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COSTS
W O R K B O O K
F E A T U R E
by Walter L. Hardy, Foster D. Snell, Inc.
Research and Development Funds Research budgets should be for research—customer service is a sales cost and process trouble-shooting, a production cost
W, be very remiss, in a monthly column on costs, to neglect Ε WOULD
the subject of research and develop ment costs. The current magnitude of the research effort, which can be expressed in terms of a 1956 spending rate of approximately $5 billion, alone would demand attention. In addition, consideration must be given to the fact that this spending rate is increasing approximately 10% per year. Those who scrutinize and approve the research budgets of industry and government have become increas ingly aware of the importance of re search. In many industries today as much as half of the current income is from products unknown 10 years ago. Government research in weapons of defense, for example, is progressing at such a rate that multimillion dollar systems are obsolete on the proving grounds. At the same time, management is demand ing more control of how and where the research dollar is spent. The era when research might have been considered a luxury is passed. Gone, too, is the day (Sept. 18, 1935) when Punch, of London, wrote of research: "It is not absolutely necessary to have a research depart ment—at least, not one of your own. In fact, probably the most efficient and economical type of research de partment is to have an employee whom you can really trust working in the research department of your principal competitor." Punch went on to give a few sug gestions on how to run a research de partment, among them : In dealing with all research prob lems the greatest desideration is Patience. The greatest of all the research problems is the people who
do the research, and in dealing with them Patience is not only a virtue but a necessity. Remember that the research worker's motto is: "Rome was not built in a day, and we don't work nightshifts" . . . If you are going to have a research department at all, go the whole hog and enter into the spirit of the thing. Build a labora tory and place in it a lot of bottles and benches. Then collect a few people from the Universities with First Class Honours degrees in Chemistry (they are quite cheap at the summer sales). Turn them loose in the laboratory and leave them. For a few days they will probably wander restlessly round, scratching at the doors and howling. But after a while they will settle down and start bending glass tubing and filtering things perfectly happily. And you will be able to show them to visitors, which is a nice thing to be able to do. The only disadvantage is cash: We cannot visualize any business man, comparing the advantages with this slight impediment, being in any doubt as to what he should do. Money isn't everything, and you can always get somebody eminent to come down and open the Research Block. The amount of money spent on basic research in the United States is woefully small, both by industry and government. This is a serious neg lect which must be corrected in the immediate future if the United States is to maintain its current standard of living and leadership in defense. It has been estimated by the Bureau of the Census that the population of this country will approximate 200,000,000 by 1970. Such a growth will re sult in a concomitant increase in de mand for goods and services of at least 50% over the 1955 rate. To meet this demand new fields of endeavor must be activated, resulting
Table I. Expenditures f o r Research b y Industry as a Percentage o f Sales, 1951 Per Industry centage Drugs 4.9 Electrical machinery 2.7 Professional, scientific, and con trolling instruments 2.5 Aircraft 2.4 Organic and inorganic chemicals 2.3 Miscellaneous chemicals 1.8 Machinery, except electrical 1.7 Stone, clay, and glass 1.3 Paints 1.3 Average, all companies 1.1 Rubber 0.9 Transportation equipment and accessories 0.8 Primary metal 0.8 Paper, lumber, and wood prod ucts 0.7 Textile a n d apparel 0.7 Petroleum and coal products 0.6 Fabricated metal products 0.6 Furniture 0.5 Food and kindred products 0.3
principally from basic scientific dis coveries. Each basic discovery is quickly pyramided into many fields of applied science and into many articles of commerce. Witness atomic energy as the sublime to chlorophyl as the ridiculous. Since the vast proportion of the research appropriation supports ap plied research, this field deserves our principal attention. It is obviously impossible to cite a cost for conduct ing a particular experiment or to de velop a particular product. Inven tion can never be systematized or subjected to time and motion study. The amount spent on research varies widely between industries as shown Table I from the Survey of Research Spending, Harvard Business School, 1953. Further, the amount spent is roughly independent of the size of the company in any industry. VOL. 48, NO. 8
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T h e important consideration is to obtain the maximum value from the research appropriation. We will assume that the research budget is for research purposes. Technical service to customers and answering customer complaints are sales costs, not research costs. Trouble-shooting on the production line, as opposed to process development for economic or product improvement, is legitimately a production cost, not a research cost. Proper Allocation of Research Funds
Allocating the research funds to research only, the greatest savings can result from more judicious approval of research projects. It is reasonably safe to estimate that millions of research dollars are wasted annually on projects originating in the sales department. We have seen many instances which have proceeded as follows: A saleman finds that a certain customer needs a particular product not made by his company. A request is made through channels that the research department develop such a product. After spending, say $10,000, the product is developed and made available for production. How often it turns out, however, that the profit from supplying the total demand for such a product would never offset the development cost. Secondly, many projects which are undertaken will never be brought to a successful conclusion or,if successful, will never result in marketable products. To a large extent this is normal, since all research work cannot be successful nor has anyone the wisdom to ascertain in advance the exact potential of success. We would not propose the elimination of the normal risk concomitant with successful research. Negative results can be equally important in eliminating ways in which a product cannot be produced. Edison was proud, when queried by a friend, that he had learned a thousand ways in which a wet storage battery could not be made. If a quarter of all research projects resulted in the development of marketable, profitable products, the results would be above average. The normal risk does not include the allocation of research funds for the development of products for 44 A
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which there is a limited or, in many cases, no market or market potential. The judicious employment of the principles of market research will eliminate most of these wasteful projects. Market research facilities are rapidly being established or expanded in larger companies. The smaller companies can avail themselves of the services of numerous qualified consultants in this field. The important consideration is that market research is inexpensive in comparison with the cost of developing a useless product. A research organization today should be keyed to rapid progress and vastly changing markets and consumer buying habits. For example, the automobile put the American on wheels to take him to his recreation and entertainment. But the wheels have become too numerous in many areas and are slowly grinding to a halt. Now the American seeks his recreation in his backyard, in his own or a community pool, and his entertainment through television. Consumer product marketing is changing rapidly with the growth of the supermarket. Convenience plays an increasingly important roll in any consumer product, whether it is in foods, paints, wallpaper, or insecticides. Planning for Maximum Results and Minimum Costs
To ensure the maximum potential of success and thus keep research and development costs at a minimum the following principles should be applied: 1. Since a large portion of company earnings 10 years from now will come from products as yet undeveloped, research planning should start at least that far ahead. In large companies this function should be handled by a special group of highly competent men with inventive minds, unhampered by prejudice or precedence. In smaller companies the top management group would carry out the function. The range of activity would cover a period 5 to 10 years hence, and the area of activity would be any source that indicates the future trend and needs of the industry, its suppliers, and its customers.
INDUSTRIAL AND ENGINEERING CHEMISTRY
2. The results of the long range planning group should be relayed to an intermediate group working in a period 2 to 5 years hence. The membership of this group would normally be project directors of the research department. 3. The first function of the intermediate group would be to make or have made a complete study on current and future market potential. A preliminary cost and profit appraisal should be prepared. On the basis of these results, the decision is reached as to activation of the research project. 4. The intermediate group should keep informed of the market and amend the results of the market survey periodically, as required. Similarly, cost estimates and other factors which will continue to confirm or reverse the decision to proceed should be amended regularly. 5. Requests for research effort by the sales and production departments should be approved by the intermediate group on the same basis as projects from the long range group. Priorities, established by the intermediate group, should be on the basis of profit potential, maximum probability of success, and the product and market policies established by management. 6. The bulk of the research and development personnel would be assigned to project directors as required to carry out the approved projects. These men will generally be working in the period from 0 time to 2 years hence, depending on the time required to carry the project through research and development and pilot plant and trial production operations. 7. If a company cannot support separate technical service and process control laboratories, research department personnel will necessarily have to carry out these functions. As was indicated, the cost for such services should be charged to the department making the request. Such functions, by their very nature, must take precedence. However, they should not exceed 10 to 1 5 % of the total research man-hours—a larger percentage would seriously handicap the research effort. If this time is exceeded, consideration should be given to establishing a separate technical service group or control group, or both.
