permanent pur- 
 poses; thus the president, vice-president and general 
 manager might be made a committee on new buildings, 
 with authority to employ an architectural engineer, 
 and the vice-president, treasurer and general manager 
 might form a committee on purchases, with authority 
 to appoint a purchasing agent and to exercise such 
 
PROPOSED REORGANIZATION 107 
 
 supervision over his work as may be needed. The 
 board might also authorize the regular committees 
 to employ experts to aid them in their several func- 
 tions; thus the finance committee might want to 
 employ legal counsel; the committee on accounts an 
 auditor or expert accountant; the factory committee 
 a power plant and a mechanical expert; the labor 
 committee an expert on sanitation or on welfare 
 work; the sales committee an advertising expert. 
 
 "I regard as the most important of the functional 
 committees at the present time the one on new devel- 
 opment. Its work in recommending to the directors, 
 after thorough investigation, what to make and what 
 not to make, is that upon which the future success 
 of the business may depend. Its mistakes may be 
 more costly than those of any other committee. The 
 usual mistake is that of underestimating the amount 
 of capital required to develop a new line. In this 
 connection the following press despatch in this 
 morning's paper may be of interest as a warning; 
 
 j^ receiver was appointed today for the Michigan 
 Buggy Co. of Kalamazoo, manufacturers of the 
 Michigan ''40" automobile. It is stated that the 
 liabilities will total $1,600,000. The Company manu- 
 factured buggies for thirty years. Insufficient funds 
 to conduct its business since the manufacture of 
 automobiles was begun was a reason given for the 
 receivership. 
 
108 INVESTIGATING AN INDUSTRY 
 
 "I think we had better now adjourn until to- 
 morrow afternoon, so that you may discuss during 
 the morning the substance of my proposals. 
 
 One of the directors said, "I don't want to discuss 
 the matter now, but it seems to me that the doctor is 
 proposing to have an enormous amount of red tape 
 in this business." The doctor repHed, ''One of the 
 essential elements of scientific management is study 
 of the subject of waste, whether of capital, material, 
 or time, or even of ink and of red tape. The work of 
 the committee on information and statistics, and 
 especially that of the 'leak hunter,' will include the 
 study of whether the excessive use of red tape hinders 
 the progress of work or is costly in itself, and of 
 finding ways by which the use of red tape may be 
 curtailed. The words 'red tape' are now used, as 
 you know, to signify any systematic method of 
 making records, issuing requisitions or orders, check- 
 ing against mistakes, countersigning checks and the 
 like. In scientific management properly applied this 
 so-called red tape is used only so far as investigation 
 shows it to be necessary or desirable, and automatic 
 machinery or other means are used to make the 
 quantity of it as little as possible." 
 
CHAPTER IX 
 
 Duties of the Functional Committees of the Board 
 of Directors 
 
 The next afternoon another meeting was held as 
 agreed, and the president of the company said, 
 ''Doctor, we had a meeting this morning at which 
 all the directors were present and four-fifths of the 
 stock was represented, and after a thorough dis- 
 cussion of your proposal it was unanimously agreed 
 to accept the principal one, that of reorganization 
 of the board of directors. We agreed also that the 
 president, vice-president, and treasurer retain their 
 present offices, and that the other four directors re- 
 sign, their places to be taken by the general manager, 
 the sales manager, the chief clerk of the sales depart- 
 ment, who will be appointed secretary, and yourself. 
 Our present constitution provides that the board 
 may fill vacancies in the directorships, the new mem- 
 bers to serve until the annual meeting of the stock- 
 holders. A special meeting of the stockholders will 
 be held in two weeks to make the changes in the 
 constitution and by-laws that may be necessary to 
 fix the duties of officers and to provide for forming 
 the functional committees and specifying their 
 
 109 
 
110 INVESTIGATING AN INDUSTRY 
 
 duties. We can have a meeting of the directors to- 
 morrow, at which the resignation of the four directors 
 can be accepted one by one and their successors 
 elected, and at which any other formal business may 
 be transacted. We shall be glad to hear from you, 
 doctor, if you have any other suggestions to 
 make." 
 
 The doctor, after thanking the directors for the 
 compliment paid him in accepting his proposal and 
 in nominating him as a director, said: 
 
 "My work as adviser to the present board of 
 directors is now finished, and I have no further sug- 
 gestions to offer, but I have spent the morning in 
 making a partial list of the many different things that 
 have to be considered in connection with a manu- 
 facturing and selling business, and I have tried to 
 assign the several items to their proper places under 
 seven heads corresponding to the seven functional 
 committees: finance, accounts, information and 
 statistics, factory, labor, sales, and new developments. 
 I shall refer this Hst to the new board, and ask that 
 it be carefully studied and revised to insure that no 
 important item is left out and that each is assigned 
 to the proper committee. When it is finally revised 
 I shall ask that it be printed on cardboard so that 
 each director may have a copy, and that a copy be 
 tacked up in the directors' room and in the office of 
 each executive officer for convenient reference. The 
 
DUTIES OF THE FUNCTIONAL COMMITTEES 111 
 
 chief use of such a list, besides that of recording the 
 assignment of work to the several committees, is 
 that of being an aid to the memory, so that when any 
 director asks himself the question, ' what subject shall 
 I now investigate, or what subjects shall I bring before 
 the committee or the board?' he may look over 
 the list and select from it the items that he thinks 
 should now be considered, and make a note of them. 
 Under the old system of management the manager 
 usually did not consider a problem until it was forced 
 upon him by some emergency; he was so busy forcing 
 the material through the shop and getting orders 
 filled that he had no time to take up subjects that 
 could possibly be postponed, such as improved 
 methods of production, and they would be allowed to 
 pass out of his mind. By the new method, each 
 committee has constantly before it a list of things to 
 be thought of, and there can be no excuse for neglect- 
 ing to consider them. Here is the list: 
 
 Finance 
 
 Committee: President, general manager, adviser. 
 
 Capital stock: outstanding; to be issued; plans 
 for increasing. 
 
 Bonded debt; secured notes; bills and accounts 
 payable. 
 
 Cash; bills and accounts receivable. 
 
 Investment of capital: in buildings and equip- 
 ment; in raw material; in work in progress; in fin- 
 
112 INVESTIGATING AN INDUSTRY 
 
 ished goods in warehouse and on consignment; in 
 advance advertising. 
 
 Surplus available; for dividends; for reserves; for 
 extensions of business. 
 
 Appropriations and other financial plans for com- 
 ing years. 
 
 Banking: interest; use of credit. 
 
 Accounts 
 
 Committee: Vice-president, treasurer, secretary. 
 
 Book-keeping system. 
 
 Cost accounts; distribution of burden. 
 
 Book-keepers and clerks. 
 
 Cost of, and improvements in accounting system. 
 
 Auditing. 
 
 Information and Statistics 
 
 Committee: Secretary, vice-president. 
 
 Bureau of information: catalogues and price lists. 
 
 Fihng system for correspondence, records, esti- 
 mates, drawings. 
 
 Statistics and charts, monthly and annual. 
 
 Classification of sales statistics: by products; ter- 
 ritorial. 
 
 Charts of production, of factory and selling costs. 
 
 Study of charts and drawing conclusions : products ; 
 variety; quantity; profitable or unprofitable; de- 
 mand regular, seasonable or fluctuating. 
 
 Leak-hunting ; inventories . 
 
 Factory 
 
 Committee: General manager, adviser, sales 
 manager. 
 
DUTIES OF THE FUNCTIONAL COMMITTEES 113 
 
 Products: design; quality; method of making. 
 
 Material: quality; specifications and tests; requisi- 
 tions; seasonable purchasing; prices; storage; hand- 
 ling; scrap; by-products. 
 
 Designing; drafting; estimating. 
 
 Superintendents, foremen; foremen's committee; 
 purchasing agent. 
 
 Blacksmith shop, pattern shop and store room. 
 
 Machine shop: equipment; arrangement of ma- 
 chines; handling of work in progress; interior trans- 
 portation; care of tools. 
 
 Power plant; engineering tests; friction; lubrica- 
 tion; boilers and boiler appliances; means for im- 
 proving economy; engines; condensers; dynamos; 
 motors; power transmission; fuel storage and hand- 
 ling, ash handling. 
 
 New machinery for new or old products. 
 
 Load factor, means for increasing. 
 
 Consider purchasing certain small parts instead of 
 making them. 
 
 Inventory of machines, age, cost, depreciation. 
 
 Items in scientific management of factory; tool 
 room, tool grinder, messenger service; store-room; 
 standard sizes and shapes of tools and of parts of 
 product; planning room; routing; moving; cars, 
 cranes,^ trucks, elevators; functional foremen; speed 
 and feed boss; care of belts; disciphnarian; time, 
 motion and fatigue study; standardizing operations; 
 instruction cards ; mnemonic symbols; wage systems; 
 task and bonus; standardized records; graphical 
 daily balance; plotting of results; eft'ect of changed 
 methods upon cost. 
 
114 INVESTIGATING AN INDUSTRY 
 
 Planning ahead for work to be done in coming 
 months. 
 
 Labor 
 
 Committee: Secretary, general manager. 
 
 Classification and records of workmen, length of 
 service, promotions, wages, premium, bonus, piece- 
 work. Changes, desirable. Apprentices. 
 
 Methods of training workmen, apprentices' school. 
 
 Pensions, old age and disabihty; accident insur- 
 ance; prevention of accidents; first-aid hospital. 
 
 Welfare work; sanitation; workmen's houses. 
 
 Complaints and suggestions by workmen. Work- 
 men's committees. 
 
 Sales 
 
 Committee: Sales manager, general manager, 
 secretary. 
 
 Selling methods; prices; discounts; commissions. 
 
 Contracts with salesmen, agents, and wholesale 
 houses. Department stores; mail-order houses. 
 
 Methods of increasing sales; pubKcity advertis- 
 ing, correspondence, circulars, bulletins, cutting 
 prices, exclusive contracts. 
 
 Methods of reducing selling expense. Training of 
 salesmen. 
 
 Charts of history of business, and of expected busi- 
 ness, classified by products and by districts. 
 
 New Development 
 
 Committee: Sales manager, general manager, 
 treasurer. 
 
 Investigation of factory conditions, as to location 
 
DUTIES OF THE FUNCTIONAL COMMITTEES 115 
 
 with reference to raw material, labor, climate, work- 
 men's houses and surroundings, market for product, 
 transportation, freight rates; as to buildings, with 
 reference to size, shape, arrangement, floors, roofs, 
 heating and ventilation, Hghting, natural and artificial, 
 fire protection, sanitation, safety devices. Investiga- 
 tion of the desirability of new buildings and of re- 
 location of the whole or any part of the factory. 
 
 Investigation of changes in market conditions, 
 such as lessened demand for products on account of 
 competition, change of fashion, improvement in rival 
 products, changes in methods of distribution; and 
 making new plans in view of these changes. 
 
 Methods of finding new things to make and to sell, 
 and of reaching conclusions as to what new things 
 should be made, how and in what quantity they should 
 be made, and what provision in the way of new equip- 
 ment is needed for them. 
 
 Methods of extending the market; foreign trade. 
 
 Abandonment of unprofitable and obsolescent lines 
 of products. Lessening of the variety of shapes and 
 sizes catalogued and kept in stock. 
 
 When he had presented the list the doctor said: 
 ^'I think we may now adjourn and await the call of 
 the president for the first meeting of the board of 
 directors, but I have three brief paragraphs concern- 
 ing scientific management which I would like to 
 have printed on the same card as the hst of subjects, 
 so that it may be a constant reminder to each member 
 of the board concerning his duties and his mental 
 attitude. I will read them. 
 
116 investigating an industry 
 
 Scientific Management 
 
 ''Scientific Management includes the critical ob- 
 servation, analysis, and classification of all industrial 
 and business phenomena, and the systematic applica- 
 tion of the resulting records to secure the most 
 efficient production and distribution of products and 
 to make preparations for future developments. Its 
 most prominent element is the mental attitude that 
 consciously applies the principles of scientific investi- 
 gation to all the phenomena of business and the 
 transference of skill to all its activities. 
 
 "The mental attitude referred to above is the 
 exact opposite of that mental inertia that leads one. 
 to say 'whatever is is right.' On the contrary, it 
 leads to the saying, 'whatever is may be wrong; I 
 am going to investigate and find out whether it is 
 right or wrong.' 
 
 "Duties of the Executives under Scientific Manage- 
 ment. — Executives must have a practical knowledge 
 of how to observe, record, analyze and compare 
 essential facts in relation to all that enters into or 
 affects the economy of production, the cost of the 
 product, the present and prospective market for the 
 product, the selling department, and the possible 
 profits." 
 
 On motion, the meeting adjourned. 
 
APPENDIX 
 A New Kind of Factory Expert — The Leak Hunter * 
 
 The president of a large manufacturing company 
 recently asked us to recommend a man for a new 
 position he wished to create in his factory to relieve 
 the manager of some work which the manager was 
 supposed to look after. The existing condition of the 
 concern was outlined about as follows: There is a 
 large and splendidly equipped factory full of orders, 
 well organized, doing a reasonably profitable competi- 
 tive business. The president is the chief executive. 
 He decides upon the general pohcy and is directly in 
 charge of the sales department, whose duties it is to 
 fill the factory with orders for the most profitable kind 
 of goods. The general manager's duty is to get these 
 goods produced and with the maximum of profit per 
 piece. The labor situation is satisfactory to the work- 
 men, piece work being generally introduced. The 
 macMne tools are of modern make, speeded to the 
 limit, and the facilities for handling goods are ex- 
 cellent. There is a good cost system and every de- 
 tail of cost is faithfully recorded. There are also a 
 works chemist and a physical testing laboratory. 
 
 * An editorial in Industrial Engineering, December, 1909. 
 117 
 
118 INVESTIGATING AN INDUSTRY 
 
 On the surface of things no factory could be in a 
 better condition. Every man appears to be doing his 
 full duty, and the manager especially is driving things 
 to the utmost. The president, however, is not satis- 
 fied. Competition is intense, prices of many of the 
 articles sold offer small margin of profit. Fashions 
 in forms of the things made are changing. There has 
 to b^ a large force of draftsmen and wood and metal 
 patternmakers employed to keep up with the designs 
 that are called for. Sales are tending to increase, 
 some departments are overcrowded, and the manage- 
 ment will soon have to face the problem of either 
 making extensions or abandoning some departments 
 to make room for the growth of others. Power seems 
 to be costing too much. Will it pay to change the 
 system of generating and transmitting power? Are 
 the iron and brass mixtures the best for which pur- 
 pose they are used? Will it pay to put in automatic 
 machines for some of the work? Should some of the 
 parts of things now made in the factory be purchased 
 outside? Should the premium system of paying 
 labor be instituted in any part of the works for the 
 part piece work and part day's work that now pre- 
 vails? Can some of the machines be speeded up? 
 Are any of the machines so far out of date or repair 
 that they should be replaced by others? Is the cost 
 system costing too much? Does it give all the in- 
 formation that it should? Are high-priced men en- 
 
THE LEAK HUNTER 119 
 
 gaged a large part of their time in doing low-priced 
 work? 
 
 The president cannot answer these questions. He 
 is too busy in his own department to study them. 
 The manager cannot, for his time is taken up in run- 
 ning things as they are, and he is satisfied with things 
 as they are. The cost clerks cannot, for they are 
 merely cost clerks. They tabulate the data, but have 
 no power of reasoning from them. 
 
 The old-fashioned method of answering such ques- 
 tions was not to answer them at all if it could possibly 
 be avoided. They were all considered questions of 
 minor importance as compared with the question of 
 driving the business, and the poKcy of the works was 
 usually to "let well enough alone." Let the other 
 man do the experimenting in new methods. The 
 modern idea is just the opposite. It is that there is 
 nothing so well done in a factory that it might not be 
 done better, but the trouble with this idea is that no 
 one has either the time or the knowledge requisite for 
 the systematic study that is needed in order to make 
 a wise decision in regard to making changes in ma- 
 chinery or improvements in methods. 
 
 The president of the concern referred to recogniz- 
 ing this fact wishes to employ some one to study the 
 general problem of what things in the factory need to 
 be improved and then how to improve them. We 
 gave him the names of some of the leading outside 
 
120 INVESTIGATING AN INDUSTRY 
 
 experts on factory organization and advised him to 
 apply to them for assistance. His idea is, however, 
 that he should permanently employ some young man 
 in the factory to look after the matters and be a sort 
 of perpetual ''leak-hunter.'' 
 
 It is a serious question whether any one who is 
 brought up inside of a factory can be as successful a 
 leak-hunter as one who has had a special training in 
 that direction. The ideal man for the purpose would 
 be one having both theoretical and practical knowledge 
 of factory operations and management and who has 
 also had considerable outside experience under the 
 direction of leading experts in this line. Such a man 
 would necessarily be a very high priced man, so high 
 priced indeed that it would require considerable 
 courage on the part of the president of a manufactur- 
 ing concern to employ him. The services asked of 
 such a man are not those of either a clerk or a manu- 
 facturing superintendent. They are, in fact, those of 
 a skilled diagnostician of factory diseases. The 
 possible number of such diseases may run into the 
 hundreds and many of them are difficult of detection. 
 The man who can ferret out and devise the proper 
 remedies is as important to a large organization as 
 either the president or the general manager. 
 
 In one concern we visited some years ago we found 
 a man who was known by the title of "Statistician." 
 His business was to be able to answer every possible 
 
LOCATING AN INDUSTRY 121 
 
 question that the general manager could ask him if 
 the answer could be expressed in the shape of figures. 
 It would seem that the modern factory must have, 
 first, a well-planned cost system, a statistician who 
 is able to digest the cost system and make abstracts 
 and plotted diagrams from it, and finally a skilled 
 leak hunter, as we have termed him, who can interpret 
 these diagrams and abstracts and from them draw con- 
 clusions as to what changes ought to be made in the 
 way of doing things in order to increase the efficiency 
 of the factory. The leak hunter probably exists in 
 many factories, but under a different title. He will 
 be a necessity of all large factory organizations in the 
 future. 
 
 Locating an Industry 
 
 Some philosopher has said that if a man makes 
 even a mouse-trap better than any one else, though he 
 build his hut in the woods, the world will make a 
 beaten track to his door — or words to that effect. 
 In the good old days, before trade papers existed, the 
 statement may have been true. Somewhere in the 
 State of New York, in the early part of the last 
 century, David Maydole made some good hammers, 
 and his neighbors began beating the track to his 
 door, and finally the whole world came to him for 
 hammers. In those old days factories were not 
 
 * Editorial in Industrial Engineering^ December, 1913. 
 
122 APPENDIX 
 
 '' located," they ''just growed," and their loca- 
 tion was usually the town in which the owner happened 
 to live. Many famous concerns had their begin- 
 nings in this way in locations which nowadays 
 would be thought to have many disadvantages. The 
 Fairbanks Co,, in St. Johnsbury, Vermont, is an in- 
 stance. The great copper and brass industries in 
 the Naugatuck Valley, Connecticut, grew in a lo- 
 cation that would now be considered far from the 
 best. The handicaps of distance from raw material, 
 from fuel, and, in many cases, from the market, were 
 overcome by the advantages of cheap labor, of busi- 
 ness enterprise, and of reputation for quality of 
 product. 
 
 In modern times, however, these special advantages 
 which were held by some manufacturers are disap- 
 pearing. Cheap labor has gone, business enter- 
 prise is becoming universal, and goods are now 
 bought on specification and test rather than upon 
 the name of a brand. Reputation, which used to be 
 obtained by long years of struggle, is now obtained 
 in two or three years by extensive advertising and by 
 public demonstration of quality and performance. 
 Success in manufacturing in the future is to be ob- 
 tained not by mere reputation for quality and by two 
 or three favorable conditions, such as ample capital 
 and cheap labor, but only by the combination of all 
 the desirable conditions, one of which is location. 
 
LOCATING AN INDUSTRY 123 
 
 The fact that locations that were good enough 
 in past times are not good enough now is shown by 
 the migrations of many large concerns and the 
 establishment of new concerns in places far removed 
 from the old centres of industry. The first great 
 relocation of industries in this country took place in 
 the iron trade. Fifty years ago its centre was in 
 eastern Pennsylvania, chiefly in the Lehigh and 
 Schuylkill valleys. Between 1870 and 1880 it was 
 moved to Pittsburgh and vicinity, to Cleveland, to 
 Chicago, and to Alabama. Philadelphia then was 
 the centre of the heavy machine-tool trade, with 
 numerous small concerns in New England; now Cin- 
 cinnati and Cleveland are competing with them in 
 foreign as well as in domestic markets. Shoe manu- 
 facturing, which used to be confined to New England, 
 is now being scattered over the West. Cotton manu- 
 facturing has developed in the South. Of individual 
 concerns that are moving or scattering, instances are 
 the Baldwin Locomotive Works, of Philadelphia, 
 which has built a new works on the Delaware, near 
 Chester, and the General Electric Co., which is locat- 
 ing its new plant at Erie, Pa., on Lake Erie, instead of 
 enlarging its plants at Schenectady and at Lynn. 
 
 In locating a new factory the owners should have a 
 long look ahead into the future. Conditions are 
 changing so that a location that is good to-day may 
 not be good ten years hence, and hasty removal from 
 
124 APPENDIX 
 
 one place to another, following the crowd, may prove 
 in the long run not to be good policy. An instance of 
 this is the recent transfer of the manufacture of 
 clothing from down- town to Fifth Avenue in New York. 
 If the millions that have been spent in building sky- 
 scrapers with marble fronts to accommodate the 
 multitudes of sewing-machine operators had been put 
 into a far cheaper location on the East River, close to 
 the homes of the operators, it would have been 
 well for all concerned. 
 
 Some of the conditions that should be taken into 
 account in locating a new factory that is expected to 
 become of great size are the following: With respect 
 to material: — cost of obtaining raw material delivered 
 at the factory; permanence of the supply from its 
 present source ; where other supplies may be had if the 
 present source fails (lumber, for example). Cost of 
 transportation of finished goods to the various mar- 
 kets. Transportation by automobile trucks, by rail, 
 by water, river, lake or canal. (The opening of the 
 Panama Canal and of the New York Water Barge 
 Canal is going to affect some locations.) Cost of fuel, 
 coal, oil or gas; if oil or gas, permanence of the supply. 
 Water-power, quantity available and its probable per- 
 manence. Electric power from a central station, 
 cost of, compared with cost from an isolated 
 plant. 
 
 Real estate; first cost, taxes, present and prospective; 
 
LOCATING AN INDUSTRY 125 
 
 room for extensions; room for development of a work- 
 men's town. 
 
 With reference to labor. Availability of an abun- 
 dant supply, skilled and unskilled. Conditions for 
 keeping workmen satisfied to remain in the works, 
 nearness of city or town supplying good and cheap 
 markets, comfortable homes, schools, playgrounds, 
 churches, hospitals, medical attendance, recreation. 
 Control by trades unions. 
 
 We regard this question of keeping workmen satis- 
 fied to remain in the works as one of the most im- 
 portant industrial questions of the future. It is not 
 merely a question of wages and of hours, but of every- 
 thing that enters into a workman's life. One of the 
 chief real troubles of the workmen to-day is the high 
 cost of food due to the unscientific methods of getting 
 the food from the producer. It would be well for some 
 of the concerns that are moving from the cities into 
 the country to consider whether the time has not 
 arrived for manufacturers employing one or more 
 thousands of workmen to establish a co-operative 
 store for them, which will buy produce directly from 
 the farmers, and which will operate a cold-storage 
 warehouse and a canning factory. In many com- 
 panies to-day the workmen are sharing in the profits 
 of the business by becoming stockholders. They also 
 invest their savings with the company, and have 
 accident insurance and old-age pensions. It is only 
 
126 APPENDIX 
 
 a further development in the same direction to pro- 
 vide the means by which they can obtain cheap food 
 and so reduce the cost of Hving, and thereby make 
 savings which may be invested in the company's 
 stock. This is a far better way of overcoming the 
 so-called " injustice of the present industrial system" 
 than the plan that the SociaHsts are continually 
 agitating, that of having the community or the State 
 become the owner of all the implements of industry. 
 It will be a step forward to the day mentioned by the 
 late Abram S. Hewitt in an address made more than 
 twenty years ago (Trans. Am. Inst. Mining Engrs., 
 1890,) when, instead of capital employing labor, labor 
 will employ capital. 
 
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