When the prolonged economic depression of the 1870s brought a continuing drop in demand and with it unused capacity in metal-working, manufacturers began to turn their attention from technology to organiza- tion.56 The new interest led to the beginnings of the scientific management movement in American industry. Organization and management improve- ment became a major topic of discussion at the recently formed American Society of Mechanical Engineers. In 1886, Henry R. Towne, the senior executive and major stockholder of the Yale and Towne Lock Company, made it the theme for that year’s annual meeting of the society. In his presidential address, entitled “The Engineer as an Economist,” Towne noted that:
The questions to be considered, and which need recording and publication as conducive to discussion and the dissemination of useful knowledge in this specialty, group themselves under two principal heads, namely: SHOP MANAGEMENT and SHOP ACCOUNTING . . . Under the head of Shop Management fall the questions of organization, responsibility, reports, systems of contract and piece work, and all that relates to the executive management of works, mills and factories. Under the head of Shop Accounting fall the questions of time and wages systems, determination of costs whether by piece or day-work, the distribution of the various expense accounts, the ascertainment of profits, methods of bookkeeping, and all that enters into the system of accounts which relates to the manufacturing departments of a business and to the determination and record of its results.57
Towne’s address was followed by two other significant papers, one on cost accounting and the other on capital accounting. These two papers provide further insights into the state of factory management in the metal- working industries in the mid-1880s. The author of the second, Captain Henry Metcalfe, was an intellectual heir of Roswell Lee, the systematizer of the Springfield Armory early in the nineteenth century.
Metcalfe had served as superintendent of several of the federal arsenals and had the previous year published the first book to be written in the United States on cost accounting in manufacturing works. His analysis and proposals were based on modifications and refinements of the procedures that were first developed at the Springfield Armory after 1815. They had similarities to the voucher system of accounts that Carnegie borrowed from the railroads.
To Metcalfe the basic managerial problems were coordination and control. He began by describing “wasteful delay” in the process of manu- facturing, which in many cases resulted from records “too often kept by memory.” He then quoted the manager and owner of a large establishment employing 1,400 men as telling him:
The trouble is not foreseeing necessities, nor in starting the work to meet them; but in constantly running over the back track to ^ee that nothing ordered has been overlooked, and in settling disputes as to whether such and such an order was or was not actually given and received. Superintendence … would be very different work if I were sure that an order once given would go of.itself through the works, leaving a permanent trail by which I could follow it and decide positively where and by whom it was stopped. As it is, I spend so much of my time in “shooing” along my orders like a flock of sheep that I have but little left for the serious duties of my position.58
Metcalfe’s answer was what he called a “shop-order system of accounts” which made it possible to control the flow and improve basic cost accounting. Each order, after it was accepted by the factory, received a number. That number was then put on what were essentially routing slips prepared at the plant’s office. These indicated which departments the order would pass through and what parts were to be fabricated and assembled. These slips accompanied materials. On them, each department foreman placed the time and wages expended, as well as the machines and materials used on that order while it was in his department. The completed set of slips thus provided a record of the costs of labor and materials used to complete each order. They also gave an accurate account of the cost of operating each department. In addition, the ticket acted as an authority to do work and to requisition materials. It also became a “roll call or time check” on the working force.59
Metcalfe further used these data to determine for each department the “indirect expenses” or overhead costs as well as the “direct expenses” or prime costs. His procedures for computing the former appear to be more sophisticated than those used by the railroads or in Carnegie’s steel works.60 He had developed a formula to determine a “cost factor” based on each department’s contribution to the work done by the enterprise as a whole. With this factor he allocated to each department a part of the general expenses such as rent, insurance, taxes, and what he termed “the standing order” charges, that is, heat, power, light, general foundry as well as general office and sales expenses. On the basis of the information pro- vided by his routing slips Metcalfe produced monthly and even daily cost sheets for each department and for each order.
The speaker who took the platform after Metcalfe at the 1886 meeting, Oberlin Smith, the chief engineer of a New Jersey machine-tool company, rounded out the discussion by considering capital accounting.61 For Smith, the purpose of such a valuation was to appraise the property accurately for tax and insurance purposes and to value properly the firm’s assets on the annual balance sheets. Smith argued for using current replacement costs in making such valuation. However, neither Smith nor his contemporaries made any attempt to account systematically for depreciation. Most metal- working firms continued to use the railroad method of renewal accounting. They charged repairs and renewals to operating costs, and listed their assets either at original (historical) costs or at replacement costs.
The long discussion that followed these papers at the meeting in March 1886 indicated that other manufacturers were developing comparable control and accounting methods. Frederick W. Taylor of the Midvale Steel Company said that his firm had been using a technique “very similar” to Metcalfe’s for the past ten years.62 John W. Anderson, who operated a “large manufacturing establishment which embraced twelve different departments, each having a foreman,” reported employing comparable ticket systems. Charles A. Fitch had observed the use of similar methods in sewing machine factories. While no one mentioned Carnegie’s use of the comparable voucher system and of other examples of railroad accounting, Taylor in his later correspondence tells of his reliance on vouchers, in particular, and on railroad accounting, in general, in developing internal statistical controls.
Taylor and Anderson immediately pointed out the basic weaknesses in Metcalfe’s proposed control system. Foremen and workers had neither the time nor interest to fill out the slips properly. For this purpose, metal- working firms were soon employing specialized clerks and timekeepers to collect, record, and disseminate the information needed for costing and coordination.63 By the 1890s, these clerks had become the first “staff” employees in a number of metal-working factories.
Although metal-working manufacturers agreed to the value of the procedures proposed by Metcalfe and others, the inside contractors and other strong and independent foremen often stood in the way of getting the new systems installed. It has been noted that: “From the contractor’s point of view any steps taken by the Company to obtain greater knowl-edge and control by expanding accounting procedures, greater inspection, or the introduction of rate cuts, represented a threat to his position and status.”04 This was true, too,’of the foremen who operated furnaces and other major activities on a piece-rate basis.
Partly as a way to get the contractors and other foremen and their workers to accept the shop-order ticket system or similar control proce- dures, Henry Towne, Frederick W. Halsey, and other metal-working manufacturers developed what they termed gain-sharing plans. These plans, the manufacturers believed, provided incentives similar to those of inside contracting by assuring workmen as well as foremen higher pay for expanded output. At the same time they permitted the management to gain control over the processes of production.
In 1889, at the annual meeting of the ASME, Towne described a gain-sharing plan which had been used in his works since I884.G5 It was essen- tially a contract with all the working force in a department or shop similar to that which his firm previously had had with individual inside contractors. By this scheme any reduction in unit costs achieved through improved equipment and plant design, more effective scheduling, fuller use of machines and materials, and more productive labor would be shared equally between the company and the workers. Thirty to 40 percent of the savings resulting from increased productivity was to go to the workers and 10 to 20 to the much smaller number of foremen.
Halsey’s plan was a premium one. It was based on hourly rather than piece rate (thus assuring a certain minimum wage). Premiums, sometimes as high as a third of the hourly rate, were paid to workers who exceeded standard output. This scheme was widely used and copied.66 In determining standard output, both Towne and Halsey had relied on past experience as shown in existing records and in the data collected through the installation of the new shop-order or voucher systems of accounts.
In 1895, Frederick W. Taylor delivered his first paper on what he soon termed “scientific management.”67 He explicitly addressed himself to improving the gain-sharing plans of Towne and Halsey.68 First, he pointed out that the costs and the resulting savings to be shared should not be based, as they were in those plans, on past experience, but rather on a standard time and output to be determined “scientifically” through detailed job analyses and time and motion studies of the work involved. In addition, Taylor would apply the stick as well as the carrot. He would do this by returning to the piece rate and by paying a “differential piece rate.” The workers who failed to meet this standard time and output received a lower rate per piece, while those who excelled received a much higher rate per piece.69
His efforts to determine scientifically standard time and output helped Taylor to become the nation’s best known expert on factory management. They also convinced him that shop or department foremen, the central figures in factory organization, must go. He became certain that no man could acquire the versatile competence needed by a general or “line” foreman to do his job properly.70 He proposed to achieve this goal by forming a planning department to administer the factory as a whole and to do so through a number of highly specialized shop bosses, or, in his terms, “functional foremen.” The activities of the general foreman were thus to be subdivided into parts. Instead of reporting to one boss the workers in one shop or department would report to eight. These included, as Taylor wrote in his major work, Shop Management, “ (1) route clerks, (2) instruction card clerks, (3) cost and time clerks, who plan and give directions from the planning room, and (4) gang bosses.” These four provide coordination and control. Three other functional foremen—the speed boss, the repair boss, and the inspector—were concerned with the performance and the result of work. An eighth, the shop disciplinarian, reviewed the workers’ “virtues and defects,” and aided them in more effectively carrying out their tasks.71
All eight of these functional foremen reported to the planning depart- ment. “The shop, and indeed the whole works,” Taylor insisted, “should be managed, not by the manager, superintendent and foreman, but by the planning department.”72 The planning department was also to supervise job analyses and time and motion studies and to set the standards of out- put. After reviewing the orders received at the plant, it was, on the basis of its analyses and information, to schedule the flows of current orders and to set the daily work plan for each operating unit and for each worker in the factory. In addition, it was to refine the shop-order system of control and to keep a constant check on “the cost of all items manufactured with complete expense analysis and complete monthly comparative cost and expense exhibits.” Its employment bureau was to have charge of recruitment and laying-off of workers. Finally, the planning department was to be responsible for “the maintenance of the entire system, and of standard methods and applicances throughout the establishment, includ- ing the planning room itself.”73
Although Taylor’s goal of extreme specialization proved unacceptable to American manufacturers, many of his basic concepts were incorporated into the organization of modern American factories. The weakness of the Taylor system was its failure to pinpoint authority and responsibility for getting the departmental tasks done and for maintaining a steady flow of materials from one stage of the process to the next. Responsibility for such activities was diffused among the several members of the planning department and among the functional foremen. Several of Taylor’s con-temporaries, including such writers on factory management as Alexander H. Church, Harrington Emerson, Leon P. Alford, and Russell Robb, pointed to this critical need in factory operations.74 Church, for example, stressed that while Taylor focused on “analysis” of tasks, he failed to consider their “synthesis” into the organization as a whole. “Coordination,” Church insisted, “is the keynote of modern industry.”
No factory owner, even those who consulted Taylor or his disciples, adopted the Taylor system without modifying it. To provide the essential overall coordination and control of throughput and at the same time to benefit from the functional specialization proposed by Taylor, many in- stalled an explicit line and staff structure. The operating departments or shops continued to be managed by foremen who were generalists and who were on a line of authority that came down from the president by way of the works manager or superintendent. The functions of Taylor’s planning department and functional foreman became those of a plant manager’s staff.77’ Overall coordination, control, and planning remained the responsibility of the works manager, who was now assisted by a staff of specialists.
The most articulate exponent of the line and staff type of factory organization was Harrington Emerson, who, not surprisingly, was an experienced railroad manager—first as a troubleshooter for the Burlington and then for the Santa Fe. In a series of articles in Engineering News in 1908 and 1909 and in two books, he proposed four major staff offices— personnel, plant and machinery, materials, and methods and procedures.76 As had been the case on the railroads, the staff was to advise on but not have responsibility for carrying out day-to-day work. “It is the business of staff, not to accomplish work, but to set up standards and ideals, so that the line may work more efficiently.”
In the first years of the new century many factories came to be organized along the lines set out by Emerson, Taylor, Towne, and other active members of the American Society of Mechanical Engineers. The contract system was eliminated; gain-sharing and incentive plans were adopted; cost accounting based on shop orders or a voucher system of accounts was introduced; time studies were carried out; route, time, cost, and inspection clerks were employed; and the manager’s staff was enlarged.
The Remington Typewriter factory at Illion, New York, reorganized in 1910 by Henry Gantt, one of Taylor’s most committed disciples, provides a good illustration.77 All the units involved in the fabrication and assembling of parts were placed in the manufacturing department—the line department. Each subunit there had its own foreman responsible for its output. The other departments—purchasing, stock order, shipping, inspection, time and cost, works engineering, and labor—became staff departments, reporting directly to the works manager or his assistant and communicating to the operating units through these two senior executives. In the structure Henry Towne finally adopted in 1905 for his lockmaking enterprise, the line and staff distinction was more explicit and the staff offices more elaborate than at Remington. Here another Taylor disciple, Carl Barth, planned a new structure. In addition to the purchasing, the stock order and shipping, the power and plant, and employment departments, there were departments for product design, production efficiency, and methods. As at Remington, Towne’s stock-order depart- ment supervised the flow of materials through the factory. It conducts, in the words of one report, “correspondence with customers concerning all entered orders, enters all orders for stock and from customers, controls all movement of material during manufacture, regulates the stock of all raw and finished materials, and supervises the packing and shipping of all finished products.” The department of productive efficiency “is responsible for the working efficiency of all employees; supervises all time-study work, and establishes both piece and day wage rates,” and the department of methods “studies and analyzes all manufacturing methods, covering both machine and assembling operations; keeps in touch with new devel- opments of machine tools, and recommends their adoption where tending to increase economy or improve the quality of the product.”78 The reorganization of Yale and Towne, Remington, and other mass-producing metal factories in the early twentieth century marked the culmination of the movement for systematic and scientific management that had its beginnings in the economically depressed 1870s. Their line and staff form of organization became standard for the management of the processes of mass production in industries using increasing complex technologies in the years after World War I.
Immediately after 1900, much the same set of managers and consultants perfected modern factory accounting.70 Here, innovations came primarily in determining indirect costs or what was termed the “factory burden,” and in allocating both indirect and direct (or prime) costs to each of the different products produced by a plant or factory so as to develop still more accurate unit costs.80 Of particular significance were the methods developed to relate overhead costs or burden to the fluctuating flow of materials through a manufacturing establishment. In a series of articles published in the Engineering Magazine in 1901, Alexander Church began to devise ways to account for a machine’s “idle time,” for money lost when machines were not in use. Henry Gannt and others then developed methods of obtaining standard costs based on standard volume of through- put. By determining standard costs based on a standard volume of, say, 80 percent of capacity, these men defined the increased unit costs of running below standard volume as “unabsorbed burden” and decreased unit costs over that volume as “over-absorbed burden.” By 1910, these and nearly all other basic methods of modern factory cost accounting were being discussed at length in engineering and other professional journals. By then, the internal statistical data needed to control the flow of materials through several processes of production within a single industrial establishment had been fully defined.
These innovators in cost accounting, however, paid relatively little attention to financial or capital accounting. Because relatively fewer financial transactions were carried on within the plant, they did not develop as careful internal auditing as that initiated by the railroads fifty years before. Nor did they concern themselves with the problem of depreciation in determining their capital account. The reason was that, until well into the twentieth century, nearly all large industrial firms continued to use replacement accounting, which their managers had borrowed from the railroads. As on the railroads, they defined profits as the difference between earnings and expenses, and the latter included repairs and renewal.
While the factory managers were perfecting their organizational structure and statistical and accounting controls, they continued to improve the technology of production. They concentrated on three types of technological innovation to help expand further the volume of throughput: sustained development of multipurpose machine tools, improvement of metals in cutting tools to increase the speed at which machines worked, and increasing application of power to move materials more swiftly from one stage of production to the next. All three intensified the use of energy and increased the amount of capital required in the processes of production.
Many of the managers concerned with organizational innovation played a significant role in these technological developments. Taylor, for example, while still at Midvale received at least eleven patents on improved machinery and metals. In 1898 and 1899, with the aid of Maunsel White, he completed experiments begun at Midvale in the 1880s to perfect alloyed steels and other metals. Used at much higher temperatures than ordinary steel, these alloys permitted the cutting, grinding, and shaping of metal at speeds many times faster than had been possible before.81 In his efforts to speed up machinery Taylor also worked to improve belting that transmitted power to the machines and carried materials to the machines and their operators. The accelerated speeds made possible by the new metals and new means of power transmission (here electricity was already replacing belting) helped to make obsolete shop methods based on older techniques of metal-working. This, in turn, made it easier to introduce further organizational changes to standardize and simplify the processes of production.
It was in the production of the automobile, the most complex product to be made in high volume in the metal-working industries, that the new technology was most fully applied. In that industry the use of multipurpose machine tools, alloys, new forms of power transmission, with improved plant design and shop organization, made possible an integration of the processes of production that brought an enormously swift expansion in the output and productivity of a single factory. When Henry Ford and his associates produced the low-priced model T in 1908 and then created a worldwide sales organization to distribute their sturdy, reliable, cheap car, the resulting almost insatiable demand created a constant pressure to increase output by accelerating throughput. The building of the Highland Park plant to produce the “T” marked a culmination of earlier developments in the metal-working industries. Ford and his colleagues adopted the most advanced machinery, used the toughest alloyed steels, and followed the “line production system” of placing machines and their operators in a carefully planned sequence of operations.82 Ford’s factory engineers designed improved conveyors, rollways, and gravity slides to assure a continuing regular flow of materials in the plant. These engineers also began to experiment with the use of conveyor belts to move parts past the worker doing the assembly, with each man assigned a single highly specialized task. The moving line was first tried in assembling the flywheel magneto, then other parts of the engine, next the engine itself, and finally, in October 1913, in assembling the chassis and completed car. The innovation—the moving assembly line—was an immediate success. The speed of throughput soared. Labor time expended in making a model T dropped from 12 hours and 8 minutes to 2 hours and 35 minutes per car. By the spring of 1914 the Highland Park plant was turning out 1,000 cars a day and the average labor time per car dropped to 1 hour and 33 minutes. The moving assembly line quickly became the best-known symbol of modern mass production.
With the coming of the moving assembly line, the processes of pro- duction in the metal mass production industries had become almost as continuous as those in petroleum and other refining industries. The increased velocity of throughput permitted Ford to reduce the price of his product until it was half that of his nearest competitor, to pay the highest wages in the country for nonskilled work, and still to acquire a personal fortune that was larger than that of John D. Rockefeller, Andrew Carnegie, or James Buchanan Duke. As in steel, oil, and tobacco, the coming of mass production made the metal-working industries capitalintensive, energy- intensive, and manager-intensive. Because of the diffi-culties of working the materials being processed, of the more intricate nature of the processes themselves, and of the complexity of the finished products, the development of mass production techniques in the metal- working industries required more time, thought, and effort than it did in others. And the additional effort required to make them more profitable and productive meant, in turn, that these industries became the major seed bed for modern factory technology and modern factory organization.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.