jim, oil, and jim's socksThis is an amusing entrepreneuring case study from which I have derived much inspiration. It's a true story of how an uneducated mechanic, who possessed much common sense, innovation and drive, built a company of value under horrible handicaps. In the 1930s at the height of the great depression, an out-of-work oil-field mechanic decided that it was ridiculous for oil companies to install permanent drilling derricks over each drill site. He conceived the concept of a portable drilling rig, which revolutionized the oil industry. The moral of the story:
I have paraphrased from the original, which is on page four of the most excellent book:
Let's call the mechanic "Jim". Jim had some handicaps that might lead you to believe that he would never make a successful entrepreneur. He couldn't write and he could barely read. He had absolutely no experience in either management or finance and so had developed some unique opinions that should have killed his company's chances. For example, he believed:
Jim was a frugal man so that when he was laid-off, he had a small fortune, over $400, hidden in a sock. While he was searching for "respectable" work, he saw his savings dwindle to $325 in three months, so he decided to risk $200 on his portable drilling rig concept. Jim needed a truck to carry around the demonstration rig that he was going to build, so he visited the International Harvester Truck dealer in Tulsa, sold him on the concept, and borrowed a ten-ton truck. The dealer couldn't move his inventory and agreed to the loan if he received payment-in-full when Jim sold his rig. Jim then rented a 50-ton hoist from a hoist manufacturer, at $10/month with the balance to be paid when the rig was sold, and he purchased usable scrap steel for $30 down and $70 when the rig was sold. When Jim wasn't standing in long lines looking for "respectable" work, he was building his rig. It took him three months. On the first demonstration, the drilling manager immediately saw the advantages of the concept and bought the demonstrator. Oddly enough, Jim was thinking of asking for $7,500 and getting $5,000, but when the manager seemed so enthused, Jim raised the price to $10,000. When the manager didn't balk, Jim added $3,500 for the truck. He left the demonstration rig at the site and hitchhiked home to await his $13,500 payment. He felt that the pending profits of $8,500 would hold his sock in order until he found "respectable" work. However, when the check came, it was accompanied by an order for 10 more units at $13,500 each. This caused Jim a very real personal problem. One cannot build 10 drilling rigs in one's spare time and still search for "respectable" work. If he accepted the order, he might miss out on a safe job. While he was debating what to do, another oil company, whom he had never demonstrated to, sent him a purchase order for 15 rigs. Thus was Jim's company born. Now, $8,500 doesn't go too far when you want to build 25 drilling rigs unless you use some sound money-leveraging principles. Here's how Jim made the money stretch. In the local paper, he advertised requesting the cream of mechanics for top wages, 75c an hour, provided they accept the following terms:
For every opening five applicants showed up, and he selected the cream. Since this was a sizable order for both the truck and hoist dealers, they agreed to supply him with 5% down and the balance when he was paid. Of course no interest was charged. He found several grocery stores which agreed to sell him all of the food his employees needed at 50% down, the balance when he got paid. Thereafter, every worker received a large sack of groceries each evening after work. The scrap steel dealers drove a harder bargain. They received 25% down, 25% after two months, and the balance when he got paid. Since excess inventories of paint, cables and chains existed, he rarely paid over 5% down and the balance when he received payment. When the twenty-fifth drilling rig was delivered, Jim's sock had dwindled to $2,300. When he was finally paid, the company was in a cash-rich position, which never changed until it was sold in the 1950s. There were some problems which might amuse you. For the first 250 units produced, the company never used anything but scrap steel, so each rig had to be engineered and built from supplies on hand. No records were ever kept and since serial number 131 was completely different from serial numbers 130 and 132, the field service people had to be extremely flexible and innovative. However, since Jim only hired the cream, this was never a real problem. When the Japanese government started buying all of the scrap steel that they could get their hands on, the prices rose so that Jim was finally forced to use new steel. In the late 1930s, the oil companies' demands finally exceeded Jim's master mechanics' engineering abilities and he was forced to hire a real engineer. When the poor man first showed up for work, there was not one blueprint or written production instruction in the entire company, which now employed 500 people, organised thusly:
It took the engineer four years to convert the company to sound engineering control systems. For the first 15 months of the company's life, the management organization consisted of:
When government auditors came in to inspect the books, they were unhappy to learn that there were no books. Instead, the record keeping system was very simple. In the top right hand drawer of the company's only desk, all unfilled orders were kept. In the upper left hand drawer, all unpaid bills were kept. All other records were kept in Jim's head. When an order was filled or a bill paid, it was pulled from the drawer and thrown in the wastebasket. Said Jim: "That way, we could always open a drawer and know what was coming in and what was going out." The auditors didn't feel that this was an acceptable accounting system and gave Jim 30 days to develop proper records. He hired his first staff employee, the cousin of one of his mechanics. This man was educated, since he had finished high school and had attended a bookkeeping course. When the auditors returned 30 days later, they found a single sheet of paper which was a combined balance sheet, income statement, and miscellaneous additional items. They were extremely unhappy so they started to padlock the door, whereupon Jim pulled out a dozen socks, filled with about $650,000 in cash, and said: "Take what you think is fair". They took more than Jim thought was fair, so he hired a qualified controller, and told him:
The new controller was also given the following instructions:
As the months went by, the controller developed ulcers concerning himself with the vast amounts of unprotected cash he had to carry, so he started cutting out newspaper stories of holdups and left them on Jim's desk. After several months and dozens of stories of how people had lost everything in holdups, the controller asked Jim about the high risks they were taking with their bundles of cash. It was then that he learned that his president hadn't read the newspaper clippings because he could hardly read. So the controller read him the clippings aloud, scared Jim, and was allowed to place half of the company's cash in five different banks. The other half had to remain in reachable cash. The company was never robbed, so when the controller retired 20 years later, he handed his replacement in excess of $4,000,000 in dimes, ones and fives. |
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