F. L. Ham
Educational Director, Business Administration Course La Salle Extension University
Writing on business analysis and control in the May, 1922, issue of Administration, Charles E. Carpenter, President of the E. F. Houghton Company, tells of the meeting of the heads of four leading Philadelphia business concerns at luncheon one day in May, 1920. Each definitely agreed that business was facing just such a slump as actually came in the following months. Yet when the slump came the minimum loss suffered by any of the concerns which they represented was $300,000, while one of them was obliged to write down its inventories to the tune of two and a half million dollars.
When Henry Ford announced a cut in prices in September, 1920, the spokesman of a leading association of automobile distributors in the Middle West made public a statement to the effect that “there was no economic reason for a reduction in the price of automobiles at that time.”
These two instances illustrate fairly the sort of thinking and action which characterized the majority of American business concerns in the initial stages of the down swing of the business cycle in 1920–21,—on the one hand a definite recognition of existing tendencies, but without adequate control to meet these tendencies; on the other a persistent ignoring of the facts and an attempt to resist adverse fundamental conditions with sheer self-induced optimism.
Most cautious students of the economic phenomena which characterize the broad up and down swings of business activity, commonly known as the Business Cycle, are extremely hesitant about predicting the ultimate discovery of any means for eliminating this cyclical movement. In fact, so little is at present known about the forces which make for continuous change in economic activity that even the proposal of measures tending to modify the extent of the cyclical movements and alleviate the suffering and waste which these movements now cause must be based on probability rather than certainty.
The value of well thought out proposals of this character, however, cannot be questioned, and the whole-hearted support of every one interested in the greater stabilization of business should be given to such measures as seem applicable and likely to yield favorable results.
The following proposed methods for mitigating the ill effects arising from depression are worthy of careful consideration. They bear the endorsement of Professor Wesley C. Mitchell, probably one of the most widely known authorities on the Business Cycle. It is important to note in connection with these measures that the prosperity period of the cycle is the time when control should be applied.
First, that the precise point be determined at which a readjustment of the rediscount rate of our federal reserve banks should be made. This might be done by the application of an index figure for physical production.
Secondly, long-range planning of public works in periods of depression when labor and material prices are low. In Pennsylvania and California legislation has been passed with this end in view and similar federal legislation has been proposed.
Thirdly, the purchase by the Federal, State and municipal governments of standard supplies so planned as to take advantage of the low prices prevailing in a period of depression, at the same time exercising a stabilizing influence upon the material markets. This proposal might be extended to large private industrial enterprises, notably the railroads, were it not for the fact that under present laws and financial policies the railroads are forced to live from hand to mouth.
Fourthly, unemployment insurance—Huber Bill.
Fifthly, further study of the Business Cycle by individual business executives, and application of the knowledge gained to the control of the concerns operating under their supervision.
This last proposal offers perhaps the most interesting, or at least more immediate possibilities for the work of the industrial engineer. It involves the education of management first in acquiring the necessary knowledge about the phenomena of the Business Cycle, and, second, in developing the managerial control essential to the application of that knowledge.
The industrial engineer is peculiarly well fitted to undertake this educational task. His staff relationship as counsellor to the management, his breadth of vision and detached point of view combined with the very nature of his work, which in its essence is the development of managerial control, equip him to convey perhaps more effectively than anybody how to use the Business Cycle so badly needed by the majority of American business firms.
In some concerns careful attempts have been made to adjust policies and operations to the curve of the business cycle. Where this has been done scientifically the results have been most hopeful, and encourage further development of control in this direction. For instance, one small Chicago manufacturing concern determined in May, 1921, to put into effect a long-deferred plan to build its plant. A loan was floated, land was purchased, and a carefully laid out building constructed, all at a relatively low cost. Today that concern is well-booked up with orders, yielding a wider margin of profit than secured in the boom period, although prices of their product today are lower than at any time since before the war.
Perhaps the most careful and complete attempt to adjust the operations of a single concern to the movements of the Business Cycle, which has been made public, is that of the Dennison Manufacturing Company. In describing the policies of his company before the American Statistical Society in December, 1921, Mr. Henry Dennison pointed out that what business needed most was careful planning and budgeting. He illustrated the policies of his concern by citing those adopted in five important phases of their business.
- Purchasing.
- Expansion of Fixed Assets.
- Finance and Credit.
- Sales and Advertising.
- Labor.
In controlling purchases, the first step was to lay down roughly maximum and minimum inventories of every important raw material to be carried at different stages of the Business Cycle. Then the course of prices for each of these materials over a long period was charted and the secular trend determined. These data were then used by the purchasing department as a guide in buying, actual purchases being varied according to the position of actual prices relative to the maximum and minimum inventory lines. For example, if on certain material the standard quantity to order was a six weeks’ supply, and prices were below the secular trend line, they might buy up to twelve weeks’ supply, but if prices were above the secular trend line, they might buy not more than two weeks’ supply.
This, of course, is not an attempt to make purchasing absolutely automatic, but to serve as a check on purely speculative buying of materials. It worked out so well in their business that in November, 1920, they found themselves with low stocks on hand when so many concerns were in a bad way owing to heavy inventories.
Pursuing the same policy with regard to fixed investments, this company having charted their estimated normal growth, using floor space as the unit, in the case of building requirements, builds more than normal when prices are low and less when prices are high.
In their financial policies they are guided by the movements of the Business Cycle. Recognizing that cash requirements increase as the cycle rises and out of all proportion to the normal lag between outgo and income, they watch closely the relationship between quick assets and quick liabilities with a view to maintaining a sound banking position. Also, in boom times they scan credits more closely and push collections harder than in periods of depression, when a stringent credit policy is an obstacle to securing badly needed orders.
As to their sales policies, during boom periods they can plan for new lines and novelties to be put out in periods of depression when sales resistance must be overcome. Salesmen are not discharged in periods of depression nor is advertising curtailed.
In handling the labor question, a careful record is kept in the Personnel Department of what every employee can do. In periods of depression every effort is made to find odd jobs, repair work, etc., to avoid laying off so far as possible.
These attempts of the Dennison Manu facturing Company point out what may be done by independent business concerns to adapt the course of their affairs to the broad swings of the Business Cycle, in spite of the present lack of information about the underlying forces which activate the cyclical movements.
These adaptations at best are bound to be imperfect. Perhaps the most that can be said of them is that they hold out possibilities of extra profit, or at least the avoidance of too heavy loss.
As stated above, our knowledge of the Business Cycle is exceedingly slight. The volume of convertible data is limited. More intelligent adaptation demands the collection and interpretation of facts which are today obscure. Thus, while American banking statistics are voluminous, thousands of state and private banks issue only an annual report, and no analysis has even been made of bank loans from the point of view of the character of the collateral behind them. Our statistics of unemployment, wages and earnings, and of the whole range of merchandising activities are inadequate. Anyone who has attempted even the most cursory study of the recent business boom and depression with the world-wide fluctuation of the price level must have been impressed with the dearth of quantitative statistics. One of the blessings—if such a term can be used—resulting from the depression of 1921, is a growing appreciation of statistics and research by business men. An organization like the Society of Industrial Engineers can do a great deal both in stimulating the interest of business concerns in this direction and in cooperating with public and private agencies in the compilation and interpretation of much-needed data which will contribute to a better knowledge of the Business Cycle.
