POLI 100K, Railroads and American Politics: Topic 3,
Railroads as Big Business
Management Innovations of the Trunkline Railroads
- The earliest railroads used the same simple form of business
organization that almost all other businesses used at that time –
the unified or
entrepreneurial form of
organization. This was the traditional owner-controlled facility in
which the owner made the day-to-day operational decisions and set long
term goals.
Unified or Entrepreneurial Form of Organization
Early Railroad Organizational Structure
- The B&O was the first to separate the management of
financial and accounting activities from those of moving trains and
obtaining traffic. This change was due to the fact that the sheer volume
of transactions grew so large that it became a formidable management
problem – conductors, freight agents, station agents, and so on, brought
in a river of coin. No other business had ever seen this massive volume
of transactions.
- In the 1850s Daniel McCallum of
the Erie Railroad perfected the operations department (responsible for
moving trains and obtaining freight and traffic business) and devised the
system of information flows using the telegraph. He was the first to
clearly define the duties and responsibilities of the executive and
administrative officers on a large railroad and to spell out the lines of
authority and communication between the various officers of the road. Part
of this scheme was a detailed system of information that flowed upward
through the organization using the telegraph.
Daniel McCallum
- Brief summary of McCallum’s organizational structure for the
transportation department: At the top was the
General Superintendent. Underneath him
were
- Masters of Engine and Car Repairs –
Responsible for the condition of locomotives and shops.
- Car Inspectors
- General Freight Agent – Supervision
of freight charges and the setting of freight rates. He negotiated
contracts with shippers and handled loss and damage claims.
- General Ticket Agent – Supervised
all passenger ticket matters and negotiated ticket arrangements with other
railroads.
- General Wood Agent – Responsible
for supplying the wood for the locomotives and for storing it along the
road.
- Superintendent of Telegraph –
Responsible for the construction and maintenance of telegraph lines and
for the telegraphers.
- Foreman of Bridge Repairs –
Inspected and was responsible for the repair of bridges
- Division Superintendents – These
men were in charge of day to day operations on about 125 miles of road
(determined by natural geographic boundaries). Underneath them would be
the station managers, the division level officers corresponding to those
at the headquarters – a) to g) above.
Albert Fink (1827 - 1897)
- In the 1870s
Albert Fink of the Louisville &
Nashville perfected a detailed cost accounting system that was widely
copied throughout the American railroad industry.
Over two-thirds of the cost
of running a railroad are fixed. Hence, a good cost
accounting system is essential to the railroad business. Fink’s system made
control through statistics a
reality. Fink’s system had
75 specific categories (some of which were totals) divided into 4
general areas:
- Movement Expenses – These were largely
variable costs dealing with the movement of trains.
- Station Expenses – These were partly
variable and partly fixed costs. The stations always had to be manned
regardless of traffic but the greater the traffic the greater the number
of laborers needed to load and unload freight.
- Maintenance of Road – These were
variable costs but with a fixed floor. That is, because of weather,
regardless the level of traffic, a minimum of maintenance had to
be done. However, as the traffic increased so did the wear and tear of
the road.
- Interest – This was a fixed
cost.
Fink's 75 Cost Categories
- Fink devised elaborate formulas to precisely calculate the
ton-mile cost corresponding to these four categories. This allowed him
to at a glance tell which portions of the railroad were costing more to
operate than other portions and the reasons for the costs. This system
was very influential and widely copied by other railroad managers.
Average Operating Expenses Misc. Railroads: 1872-86
Average Tonnage Per Trainload:
Lake Shore & Michigan Southern, 1872-86
Average Operating Expenses:
Lake Shore & Michigan Southern, 1872-86
L & N and other Railroads: Growth Rates of Total Assets
- By the 1880s the operations department was split into the
transportation department that handled the movement of trains and the
traffic department that was responsible for obtaining business. This
produced the three great functional departments:
Finance,
Transportation, and
Traffic.
- These three departments coupled with the line and staff form
of organization invented by
J. Edgar Thomson of the Pennsylvania Railroad,
plus Fink’s cost accounting system, created the standard railroad
management structure that was to last well into the 20th
Century.
J. Edgar Thomson
Tom Scott
The "Standard Railway of the World"
The Horseshoe Curve
- This form, known as the U-Form, spread rapidly to
other industries becoming the de facto standard. This form of management
utilized functional departments in centralized offices with middle managers
responsible for the specified functions. The line and staff form ensured
that staff managers at the central offices received information flows
from the line officers in charge of running the day to day functions of
the business. This information flow was used to create overviews of the
entire organization that allowed for greater statistical control and
increasing efficiency in the operations as well as provided for efficient
long range planning. All of this was pioneered by the railroads.
The "U-Form" of Business Organization
- Andrew Carnegie Revolutionizes
the Iron and Steel Industry