By Henry Gantt

5: VALUE OF AN INDUSTRIAL PROPERTY DEPENDS ON ITS PRODUCTIVE CAPACITY

In the summer of 1916 a professor of political economy in one of our most conservative universities admitted to me that the economists had been obliged to modify many of their views since the outbreak of the European war. My comment was, that the professors of political economy were not the only people who had been obliged to modify their economic and industrial views.

 

The war taught everybody something. Military methods have undergone radical changes, but industrial methods are undergoing changes which promise to be even more radical than the military developments have been.

 

If there is any one thing which has been made clear by the war it is that the most important asset which either a man or nation can have is the ABILITY TO DO THINGS. Our industrial and economic developments have in the past been largely based on the theory that the most important quality a man can possess is his ability to buy things ; but the war has distinctly shown that this quality is secondary to the ability to do things. The recognition of this fact is having a most far-reaching effect, for it makes clear that the real assets of a nation are properly equipped industries and men trained to operate them efficiently. The money which has been spent on an industrial property, whether it has been spent wisely or unwisely, and the amount of money needed to reproduce it are both secondary in importance to the ability of that plant to accomplish the object for which it was constructed, and hence cannot be given the first place in determining the value of the property.

 

In as much as every industrial plant is built to produce some article of commerce at a cost which will enable it to compete with other producers, the value of a plant as a producing unit must depend upon its ability to accomplish the object for which it was created.

 

To determine the value of an industrial property, therefore, we must be able to know with accuracy the cost at which it can produce its product, and the amount it can produce. To compare two factories on this basis, their cost systems must be alike ; for, if there is a lack of agreement as to methods of cost accounting.


VALUE OF AN INDUSTRIAL PROPERTY DEPENDS ON ITS PRODUCTIVE CAPACITY

 

There will necessarily be a lack of agreement as to the estimated value of the properties. There are many methods of cost accounting, but there are only two leading theories as to what cost consists of.

They are:

 

First, that the cost of an article must include all the expense incurred in producing it, whether such expense actually contributed to the desired end or not.

 

Second, that the cost of an article should include only those expenses actually needed for its production, and any other expenses incurred by the producers for any reason whatever must be charged to some other account.

 

The first theory would charge the expense of maintaining in idleness that portion of a plant which was not in use to the cost of the product made in that portion of the plant which was in operation, while the second theory would demand that such an expense be a deduction from profits, or at least be charged to some other account. When plants are operated at their full capacity, both theories give the same cost. If, however, they are operated at less than their full capacity, the expense of carrying the idle machinery is, under the first theory, included in the cost of the product, making the cost greater; while under the second theory, this expense of idle machinery is carried in a separate account and should be deducted from the profits, leaving the cost constant. It is most interesting to note that, when costs are figured on the second basis, great activity immediately ensues to determine why machinery is idle, and to see what can be done to put it in operation. It is realized at once that this machinery had better be operated, even if no profits are obtained from its operation and only the expense, or even part of the expense, of owning and maintaining it is earned.

Fig. 1 illustrates this subject most clearly, and is an indication of the efficiency of the management as contrasted with that of the workmen, about which we hear so much. It is interesting to note that charts of this nature, which are being made monthly in several large plants, have already had a very educational influence on the managers of those plants. They show that idle machinery which cannot be used should be disposed of, and the money received, and the space occupied, put to some useful purpose.

 

A little consideration of the method of getting the data on this chart will make its value more apparent. It is a logical outgrowth of the previous chapter on Production and Costs, and is based on the fact that simple ownership of a machine costs money, in as much as it takes away from available assets. For instance, if we buy a machine for $1,000 we lose the interest on that $1,000, say at five per cent per year, then we have taxes on the machine at two per cent, and insurance of one per cent. Further, the machine probably depreciates at a rate of twenty percent per year, and we must pay $50 or more per year for the rent of the space it occupies. All these expenses, together $330, go on whether we use the machine or not. Thus, the simple fact of our having bought this machine and kept it takes from our available assets approximately one dollar per day.

 

If now the cause for idleness is ascertained each day we can find the expense of each cause of idleness as shown on the chart. That part which is due to lack of orders points out that our selling policy is wrong, or that the plant is larger than it should be— in other words, that somebody in building the plant has overestimated the demand. It is clear, however, that no conclusion should be based on the figures for one month, but on the results for a series of months during which the problem has been carefully studied. If a mistake has been made in building too large a plant, an effort should be made to determine the proper disposal, or utilization, of the excess, in order that the expense of idleness may be taken care of, even if no profit can be made.

 

The next column shows the expense due to a lack of help, which means that we must investigate the labor policy. The next column, showing the expense due to lack of, or poor, material, is an indication of the efficiency of the purchasing policy and storekeeping system. The next column reflects the repair and maintenance department.

 

If in any case the expense of idleness is greater than can be attributed to all of these causes together, it must go in the last column as poor planning.

 

We can hardly claim that such a chart gives us a measure of the efficiency with which the above functions are performed, but it certainly does give us an indication of that efficiency. In several cases, the first of such charts gotten out resulted in the scrapping of machinery which had been idle for years. The space thus saved was used for a purpose for which the superintendent had felt he needed a new building. In another case it resulted in the renting of temporarily idle machinery at a rate which went far toward covering the expense of carrying that machinery.

 

Under the first system of cost-keeping the facts brought out by this method are not available and the increased cost that a reduced output must bear is a great source of confusion to the salesman. The newer system with its constant cost shows that non-producing machinery is a handicap to the industry of a company, just as workmen who do not serve some useful purpose in a plant, or industry, are a handicap to that plant or industry. Similarly, plants or people, therefore, who do not serve some useful purpose to a community are a handicap to that community, for idle plants represent idle capital, and idle people are not producers but consumers only. The warring nations recognized these facts, and put both idle plants and idle people to work wherever possible.

 

The statements so far made concern principally the operation of industrial plants and the production of articles of commerce; but they are none the less true concerning the construction of industrial plants. We may ask the same question about construction that we ask about operation, for instance, should the cost of a railroad include all the money spent by the people engaged in building it, or should it include only such money as contributed to the building of the road? As an illustration, is the cost of a piece of road which was built and then abandoned for a superior route before being used a part of the cost of the railroad built, or is it an expense due to improper judgment on the part of the builders?

 

I am not discussing the question as to whether, the public should be called upon to pay interest on the money uselessly spent through improper judgment, but I do think that in all construction it should be possible to separate those expenses which contributed to the desired result from those which did not so contribute. A comparison of these amounts will give a measure of the efficiency of the builders. On this knowledge, proper action can ultimately be taken.

 

Still another factor enters into the value of a “going plant”. We all have known cases where the same plant operated under one manager was a failure, and under another a very decided success. The value of a going plant, therefore, consists of two elements; namely, the value of the physical real estate and equipment, and the value of the organization operating it. In considering the value of an organization we should realize that it lies not so much in the personality of the managers or leaders (who may die or go elsewhere) as in the permanent results of their training and methods, which should go on with the business, and are therefore an asset and not an accident.

 

We have the authority of no less a person than Andrew Carnegie, for the statement that his organizations were of more value to him than his plants. Before we can determine exactly the value of a going plant, therefore, we must find some means of measuring the value of the operations which operates it, for this is an integral factor in the valuation of an industrial property, which is just as real as the more tangible brick and motor of which buildings are composed. Our charts showing the expense of idleness give us at least a rough indication of this value, for they show the expense of inefficient management.

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