David R. Henderson  

Great Moments in Cost Cutting: Rockefeller Edition

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Rockefeller was relentless in ferreting out ways to cut costs. During an inspection tour of a Standard Oil plant in New York City, for instance, he observed a machine that soldered the lids on five-gallon cans of kerosene destined for export. Upon learning that each lid was sealed with 40 drops of solder, he asked, "Have you ever tried 38?" It turned out that when 38 drops were applied, a small percentage of the cans leaked. None leaked with 39, though. "'That one drop of solder', said Rockefeller,...'saved $2,500 the first year; but the export business kept on increasing after that and doubled, quadrupled--became immensely greater than it was then; and the saving has gone steadily along, one drop on each can, and has amounted since to many hundreds of thousands of dollars"' (Chernow 1998, pp. 180-81). Over the course of his career at the helm of Standard Oil, "Rockefeller cut the unit costs of refined oil almost in half" (Ibid., p. 150).
This is a footnote in Michael Reksulak and William F. Shughart II, "Of Rebates and Drawbacks: The Standard Oil (N.J.) Company and the Railroads," Review of Industrial Organization (2011) 38:267-283.

In the article, Reksulak and Shughart defend the rebates that Rockefeller extracted from railroads as a pro-efficiency measure. Drawing on the literature up to circa 2000, I addressed this issue in much less detail here. What I had not understood, though, is how one could defend the rebates Rockefeller received on his competitors' shipments as being pro-efficiency. Reksulak and Shughart do so, and I will give their argument in a later post.


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CATEGORIES: Business Economics



COMMENTS (4 to date)
Eric writes:

Nice story. The benefits are listed, though the costs are not. How much money did it cost in manpower, material and losses on the leaky containers to test 38 and then 39 drops of solder? More or less than $2,500? More or less than "hundreds of thousands of dollars"? What if the tests had been delayed a year? two? In addition, finding 39 worked was somewhat lucky. How often would you expect such a test to produce significant savings? How many other such tests did Rockefeller order with costs but no benefits? Until these numbers are known, it's hard to evaluate the story. On the other hand "cutting the unit costs in half" is valuable if both the savings and the costs of tests are correctly allocated to the correct "units".

david writes:

Decent chance that the machine was just tuned back to use forty drops after the leakage, and if the boss asked, everyone just said that it only used thirty-nine. Why disappoint the boss's fantasies?

Arthur_500 writes:

Gentlemen you are such cinics. Attitude is very important in running any business.

Years ago I was in a position and determined that adding 30% ground turkey to ground beef reduced costs of products made with ground meat with no change in taste. I listened to my staff and worked closely with them all. One day it was suggested that we could probably utilize all ground turkey and save a bunch of money.

Great idea from a staff that understood and embraced the ideas of efficiency. However, I drew the line as I did not want to change products nor advertise something that it was not.

Rockefeller has been described as ruthless by some and a great manager by others. It is all about perspective and attitude.

Tracy W writes:

Eric, remember that Rockefeller lived in the 19th century, before inflation. A $100,000 in 1913 is the same as $2.3 million now.
Yes, he doesn't state the work time, but it's quite believable that the tests would cost a lot less than $2.3 million.

http://inflationdata.com/Inflation/Inflation_Calculators/Cumulative_Inflation_Calculator.aspx

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