Factory storeskeeping

Foreword

Great managers are primarily concerned not with today, but with to-morrow. This is true because they have taken advantage of the possibihty of standardizing those features of their work which lend themselves to standardization so that they are left free to give their personal attention where it is really most needed — to matters which cannot be systematically controlled. The administration of any industrial enterprise may be broadly divided iiito the management of men, and the management of things such as plant, equipment, and materials. The former constitutes the art in management, while the latter is susceptible to a more scientific regulation. If the administration of industrials is to become less of an art and more of a science, a sharp division must be made between those matters which from their very nature must remain largely in the realm of art — the functions of dealing with human beings and with intangible questions of policy — and those which may be controlled through predetermined and systematic procedure.

Even where the effort has been made to develop the scientific side of management, however, the popular imagination has been caught by that part of it which deals with shop planning and incentive payment, and more than its share of the average manager's serious attention is absorbed by the actual making of goods. The fact that such planning and payment to be truly effective must be based on unspectacular standardization of equipment and materials has not been sufficiently stressed, and the fact that no part of the business; can function to best advantage until all parts function to good advantage is just beginning to be appreciated.

vi FOREWORD

Thousands of dollars are lost in hundreds of factories through unorganized handling of materials. Although the cash statement is scrutinized with fatherly care, once part of this cash is converted into materials, which are of considerably greater potential value than an equivalent amount of money, this form of wealth tends thenceforth to be neglected and the attention remains centered in the cash drawer. The fact is that the interests of the cash drawer are best served by management so organized and controlled as to serve directly production needs, and good industrial relations in the factory are well-nigh impossible without control not only of materials but also of all other controllable features of the work. It is for this reason that the attempt has been made in this volume to show how one of these functions of management may to a considerable extent be removed from among the ever-present troubles of the manager.

As used, the term materials will be understood to include stores or raw materials and factory supplies, and worked materials or work in process and partly or completely finished parts. The book deals with the replenishment, storage and disbursement of these two classes of materials, but excludes the administration of work while in process, after it passes from storage to the shop, which is known as routing and which does not fall within the scope of this volume. Unless otherwise stated, the discussion applies to both stores and worked materials; and the viewpoint is that of the manager of production of the medium sized plant engaged in manufacturing a variety of articles both to stock and to order. No attempt is made to outline a '^ system" for any specific type of factory, since local variations necessitate local adaptions ; rather the guiding principles of effective material control which are applicable alike to all types and kinds of production are emphasized and illustrated by examples of detailed procedure which has been found effective in numerous instances.

FOREWORD Vll

The object of this book, then, is to outline the principles and methods by which one of the problems of industrial management — the handling of materials — may be standardized and cheapened through scientific regulation, in the hope that the time and energy of the manager may be thus released for the task of Management in the highest sense, that of bringing about the very best conditions for everybody concerned.

Henry H. Farquhar.

Belmont, Mass., May, 1922.

ACKNOWLEDGMENT

To the late Frederick W. Taylor, whose pioneer work in formulating principles of management and developing sound methods by which those principles were made effective, I am indebted for the general viewpoint as well as for whatever in the following pages is sound in theory and effective in practice.

I wish to express appreciation of the help and advice received in the preparation of this volume from my wife, Elizabeth Holton Farquhar; from L. Herbert Ballou; from Charles R. Howard; from Harlow S. Person, and from Hugo Francke.

My thanks are due also for forms and materials supplied by the I^ewis Manufacturing Company, Walpole, Mass.; by the Bethlehem Steel Company, Bethlehem, Pa.; by the Russell, Burdsall and Ward Bolt and Nut Company, Port Chester, N. Y. ; by the Universal Winding Company, Providence, R. I.; and by the W. H. GrifHn Shoe Company, Manchester, N. H.

Contents

, Page

Foreword v

Chap.

Chapter I Relation Between Material Control And Production

Summary: Thb Functions of a Manufacturing Plant. All Contribute to Production. Standardizing for Material Control. Simplification. Specifications. Maintenance of Quality. Determination of Quantity. Methods of Administrative Control. — The Ideal Material System. Knowledge Required to Secure it. Speculative Purchasing. — Relation between Manufacturing Efficiency and Material Control. All Costs are Costs of Production. Storage and Handling Costs must be Low as Possible. Some Typical Cases. — Summary of Material Losses. Lack of Standards of Variety and Quality. Excessive Supply. Deficient Supply. Faulty Management.

The Functions of a Manufacturing Plant. — A manufacturing establishment, as the name implies, exists primarily for the purpose of turning out a product for sale at a profit. This fact curiously enough seems sometimes to be overlooked. Activities other than production proper are of course necessary in order that the main purpose for which the plant exists may be accomplished, and it is necessary in order to avoid a lack of balance in management that each activity be seen in its true perspective without misleading lights and shadows. The main functions in the administration of any manufacturing undertaking are :

The Financial and accounting, or the raising and regulation of funds by which the business is carried on.

The Engineering or technical, which determines the design and composition of the product.

The Production, the prime function of transforming raw material into a salable product.

Selling, which creates a demand for and disposes of what is manufactured.

Personnel, which has to do with the policies and practices grouping themselves about the human element.

All minor activities of the plant may be grouped under one or another of these broad major functions, and all, it must be remembered, spring from and must primarily serve production since this is the activity for which the whole establishment was founded. Looking at the matter in this light, the Production function really embraces finance, engineering, selling and personnel, but deals more specifically with activities in turning out a product through the use of land and buildings, equipment, organization, materials, production and cost systems, and so on. Now, if we have learned anything from the great amount of careful work which has been done in an attempt to reduce the management of industry to less of an art and more of a science, it is that it is just as necessary to control one of these variables with which the manager must deal as it is to control any other and that the business must be looked upon as being organic and not as a series of disjointed and unrelated activities. This viewpoint brings home at once the fact that none of these production activities can continue unless selling provide a market, that machines are useless unless power be available to drive them, that men are useless unless they be provided with work to do and with facilities to do it, and that in turn all of these activities must cease , unless materials are supplied as needed. It is only through the conduct of manufacturing operations that the material problem in the strictly manufacturing business arises — eliminate the production activity and the need of materials, aside from miscellaneous office supplies and the like, disappears.

One of the major functions of production, then, is ',that of providing its needs in materials and of standardizing material activities so that these needs may be adequately met. The function of material supply, instead of being relegated to the background and considered as a ''necessary evil," must thus take its place beside those ordinarily given greater consideration. Only by so doing may a balanced management be brought about ; only when material regulation has been standardized may it be pushed to the background to make room for some of its brothers which are less amenable to control.

Standardizing for Material Control. — Constant emphasis is placed throughout this volume upon the importance of standardizing the various features of the whole material problem of the factory, with special emphasis upon certain phases of such standardization. As applied to material problems, standardization embraces the following :

1. Simplification, or the reduction of the variety of different kinds of material dealt with.

2. Specifications, or the determination of requisite quality of each item of material to be carried.

3. Maintenance of Quality, or the measures necessary to see that materials actually received conform to predetermined specifications.

4. Determination of Quantity, or the question of ascertaining and regulating how much and when to buy various materials under different conditions.

5. Methods of Administrative Control, or the measures by which the whole material cycle is brought under systematic operation.

The major emphasis in the present volume is given to the last two topics, that is, to the regulation of inventory and the methods of coordinating and controlling the whole material procedure from beginning to end — both aspects of factory storeskeeping of vital importance entirely out of proportion to the attention they usually receive, yet the fundamentals of which must be grasped . by the men responsible for materials in the factory if this function of production is continuously to play its part in the struggle for high output and low costs. It is because of the comparatively little serious attention usually given to these two phases of material handling as contrasted with that usually devoted to questions of variety and quality, that these problems of quantity and control have been given right-of-way in this book. Before passing to these in detail, however, it is necessary to get a clear picture of the relation between them and simplification, determination of specifications, and maintenance of quality.

Simplification. — Reduction of variety of materials necessary under given conditions may ordinarily be accomplished without a corresponding reduction in the number or variety of products manufactured, desirable as the latter is in many instances. But without touching the question of the number of products to be made, it is usually possible through careful investigation, to eliminate many items heretofore carried through analyzing exact needs and rigorously eliminating needless frills and varieties, and by making parts interchangeable so far as possible.

The necessity of conserving manufacturing facilities for strictly military needs during the war gave a tremendous impetus to reduction of variety, substitution of standard or interchangeable parts, and elimination, of all materials for which there was not a real need. The War Industries Board did notable work in this connection, and it is significant that much ground gained at that time has been held and that the work of simplification is progressing steadily in almost every industry fostered by the Department of Commerce.

As a result, many instances of remarkable financial savings in various lines of work through centering attention upon essentials only, might be cited, and the effort to cut down the number of articles with which the factory supply service must deal is one of the essentials of good material management. Many storerooms contain upwards of 25,000 different items; a reduction of even a fraction of this number is usually worth all it costs, through saving storage space, interest on investment, labor of handling and keeping inventory correct, balance sheet work and all of the clerical operations necessary to put through any transaction in requisitioning, purchasing, receiving and inspecting, storing, issuing and accounting for any item of material. The degree of control which may be exercised over material routine generally, varies inversely with the number of items between which attention must be divided; it is therefore essential to reduce these to the very minimum consistent with successful operation of the plant.

Specifications. — The determination of the specifications or the requisite quality of each item of material to be retained after simplifying our needs is a technical matter of the utmost importance. It would be out of place to attempt to treat a subject of this size and importance in a volume devoted primarily to a different purpose. No manufacturing undertaking, however, can be successfully carried on until raw material specifications, in the form of standards of composition, of dimension, of strength, of finish, of color, and so on, have been determined, and a strict regulation of quantity is predicated upon a predetermination of quality because the very act of setting a strict limit on the amount of goods to be carried necessitates being sure that each item of this supply be suitable for the uses to which it is to be put.

Maintenance of Quality. — Standard specifications may prove to be a positive harm, however, unless means be taken to put them to constant and effective use, for unless this be done the specifications themselves lend a false feeling of security as to quality. On the one hand, in setting specifications it should be remembered that ''good enough is best;" on the other hand once necessary quality has been determined by those who know, it becomes the imperative duty of those entrusted with inspection of quahty to see that no material not up to these minimum requirements be passed for use. The safeguards which must be thrown around the technical inspection work itself, therefore, are here dealt with as one of the essentials of current material handling upon which adequate regulation rests.

It will thus be seen that there is a very intimate relation between simplifying varieties, determining standards of quality, inspection to enforce conformity to those standards, determination of quantity and standardization of methods of material management. These five must go hand in hand if ideal results are to be secured.

The Ideal Material System. — From a material standpoint the fundamental idea upon which war is conducted is so to organize and manage that the man at the front is enabled to keep his mind continuously on his main duty — the defeat of the enemy — without handicapping him in any way with questions of supplies of any kind. He should be able absolutely to forget material. Ideally and actually he should be able to reach his hand behind him at any time and receive exactly what he needs — no more, no less — at the moment. An over supply will impede his action, consume his time and attention and result in waste; a deficiency either in quantity or in quality will render him helpless. That is the basis upon which the supply service of the army is organized — • material and ration supply should be automatic and governed absolutely by current needs.

For the man at the front substitute the man at the machine, and the above ideal becomes that of the supply service in the factory, for the same reasons and to be attained through similar methods.

To make this supply automatic in either case, we must first know the requirements; we must know the original outfit in quality and in quantity that a man needs when he takes up his work and the probable rate of use of each article while on the job. Then, if we are to send forward the right quantity of the right materials to him just when wanted, many other things are necessary. We must know how long it takes to secure the goods ourselves from our supplier, and how long it takes us to forward them from ourselves to the man who is to use them. It is necessary to know how much of the goods are on hand in the store room, how much has been ordered to be shipped, how much has been promised for specific uses and therefore not available for filling subsequent requests, and from this how much is still available for future demands. Besides these things, to make the supply reliable, there must be a definite location for each article of goods in stock, knowledge as to exactly where and how much of each is on hand, and ability to get them in and out quickly. This, of course, requires that means be taken to safeguard materials while in storage and to keep accurate records of amounts. Accuracy in handling, is essential, all items should be checked all the way down the line as far as is possible consistent with speed and with the personnel employed. Theoretically no goods may pass out of one's hands without a receipt: this, of course, is not always possible in war, or necessary in war or industry. But efficient transportation and sufficient checks at each stage are necessary; therefore, proper identification of the goods is required so as to enable anyone into whose hands they pass to know what the goods are and for whom they are intended. In addition to all these considerations of quantity and time, in both war and industry there are considerations of quality, and in addition to this in industry the further consideration of cost, by which is meant not simply the original purchase cost, but the final use or time cost considering the effectiveness and durability of the particular item in actual use.

These are a few of the many details to be brought under control in well-regulated material handling. They are not matters to be looked after by an inexperienced clerk. Neither does the answer lie in devising a material '^system" and thereafter leaving it to run itself or to be supervised by otherwise preoccupied officials or those who, because their duties do not bring them face to face daily with production troubles, may not realize the vital dependence of manufacturing efficiency upon material control. There is, strictly speaking, no such thing as a material function in itself in the manufacturing business, and those manufacturers who, in addition to producing, deliberately indulge in the buying of materials for re-sale and ''playing the market" are by so much engaging in a separate line of business as distinct as possible from that for which presumably their investment in plant and equipment was made — a dangerous speculative business in which they would in most cases do better not to indulge. Even though a conscious buying for re-sale be not permitted, there are many plants which are even worse off because, lacking this definite policy, they have yet failed to substitute the proper one of governing purchase from the standpoint of manufacturing needs. The tendency in the best plants today is to look upon the control of material as a production function and to govern the replenishment of materials in accordance with the requirements for production during a reasonable future period. One of the oldest, largest, and most progressive manufacturing plants in this country adheres steadfastly to this policy, and has done so for a number of years.

Relation between Manufacturing Efficiency and Material Control. — The vital dependence of manufacturing efficiency on the strict regulation of materials is realized most by those closest to and responsible for production. Although a blunder on the part of the purchasing agent, for example, may result in just censure of that individual, it is after all production which has to bear the cost of the blunder, for the cost of what he buys, as well as the cost of his failure to buy when he should, alike must eventually be borne by the cost of the product turned out.^ Production must, therefore, suffer, in addition to leaks, any evils of over- or under-stocking; and curiously enough both of these losses are most often encountered in the same plant simply because insufficient attention is paid to material problems in general. The only economic justification for storing materials in quantity is that through this reservoir production may be regularized and thus cheapened. It therefore follows that the cost of the product must not be unduly increased through storing too much nor through failure to store enough, for in either event production is not securing the benefit of storage to which it is entitled. There are but two ways in which materials may be sold at a profit: they may be re-sold in the condition in which they were bought at higher than the purchase price, or they may be processed to a finished or partly finished state and sold for more than the cost of raw material plus manufacture. Obviously excess materials cannot be processed, which leaves us only the first alternative of re-sale — as before stated, a questionable policy for a manufacturing concern.

The now classic case of a government establishment may be recalled in this regard. There was here, of course, no element of speculation, but the loose methods of regulating materials then prevalent and still common were in use. Upon the initiation of changed methods of management, the stores situation was thoroughly overhauled. Among other things which came to light was a

1 This regardless of the cost methods used, for even where a so-called "Standard" or predetermined cost of material entering the product is used (any excess over this cost being charged to Profit and Loss), the balance sheet must yet show that articles produced are sold at more than all costs of producing them (blunders included) or the business must eventually discontinue. We are only obscuring the approach of the evil by absorbing such losses in a separate account.

supply of materials above current needs amounting to more than $122,000.

This occurred in a government institution, however, for which allowances may be made. Let us look at some happenings in private plants. The author vouches for the accuracy of these stories, although, of course, names cannot be mentioned. In a machine shop, upon a similar round-up 40 tons of idle stock was unearthed from around the machines, under the benches, and on the floor of one department. This consisted of raw stock cached by the workman, excessive amounts delivered to the machine and not disposed of, partly worked parts sidetracked for "rush" jobs, and so on. There was no speaking acquaintance between material regulation, either purchasing or issuing, and production needs.

In another plant the purchasing agent bought only for current needs as judged from comparison of reports of materials on hand and sales orders which were furnished him. From this placing of responsibility for such matters and from the methods in use, his ability to do so was questioned although he surpassed the average purchasing agent in capability. An actual investigation showed more than $50,000 worth of excess miscellaneous items on hand. Any of those items could have been secured in 3 weeks; some were on hand in sufficient quantities to last 10 years. The intent was good in this case, but human limitations and faulty detail made its accomplishment impossible.

The purchaser for one medium-sized factory was a bargain hunter — one of the most costly and tenacious diseases to which purchasing agents are heir. Responsibility for designation of how much to buy had, up to this time, never been clearly defined, and was usually exercised by the purchasing agent alone; he originated and approved replenishment orders unless some special occurrence made consultation necessary. One morning he beamed into the office with the news that there had just been delivered 18 months' supply of a certain item which he had obtained at an ''exceptional reduction in price." The works manager replied that they had just discontinued the use of that particular item altogether. In this case the material was ' immediately re-sold (at a lower price than was paid for it), but such ''bargains" often form very considerable portions of the excess supplies shown up when materials on hand are measured against requirements.

A somewhat elaborate "stores system" had been installed for keeping track of partly worked parts in another factory. Due to a multiplicity of detail whereby the main requirements of successful stores management had been, however, missed, the difference in inventory as shown on three supposedly accurate interlocking records was surprising, and $15,000 worth of material, as per the book records (in this case under the control of the cost department), could not be physically located or otherwise accounted for. Those entrusted with the work of recordkeeping did not realize the importance of it and had no particular incentive to keep it accurate; the cost man regretted that it became necessary to "write off" such a loss, but otherwise attached no particular significance to the matter.

Akin to this is the case in another plant where the works manager in all important cases must send a personal representative to the store room to check the accuracy of the book balance reported to him from the balance sheets. These again are under the control of the cost office.

A case came to light in an otherwise exceptionally progressive factory where, because of fairly uniform production requirements, it was thought to be unnecessary to apportion, or reserve on the books, material for each manufacturing order in advance of its disbursement. Instead, the average consumption over a period of weeks was determined, to which was added a liberal factor for

12 FACTORY STOEESKEEPING

safety, and the resulting quantity was specified as the ''minimum" below which goods on hand should not be allowed to fall without issuing a replenishment order. This minimum was entered on the balance sheet for the item, and book balances were carefully checked with bin contents from time to time. To give added assurance, over the minimum quantity in the bin was placed a red cloth as a signal to the storekeeper, before touching the minimum stock, to remind the balance clerk to issue a replenishment order. This procedure seemed to the manager to be water-tight, but after a few months' operation a costly shortage occurred on the item. Upon investigation it was found that recent demands had so far exceeded average demands (upon which the ''minimum" was based) that stock became exhausted. Rather than increase the minimum limit to cover such exceptional demands and thereby increase the inventory of idle material during all times of normal consumption, the firm was persuaded to adopt the common sense policy of looking ahead in these matters and apportioning all such material immediately the need became known.

No, efficiency in production cannot be obtained under such handicaps. Money is carefully guarded and checked to the penny; materials are potentially of far greater importance to the manufacturing business than an equivalent amount of money. They should be as carefully guarded and controlled.

Summary of Material Losses.

A. Lack of Standards of Variety and Quality.

B. Due to Excessive Supply. — Excess materials, not disposed of, cause any one or all of the following losses:

1. Loss of Interest on Investment. — The money which is spent for material in excess of what is needed for production during a reasonable period might otherwise be loaned at interest or reinvested profitably in the business, thus producing more money; or it may be used to obviate the necessity of borrowing, thus producing a direct saving; invested in idle material, however, it adds a cost of doing business — the cost of the loss of interest on money needlessly spent.

2. Loss of Insurance on Goods. — A heavy inventory imposes a heavy insurance cost, or a heavy loss in case of fire, usually both.

3. Excess Storage Space. — Every cubic foot of storage space has a rental value. Taxes, insurance, depreciation and repairs on the building, interest on investment, heat, hght, cleaning — ^all such costs for any space throughout the plant must be charged against what occupies that space, be it an operating machine or dead stock, and this charge must eventually appear against the cost of the product which the space is supposed to benefit. In the former case the product of the machine may offset or more than offset these rental charges: in the latter case the charges go to swell expenses which ordinarily can not be returned by the excess materials themselves and which therefore add to the burden which must otherwise be shouldered.

4. Deterioration. — In few cases do materials of any kind retain their original quality during the passage of time. Deterioration, depreciation or obsolescence will sooner or later cause a loss in idle stock.

5. Reduced Stock Turnover. — During normal times of the buying and selling markets the ideal condition as regards storage in the manufacturing business would be that in which no storage whatever is necessary. Imagine a factory where, immediately upon receipt, raw material is delivered to the machine, processed at once and immediately shipped upon completion. Such a factory would have a stock turnover limited only bj'' the time necessary for the longest operation on the product. The cost of material entering into the product under such conditions would obviously be less than that in which storage is necessary, for in storing we have the fixed costs mentioned previously, the cost of added delivery, handling and transportation charges, and possibly deterioration or obsolescence in the materials themselves. No matter for how short a period we store, therefore, the cost of the stored article issued to the shop is actually greater (whether it show on cost records or not) than is the cost of a non-stored article. The profit on the finished product is therefore less; or, if the same, that part of it which pertains to the materials occurs fewer times per year. It is more profitable to make 2 per cent per transaction six times a year than it is to make 13 per cent only once a year. This is a point overlooked in innumerable manufacturing and other concerns.