The impact of these rates on relative costs may be brought out by an example. Assume the manufacture of a given set of dies requiring 30,000 labor hours. Comparable total costs under job shop and captive shop conditions, assuming no differences in labor efficiency, would then be as follows:

With these assumptions it is apparent that a total cost saving ranging from $137,250 to as much as $292,500 is possible on a 30,000-hour set of dies produced under job shop conditions.

It will of course be recognized that an effective pool of competitive job shops could not continue to be available indefinitely, in Detroit or any other area, if major customers were to take the position that they will do all their own tool and die construction unless they are able to have this work done outside at prices generally comparable with estimated differential or "out-of-pocket" costs in an existing, well-equipped captive shop. Taking advantage of bargain or "distress" prices in particular situations for a short period is no crime, but it is not reasonable business practice to treat such alternative partial cost calculations, however carefully determined, as important benchmarks in deciding whether to buy or make. The independent job shop, like any other enterprise, cannot stay in business for long by following a policy of bidding for work at less than its full costs, including all overhead charges; and full cost to the job shop will generally be substantially higher than estimated incremental cost to the captive shop, despite the cost advantages inherent in the efficient job shop. Moreover, it must be remembered that even full cost is not a proper measure, for any considerable period, of selling price. In a competitive

market economy capital must have the lure-the prospect-of net earnings, which simply means in the case in hand that the well-run job shops must find it possible to make a return on the capital employed or resort to a process of liquidation, either abrupt or gradual. It simply doesn't make sense for customers to imagine that producers in any line can be expected to be satisfied for long with a mere break-even operating result. There is ample evidence that private funds will not flow into, or remain in, any field of business which does not provide at least a good prospect of yielding an attractive return on the resources employed, in the light of the risks assumed. And, to be very specific, if a pool of low-cost, competitive job shops is essential to the large users of tools and dies in the Detroit area such as the major automobile producers (and this seems to be the prevailing opinion of the managements of these producers) it is of the utmost importance, in view of current conditions, that recent trends and policies with respect to the buy-or-make problem be promptly and carefully reconsidered.

The absolute necessity of getting on and staying on the "approved list" should motivate job shop management to meet delivery promises and quality specifications. Timing is of vital importance to the customer in an industry where new model dates are announced far in advance, and when the job shop is at fault in causing delay there can be little more than expressions of sympathy if the shop is dropped from the approved supplier list. This, however, is not something that job shop owners have not heard before, and it is believed that failures of this sort are quite rare. What has just been said of delivery timing holds true, also, of quality. As is the case with prices, competition plus the will to survive must serve as harsh regulators.

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A third advantage through use of outsiders is the relief from certain risks. The price of a die, for example, is final once the bid of the job shop has been accepted. This cost assurance, obviously, is lacking if the job is undertaken internally. Risk of loss through obsolescence and risk from economic recession are also reduced if the job shop supplier is the one who undertakes the investment in machinery and structures.

Certain other financial advantages of outside purchasing of tooling are apparent. Somewhat analogous with the popular

"This assumes the absence of subsequent engineering changes.

lease-back practice, the use of job shops can reduce the customer's capital investment needs by many millions of dollars. Moreover, in this industry it is not common for the customer to make payments in advance of final delivery-and the suppliers thus make possible the release of many millions of dollars of working capital on a year-round basis. A given customer, for example, may require tooling costing well over $100 million; the avoidance of investment in unfinished work for the duration of such a program constitutes a clear-cut and significant financing by the supplier.

Other miscellaneous, but nonetheless important, advantages have been mentioned earlier. These include the access to all varieties and classes of equipment as well as to skilled specialists to meet practically any need. Design and quotation services are rendered by the job shops somewhat as a free consulting service in connection with bids. Examples of important cost savings derived from the wealth of experience in the pool of job shop managers are numerous.

Economical Functions of Captive Shops

Wherever dies are used in mass production the preservation of production schedules requires that skilled craftsmen and equipment be conveniently available to "maintain" the dies when, for various reasons, product of the presses deviates from required specifications. For this reason stamping plants, almost as a matter of necessity, establish tool and die rooms in space adjacent to the production press lines. This appears to be the minimum tool room requirement. Perhaps equally important, the manufacturer of stampings (and user of dies) requires a crew of skilled hands for the adaptation and installation of new dies as they are received from outsiders and are placed in the production presses. In some instances the installation period, a period of "final tryout," discloses ways of modifying the press operations for the sake of economy or of improved product, and the dies are given further processing or modification. For all of this minimum captive tool and die shop facilities are a necessity; to rely upon the outside supplier for these services, while a possibility, would undoubtedly not prove economical to the manufacturer except in cases where substantial alterations or rework are required.

If the tool and die adaptation and maintenance facilities are used only for these purposes it is probable that for much of the time a substantial portion will be idle. It is accordingly reasoned that "since we already have the structure, the machines, the employees, and much of the fixed overhead, we add only to our out-of-pocket costs if we fill in the idle time gaps with the actual production of tooling items." In other words, minimum tooling construction is claimed to be justified on the ground that the added cost of performing it is smaller than if this tooling were purchased from outsiders. While cost data relevant to this position are not at hand, it would appear reasonable to assume the contention to be true in cases where only maintenance equipment is needed for the new construction. Fortunately, under present conditions the manufacturer does have the ready option of sourcing the tool production outside whenever the maintenance facilities are crowded, and such flexibility undoubtedly is a real advantage.

It should be emphasized that this particular situation is uniquely adapted to the utilization of out-of-pocket cost computations: (1) the captive shop is a necessity for a basic reason (tool maintenance), and (2) this basic use never fully utilizes the facilities that must be possessed in order to perform it-leaving a substantial amount of idle capacity, the cost of which will continue whether used or not. Under these special circumstances fill-in work places an added burden on the company only to the extent of newly added costs. Few if any independent job shops are likely to be so economical in operation as to be able, without loss, to underbid the captive shop for this layer of work unless the industry is in such a depressed condition that the job shop, in turn, bids for work on an out-of-pocket cost basis.

A number of captive shops have undertaken further additions to their work schedules, adding the machinery and tools necessary to produce tooling items considerably in excess of the "fill-in" needs. In the cases of the individual, large automobile companies, varying considerably as the degree of model change varies, the quantity of internal tooling production may now range from 20 per cent up to 70 per cent or 80 per cent of total needs. It is this level of tool production that is the special concern of this study. What are its justifications?

It has sometimes been asserted that tools must be produced internally in order to avoid leakage to competitors of confidential styling plans. Were this true, substantial added

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costs might well be borne through internal production as a security measure. Actually, however, tool and die men do not subscribe to this line of reasoning. They point out that security leaks that are damaging occur in the advance product engineering phase, and by the time work reaches the tool and die shop (the "in iron" stage) it is too late for a competitor to pirate the design successfully. Also, relatively few of the hundreds or thousands of dies are sensitive in the sense that they could reflect confidential plans; moreover, the dies for a given model are certain not to be concentrated in the hands of a single, outside supplier, but will probably be widely scattered among many job shops; finally, the relatively few critical or key dies can be made internally if added precaution seems mandatory. Thus the internal production of dies for security reasons could only in part, if at all, be counted as a compelling reason for expansion of captive shop facilities.

A second reason for internal production of tooling, especially dies, is more commonly offered. It is stated that certain dies produced by job shops may provide the requisite 50 to 75 acceptable sample stampings in the job shop tryout presses, but that when they are put to work in high-speed production presses they do not produce satisfactory stampings without being "respotted" to the production presses. Clearly the job shop that bids on and undertakes a job which it cannot fulfill to the customer's satisfaction is open to criticism, and the customer with exacting requirements of this sort would be expected to seek bids from a somewhat restricted list of potential suppliers. If then no supplier is found equipped with adequate tryout facilities the customer must either permit the utilization of his own production line presses or, finally, produce the dies internally. It should be recalled, however, that the member companies of the Detroit Tooling Association possess more than 550 tryout presses and should be able to meet any requirement.

Insurance of supply constitutes the third reason for internal production of tooling in volume beyond the mere filling-in of open time in tool maintenance facilities. This is insurance against two types of risks, first, that a number of large companies may all in the same year decide to make major or complete model changes in a substantial part, if not all, of their product lines. The tooling demand of nearly $1 billion that would result from such a coincidence could swamp the job shop facilities, prevent fulfillment of manufacturing commitments