Great Moments in Cost Cutting: Rockefeller Edition
By David Henderson
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.