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Peter Drucker talks manufacturing in 1999.

We can't build it yet, but the essence of the 'postmodern" factory is emerging. It's conceptual-the product of four principles and practices that together constitute a new approach to manufacturing.

Each of these concepts is being developed separately, by different people with different starting points and different agendas. Each concept has its own objectives and its own kinds of impact:

1. Statistical quality control SQC) is changing the social organization of the factory.

2. New manufacturing accounting lets us make production decisions as business decisions.

3. The flotilla," or module organization of the manufacturing process promises to combine the advantages of standardization and flexibility.

4. Finally, the systems approach embeds the physical process of making things-manufacturingin the economic process of business-creating value.

As these four concepts develop, they are transforming how we think about manufacturing and how we manage it. Most manufacturing people in the US now know we need a new theory of manufacturing. Patching up old theories hasn't worked, and further patching will only push us further behind. Together, these concepts give us the foundation for the new theory we so badly need.

The social side of SQC

The Japanese owe their leadership in manufacturing quality largely to their post-war embrace of Deming's and Juran's precepts. But, US industry ignored their contributions for 40 years, and is only now converting to SQC, with companies such as Ford, GM, and Xerox among the new disciples. Western Europe also has largely ignored the concept. More importantly, even SQC's most successful practitioners do not thoroughly understand what it really does. Generally, it's considered a production tool. Actually, its greatest impact is on the factory's social organization.

It's well known how SQC spots malfunctions, identifies the impact of any process change, and shows how process productivity can be improved. But these engineering characteristics explain only a fraction of SQC's results. They do not explain the productivity gap between Japanese and US factories. Even adjusting for their far greater reliance on outside suppliers, Toyota, Honda, and Nissan turn out two or three times more cars per worker than comparable US or European plants do. Building quality into the process accounts for no more than one-third of this difference. Japan's major productivity gains are the result of social changes brought about by SQC.

The Japanese employ proportionately more machine operators in direct production work than Ford or GM. In fact, the introduction of SQC almost always increases the number of machine operators. This increase is offset many times over by the sharp drop in the number of nonoperators: inspectors, above all, but also the people who do not do but fix-repair crews and "fire fighters."

In US factories, such nonoperating, blue-collar employees substantially outnumber operators. In some plants, the ratio is 2:1. Few of these workers are needed under SQC. Moreover, first-line supervisors also are gradually eliminated, with only a handful of trainers taking their place. In other words, not only does SQC make it possible for machine operators to be in control of their work, it makes such control almost mandatory. No one else has the hands-on knowledge needed to act effectively on the information that SQC constantly feeds back.

By aligning information with accountability, SQC resolves the century-old conflict between the engineering approach of Frederick Taylor's scientific management (build it into the process) and the human resources approach (build it into the man). Without SQC's rigorous methodology, neither scientific management nor assembly-line automation could deliver built-in process control. Similarly, without SQC information, the human-relations approach fails to distinguish productive activity from busyness," or whether a proposed modification will truly improve the process or simply make things look better in one corner, only to make them worse overall.

Quality circles, invented here in World War II, have been successful in Japan because they came in after SQC had been established. As a result, both the quality circle and management have objective information about the effects of workers' suggestions. In contrast, most US quality circles have failed despite great enthusiasm, especially on the part of workers. Why? They were established without SQC, i.e., without rigorous and reliable feedback.

With few exceptions, the US has lacked the methodology to build quality and productivity into the manufacturing process. Similarly, we have lacked the methodology to move responsibility for the process and control of it to the machine operator. SQC makes it possible to attain both traditional aspirations: high quality and productivity on the one hand, work worthy of human beings on the other. By fulfilling the aims of the traditional factory, it provides the capstone for the edifice of twentieth-century manufacturing.

New manufacturing economics

Bean counters have been blamed for all the ills that afflict US manufacturing, but they will have the last laugh. In the factory of 1999, manufacturing accounting will play a bigger role than ever, but the beans will be counted differently. New manufacturing accounting-more accurately, "manufacturing economics"-will differ radically from traditional cost accounting. Its aim is to integrate manufacturing with business strategy.

Developed in the 1920s by GM, GE, and Western Electric (AT&T's manufacturing arm), manufacturing cost accounting, not technology, gave these companies the competitive edge that made them world leaders. Following World War 11, cost accounting became a major US export. But by that time, cost accounting's limitations were becoming apparent. Four are particularly important:

1. Cost accounting is based on the realities of the '20s, when direct, blue-collar labor accounted for 80% of all manufacturing costs other than raw materials. Consequently, it equates "cost" with direct-labor costs. Everything else is lumped into overhead. Today, a plant where direct labor costs run as high as 25% is a rare exception. Even in automobiles, direct-labor costs in up-to-date plants are down to 18%, and 8% to 12% is fast becoming the industrial norm. Yet, cost-accounting systems based on direct-labor costs carefully, indeed minutely, distribute the remaining costs-80% to 90%-by ratios that everyone knows are purely arbitrary and totally misleading: directly proportional to a product's labor costs or dollar volume.

2. The benefits of a change in process or in method are primarily defined in terms of labor-cost savings. If other savings are considered at all, it is based on the same arbitrary allocation by which costs other than direct labor are accounted for.

3. Like a sundial, which shows the hours when the sun shines but gives no information on a cloudy day or at night, traditional cost accounting measures only the costs of producing. It ignores the costs of nonproducing, whether they result from machine downtime or from quality defects, scrap, or rework. It assumes the manufacturing process turns out good products 80% of the time. But, we now know that even with the best SQC, nonproducing time consumes far more than 20% of total production time (in some plants, it's 50%), and costs just as much as producing time in wages, heat, lighting, interest, and even raw materials.

4. Manufacturing cost accounting assumes the factory is an isolated entity. Cost savings in the factory are "real"; the rest is "speculation." It can hardly justify a process improvement, let alone a process innovation. Automation shows up as a cost, but almost never as a benefit. All of this we have known for almost 40 years, and for 30 of these, accounting scholars, government accountants, industry accountants, and accounting firms have worked hard to reform the system. They have made substantial improvements, but since the reform attempts tried to build on the traditional system, the original limitations remain.

The benefits of automated equipment, we now know, lie primarily in the reduction of nonproducing time by improving quality setting it right the first time) and by sharply curtailing machine downtime for product changeover-gains cost accounting does not document.

Out of these frustrations came Computer-Aided Manufacturing International, or CAM-1, a cooperative effort by automation producers, multinational manufacturers, and accountants to develop a new cost-accounting system. The CAM-I work started in 1986, and it soon became apparent that the traditional accounting system had to be replaced. Labor costs are clearly the wrong units of measurement, but-and this is a new insight-so are all other elements of production. The new measurement unit has to be time. The costs for a given period of time must be assumed to be fixed; there are no variable" costs. Even material costs are more fixed than variable, since defective output uses as much material as good output does. The only thing that is both variable and controllable is how much time a given process takes. And "benefit" is whatever reduced that time. In one fell swoop, this insight eliminates the first three of cost accounting's four traditional limitations.

For example, finished-goods inventory, an asset" that costs nothing because it doesn't absorb labor, is now seen as a "sunk cost" tying down expensive money and absorbing time. The new accounting measures these time costs against the benefits of finished-goods inventory (quicker customer service, for instance).

Yet, manufacturing accounting still faces the challenge of eliminating the fourth limitation of traditional cost accounting: its inability to account for the impact of change-the return on an investment in automation, or the risk in not making an investment to speed up production hangovers. In-plant costs and benefits of such decisions can now be worked out with considerable accuracy, but the business consequences are indeed speculative. One can only say, "Surely, this will help us get more sales," or "If we don't do this, we risk falling behind in customer service." But, how do you quantify such opinions?

Cost accounting's strength has always been that it confines itself to the measurable and thus gives objective answers. But if intangibles are brought into its equations, cost accounting will only raise more questions. How to proceed is thus hotly debated, and with good reason. Everyone agrees that these impacts have to be integrated into the measurement of factory performance. One way or another, new accounting will force managers, both inside and outside the plant, to make manufacturing decisions as business decisions.

Flotilla flexibility

Henry Ford's epigram, "The customer can have any color as long as it's black," actually meant that flexibility costs time and money, and the customer won't pay for it. Manufacturing people today still tend to think like Henry Ford: you can have either standardization at low cost or flexibility at high cost, but not both.

The factory of 1999, however, will be based on the premise that you not only can have both, but also must have both-and at low cost. But to achieve this, the factory will have to be structured quite differently.

Today's factory is a battleship. The plant of 1999 will be a flotilla," consisting of modules centered either around a stage in the production process, or around a number of closely related operations. Although overall command and control will still exist, each module will have its own command and control. Each, like ships in a flotilla, will be maneuverable, both in its position in the entire process and its relationship to other modules. The organization will give each module the benefits of standardization, and at the same time, give the whole process greater flexibility. It will allow rapid changes in design, rapid response to market demands, and low-cost production of specials in fairly small batches.

No such plant exists today. No one can yet build it. But many manufacturers, large and small, are moving toward the flotilla structure. A big impetus was GM's failure to get a return on its massive 30+ billion investment in automation. GM, it seems, tried to use new machines to improve its existing process, but the process became less flexible and less able to accomplish rapid change.

Meanwhile, Japanese automakers and Ford were spending less and attaining more flexibility. In these plants, the line still exists, but it is discontinuous rather than tightly tied together. The new equipment is used to speed changeovers in jigs, tools, and fixtures. The line has acquired the flexibility of batch production without losing its standardization. No longer an either/or proposition, the two have been melded together.

An "average" balance between standardization and flexibility, however, does nothing very well. It simply results in high rigidity and big costs for the entire process, as apparently happened to GM. What is required is a reorganization of the process into modules, each with its own optimal balance. Moreover, the relationships between these modules may have to change whenever the product, process, or distribution changes.

This will require more than a fairly drastic change in the factory's physical structure. Above all, it requires different communication and information. Instead of each department reporting separately upstairs what upstairs has asked for, in the factory of 1999, each will have to think through what information they need from whom. A good deal will flow sideways and across department lines, not upstairs. The factory of 1999 will be an information network. Consequently, all the managers in the plant will have to know and understand the entire process, just as the destroyer commander has to know and understand the tactical plan of the entire flotilla. They must think and act as team members, mindful of the performance of the whole. Above all, they will have to ask: "What do the people running the other modules need to know about the characteristics, the capacity, the plans, and the performance of my unit? And what, in turn, do we need to know about theirs?" Systems integration The last of the new concepts transforming manufacturing is systems design, in which the whole of manufacturing is seen as an integrated process that converts materials into goods; that is, into economic satisfactions. Marks & Spencer, the British retail chain, designed the first such system in the 1930s. Marks & Spencer designs and tests the goods it has decided to sell, designates one manufacturer to make each under contract, works with them to produce the right quality at the right price, and organizes just-in-time (JIT) delivery to its stores. The entire process is governed by a meticulous forecast of customer demand. In the past ten years, such systems management has become common in retailing. In the early 1920s, Henry Ford decided to control the entire process supplying his gigantic River Rouge plant. He built his own steel mill, glass plant, railroad, rubber plants, etc. But, instead of building a system, he built a conglomerate, an unwieldy monster that was expensive, unmanageable, and horrendously unprofitable.

In contrast, the new manufacturing system is not "controlled" at all. Most of its parts are independent-independent suppliers at one end, customers at the other. Nor is it plant centered. It sees the plant as little more than a wide place in the manufacturing stream. Planning and scheduling start with shipment to the final customer, just as they do at Marks & Spencer. Delays, halts, and redundancies have to be designed into the system-a warehouse here, an extra supply of parts and tools there, and even a stock of old products occasionally demanded by the market. These are necessary imperfections in a continuous flow that is governed and directed by information. What has pushed American manufacturers into such systems design is the trouble they encountered when they copied Japan's JIT methods, a scheme founded in social and logistic conditions unique to that country and unknown here. Company after company found that JIT delivery of supplies and parts created turbulence throughout their plants. And while no one could figure out what the problem was, one thing that became clear was that with JIT deliveries, the plant no longer functions as a step-by-step process that begins at the receiving dock and ends when finished goods move into the shipping room. Instead, the plant must be redesigned from the end backwards and managed as an integrated flow.

By and large, American and European manufacturing plants are neither systems designed nor systems managed. Few have enough knowledge about what goes on in their plants to run them as systems. JIT delivery, however, forces managers to ask systems questions: Where in the plant do we need redundancy? Where should we place the burden of adjustments? What costs should we incur in one place to minimize delay, risk, and vulnerability in another?

As soon as we define manufacturing as the process that converts things into economic satisfactions, it becomes clear that producing does not stop when the product leaves the factory. Distribution and service are still part of the production process and should be integrated with it, coordinated with it, and managed together with it. Caterpillar, for instance, can supply any replacement part anywhere in the world within 48 hr. Companies like this are still exceptions, but they must become the rule. If manufacturing is a system, every decision in a manufacturing business becomes a manufacturing decision. Every decision should meet manufacturing's requirements and needs, and in turn, should exploit the strengths and capabilities of a company's particular manufacturing system.

Full realization of the systems concept in manufacturing is years away. It may not require a new Henry Ford, but it will certainly require very different management and very different managers. Each will have to know and understand the manufacturing system. We might well adopt the Japanese custom of starting all new management people in the plant and in manufacturing jobs for the first few years of their careers. Indeed, we might go even further and require managers throughout the company to rotate into factory assignments throughout their careers-just as army officers return regularly to troop duty.

Manufacturing is the integrator that ties everything together. It creates the economic value that pays for everything and everybody. Thus, the greatest impact of the manufacturing systems concept will not be on the production process. As with SQC, its greatest impact will be on social and human concerns-on career ladders, for instance, or more important, on the transformation of functional managers into business managers, each with a specific role, but all members of the same production and the same cast. Surely, the manufacturing businesses of tomorrow will not be run by financial executives, marketers, or lawyers inexperienced in manufacturing, as so many US companies are today.
COPYRIGHT 1991 Nelson Publishing
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Drucker, Peter F.
Publication:Tooling & Production
Date:Feb 1, 1991
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