The amount of capital tied up in raw material supplies, stock in process and finished product should not be greater than that which is necessary to get the greatest output per dollar of investment.
In the machinery-building world there is no such thing as a steady long-lived demand for any machine. Hence the proposition to build a locomotive or printing-press by methods employed in watch or sewing-machine manufacture is entirely ill-timed at least.
For this reason the stock in process must not necessarily be considered insufficient if it appears to be on the hand-to-mouth plan. The dividing line between excessive and insufficient stock must be drawn in each individual case.
Raw material should be purchased in reasonable quant.i.ties with due regard to the price which varies with quant.i.ties but there should always be a regard for the amount of capital used for this purpose. Any excess represents just that much extra capital unnecessarily risked in the business.
There should be a constant supply of material throughout the entire work. The stock in process should flow through the plant in a rapid but thin stream. The quant.i.ty should be no greater than absolutely necessary to insure a steady supply for all of the workers, including the a.s.sembling and selling workers.
An excessive stock of this or that piece, or of all pieces, means that much capital idle, and it also tends to slackness of management. Frequently it is the outcome of carelessness.
A slip-shod management that disregards this point will use no care in purchase of material or in putting in the shop orders. All that is needed is to just hurry forward the stock that "happens" to be "out", and at the same time allow the acc.u.mulation of the unneeded stock to go on unchecked.
Immense storerooms for keeping finished stock are shown with pride, unmindful of the fact that every dollar"s worth of unnecessary stock on the shelves in the stockroom, every dollar"s worth of unnecessary work in the plant, represents idle money and faulty management.
If this money is to be retained in the business, the system should be changed so that the money will be put where it will bring the best return.
The excessive stock in process is sometimes an outcome of blind progressiveness--the blindness that fails to see that there is as much money tied up in stock in process and in finished product as there is in the entire machinery equipment.
An adaptable equipment facilitates keeping down the amount tied up in stock in process. The modern plant should take advantage of these modern methods and machines which tend toward profitable use of capital. Such machines are highly developed and true to the controlling ideal of adaptability and largest output per dollar of investment.
Cost of the Product.
The practice of disregarding the profit, when considering changes in machine equipment, is the natural outgrowth of the separation of the mechanical and the business departments.
The changes in the equipment are usually determined by the mechanical department, and this is done with particular regard for the quality of work and the cost per piece. The relation between the profit and the net labor cost is not considered.
The cost of the product of the average machinery-building plant may be divided into three nearly equal parts: the material, the labor, and the burden; or, in four equal parts, if a reasonable interest charge is made for the use of the capital invested.
The material is the iron, steel and other material that enters into the construction of the machine, and it is taken in the condition in which it usually comes to the machine shop.
The burden includes all expenses and salaries necessary for the maintenance of the business.
About one-half the amount paid for labor goes to the men who run the machine tools, and the other half is paid to workmen who do the other work, such as handwork, a.s.sembling, transporting, etc.
Therefore, the cost of machining is either one-sixth or one-eighth of the total cost.
On top of the net cost of the product there should be a profit. If it is not there, the sooner something happens the better. If it is there, then it is proportioned to the volume of the output.
Therefore, both the size of the output and the labor cost should be kept in mind.
The size of the profit per unit of output is not generally known to the mechanical departments. But even if it is not known, there is no reason for their being uninformed as to the importance of large output for cost of the plant.
Largest Profit Per Dollar Invested.
One of the most satisfactory policies of management is that which tends toward getting the best return or profit per dollar of investment.
We shall not refer to the quality of the product, the design, or any other elements which affect the good name and standing of the business, for it goes without saying that no business can be maintained where these are disregarded. The point to be brought out here is that, These thing being equal, the best scheme of management for profit is one that puts the capital where it will do the most good.
The above statement is one with which all will agree, but strangely enough there has been a tendency to tie up capital in ways that actually throttle the output of the entire business.
Furthermore, this is frequently done by increasing the portion of the investment that is irrevocably tied to the existing product, thus not only reducing the earning power of each dollar invested, but also increasing the hazard by tying the capital to the present product, which soon may be unsuited to the market demand.
One of the most common errors in this respect is the one that regards the reduction of the labor cost as the paramount consideration.
Reduction in labor cost has been the war-cry. The pay-roll has been talked about so much that it has seemed to become the whole thing. A man who declares that the labor cost per piece is not the most important element is at once branded as an advocate of old-fashioned methods.
It is needless to give a.s.surance that there is no intention to disregard the labor cost. The net cost per piece is a very important element, but it should neither eclipse the question of profit per dollar invested, nor the risk of the capital tied up.
What is the gain if the means for reduction of the net labor cost reduces the profit more than the saving in labor? If doing so results in an actual loss of profit, why is it done?
We can readily see that the overhopeful managers may disregard the risk of the money invested, but we cannot see why the relative importance, or rather unimportance, of the labor cost should be so disregarded.
The machine tools in a plant usually determine its character. This character is not one that can be quickly changed, but every addition to the equipment does change it for better or worse.
Usually the installation of a new machine is hailed as a progressive move, just because the new machine works better than the old, but its effect may be very bad. It may be changing the character of the plant adversely to the interests of all concerned. Therefore, the controlling spirit should see to it that each move is made on a basis that is economically sound.
It is in these changes that the scheme of management has a chance to make a great difference in the earning power of the entire business.
If too large a proportion of the total available capital is tied up in the machine equipment, the business is handicapped. There is a right amount which bears a certain relation to the total required to carry on the enterprise.
With a given amount of capital for machine equipment, the output of the plant will be seriously throttled if the net cost of labor per piece machined is allowed to become the controlling element.
The Workers Help Bring Success.
The inventor, the officers, and mayhap the foreman, taken all together, do not and cannot make a successful machine or business without this supplemental work or ideas that come from actual work of all workers.
This new kind of knowledge should not take away a man"s courage; on the contrary, it should give him a true sense of value of existing, "going" things. With this knowledge he can confidently and earnestly push a machine that is the product of a good organization. He will know the great value of much experience and practise of each of the many men in the organization. He will neither kill the business by half-hearted indors.e.m.e.nt, nor increase the hazard of investment by urging this or that modification. Nor will he advocate this or that machine being added to a line that is already too great.
The invention, the general organization, the proper direction of the business, are essential to success. But without that organization which is only obtained by actual, thoughtful experience of the men who do things, all the knowledge and industry of the leaders are utterly useless.
This knowledge produces a new kind of confidence that has greater faith in the existing and running things than in the claims for something that has not had the development of practice. It is the confidence that knows that the right fundamental ideas and the policy of "sticking to one thing" will accomplish the best results.
This is not a doctrine of optimism that holds there is no inferior machine. The "best" implies the existence of the inferior. In nearly all lines there are many grades from the best to the worst, but the loss of faith in the relative value of a machine is most commonly due to a lack of full knowledge of the other types, and it is this kind of loss of courage, confidence, or whatever it may be, that this chapter is intended to offset.
Have Faith in Your Products.
What has been said regarding the optimist, the pessimist, and the vacillating man, from the designing and manufacturing point of view of a machine business, applies with equal force to the business organization.
The business is pushed forward by men who have confidence in the project and in the product. If these men lose their faith in their own business, they not only lose their usefulness as pushers and managers, but they become drags on the industry, and remain so until restored to normality. The hazard of investment is greatly increased by such conditions.
Instances without number have been observed in which men who have been successful have become unsuccessful through loss of confidence due to acquiring the "dangerous half-knowledge."