Management of dairy plants

Preface

The larger portion of the material presented in this book has been collected by the author during the fourteen years while he was engaged in commercial dairy work. Much has also been obtained from the experience of others. The author has during the past ten years taught the subject of creamery management to students, and the material presented in this book has been given to the students in the form of lectures.

Acknowledgment is due to Professor F. W. Beckman of the Department of Agricultural Journalism of Iowa State College for his valuable assistance, particularly with the chapter on Advertising, which was largely written by him, also to Professors B. W. Hammer, A. W. Rudnick, and M. R. Tolstrup, who have all assisted in this work.

The author is indebted to the following parties for the use of electrotypes and illustrations: Creamery Package Manufacturing Company, Chicago, Illinois; J. G. Cherry Company, Cedar Rapids, Iowa; York Manufacturing Company, York, Pa.; Vilter Manufacturing Company, Milwaukee, Wisconsin; Madison Cooper Company, Calcium, N. Y.; National Dairy Council, Chicago, lUinois; The Wisconsin Experiment Station, Madison, Wisconsin; Kansas Experiment Station, Manhattan, Kansas; and the Dairy Division, Department of Agriculture, Washington, D. C.

M. MORTENSEN.

Iowa State College, December, 1920.

Contents

Chapter Page

I. Preliminary Survey of Conditions i

Copartnership 1 1

Chapter I Preliminary Survey Of Conditions

A CREAMERY may be owned and controlled by an individual, a closed stock company, or it may be controlled by the people of the entire community; but regardless of its prospective form of organization, certain factors which will largely determine the success or failure of the enterprise should be considered in its undertaking. These are:

1. Nature of business.

2. Raw material available.

3. Competition.

4. Amount of money required.

5. Banking facilities.

6. Amount of rural business handled by the town.

7. Attitude of the community toward the undertaking.

8. Railroad facilities.

9. Suitability of site and building. 10. Competence in the manager.

Nature of Business. — Formerly the creamery business was confined strictly to butter making, but now several side lines are often included, such as ice cream making and cheese making. A creamery receiving milk, either exclusively or in part, may find it advantageous to manufacture cheese from all or from a portion of it. Some creameries handle eggs at a profit. It is even claimed that a laundry may be operated profitably in connection with a creamery. It may be operated at a profit; but, for sanitary reasons, a laundry seems hardly proper as a side

I line as a coordinate feature of the creamery. If operated by common power, the laundry should be separated from the creamery by a solid wall and the workers in one place should take no part in the operations of the other place.

The market facilities will naturally play a big part in determining the nature of the business. If a creamery is located in a thriving town or in a city, ice cream making would naturally fit in with butter making. Special demands may be created for soft cheese. A retail business may be started to advantage. In a number of cities, creameries are selling, at retail, all the products they manufacture.

Although some or perhaps all of such side lines should be taken up gradually only after the business has been established, yet there should be a fair survey of such opportunities at the outset, as these will often largely determine the advisability of starting a creamery.

Raw Material Available. — Considering Iowa conditions, a creamery located in the country or in a small town and not depending on local markets for the sale of its products, nor placing any dependence on side lines, should receive cream or milk from not less than 600 cow^s.^ If working with less, the operating expenses are too great and such a creamery is unable to compete with a strong rival. Farrington and Benkendorf 2 estimate for Wisconsin that there should be at least 400 cows for a creamery and 200 cows for a cheese factory, with a good prospect of increasing this number in the near future.

As an illustration, consider two creameries, one receiving the raw material from 400 cows, the other receiving the raw material from 800 cows. Assume that these creameries are handling only gathered cream, that the entire amount of butter fat produced by the cows is sold to the creamery, and that each cow produces 140 pounds of butter fat annually. Also take for granted that the price paid by each creamery for butter fat delivered at its plant is not less than the New York quotation for extras, and that the butter is sold on commission at one cent per pound in excess of the price paid for butter fat. The

PRELIMINARY SURVEY OF CONDITIONS 3

average yearly selling price of the butter is estimated at 27 cents per pound. The overrun is figured at 20 per cent.

Daily Statement of Creamery No. i ^ 400 cows produce yearly 56,000 lbs. butter fat. 400 cows produce daily 155.5 lbs. butter fat. 155.5 lbs. butter fat produce 186.6 lbs. butter.

Disbursements

155.5 lbs. butter fat at 26 cents $40.43

Butter maker's salary at $100 per month 3.33

Tubs, salt, color, etc 1.20

100 lbs. skim milk for starter .50

Coal and ice i .00

Drayage .25

Miscellaneous expenses .50

8 per cent interest on a $4,000 investment .89

Annual depreciation of 10 per cent i.ii

Freight on 186 lbs. butter at i cent per lb 1.86

Commission of 5 per cent on 186.6 lbs. butter at 27 cents.. 2.52

$53-59 Credits

186.6 lbs. butter at 27 cents $50.38

500 lbs. buttermilk at 10 cents per cwt .50

50.88

Daily Loss $ 2.71

Daily Statement of Creamery No. 2

800 cows produce yearly 112,000 lbs. butter fat. 800 cows produce daily 311.1 lbs. butter fat. 3 II. I lbs. butter fat produce 373.3 lbs. butter.

, Disbursements ^

311. 1 lbs. butter fat at 26 cents $80.88

Butter maker's salary at $125 4.16

Tubs, salt, color, etc 2.40

200 lbs. skim milk for starter i .00

Coal and ice i .20

Drayage .25

1 Estimates made under pre-war conditions.

Miscellaneous expenses $ .50

8 per cent interest on a $4,000 investment .89

Annual depreciation of 10 per cent i.ii

Freight on 373.3 lbs. butter at i cent per lb 3.73

Commission of 5 per cent on 373.3 lbs. butter at 27 cents. . . 5.04

$101.16

Credits

373.3 lbs. butter at 27 cents $100.79

1,000 lbs. buttermilk at 10 cents per cwt i.oo $101.79

Total Profit 0.63

From the above it is evident that a creamery receiving the cream from only 400 cows will not be able to pay for butter fat within one cent of the price received for its butter. When meeting competition from a larger plant, its strength will be reduced. It also appears as if Creamery No. 2 should be able to pay for butter fat within a fraction of a cent of the price it receives for butter.

In using the above tables, however, it should be considered that a certain amount of milk and cream will be used on the farm. In reality, therefore, if the stockholders sign up for 800 cows, we should not depend on receiving the cream from more than 600 cows.

Competition. — Competition should be considered in the purchase of raw material as well as in the sale of finished product. In the matter of purchase, study the character of the competition, the methods adopted by competitors, the nature of their business, their costs for collecting raw material and for producing finished output, and their facilities for marketing. If the competitor is a man of clean habits and of sound business principles, then he will have the best people of the community working with him. If he is less honest in his dealings, his competition may be disagreeable for a time but will eventually lose out against a strong rival. A proprietary plant cannot prosper in the same town where a successful cooperative creamery is in

PRELIMINARY SURVEY OF CONDITIONS S

operation. The cream-receiving station is usually operated at such an expense and the cream collected there is of such poor quality that its competition seldom wins great strength against a local cooperative plant. But it should always be considered that a competing firm, regardless of its nature, will, while it lasts, receive at least a share of the business.

A cooperative creamery may be organized and operated in any community if the stockholders represent enough cows. A proprietary plant should seldom, if ever, be established in a territory surrounded by strong competitors, for under otherwise equal conditions the younger firm is at a disadvantage.

It is rather unusual for a smaller plant to establish a local market for its butter; but if it does, it should know about its competitors who sell goods on the same market, their selling prices, quality of goods, cost of delivery, credit systems, and special concessions offered to their dealers.

Amount of Money Required. — The money needed to start and carry on a creamery business includes the amounts necessary for building, equipment, and working capital.

The building may be rented. This is the mode frequently adopted when starting in cities, especially by people who have only limited means, and while the business is yet in its experimental stage. A storeroom is often fitted up at small cost and the principal investment consists of such machinery as may be readily converted into cash in case of failure. A new creamery building large enough to make i,ooo pounds of butter daily when only cream is received may be built and equipped for from $4,000 to $5,000, while a creamery with a capacity of 2,000 pounds of butter daily, including a six-ton compressor, can be built and equipped for from $8,000 to $10,000.^

In addition to the building and equipment, a working capital is required. By working capital is understood the margin of quick assets over current liabilities. Quick assets are those which can readily be turned into cash, such as good accounts, good receivable bills, marketable notes, and securities. Furthermore, in the creamery business we can include under this head

1 Estimates made under pre-war conditions.

inventories of raw material as well as of finished product; also, such supplies as tubs, salt, butter color, etc. However, butter wrappers, cartons, or other articles marked with a particular trade-mark and which could, therefore, not be sold readily to other factories should not be considered under the head of quick assets.

The amount of money required for working capital depends mainly on the amount of business, method of paying for cream, time of credit on supplies, amount of supplies carried on hand, terms of credit to customers, and promptness in collecting outstanding accounts, and, finally, on the amount of stock kept on hand either in the form of finished products or as products in process of manufacture.

Where the raw material is bought on time and the finished product is sold for cash or on a commission basis, only a small working capital is required. Some cooperative creameries conduct their business on this basis, paying monthly or semimonthly for the raw material and selling their butter on consignment. In such cases the company often makes out a sight draft, with bill of lading, for two thirds the value of the butter shipped. This draft is then sent through the bank, and the company's account there is generally credited with the amount at the time of deposit. If, however, a system is adopted by which the raw material is bought on cash basis and the finished product sold on two weeks' time, then the company will need sufficient capital to pay in advance for the month's supply of cream and supplies needed. This is because the butter fat remains unsold in the creamery for several days in the form of cream or butter. Moreover some of the outstanding credit accounts will not be collected even w^ithin three or four weeks after sale of butter.

Banking Facilities. — Due consideration should be given both to the financial responsibility and to the authorized capital stock of the bank from which the creamery enterprise must make loans. National banks by law are required to limit their loans to one concern to 20 per cent of the bank's authorized capital and surplus. A creamery transacting a big business and buying its raw material for cash may often during the

PRELIMINARY SURVEY OF CONDITIONS 7

summer months need to borrow more money than the smaller banks are able to furnish.

Amount of Rural Business Transacted in the Town. — To a local proprietary creamery it is of importance that the farmers from the surrounding territory do their trading in the town in which the creamery is located. The greater the territory the town draws trade from, the better patronage the creamery will receive, as farmers usually sell their cream where they do their buying. It has also the advantage of enabling the creamery man to meet more of his patrons and thereby to come in closer touch with them.

For the cooperative and the central creamery this factor is of less importance. In the former case, farmers deliver their cream where they are financially interested. In the latter case, the central plant generally prefers to locate in some city where other opportunities of greater importance are afforded. Such concerns do not cater particularly to local producers, but depend on raw material being shipped to them from long distances.

Attitude of the Community Toward the Undertaking. — Unless both the producers and the people of the town manifest a reasonable amount of interest in the creamery undertaking it will be more or less of an experiment as to outcome. A cooperative creamery may be successful without the support of the people of the town, but a proprietary plant should have the support of both country and town people.

If the people do not manifest any interest or if they show unwillingness to support the local creamery, such indifference or even unfriendliness may usually be traced to one or more of the following causes: First, the people have had unpleasant experiences with former local creameries; or, second, they consider the men at the head of the undertaking as undesirable persons with whom to do business; or, third, the community as a whole is rather pessimistic and lacking in cooperative spirit. Any one of these factors is well worth considering. Although a manager may win out eventually in spite of it all, yet the business will have proved more expensi\x by the time it is put on a profitable working basis than in the case of the creamery which receives the support of its local people in starting.

A community of townspeople and farmers may often indicate its good will toward such a project by offering a bonus to the promoter. This usually consists of a building site or even offer to pay part of the building costs. Such an offer is of much value as an evidence of local friendliness; but as the bonus is, of course, always in lieu of certain specified conditions, to accept it may hamper future success more than the bonus will compensate. The creamery company as a rule will do better to buy its own site and erect its own building, thereby keeping greater independence and increasing its prestige in the community.

Railroad Facilities. — A central plant should be located in a city with more than one railroad. The more railroads leading to the city, the larger the region to draw from and the more thoroughly the immediately surrounding territory is made available to the creamery. A large plant also markets its own products, and it is therefore an advantage to be directly connected with a larger number of towns and cities. This factor should not be disregarded by the smaller plants, for many of them might advantageously dispose of their products to near-by dealers.

Suitability of Site and Building. — In determining the location and housing of a creamery give thorough consideration to sanitation, convenience, and business advantages.

I. Location with Reference to Sanitation. — The surroundings of a creamery should be sanitary. Good facilities for drainage are essential. A creamery should never be located close to barns or places where offensive odors are prevalent, or to places which are natural breeding grounds for flies. It is advisable to provide room for a septic tank large enough to handle the sewage from the creamery. A sufficient supply of good water should be available.

If a building formerly utilized for other purposes is secured, it should be so located and constructed that it can readily be put into a suitable and sanitary condition without too great

PRELIMINARY SURVEY OF CONDITIONS Q

expense. The floors will usually have to be replaced with cement floors; the walls should be smooth, preferably cemented with smooth, hard, cement plaster, or at any rate they should be thoroughly renovated and painted or whitewashed. There should be plenty of windows, and the building should permit of easy ventilation.

2. Location with Reference to Convenience. — If the creamery is in a city, it should be so located that at least one side and one end of the building face a street or an alley. If located in the center of a block it will be inconvenient for shipping and the amount of sunlight available will be insufficient. A creamery should not be located in the principal retail portion of the city, as those streets are crowded with people and the sidewalks cannot be used for shipping so readily as in districts less crowded. In smaller towns this factor will not deserve so much consideration.

A location adjoining a railroad track is of advantage to a creamery doing a large business, but for the smaller plant in a small town the railroad track is of less value. It may even be a disadvantage, inasmuch as patrons delivering their own milk or cream will consider the trains a source of danger. Where farmers deliver their products to the creamery, the location is most convenient if near the center of town. But if, for other reasons, the creamery must be located inconveniently for these deliveries, patronage will often be secured by establishing cream-receiving stations near the trading centers. ^

3. Location with Reference to Business Advantage. — Cream-receiving stations are located at business centers, not merely for the sake of convenience, but also for advertising advantages which are perhaps of equal importance. The creamery itself, if located in the main portion of a town, is thus better advertised. In such a building the front windows should be large enough for the passer-by to obtain a fair view of the entire plant. In larger cities, small creameries are at times located^ in the retail districts, but they should be so placed that shipping will

1 This is to be recommended only for such places where other creameries collect through stations.

lO MANAGEMENT OF DAIRY PLANTS

be taken care of from the back part of the creamery through the alley.

Competence of the Manager. — Managers competent to operate a large creamery are scarce. The successful manager should have had general business experience, and preference should be given to one who has also had practical creamery experience. A company should thoroughly investigate the past record of the man under consideration for this position.

The manager should be honest and broad-minded. He should be fair in his dealings with everybody. The manager should be clean in habits. One who is addicted to liquor cannot be trusted at all times nor can he render his employers the best service.

The creamery manager should have a discerning mind. He must be able to judge the men with whom he has business dealings and also the meli he employs. He should recognize the limitations as well as the possibilities of his employees.

He should be an organizer. He must be able not only to establish a superior working system in factory, field, and office, but along with this he must also organize a working force which can carry out his ideas without friction, each member becoming a useful link in the entire chain of the organization. He should be a good executive. As such he must be a man of punctuaHty and perseverance, able to gain the confidence of his employees, and at the same time obtain efficient and economic service from them.

He should have had at least a fair technical training in the manufacture of those products which his factory is to handle.

He shou]d be a money-maker. The success of a business enterprise is largely measured by its financial success. A man that can be expected to make money for the company is supposed to be able to save for himself. Nevertheless, some men do make money for their employers while spending their own earnings as soon as received. The ability of a man to save is, however, a good guide when engaging a creamery manager.

Chapter II

The simplest and oldest form of business ownership is that by the individual. As long as one person owns and operates a business, its organization is very simple. All business transactions with this individually owned concern will be directly with the owner or his agent. Should this person, however, take one or more partners, then an organization known as a copartnership is formed.

COPARTNERSHIP

A partnership is an association founded upon a contract between two or more competent persons for joining their money, goods, labor, and skill, or any or all of these, for the purpose of carrying on a legal trade or business, with the understanding tha^there shall be a communion of profit among such partners.

Partnerships are of two kinds — general and limited. A general partnership is the most common form and is an association of two or more parties who agree to enter into a specified business without fixing limitations. A limited partnership is an association of parties for some of whom liability is limited. This latter form of partnership is allowed in some states, but is rarely organized, and is now largely supplanted by the corporation. A limited partnership is usually required to file in some public office a certificate showing its membership, the purpose for which organized, its total capital, its assets, and the number of shares held by special partners.

How a Partnership is Formed. — A partnership may be formed by a written agreement. Such an agreement should specify the names and duties of each partner, the purpose for which the partnership is created, the amount of money invested by each, how the partners will share in profits and losses, form

II of bookkeeping records, duration of the company, and other special provisions.

A verbal agreement is sufficient for creating a partnership, but in the absence of a written agreement the law assumes that partners share profits and losses equally.

Who May Be Partners. — All legally competent persons may enter into a partnership. Insanity, idiocy, or habitual drunkenness disqualifies persons from becoming partners.

A minor may enter into a partnership, but contracts by him are voidable and he cannot be held for partnership liability. The minor, when he comes of age, or before, has the further privilege of renouncing his connection with the company and of disaffirming past transactions if he chooses. If, however, he remains connected with the company a reasonable length of time after coming of age, the law assumes that he i, a legal partner.

Classes of Partners. — According to their responsibilities, partners may be designated as:

1. Ostensible Partner, the real partner; that is, the one known to the world as a partner.

2. Dormant Partner, the silent partner; that is, not known to the world as a partner but partaking of profits. He can sever his connection with the company without giving public notice of the same and is not liable for debts contracted after his retirement.

3. Nominal Partner, appearing to the world as partner without having any interest in the firm's business. He is liable to a third party to the same degree as the ostensible partner.

4. Special Partner, one who supplies a certain amount of capital. If complying with the statutory requirements, he is liable only in proportion to his interest in the firm.

Liabilities of the Firm. — A partnership has the privilege of doing business in the firm name and may sue or be sued like an individual. Debts contracted by any member of the firm for purchases made on the firm account shall be paid by the partnership. In case of the partnership being dissolved, the partners, in accordance with agreement, will divide the

^ FORM OF ORGANIZATION I3

property which remains after all firm indebtedness has been paid.

Liabilities of Individual Partners. — The liabilities of partners to each other are regulated by written agreement; in its absence, the law assumes that partners share alike in profits and losses. If a partner withdraws before his partnership contract expires, he is liable to the remaining member or members of the firm for damages due to his withdrawal.

The partners are individually responsible to a third party for indebtedness contracted by the copartnership.

But creditors of each partner as an individual, if any, must first be satisfied before that partner's personal property can be attached for his partnership liabilities.

A new partner is not responsible for debts contracted before he was a.imitted as a partner.

Dissolution of Partnership. — A partnership is dissolved by

1. Expiration of predetermined time,

2. Mutual agreement.

3. Death of a partner.

4. Change of membership.

5. Bankruptcy of a member or of the partnership itself.

6. Court action, as in case of dishonesty, habitual drunkenness, etc.

No partner can sell out his interest in a copartnership and in that way avoid liability for debts contracted.

When a copartnership is dissolved, a notice thereof should be sent in writing to all firms or individuals with whom the company is dealing or with whom it had former dealings. Such announcements should also be made through the newspapers.

If a partnership is dissolved by the death of one member, the surviving members settle the partnership accounts, but they are not authorized to carry on the business for other purposes. When the affairs of the partnership have been settled and when the amount belonging to the deceased has been paid to his rightful heirs, the surviving partners may then resume business.

CORPORATION

A corporation has been defined as an association of individuals forming a body which the law regards as an individual. The members of such a body may change successively without affecting its status as a legal unit.

We may distinguish between business corporations organized for pecuniary profits and corporations estabhshed for other than pecuniary purposes, such as churches, fraternal organizations, etc. The business corporation is gradually supplanting the more risky form of copartnership. This body organized for pecuniary profit is the one most commonly known by the name of "Corporation" or "Business Corporation," being an organization of persons for the purpose of conducting some commercial enterprise.

Advantages of the Corporation. — Parties investing money in business find that the corporation has several advantages over the older form of organization. Such advantages are: First, the permanency of the organization regardless of death, insolvency, or change of its members; second, the limited liabilities; third, the ease with which any person's interest in the corporation may be disposed of or transferred to other parties.

Creation of a Corporation. — A copartnership is created by contract between two or more competent persons with the purpose of carrying on some legal business. A corporation is not created merely by agreement of the members, but must receive permission from certain government officials to act as a corporate being. Usually the secretary of state grants the applicant a charter permitting the members to do business under a corporate name and particularizing the rights and privileges granted to such a body. The number of members required for creating a corporation varies in the different states, the minimum number in most states being from three to five.

Before commencing any business except their own organization, the members must adopt articles of incorporation which must be signed and acknowledged by the incorporators. For a corporation consisting of a number of members it is not necessary that all act as incorporators, the number required being designated by law. The articles, when properly signed, are submitted to the secretary of state for his acceptance.

It is advisable to consult an attorney when formulating the articles of incorporation, as the required form is controlled by statute. The following may serve as an illustration of points which are usually considered in such articles.

1. The name of the corporation and its principal place of business.

2. The general nature of the business to be transacted.

3. The amount of capital stock authorized, the number of shares into which it is to be divided, and the time and conditions on which it is to be paid.

4. The time of commencement and termination for the corporation.

5. The names of the officers or persons by whom its affairs are to be conducted and the time and manner in which they will be elected.

6. The highest amount of indebtedness to which it is at any time to subject itself.

7. Whether private property is to be exempt from corporate debts.

Powers of the Corporation. — A corporation is considered by law as being a legal or artificial person. It cannot carry on business except to the extent permitted by its articles of incorporation. If the organization decides to engage in business not permitted by its charter, an amendment to its articles of incorporation must first be made. The ordinary powers of a corporation are as follows:

I. Perpetual Succession. — By this it is not understood that a corporation can continue forever, for in most states the duration of the corporation is determined by the articles of incorporation. But if the organization is operated in compHance with law, the corporation may be renewed successively and thus continue indefinitely.