Mass Production: The Metal-Making Industries

Modern factory management was first fully worked out in the metal- making and metal-working industries. In metal-making, it came in re- sponse to the need to integrate (that is to internalize) within a single works several major processes of production previously carried on in different locations. In metal-working, it arose from the challenges of coordinating and controlling the flow of materials within a plant where several processes of production had been subdivided and were carried on in specialized departments. In both metal-making and metal-working, the processes of production became increasingly mechanized, capital-intensive, and energy consuming. But because the materials were so hard to process and more difficult to work than in the mechanical or refining industries, mass production came in a slower, more evolutionary manner. In the metal- making and metal-working industries the drive to mass production required far more intricate and costly machinery, a more intensive use of energy, an even greater attention to the design of works and plants, and for the first time, concentration on the development of systematic practices and procedures of factory management.

In metal-making, the challenge of scheduling, coordination, and con-trolling the flow of work came only after more than one process had been placed in a single works. On the old “iron plantations” facilities had been too small and the technology too crude to create a need for internal scheduling and control or to permit a greater increase in output through careful plant design and improved management procedures. Then, the iron industry began to “disintegrate” in the 1830s and 1840s, when the availability of coal permitted a greater and steadier output and when many of the plantations had exhausted their ore supplies. Blast furnaces, forges, and rolling and finishing mills were soon operating in different establishments.

The reintegration of the iron-making processes came quickly. It first appeared with the building of the earliest large rail mills in the 1850s. As one rail mill normally consumed the output of two or three blast furnaces, there was an obvious advantage to placing the blast furnaces and final shaping mills within a single works.25 By 1860 the four biggest integrated rail mills were the largest enterprises in the iron industry. Soon they were producing wire, beams, and merchant bar iron as well as rails. The capitali- zation of each was over $1 million. Not only was equipment costly but also the labor force in these mills was large. The ratio of capital to worker was still relatively low; the mills remained relatively labor-intensive. In i860 the Mountour Iron Works at Danville employed close to 3,000 employees; the Cambria Iron Works at Johnstown, 1,948; the Phoenix Iron Company at Phoenixville, 1,230 (all three were in Pennsylvania); and the Trenton (New Jersey) Iron Works, y86.26 During the Civil War the number of large integrated iron-making works increased, though they remained about the same in size.

In such integrated rail mills the Bessemer steel process—the first to produce that metal on a massive scale—was introduced into the United States in the late 1860s and early 1870s. And it was in these same mills that the open-hearth process made its appearance in the 1880s. Between 1865 and 1876 eleven iron and steel enterprises installed Bessemer converters.27 In most cases the converters worked alongside or took the place of the existing puddling and rolling mills. However, Andrew Carnegie’s Edgar Thomson Works in Pittsburgh and one or two other rail plants were entirely new ones.

One man, Alexander Lyman Holley, was responsible for the design of these eleven new steel works. This brilliant and versatile engineer had found his calling in bringing to fruition the ideas and plans of Henry Bessemer for the mass production of steel.28 Holley’s achievements were less in technological innovation than in the designing of equipment and facilities and their arrangement within the works. He defined as his pri- mary goal “to assure a very large and regular output.” He improved ma-chinery by placing removable bottoms in the converters to shorten the time needed to reline them and by reshaping the form of converters them- selves.29 In Holley’s mind, however, the design of the works and the quality of its management were as important as machinery in increasing the velocity of throughput. He emphasized this point in an article printed in the Metallurgical Review in 1877, in which he compared steel-producing works in Great Britain and the United States:

In the United States, while the excellent features of Bessemer and Longsbon’s plant have been retained, the very first works, and in a better manner each succeeding works, have embodied radical improvements in arrangement and in detail of plant, the object being to increase the output of a unit of capital and of a unit of working expense…. It will have been observed that the capacity of these works for a very large and regular output, lies chiefly in an arrangement which provides large and unhampered spaces for all the principal operations of manufacture and maintenance, while it at the same time concentrates these operations. The result of concentration which is realized is the saving of rehandling and of the spaces and machinery and cost required for rehandling. A possible result of concentration which has been avoided is the interference of one machine and operation with another. At the same time a degree of elasticity has been introduced into the plant, partly by the duplication and partly by the interchangeableness of important appurtenances, the result being that little or no time is lost if the melting and converting operations are not quite concurrent, or if temporary delays or failures occur in any department of manufacturing or maintenance.

The fact, however, must not be lost sight of that the adaptation of plant, which has thus been analyzed, is not the only important condition of large and cheap production; the technical management of American works has become equally improved. Better organization and more readiness, vigilance and technical knowledge on the part of the management have been required to run works up to their capacity, as their capacity has become increased by better arrangement and appliances.30

Holley considered the Edgar Thomson Works his finest creation. He was proud of the installation he had built at his Cambria works at Johnstown, Pennsylvania, but that involved only the placing of the Bessemer units within a large, already existing works (see figure 6).31 In building the Edgar Thomson Works for Andrew Carnegie he could start from scratch. The comparison of the layout of the two works is illuminating. Cambria was originally built in the 1850s before manufacturers fully appreciated the importance of plant design to productivity. It was constructed with little attention to flow of materials within the works. This had been the case with the layout of other large early works, such as the Du Pont Company’s establishment on the Brandywine Creek and the Springfield Armory on the Connecticut River. On the other hand, at Carnegie’s new works the site itself, on the Monongahela River at the junction of three railroads—the Pennsylvania, the Baltimore & Ohio, and the Pittsburgh & Lake Erie—was selected to make the fullest use of existing railroad transportation. The plant was designed to assure as continuous a flow as possible from the suppliers of the raw material through the processes of production to the shipment of the finished goods to the customers. Holley described the works in 1878, three years after operations began, by saying:

Figure 6. Plan of the Cambria Iron Works, 1878

Source: A. L. Holley and Lennox Smith, “Works of the Cambria Iron Company,” Engineering, 26 : 22 (July 12, 1878).

As the cheap transportation of supplies of products in process of manufacture, and of products to market, is a feature of first importance, these works were laid out, not with a view of making the buildings artistically parallel with the existing roads or with each other, but of laying down convenient railroads with easy curves; the buildings were made to fit the transportatioti. Coal is dumped from the mine-cars, standing on the elevator track . . . , directly upon the floors of the producer and boilerhouses. Coke and pigiron are delivered to the stockyard with equal facility. The finishing end of the rail-mill is accommodated on both sides by low-level wide- gauge railways. The projected open- hearth and merchant plants have equally good facilities. There is also a complete system of 30-inch railways for internal transportation.32

The works relied at first on Carnegie’s nearby Lucy and Isabella blast furnaces for their pig iron. Then in 1879 large blast furnaces were built at the plant site. The design of the works (figure 7) permitted the E. T. Works, as they were always called, to become the most efficient steel producer in the nation, and indeed the world.

In addition, Carnegie’s blast furnaces—Lucy, Isabella, and then.those at the E. T. Works—were the largest and most energy-consuming in the world. By “hard driving,” through the use of more intense heat and im- proved and more powerful blast engines, the Lucy furnace increased pro- duction from 13,000 tons in 1872 to 100,000 tons in the late 1890s.33 By 1890, other furnaces besides those of Carnegie were producing over 1,000 tons a week—an enormous increase over the 70 tons a week of the blast furnaces even as late as the early 1870s.

In the same period similar increases occurred in the output of the suc- ceeding stages of the process and in quickening the flow from the blast furnace to the shipment of the final product. As Peter Temin has noted: “The speed at which steel was made was continually rising, and new in- novations were constantly being introduced to speed it further.” At the Carnegie works, for example, Bessemer converters became larger, the Thomas-Gilchrist process made possible a large output from open-hearth furnaces, and the Jones mixer accelerated the flow of materials from the blast furnace to converter. Here and at other works the cooling of ingots in the soaking pits was done faster and carrying rollers improved. “Steam and later electric power replaced the lifting and carrying action of human muscle, mills were modified to handle the steel quickly and with a mini- mum of strain to the machinery, and people disappeared from the mills. By the turn of the century, there were not a dozen men on the floor of a mill rolling 3,000 tons a day, or as much as a Pittsburgh rolling mill of 1850 rolled in a year.”34

Technological innovation and improved plant design, which continued to accelerate velocity of throughput, made the processes more capital- intensive and energy consuming. This was true not only of the largest and most efficient works, including those using the new open-hearth furnaces installed in the 1880s, but also of the industry as a whole. Between 1869 and 1899 the average annual output of the blast furnaces rose from 5,000 to 05,000 tons and that for steel works and rolling mills from 3,000 to 23,000 tons.35 For the same period, the average capital investment for a blast furnace establishment increased four and a half times, from $145,000 to $043,000, and rolling mills eight times, from $150,000 to $967,000. The working force grew more slowly. That for a blast furnace increased from an average of 71 to 17Ố, or two and a half rimes, and for rolling mills from 119 to 412, or three and a half times. In the same period the number of blast furnace establishments fell from 386 to 223, while the number of steel works and rolling mills stayed at about 400. This great expansion in the speed and volume of output required an immense amount of fuel. Coke, which was just beginning to be used in the United States as fuel in the 1850s, consumed 8.1 million tons of coal in 1885 and 49.5 million tons in 1905.

The greatly increased velocity of flow through these works, as Holley suggested, placed increased demands on their managers. Overall coordina- tion and control was difficult, for unlike an oil or sugar refinery, each part of the production process involved different activities. Moreover, the subunits within the works—the coke ovens, the blast furnaces, the Bes- semer converters or open hearths, the rail, wire, beam, and other finishing mills—were managed, in the words of one of the most able steel-makers, John Fritz, as “small principalities, each of them being governed by a despotic foreman.”36 These autocrats handled the day-to-day activities in their units. They hired, fired, and promoted the men who worked under them. Effective coordination of throughput required the placing of vigor- ous management controls over these despots.

In no metal-making enterprise were the techniques of coordination and control more effectively developed than in those of Andrew Carnegie. In building the administrative structure for his new steel works, Carnegie and his subordinates drew directly from the railroads. Carnegie himself was an experienced railroad executive before he entered iron- and steelmaking. At the age of seventeen he had become an assistant to Thomas Scott, who was then the first superintendent of the Western Division of the Pennsylvania Railroad.37 When Scott moved up to be vice president, Carnegie succeeded him as division superintendent. He quickly proved himself a most effective manager on one of the busiest divisions of what was then the nation’s best-managed railroad.

The Carnegie Company’s close relation to the railroads was not unique. The entire output of the first Bessemer plants went into rails. “All of the Bessemer plants had ties of one sort or another with the railroads, usually through the medium of common ownership or directorships.”38 Railroads, in order to assure themselves of such essential supplies, provided much of the capital investment required in the new Bessemer works. The transfer of administrative techniques from the railroads to iron- and steel-produc- ing plants was perfectly natural.

In organizing his steel company, Carnegie put together a structure simi- lar to the one he had worked in on the Pennsylvania Railroad.39 He ap- pointed the nation’s most accomplished steel-maker, Captain William Jones, as general superintendent to oversee the day-to-day work of the superintendents in charge of the blast furnaces, Bessemer converters, rail- road mills, bridge-making plants, and other departments. As general man- agers, Carnegie selected William P. Shinn, a highly competent railroad executive who had been appointed the general agent of the Pennsylvania Company (the subsidiary that operated the Pennsylvania’s lines north and west of Pittsburgh) when it was formed in 1871. “It was Shinn,” notes Carnegie’s biographer, Joseph Frazier Wall, “who had coordinated the various parts and created an effective unit of production.”40

Shinn’s major achievement was the development of statistical data needed for coordination and control. According to James H. Bridge, who worked in the Carnegie enterprises, Shinn did this in part by introducing “the voucher system of accounting” which, though it had “long been used by railroads, .. . was not [yet] in general use in manufacturing concerns.”41 By this method, each department listed the amount and cost of materials and labor used on each order as it passed through the subunit. Such information permitted Shinn to send Carnegie monthly statements and, in time, even daily ones providing data on the costs of ore, limestone, coal, coke, pig iron (when it was not produced at the plant), spiegel, molds, refractories, repairs, fuel, and labor for each ton of rails produced.42 Bridge called these cost sheets “marvels of ingenuity and careful accounting.”43

These cost sheets were Carnegie’s primary instrument of control. Costs were Carnegie’s obsession. One of his favorite dicta was: Watch the costs and the profits will take care of themselves.44 He was forever asking Shinn and Jones and the department heads the reasons for changes in unit costs.

Carnegie concentrated, as he had when he was a division manager on the Pennsylvania, on the cost side of the operating ratio, comparing current costs of each operating unit with those of previous months and, where possible, with those of other enterprises.45 Indeed, one reason Carnegie joined the Bessemer pool, which was made up of all steel companies pro- ducing Bessemer rails, was to have the opportunity to get a look at the cost figures of his competitors. These controls were effective. Bridge reports that: “The minutest details of cost of materials and labor in every department appeared from day to day and week to week in the accounts; and soon every man about the place was made to realize it. The men felt and often remarked that the eyes of the company were always on them through the books.”46

By 1880 Carnegie’s cost sheets were far more detailed and more accurate than cost controls in the leading enterprises in textile, petroleum, tobacco, and other industries. In the metal-working industries comparable statisti- cal data were only just being perfected. In addition to using their cost sheets to evaluate the performance of departmental managers, foremen, and men, Carnegie, Shinn, and Jones relied on them to check the quality and mix of raw materials. They used them to evaluate improvements in process and in product and to make decisions on developing by-products. In pricing, particularly nonstandardized items like bridges, cost sheets were invaluable. The company would not accept a contract until its costs were carefully estimated and until options had been obtained on the basic materials of coke and ore.47

Nevertheless, Carnegie’s concern was almost wholly with prime costs. He and his associates appear to have paid almost no attention to overhead and depreciation. This too reflected the railroad experience. As on the railroads, administrative overhead and sales expenses were comparatively small and estimated in a rough fashion. Likewise, Carnegie relied on replacement accounting by charging repair, maintenance, and renewals to operating costs. Carnegie had, therefore, no certain way of determining the capital invested in his plant and equipment. As on the railroads, he evaluated performance in terms of the operating ratio (the cost of operations as a percent of sales) and profits in terms of a percentage of book value of stock issued.48

Although Carnegie had by the end of the 1870s created a plant organi- zation at the E. T. Works that could be considered modern, the number of managers was still low and the staff was small. The staff executives in- cluded only the accountants who provided statistical controls, three engi- neers in charge of maintenance of plant and equipment, and a chemist, “a learned German, Dr. Fricke,” whose laboratories played an important role in maintaining the quality of output and in improving the processes of production.49 The enterprise was still very much an entrepreneurial one with Carnegie making nearly all the top management decisions.

The history of the American steel industry illustrates effectively how technological innovation, intensified use of energy, plant design, and overall management procedures permitted a great increase in the volume and speed of throughput and with it a comparable expansion in the pro- ductivity of operation. Carnegie’s preeminence in the industry came from his commitment to technological change and from his imaginative trans- ferral to manufacturing of administrative methods and controls developed on the railroads. Technological and organizational innovation paid off. Carnegie’s prices were lower and his profits higher than any producer in the industry. As soon as the E. T. Works was opened in 1875 it recorded profits of $9.50 a ton.50 In 1878 Carnegie’s rail mill recorded a profit of $401,000 or 31 percent on equity. It rose in the next two years to $2.0 million. As the business grew, so did its profits. At the end of the 1890s Carnegie’s larger and more diversified enterprise had profits of $20 million. For the year 1900 they stood at $40 million. By becoming a pio- neer in the methods of mass production in steel, Carnegie quickly accumulated, as John D. Rockefeller had done in petroleum, one of the largest fortunes the world had ever seen.

Similar though less spectacular developments occurred in other steel companies and in the processing of iron, nonferrous metals, and glass. The new technology and organizational forms became well known. Carnegie, Jones, and other steel makers enjoyed describing their achievements. Many of their technical problems and procedures were written about in the pages of Iron Age, the Engineering and Mining Journal, the Bulletin of the American Iron and Steel Institute, and the Proceedings of the American Institute of Mining Engineers. These journals also reviewed the coming of new methods in the processing of copper, zinc, and other metals and in the production of plate glass. In all these industries expan- sion of output came more from increasing the velocity of throughput within the plant than from increasing the size of the establishment in terms of area covered and workers employed. Other metal-making in- dustries became increasingly, though more slowly than in steel, capital- intensive, energy-intensive, and manager-intensive.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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