All Commentary
Thursday, March 1, 1962

Production Unlimited

Mr. Sparks is an officer of a manufacturing company in Canton, Ohio. He appears here as a “friendly witness,” not an affiliate of the City Tool Corporation.

Imagine yourself president of a company employing more than a hundred persons. You manufac­ture and sell products in a very competitive market. A business slump and increasing costs have all but eliminated your profit.

Then a miracle happens to your company—and only your company—wherein the general overhead is cut 40 per cent, factory supervi­sion entirely eliminated, factory payroll taxes removed, product costs substantially reduced, qual­ity raised, and capacity for cus­tomer service and prompt delivery vastly improved. Furthermore, you no longer spend half your time on production problems, and thus can double the time you give to sales and promotion work.

This, you say, would be an amazing, unattainable dream—a miracle!

After this moment of fantasy, you tell yourself these things can­not happen to any company in our day of government regulation and taxation, union interference, and company paternalism toward em­ployees. It simply could not hap­pen, you say, and the dream evap­orates.

But it did happen to Claude Wil­son, Jr., President of City Tool Corporation of Dayton, Ohio. “Happen” is not the right word, however, for that implies chance or luck. Claude Wilson made it happen by pursuing a wisp of an idea—expanding it, turning it over, reshaping it, and finally seeking unique professional help to bring it into being. The idea was more than three years in em­bryo before its birth in August 1959. After more than two years of “learning to walk,” the miracle now approaches the dream des­cribed above.

When the story began in 1955, the 7-year-old tool and die firm employed approximately 95 pro­duction workers in the factory. Mr. Wilson was convinced that the conventional company-organi­zation line of authority released but little of the potential energy and creativeness of his employees. He saw that creative thought was unlikely to reach a significant level because it could not flow freely through the autocratic or­ganization path. New ideas could flow but one way—top down —with very little seepage upward to the president. Late in 1956, he arranged for Ted Otteson, an independent consultant on organi­zation development, to take over the communication job in City Tool Corporation. The aim was to open up the flow of ideas among all employees.

The theory was that in most any company there could be found the answer to the vexing problem of the moment if the right mind could be reached. It was further assumed that only when persons were free’ would they truly com­municate with one another—send and receive ideas without obstruc­tion. A horizontal organization plan was deemed most conducive to such communication. The ob­jective would be to replace the difficult employer-employee com­munication, which generally flows in but one direction, with a two-directional cross flow.

How To Release the Full Potential of Each Man

That the most complete release of the energies of the persons working for City Tool could not be accomplished under an em­ployer-employee relationship must have been quite an earth-shaking revelation and a tremendous new idea, even for the advanced-thinking Wilson-Otteson team.

Eliminate the employer-em­ployee relationship in factory pro­duction? The idea seemed ridicu­lous. And yet, release of the maxi­mum energy of the workers seemed to lie in this unexplored area—foreign to almost all busi­ness organizations. The arrow of logic clearly pointed in this unexpected direction, and this was where a solution had to be hunted out.

After much serious creative thought and study2 in which all management and production per­sonnel took an active part, and with the assistance of the legal profession, a novel “plan” was evolved whereby each person pro­ducing tools and dies would be­come a businessman in business for himself. Much legal work was involved, particularly to create new organizations which would not be under the jurisdiction of agencies regulating employers, but which would comply with all the state and federal regulations for independent businessmen. Every effort was made to estab­lish a true arms-length relation­ship between and among the new independent companies.

Tool and die producers have large, expensive pieces of equip­ment, such as milling machines, duplicators, boring mills, grind­ers, lathes, shapers, and presses, the cost of each machine ranging up to $50,000 and higher. How could these former employees ac­quire the use of such equipment in their new role as independent businessmen? City Tool solved this problem by selling to a leas­ing company which then leased the equipment to Partners Tool Company, a general partnership of former City Tool employees now in business for themselves. Walter Harvey is the general partner heading this company, and has been highly instrumental in the success of the plan. This partnership, in turn, offered each piece of equipment on a sub­lease basis to the other new busi­nessmen (former employees of City Tool) who also had formed partnerships of two or three per­sons each.

The problem of subleasing large pieces of equipment to the small partnership firms was solved by leasing each machine by minutes that is, in small increments of time which the partnerships could afford to buy. Each piece of equip­ment in the factory building formerly operated by City Tool is now coin-operated with the excep­tion of some very large machines which are leased on a time-meter basis. One machine may be avail­able for five minutes at 5¢, an­other for fifteen minutes at 10¢, a more expensive piece may re­quire 25¢ for fifteen minutes, and so on, thus enabling the numerous small producing partnerships to acquire the use of large equip­ment for short periods of time.

How It Functions

It is difficult to picture ade­quately the “unorganized system” that has developed. There are few terms to describe the functions of the new firms developed under this concept. The various small companies have names, such as Partners Tool Company, Viceroy, CAM, Galaxy, J. B. Smith and Company, which serve their pur­poses at least, for they know the nature of the operating functions performed by each company.

When City Tool finds a poten­tial job or customer, it seeks price quotations from the Part­ners Tool Company—the general partnership that leases and main­tains the equipment and also serves as raw materials purchas­ing agent. The various producing partnerships are then invited to prepare sealed bids so that a quo­tation can be made to City Tool. Specific information, delivery dates, and other customer require­ments are made known to each producing partnership wanting to bid. Producing partnerships are not required to bid; and the com­pany on the other hand is free to deal with another toolmaker if it wishes. The bids submitted are opened at the scheduled time and are listed on a bulletin board with the low bid indicated. The bid is then passed on to City Tool Cor­poration. City Tool, after adding an amount for selling, promotion­al expense, and profit margin, quotes the job to the customer. In this way the customer obtains from one source the result of two to eight competitive bids. If the job is awarded to City Tool, the producing partnership that sub­mitted the lowest bid is assigned the order. That partnership is completely responsible for pro­ducing the product according to the specifications and time-table required.

Before and After

The extraordinary results can be best visualized by comparing the “before” and “after” picture of this operation. Before, there was a president who devoted halfof his time to production prob­lems. There was also a vice-presi­dent with approximately the same division of time. Others involved in the factory administration were the factory manager, factory su­perintendent, general foreman, supervisory foremen, estimators, purchasing agent, clerks, main­tenance men, tool crib foreman, plus a complement of payroll and accounting employees.

Now there are none of these! No one has to remind another of his responsibility to give an “honest day’s work,” because the degree of fulfillment of his obli­gation and the financial reward are automatically in accord. No one is required to tell a producing partner that he must work from 7:00 o’clock to 4:00 o’clock. His time is his own. He understands what this means better than ever before. The equipment is available in the factory building twenty-four hours a day, seven days a week. Each partner has a key to the building and, being in business for himself, he works the hours required to complete the jobs con­tracted for in his successful bid proposals.

Supervisory overhead is non­existent!

Furthermore, the second-floor offices of the City Tool Corporation have been virtually abandoned, and most of the personnel, for­merly essential to keep voluminous records, are no longer needed. On­ly the offices on the first floor, about half the former space, re­main.

Some Afraid To Risk Freedom

The biggest problem at the out­set of this unique experiment was a subconscious reluctance in the minds of these untried, independ­ent businessmen to make deci­sions, rather than rely on others. The brand-new need for self-reli­ance involved a process of prun­ing, much as trees in a forest shed their dead wood. Machinists and toolmakers who did not wish to think and act for themselves simp­ly left and sought conventional em­ployment elsewhere. More than half of the original production employees departed in the early months. On the other hand, the new concept began to attract the more competent men of the area, at the same time retaining those willing to compete on the basis of their own ability, initiative, and hard work.

Many tool and die companies have employees specialized to the point where a machine operator, for example, will operate only the equipment upon which he is skilled. Unless management sched­ules work for him at capacity, he is apt to become idle for part of the time, even though his wages continue. In this Dayton “unorganization,” there is a tendency toward less specialization and more all-around competence. This, of course, does not deny the ad­vantages of the division of labor, but merely points out that each producing partnership deemed it important to become well-rounded in its ability to turn out complete jobs regardless of the varieties of skills required. The need to attain greater “know-how” first, has at least temporarily reduced speciali­zation; but within the partner­ships is usually found one partner who is more able at bench work while the other is better qualified to handle machine work, thus achieving a sound, economic bal­ance.

Market Guides

The miracle of the market place has come into play in many interesting ways. One of the less­er-skilled jobs is that of a hand­saw operator. In the beginning, the small partnership companies came to the saw operator for their brief rough-sawing jobs. He soon noted that he appeared to have a monopoly of this kind of work, and he doubled the former price. Since it is unprofitable for a toolmaker to send a job outside for sawing because of the relatively short time and dollar amount involved, it appeared that the saw operator had, indeed, hit upon a bonanza. He had not reckoned with the open market, however, and in a short time fewer and fewer saw­ing jobs were being referred to him. He found that the toolmakers and machinists had learned to use milling equipment to eliminate the need for a portion of the sawing operation. In many cases, the saw operator could not regain his former business even by adjusting his prices to the original rates. He then discovered that he could become more expert at sawing and eliminate a subsequent operation otherwise often required. Once again, he has attracted the busi­ness of the producing partnerships which pay a higher price for the more proficient sawing operation. It saves them money.

Another small firm seemed to have a monopoly on jig-boring and jig-grinding. This work is usually of sufficient volume to warrant competitive bids from outside firms. So, when the jig-boring and grinding firm set its prices too high, the small partnerships took their work elsewhere! The open market again had its effect, and the jig-boring and grinding part­nership reduced its prices. Now it receives almost all of the business available from the producing part­nerships. In addition, it sells its services to other shops in the Day­ton area.

There are a number of ways to drill a hole. Anything from a simple hand drill to an expensive radial drill will accomplish this end. Before these men became in­dependent businessmen, the easiest and most expensive way to drill a hole was most often used. Now the method selected is that which is most economical. A few holes on a drill press may cost only 5¢, while the same holes on a radial drill may cost 25¢. Another cost comparison is interesting. When these men were employees, they did not appear conscious of time wasted as they walked back and forth between machines to do this job and that. As independent busi­nessmen, however, they carefully lay out work to obtain the fullest output of the equipment during the period they have it leased.

At one time a toolcrib foreman was required, and the expense of supplying replacement tools was considerable. The toolcrib itself was fenced in and kept under lock and key. There is no longer any requirement to have a toolcrib foreman, and the fence has been removed. Tools are owned by the small producing partnerships. Oc­casionally, a partner may buy a special tool of a kind not owned by any other partnership. Rental arrangements for the special tool are easily worked out between the small partnerships on a business­like basis.

The Cost of Experience

One producing partnership al­most bit off more than it could chew when the partners ambi­tiously accepted an order requiring complex technical knowledge be­yond their previous experience. Eager to learn and willing to spend long hours to gain valuable new knowledge and “know-how,” this small business firm now is probably the most able tool producer in the United States in this particular technique, even though that first job lost money.

If a completed job fails to meet the specifications of City Tool and its customer, the responsibility for restitution is placed exactly where the fault lies! One member of a partnership related that he lost several thousand dollars on a job soon after the “plan” went into effect. Regardless of that unfor­tunate experience, he emphasized that he would not care to return to the former arrangement, for he enjoys being his own boss. Be­sides, his income has risen far above his former wages. He comes and goes as he wishes, for his success or failure lies with no one other than himself. If he takes the day off for golf or fishing, or sev­eral weeks off for vacation, there is no boss to reverse his decision. But he is completely aware that only when he is producing is he rewarded for his efforts; and when he does not produce, he earns nothing.

In the factory building, the timeclock no longer functions, and the timecard racks are empty; but there is no lack of production ac­tivity. The men at work provide an air of quiet efficiency, for a partner wishing to loaf generally does so at home. Since he works for himself, the shop represents the place to be busy, not a place to “get his hours in” in the least unpalatable manner, as formerly.

The customers of the City Tool Corporation highly approve this new “system” because they can get in close touch with the men who are working on their dies rather than filter their inquiries and instructions down through the salesman, sales manager, plant manager, superintendent, and foreman before reaching the man on the job.

Sales Stimulant

Another unexpected result of this “system” has been the in­creased stimulation of the City

Tool sales effort. City Tool main­tains a good relationship with Partners Tool Company by being its best customer—which means that results must be shown in terms of profitable sales. The self-reliant toolmaker-businessmen provide sales motivation with their experienced and competitive cost information, enabling City Tool salesmen to seek out profitable sales rather than waste time on unprofitable accounts. In addition, the increasing versatility of the producing partnerships has led to a vastly expanded and more di­versified sales program.

Some of the former officers of City Tool Corporation can be found as partners in one or an­other of the producing partner­ships. One former officer said that he and his partner would probably work right through that particular weekend because of three jobs due on the following Monday. Dead­lines are meticulously met. This same man said, in discussing per­sonal insurance, that he carries three accident policies on himself. No rule requires such f ore-thought; this is his responsibil­ity! His wife does the record-keep­ing for him and his partner, and files their tax returns.

In the past two years, City Tool’s percentage of orders re­ceived to quotations made has climbed to more than twice thenational average for this kind of business. In the same time, the percentage of rejection of jobs completed has fallen off to almost nothing. City Tool is able to quote better delivery dates, and they are met more often than ever before. City Tool estimates that its total business this year will be more than twice the volume of the first year’s operation under the new concept.

The earnings of the tool and die makers have also climbed. Al­though the City Tool management no longer has access to any records revealing the earnings of the men who were their former employees, volunteered estimates by various partners indicate that the average earnings of these men have risen from a former level of between $6,000 and $10,000 annually, to a new level averaging over $15,000. It is reported that some individu­als in these partnerships are earn­ing between $20,000 and $25,000 a year.

Thanks to the courageous pio­neering of the company president and his ex-employees, everyone has benefited—customers of City Tool, the investors in large equip­ment, the partnership operating the equipment and purchasing raw materials, and last but not least, the producing partners who are in business for themselves. One or two of the producers report that they do not earn any more than they earned as employees. Even these men ardently support the new arrangement because they like the independence, and further­more, hope to acquire greater skill and knowledge so they, too, can rise to new heights.

While the story of City Tool and its experience is fascinating, one should not overlook the key point that led to its unusual success. Privately-owned companies, whether or not incorporated, in­variably adopt the customary em­ployer-employee organization plan, thereby closing off much of the po­tential flow of communication —and thus precluding maximum suc­cess. This is not an argument to the effect that employees should have equal voice in the manage­ment of the employer’s assets and business decisions. This cannot and should not be. The startling new concept derived from this ex­perience is that whenever employ­ees can cease to be employees and become individual entrepreneurs instead, the maximum human en­ergy is released. True freedom of action and self-reliance are prereq­uisite to achievement of this great potential.

Whether or not this principle, as applied in City Tool’s job shop, can be successfully repeated in other business organizations, only time, experience, and further ex­ploration will tell. If it can, we may have quite a wonderful revo­lution on our hands. Regardless, the amazing account of what hap­pened there, when employees changed into self-responsible busi­nessmen, should be an inspiration to others seeking the rich rewards of maximum freedom.

Reprints of this article available, 10 cents each.

Foot Notes

1 The word “free” is used in this sense to mean free from restrictive authority within a nongovernment organization.

2 Study included examination of trans­portation companies that in recent years had adopted variations of an idea where­by the former driver-employee acquired his own motorized unit and became an in­dependent owner contracting to haul the trucking firm’s trailers to their destina­tion. Experience indicated substantial re­duction of general overhead and mainte­nance expense.

  • John C. Sparks, who died on March 27, 2005, served on the board of trustees of the Foundation for Economic Education for many years. In the mid-1980s, following his retirement from business, Mr. Sparks served a term as FEE’s president.