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Organizing Manufacturing Enterprises for Customer Satisfaction

HARRY E. COOK

There is considerable dissatisfaction today with the so-called functional organization, as shown schematically in Figure 1 . It is not so functional anymore because it tends to support a sequential manner of product realization, which is believed to be a significant source of substandard cost, quality, and lead-time performance versus enterprises that operate in a more parallel fashion (Clark and Fujimoto, 1989b; Dertouzos et al., 1989; Hayes et al., 1988; and Stalk and Hout, 1990). However, before the onset of highly competitive, global markets, the functional organization seemed adequate to the task. In markets that were only weakly competitive, the enterprise could move slowly and still be successful. It could control quality by inspection. It could control costs by having design engineers measure their results against a design cost standard based on a process unlike the one that would actually be used to make the part.

In searching for an organizational structure that better suits today 's highly competitive environment, it is useful to have a means of forecasting the effectiveness of a structure under consideration. The obvious approach is to look at the most successful companies, see how they are organized, and adopt their structure. However, organizational structure is not the only factor that determines the effectiveness of an enterprise. The culture and technology of the enterprise are also important. Culture is manifested by the informal organization through working relationships and shared values (Allaire and Firsirotu, 1984; Bate, 1984). Technology is defined by the



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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE Organizing Manufacturing Enterprises for Customer Satisfaction HARRY E. COOK There is considerable dissatisfaction today with the so-called functional organization, as shown schematically in Figure 1 . It is not so functional anymore because it tends to support a sequential manner of product realization, which is believed to be a significant source of substandard cost, quality, and lead-time performance versus enterprises that operate in a more parallel fashion (Clark and Fujimoto, 1989b; Dertouzos et al., 1989; Hayes et al., 1988; and Stalk and Hout, 1990). However, before the onset of highly competitive, global markets, the functional organization seemed adequate to the task. In markets that were only weakly competitive, the enterprise could move slowly and still be successful. It could control quality by inspection. It could control costs by having design engineers measure their results against a design cost standard based on a process unlike the one that would actually be used to make the part. In searching for an organizational structure that better suits today 's highly competitive environment, it is useful to have a means of forecasting the effectiveness of a structure under consideration. The obvious approach is to look at the most successful companies, see how they are organized, and adopt their structure. However, organizational structure is not the only factor that determines the effectiveness of an enterprise. The culture and technology of the enterprise are also important. Culture is manifested by the informal organization through working relationships and shared values (Allaire and Firsirotu, 1984; Bate, 1984). Technology is defined by the

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE FIGURE 1 The functional organization shown with a sequential flow of work. skills, tools, and methodologies employed by the enterprise in transforming input to output (Passmore, 1988). Thus, if we judge best structure from comparative studies, we have the problem of having to factor out the cultural and technological contributions to effectiveness, which is not straightforward to do. Another approach, which avoids this difficulty, is to draw upon classical administrative criteria. Administrative theory, whose origins date from Taylor's (1911) publication of The Principles of Scientific Management, was an attempt to illuminate rigorous principles for creating successful organizations. However, the classical administrative criteria do not, as originally intended, hold the stature of fundamental principles (Simon, 1976, pp. 20–36). Simon argued instead that these so-called principles of organization are but part of the criteria for describing and diagnosing administrative situations. The purpose of this chapter is to identify the key criteria for diagnosing the administrative situation posed by a manufacturing enterprise and to use them to arrive at an organizational structure that should overcome the problems of the functional organization. CRITERIA RELEVANT TO ORGANIZATIONAL STRUCTURE The traditional bottom-line metrics for rating the effectiveness of a manufacturing enterprise are return on investment and market share. However, there are other metrics, or measures, of enterprise effectiveness, such as quality, cost, lead time (including flexibility), and innovation (Leong et

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE al., 1990). Manufacturing enterprises that are successful in competing in highly competitive world markets have been found to score well on these metrics (Clark and Fujimoto, 1989b; Dertouzos et al., 1989; Hayes et al., 1988; and Stalk and Hout, 1990). It follows, therefore, in competitive markets, that a manufacturing enterprise should focus its energies not directly on the dependent bottom-line metrics but instead on goals that challenge the enterprise to score highly on a set of fundamental metrics that the enterprise can directly influence and which, in turn, drive the bottom line. These goals represent important criteria to be considered in arriving at an organizational structure. Another important consideration is the work plan that the enterprise uses for achieving the goals. Thus, the effectiveness of a proposed organizational structure can be evaluated from an administrative viewpoint by seeing how well it serves the classical criteria in administering the goals and the work plan. This can be determined using a process defined by the following steps: (1) Draw the structure of the proposed organization, starting with boxes showing all the vice presidents and their titles. (2) Map onto this structure the locations where authority and responsibility for the product lies in terms of the goals and the steps of the work plan. (3) Judge whether the goals and the work plan authority and responsibility mappings pass or fail the classical administrative criteria. (4) Repeat the process until you find a satisfactory coarsegrained organization. (5) Repeat this process at the next lower level in the organization to evaluate the structure at finer and finer levels. (6) Stop the process when it begins to give bad answers. CLASSICAL ADMINISTRATIVE THEORY The classical administrative theorists did not arrive at one exact set of criteria. We will use those attributed to Urwick (Brech, 1958, pp. 371-378): Functionalization: The necessary units of activity involved in the objectof the enterprise should be analyzed, subdivided, and arranged in logicalgroups in such a way as to secure by specialization the greatest resultsfrom individual and combined effort. Correspondence: Authority and responsibility must be coterminous,coequal, and defined. Initiative: The form of the organization must be such as to secure fromeach individual the maximum initiative of which he is capable. Coordination: The specialized conduct of activities necessitates arrangements for the systematic interrelating of those activities so as to secure economy of operation. Reference from one activity to another shouldalways take the shortest possible line. Continuity: The structure for the organization should be such as toprovide not only for the activities immediately necessary to secure the ob-

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE ject of the enterprise, but for the continuation of such activities for the fullperiod of operation contemplated in the establishment of the enterprise. This involves a continuous supply of the necessary personnel and arrangements for the systematic improvement of every aspect of the operation. The initiative criterion supports modern ideas of employee involvement such as quality circles and participative management. The continuity criterion's call for “systematic improvement” is no less than today's call for “continuous improvement.” Thus, Urwick's administrative criteria are very much with the times! CHOICE OF FUNDAMENTAL METRICS Other authors in this volume identify various metrics. Some of these —such as part counts and materials used—are very detailed, while others such as time are more general. The goals defined in terms of the fundamental metrics for an organization should be few in number and the most fundamental in the sense that they should include as a subset most if not all other more detailed metrics that are important in the fine-grained, operational structure of the organization. For example, a targeted level of quality may be an enterprise goal that includes the goal of a specific factory defined by a detailed metric of low variance from specification for the component made by the factory. The fundamental metrics we will use here are cost (C), value-to-thecustomer (V), and the pace of innovation (1/dt), where (dt) is the time between innovative product introductions into the marketplace. The rationale for selecting these as fundamental metrics was derived elsewhere (Cook and DeVor, 1991) based on a simple market model that yielded equations that expressed return on investment and market share in terms of these quantities. Perhaps somewhat surprisingly, quality, defined as the net value of the product to society, was found to be a bottom-line metric depending on the square of the difference between value and cost, much like return on investment. This new definition of quality is an inversion and extension of Taguchi's definition of quality loss as the loss to society as a result of a product's variance from ideal specification (see Taguchi and Wu, 1980). TAGUCHI'S PARADIGM A simple but powerful paradigm for the general work plan of a manufacturing enterprise has also been put forth by Taguchi (see Taguchi and Wu, 1980). This is a multistep process as shown in Figure 2 . System design generates the product specifications based on customer needs tempered by practical design and manufacturing considerations. Parameter design minimizes variance in the product specifications or target values re-

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE FIGURE 2 Taguchi's paradigm for achieving a robust product and process design. sulting from process and environmental “noise.” This step is based on Taguchi's definition of quality loss as the loss to society resulting from variations from specification. The final step is tolerance design, which offsets the singular nature of the added costs to manufacture a product to absolute precision by permitting a bounded level of statistical variance. Taguchi's methodology is chosen here under the strong belief that, other things being equal, products developed according to this paradigm will result in the least loss of quality due to variance from specification and also meet cost constraints. Moreover, starting with a given baseline process and product, application of Taguchi methods often simultaneously improves quality and reduce costs (American Supplier Institute, 1989). APPLICATION OF THE CRITERIA The statement of our problem then is as follows: “Find the organizational structure that best satisfies the administrative criteria when the enterprise, using Taguchi's paradigm as a work plan, desires to score highly in terms of the fundamental metrics. ” The first administrative criterion listed (functionalization) does not have to be considered any further as it is no more than a restatement of the problem. We will also hold judgment on the initiative and continuity criteria until we have looked at two different organizational structures for comparison. It is useful first to establish a baseline by evaluating the correspondence and coordination criteria for the functional organization. The results have been tabulated on a pass/fail basis in Table 1 based on mapping the three fundamental metrics and the three steps for Taguchi's paradigm onto the

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE organizational structure of Figure 1 . The correspondence criterion fails against every objective but one because the responsibility and authority for value to the customer (V), cost (C), the pace of innovation (1/dt), and the Taguchi paradigm are so diffuse across the functional structure. The pace of innovation for the functional organization is given a passing grade for its “quantum leaps” but a failing grade for continuous improvement. The coordination criterion for the product is also compromised in the functional organization as the reference from one activity to another—from engineering to manufacturing, from manufacturing to purchasing, etc.—requires crossing divisional boundaries and thus does not take the shortest possible line, which would be intradepartmental or intradivisional. The systems design step of the Taguchi paradigm requires close coordination between marketing, planning, and systems engineering. Parameter and tolerance design require close coordination between design engineering and manufacturing. All are in different divisions in the functional organization. Innovation again receives both pass and fail marks because quantum leaps often do not require much if any coordination for the initial inspiration; whereas, continuous improvement requires much coordination on a day-today basis. The above results would not change if the metrics used were quality, lead time, cost, and innovation. As noted above, the functional organization's fatal flaw is that it supported a sequential product-realization process. Based on our evaluation of this structure using the classical administrative criteria, we are able to give a more insightful description of its shortcomings: Simply stated, the functional organization is unable to administer the metrics and the work plan required to face off against world-class manufacturers in highly competitive TABLE 1 Pass/Fail Analysis of the Correspondence and Coordination Administrative Criteria for the Functional Organization versus the Three Metrics and Taguchi's Paradigm   The Three Metrics Taguchi's Paradigm For Robust Design   Value Cost Pace System Parameter Tolerance Correspondence F F P/F F F F Coordination F F P/F F F F

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE global markets. Thus, for success in today's environment, it is necessary to arrive at an organization that groups the right elements of the product-realization process into units such that the correspondence and coordination criteria are simultaneously satisfied for the product (the fundamental metrics) and the process (the steps in Taguchi's paradigm). There are myriad other ways than functional to divide the manufacturing enterprise for organizational purposes. When studying product design, the design process, and the manufacturing process, a useful division is often achieved by exploding the total system into subsystems which in turn factor into sub-subsystems that eventually factor into components. In what follows, we will use the natural system/subsystem (SYS/SS) architectural breakdown of a product as the proposed organizational structure for developing and manufacturing the product. We will staff the organization and place authority and responsibility in a manner that satisfies the administrative criteria when tested against the fundamental metrics and Taguchi's paradigm. This organizational structure is shown in Figure 3 . Materials are input on the left side of each box, and all output leaves from the right. Connection points for material flow are shown with a mesh fill and connection points for information flow are shown with wavy fill. Control information enters at the top of each box. Like the traditional product organization, the SYS/SS structure is an example, and a very robust example, of a self-contained organization (Galbraith, 1977, p. 51; March and Simon, 1958, p. 29; Walker and Lorsch, 1970) that should generate a strong customer orientation. The customer is the unit labeled C. The SYS unit has the authority and responsibility for the traditional functions that consider the product as a complete unit. In the functional organization, these would be marketing, sales, design, systems engineering, packaging, and final assembly. It is mandatory, for example, that packaging and final assembly responsibility and authority reside together in the SYS unit to satisfy the administrative criteria. The chief responsibility of the SYS unit is to understand the customer's changing needs and translate them into a set of specifications for each individual subsystem. The systems unit must, therefore, have the authority and skills to achieve this important task. Its hallmark should be the ability to be close to the customer and translate customer needs into product specifications that result in the optimum balance of product value and cost for the intended market segment. It should be hard to discern, for example, any boundaries within the SYS unit between what has traditionally been marketing and systems engineering. The units labeled SS1, SS2, and SS3 represent subsystem units. The SS3 unit is cross-hatched to indicate that it is (or could be) a supplier and not part of the parent organization. Subsystem units have the responsibility to supply the systems unit with subsystems that are ready for final assembly

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE FIGURE 3 Input, output, and control for an organization based on a SYS/SS architecture. For clarity, this figure does not show direct lines of communication from the SS units to the customer or the myriad feedback channels between the SYS and SS units. and that satisfy the system specifications for the subsystem. The latter are defined through controls issued by the systems unit. It is important to understand the basic purpose of controls; they exist so that the system is optimized for the customer. Without controls, each subsystem unit would tend to optimize the subsystem for which it is responsible, with the result that the overall system is suboptimal. The controls include cost, weight, package dimensions, and high-level performance criteria for each subsystem. The controls should represent the truly minimal number of specifications needed to generate the desired level of customer satisfaction while leaving the subsystem units considerable lati-

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE tude in arriving at the best subsystem design solution under the control constraints. The establishment of control parameters at the outset of the product realization process would likely be aided, in true simultaneous engineering fashion, by a small transient team made up of specialists from the system and subsystem units. This would ensure that the control parameters are viewed by the subsystem units as a handshake instead of a handoff. On receiving the control parameters, the subsystem units can actively begin the product realization process. The desired result is a subsystem design that couples the product and process parameters in a manner that minimizes variability in the product through Taguchi's parameter and tolerance design steps. To achieve this result requires close coordination between those responsible for designing and manufacturing the subsystem and those in purchasing who support them. All of these persons must reside within each subsystem unit to satisfy the administrative criteria for the fundamental metrics and for the parameter and tolerance design steps in Taguchi's paradigm. When the SYS/SS structure is staffed in the fully self-contained manner described above, this organizational structure passes (at the coarse-grained level shown) all the correspondence and coordination criteria for Taguchi's paradigm and for all the metrics except for, perhaps, the “quantum leap” form of innovation. A separate research division may be required for quantum leaps. (This same requirement probably also holds true for the functional organization.) In contrast with the functional organization, authority and responsibility are coterminous, coequal, and clearly defined for the SYS/SS organization as described here. Both the functional and the SYS/SS structures should be equivalent for the initiative criteria. However, for the continuity criteria, they differ considerably when it comes to developing people who have the business experience to lead a manufacturing enterprise. The functional organization generally serves up leaders with narrow expertise. The SYS/SS structure, however, should give early and broad experience through routine immersion in all business disciplines. A natural consequence of this structure is that the leaders who emerge should have a full, accurate understanding of the product-realization process. DISCUSSION To illustrate the difference between the functional and the SYS/SS structures, consider the purchase of an automobile. The customer wants a durable, responsive engine and a reliable, smooth transmission, for example. The responsibility for value to the customer of these subsystems, however, is shared between engineering, manufacturing, and purchasing for functionally organized automotive companies. It is not coterminous at any practical

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE level as the total responsibility for these three operating divisions generally resides with the president or chief operating officer. Each group has sufficient responsibility to become involved in every issue regarding value to the customer for these two subsystems, making it difficult at best to administer the issues. Agreements come slowly. When problems arise, finger pointing is the norm. When everyone is partly responsible, no one is. Intense competition, which causes customer satisfaction and lead time to become crucial metrics, has challenged the responsiveness of functional organizations, and many are struggling as a result. For our automotive example, the system unit would be responsible for understanding and specifying the vehicle value-to-price relationship important to the customers within the targeted market segment. This would include specifications for vehicle style, weight, cost, features, options, and overall performance factors such as fuel economy, acceleration, ride, and handling. There is no a priori need for separate marketing, planning, and systems engineering groups with this structure. Strict application of thecorrespondence and coordination criteria also places vehicle assembly operations within the SYS unit for an automotive company. Each subsystem unit would develop, manufacture, and assemble its subsystem in accordance with the pertinent control parameters. The latter of course have to represent what is possible according to the state of the technology, which means that excellence in systems engineering, as noted earlier, would need to be a strong point of the SYS unit. Each subsystem unit would also require systems expertise in transferring the control parameters into meaningful design direction for each of the component groups that make up the subsystem unit. Thus, the subsystem/component structure parallels the SYS/SS structure. This is shown schematically in Figure 4 for subsystem SS1, which is factored into three component units, CM1, CM2, and CM3 (outside purchased), and a unit labeled SS1:SYS. The last of these has the systems responsibility for SS1, which is, of course, a system included in but subordinate to the full product system. Most large subsystems will not factor into components immediately as shown in Figure 4 but will factor first into a set of less complex subsystems. The SYS/SS architecture shown in Figure 3 and Figure 4 creates a waterfall of self-contained teams, minimizing the need for transactions between units, whereas the functional organization requires many more interdivisional transactions for successful product realization. Moreover, divisions in functional organizations are different culturally, which makes interdivisional transactions difficult. The “throw-it-over-the-wall” syndrome for product realization most likely arose from the desire to minimize face-to-face interactions between functional divisions after transactions had become too tedious and adversarial as cultural differences became large and entrenched over time. The sharp differences in operational responsibility between divi-

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE FIGURE 4 Input, output, and control at the subsystem and component level. sions in the functional organization are most likely the root cause for theirsharp cultural differences. By contrast, units in the SYS/SS architecture should have similar cultures, because on average each has similar types of responsibility, including engineering, manufacturing, purchasing, and financial control. Thus, the SYS/SS structure should achieve objectives more quickly because fewer transactions are required between divisions and because those that are needed should proceed smoothly because the cultural differences should be small (Cook, 1991). Although the emerging practice of simultaneous engineering should improve the performance of functional organizations, the results will likely be suboptimal because team members will often have divided loyalties between their parent functional divisions and the team. It is also difficult to transfer responsibility fully for the value, cost, and the pace of innovation

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE away from the operational divisions and to the teams, because the teams generally have a finite lifetime. The divisions, on the other hand, have an indefinite lifetime and thus have to live with the results that the teams produce. Present efforts at simultaneous or concurrent engineering may be a classic attack on symptoms, resulting in a suboptimal “band-aid” and not a solution to the root cause of the shortcomings of functional organizations in today's environment. Moreover, since the functional organization is likely to be the source of the cultural differences that impede the effectiveness of an enterprise organized along these lines, these cultural differences should persist as long as the source for them remains. The SYS/SS architecture, however, is a much more robust formulation of the team concept than simultaneous engineering by creating teams at every level and by coupling more strongly actual production plants to the design process. In total, these actions should bring the organizational structure into better harmony with the requirements of the Taguchi paradigm and classical administrative criteria for value, cost, and the pace of innovation. At some point in unfolding the organization below the level shown in Figure 4 , the arguments used to develop the SYS/SS structure could begin to generate specialists with not enough work to do. This would define the point where some traditional functional responsibilities would begin to appear in the organizational structure as opposed to full system, subsystem, and component responsibilities. However, if people can handle more skills than they are given credit for today in most manufacturing enterprises, then the SYS/SS structure could extend to a finer level of the organization. There is great discourse about wanting to reduce the number of job classifications on the plant floor. The proliferation of specialists in the office should also be challenged (Hayes and Jaikumar, 1988). Marketing and systems engineering skills are closer together in the scheme of things according to both the Taguchi paradigm and the quality function deployment (QFD) process (Hauser and Clausing, 1988) than one might expect from the separate way in which these specialists are formally trained. The same can be said of component design engineers and component manufacturing engineers.