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3 People and Organization The competitive pressures and technological capabilities dis- cussed in the previous chapters are two dimensions of the changes that can be expected in the future manufacturing environment. This chapter addresses changes in the management of people and organizational design that future manufacturers will need to pur- sue to be successful. Such changes can strengthen the competi- tiveness of many companies regardless of the technology employed, and in virtually every case, modifications in both the internal and external relationships of the business are a prerequisite to effective use of new technology. The changes needed in people and organizations will be a diffi- cult aspect of the revolution in manufacturing. They require a dra- matic refocus of the traditional culture in the factory, away from hierarchical, adversarial relations and toward cooperative sharing of responsibilities. With such fundamental changes, progress will be slow, the degree of change will vary among companies, and the full transition is likely to be accomplished by a relatively small number of companies. However, the demands placed on manufac- turers to be effective in an increasingly competitive marketplace can be expected to push managers and workers in the directions described in this chapter. Much depends on the size and culture of the firm and the commitment of managers and workers. Many manufacturing en- terprises need changes not only in broad organizational areas and 49

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50 management philosophy but also in employee behavior, union policies, and customer-supplier relations. Every stakeholder- managers, employees, owners, suppliers, and customers must rec- ognize the challenge and be prepared to change traditional prac- tices. Furthermore, people who may not have a direct stake in manufacturing government officials, educators, researchers and scientists, and the general public-will need to understand the importance of manufacturing to future prosperity, recognize the evolving role of manufacturing in the U.S. economy, and support the many social and cultural changes that will both result from and encourage continued progress in U.S. manufacturing. A SYSTEMS APPROACH Part of the problem of U.S. manufacturing is that the com- mon definition of it has been too narrow. Manufacturing is not limited to the material transformations performed in the factory. It is a system encompassing design, engineering, purchasing, qual- ity control, marketing, and customer service as well as material transformation; the operations of subcontractors and the whims of customers are also important parts of the system. The systems approach is a key principle not only for manufacturing technol- ogy, but also for organizational structure, supplier relations, and human resource management. Such a concept hap been foreign to most U.S. managers (although embraced by Japanese managers), and the result has been a lack of responsiveness and declining competitiveness in many industries. Managing manufacturing as a unified system will profoundly affect every activity involved; it is the only way to take advantage of the many opportunities in both products and processes that the future will bring. An aggressive systems approach in a company should elim- inate many of the functional distinctions that can introduce in- efficiencies into the production process. Instead of the labyrinth of functional departments common in many firms, the operations function is likely to become the focus. Ancillary and support- ive functions will be reintegrated into operations. Maintenance and process design, for example, will no longer be distinct entities with separate schedules and staffs; instead, employees in opera

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51 tions will be responsible for maintaining equipment or modifying the process as the need arises. Such reintegration will mean that management structures are likely to be more streamlined and that many job classifications will be eliminated to allow employees to perform multiple tasks. Job design and classification will be based on broad operational functions rather than narrowly defined ac- tivities. Functions such as product design, manufacturing, purchasing, marketing, accounting, and distribution will require close coopera- tion and tight coordination. Eliminating them as separate depart- ments would be impractical the various types of expertise will still be needed but, with increasing computerization and com- munication capabilities, information on each area will be widely available and close cooperation will be essential. This coopera- tion often is likely to be accomplished through working groups of people from different departments. They will include permanent groups to ensure long-term integration of ideas and temporary groups designed to address specific projects. Techniques such as comprehensive job rotation may be used to eliminate interdepart- mental barriers. The process of integrating the data bases and process technologies in the factory also will help to eliminate ar- tificial barriers between functions, but the major tools for change will be the guidance of senior managers and the initiatives of em- ployees. In external relations, a systems concept calls for reassess- ment of the mechanisms used to specify, order, manufacture, and deliver subcontracted parts. Because production by suppliers will . be viewed as the initial step in the manufacturing system, major customers will need to take a strong interest in the capabilities of their suppliers and institute programs to raise those capabilities through gentle persuasion, direct assistance, or reselection. As an example of the changes that can be expected, customers' design equipment will be able to communicate directly with suppliers' production equipment. Substantial investments will be made in communication linkages to allow extensive sharing of data on de- sign, production scheduling, material requirements planning, and costs. These types of arrangements will be essential for flexible man

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52 agement of the manufacturing system, but they imply significant change in supplier relations. More subcontracts will be long term, and the number of captive shops supplying one customer can be expected to increase substantially. The investment in communi- cation links by the customer and the corresponding investment that the customer will expect of the supplier will make long-term contracting desirable for both parties. Since long-term contracts weaken the threat of changing suppliers if standards are not met, a strong commitment to close cooperation will be a necessity. Prob- lems will need to be solved as they arise, just as with in-house production, because the cost of failed relationships will be high. Both parties will lose independence in the subcontracting process, but the advantages of an integrated, highly efficient manufactur- ing system will outweigh the costs. Examples of these types of relationships can be seen already in both the automobile and aircraft industries. Long-term sum contracting has been common in both industries for years, but only relatively recently have design data been transferred directly from the CAD system of a major manufacturer to the machine tools of the subcontractor. PARTICIPATION AND OWNERSHIP A key step in the evolution of human resource management in manufacturing will be to broaden participation in the com- pany's decision-making process. Employees at all levels should be given an opportunity to contribute ideas, make decisions, and implement them in areas that may affect operations beyond the individual's formal responsibilities. The principle involved is intel- lectual ownership: if all employees can fee} a degree of ownership in decisions that affect them and the company, they are likely to support those decisions more enthusiastically, resulting in a highly motivated work force and a more responsive, effective company. Extensive, even universal, participation in decision making gives all employees a stake in the company, beyond financial consider- ations, that may be essential for continued competitiveness in a rapidly changing environment. For most manufacturers, such a decentralized decision-mak

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53 ing process wall require a major cultural shift and a number of pre- requisites to avoid disorder. The most fundamental requirement is a well-understood, common set of goals and a high level of commit- ment to them from both managers and employees. Beyond that, both management and labor must meet certain responsibilities. Management cannot expect employees to contribute ideas and participate ~ decision making without the necessary knowledge and expertise. Vehicles will be needed to facilitate the rapid flow of information within the organization and to ensure that the proper intellectual resources are available at all levels. Close links be- tween upper management and operatives on the factory floor will be required for rapid information exchange and responsiveness. Information must flow both upward and downward in the organi- zation. Employees must understand fully the goals and priorities of the firm to make consistent, effective decisions. Managers need to be assured that the correct decisions are, indeed, being made. This type of cooperative, two-way flow represents a radical shift for many firms that may cause significant cultural disruptions. Information linkages are currently provided by several lay- ers of middle management that serve primarily as an information conduit. With decision-making responsibility pushed to the lowest possible level, the extra layers of middle management are likely to be both unnecessary and unaffordable. The result in most cases probably will not be mass layoffs of middle managers; instead, the change will become manifest as a gradual blurring of the distinc- tions between operatives and managers. Middle managers will be reduced in number and merged into new roles that allow direct access between upper management and floor workers. Knowledge requirements, authority, and responsibility will tend to converge, resulting in much flatter organizations. This fundamental change in organizational structure already is happening in a number of companies.) Progress in factory communications technology also can be expected to facilitate information flows and contribute to the elim- ination of management layers. Wide, if not universal, access to all types of information, from part designs and scheduling to account- ing data and marketing plans, will reduce the need for personal ex- changes of information. Both upper managers and operatives will

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54 have direct access to the information needed to make effective deci- sions. With the process of flattening the organizational structure and creating direct communication channels between operatives and upper management well under way, advanced data-tracking and communications systems wiD be far more effective. Without the efficiencies introduced by wide participation and shared re- sponsibility, a manufacturer might be overwhelmed by the volume of information provided by the new technologies. As with most as- pects of the new manufacturing environment, organizational and technological changes complement each other and cannot be sep- arated without tremendous costs in corporate effectiveness. Elective decision making depends on trained personnel. Em- ployees not only must be competent in their own jobs, but also must understand the relationship of their jobs to overall corporate operations and goals. Developing the required knowledge will re- quire extensive training, by a variety of mechanisms and a signifi- cant amount of job rotation at every level of employment. As new technology is imple~nented, substantial training can be expected from equipment vendors, but the broader scope of job responsibil- ities is likely to require off-site classroom courses, company-wide seminars, and on-thejob training. Training will need to be ex- tended to every employee as a corporate necessity, and it will account for a much higher percentage of working time and total costs than it has traditionally. Job rotation also can be expected to be far more extensive than has been common in U.S. firms. Short-term efficiency will be lost to a degree as employees rotate into unfamiliar jobs, but the long-term benefits, in terms of sys- tems knowledge and a greater sense of a corporate team, will be indispensable for competitive operations. EMPLOYMENT SECURITY Creating a company-wide environment suited to competitive production with advanced technology will require a strong com- mitment to employment security-the ability of a firm to retain its employees even though changing market conditions or advancing technology may significantly change the content of the jobs they do. There is little doubt that manufacturing will no longer be

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55 a strong source of employment for the unskilled and semiskilled. Factories will employ fewer people in these groups in particular, but the number of people employed among skilled workers and managers also will decline. The remaining jobs, however, will be challenging, rewarding, and in demand. Competition for those jobs and competition for good people will make strong job secu- rity an interest of both employee and employer. Information systems, training programs, and changes in or- ganizationa] structures will represent huge investments In human capital. Cyclical layoffs or unnecessary turnover would severely limit the return on that investment and risk a complete break- down in the company's operations. Employment security ~ cru- cial to engendering commitment of workers as true stakeholders. Increased responsibility and participation will improve the attrac- tiveness of manufacturing jobs, but employees are not likely to fee] a strong stake in the company unless they believe it has a stake in them. From the perspective of both company and employees (unionized or not), job security is a critical principle to pursue, which in itself will represent a significant change in the attitude of management and labor. Although various mechanisms will be used in pursuit of a sta- ble work force, absolute job security is likely to remain both elusive and a source of contention. Some companies recently have been very successful in relocating unskilled and semiskilled workers to other plants and in retraining them to perform new and varied tasks in the automated factory. Many employees, however, will be unable to adapt to a new environment that requires more skills, knowledge, and responsibility. Following this shakeout, however, it will be feasible and advantageous for employers to provide strong job security for a core group of employees. This core group would be capable of handling daily operations, and subcontracted tem- porary workers would be hired to meet surge demands. These temporary crews would perform specific duties that do not require extensive knowledge of the company's operations. They would be managed by the operatives usually responsible for those tasks to maintain continuity in decision making. This approach will insu- late the core staff from fluctuations in market demand (essentially making the core labor a fixed cost), will provide employment op

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56 portunities for previously displaced workers, and, if widely used, may change the nature of unemployment trends in the macroe- conomy. The approach is already used extensively in the airframe industry. Job security also may be strengthened by the trend to per- form previously subcontracted work in-house, although this trend will vary across industries and firms depending on size, available technology, and product mix. No company can do everything well, and, in many industries, subcontracting is a way to share risks, costs, and expertise. In some industries, however, advanced process technologies are likely to provide sufficient capacity and flexibility to encourage firms to pull subcontracted production in- house. The advantages in quality control, production scheduling control, and design change would reinforce the job security bene- fits of such a strategy. In fact, the trend can be seen already in the domestic mainframe computer industry. In other industries, the advantages of small, focused factories may create more sub- contracting than has been traditional. Despite these variations, many companies will find that the advantages of in-house pro- duction outweigh the disadvantages, particularly in maximizing return on the large investment in human capital. INCENTIVES, EVALUATIONS, AND DECISION CRITERIA Traditional measures of success in manufacturing will be in- adequate for tomorrow's manufacturing environment. New mea- surements, as well as new rewards, will be needed to manage pro- duction effectively, maintain employees' motivation, justify new investments, and stimulate stockholders' interest. In the area of factory operations, managers will need new criteria on which to base operational decisions. Mechanisms for improving factory effectiveness, such as precise inventory control systems, material requirements planning, in-house production of previously subcontracted work, production process planning, and the many aspects of factory automation, will change the opera- tions of the future factory. The criteria that managers have tra- ditionally used to make operational decisions will change, and, in many cases, the decisions will change. A factory using just-in-time

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57 inventory control, for example, will have less input inventory on hand than a manager may have been accustomed to having. As another example, changes in production processes and work flows will change the criteria used to judge effective machine utilization rates, manning levels, acceptable work-in-process inventory, and tooling requirements. Managers will need retraining to alter their thinking about the effective operation of the factory to prevent old habits from inhibiting potential cost savings, quality improve- ments, and overall effectiveness. Evaluations of individuals- bothmanagers end workers are likely to be much more subjective than they have been tradition- ally. Quantifiable improvements in individual performance, such as increasing output per hour or shift, will not be applicable to au- tomated, integrated production with emphasis on project teams. Objective indicators of performance will remain in areas such as quality, delivery, process system costs, customer satisfaction, and company earnings, but these will reflect more on group efforts or the total work force than on individuals. Consequently, individ- uals' pay is expected to shift from hourly wages to salaries; pay will entail a greater emphasis on bonuses based on improvement in short-term results, long-term improvements in the total sys- tem, and achievement of the goals of that particular level of the organization. The "profit center" and "cost centers focus used in the past as a basis for judging individual performance can be expected to be replaced by a systems focus. Subjective assess- ments of individuals' skills and competence by their peers will affect salary decisions at least indirectly. Promotions will remain a form of recognition and opportunity for increased responsibility, but increased use of project teams and job rotation is expected to diminish the importance and obvious benefits of promotions; the elimination of most middle management positions will reinforce this trend. At the company level, evaluation of performance will depend largely on a meaningful management accounting system.2 ~adi- tional methods that aggregate data, allocate costs based on direct labor, and compute data over long intervals (usually monthly) will be ineffective and counterproductive in the new environment. With computer-integrated manufacturing technologies, companies

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58 will be able to measure their performance continually by resource category, cost center, and product class and will abandon cost ac- counting systems based on direct labor. New accounting systems will give manufacturers the accurate, timely data they need to respond rapidly to changing conditions. The availability of more relevant data will give almost everyone in the business a clear perspective on total performance and its response to key deci- sions on matters such an investment, personnel, subcontracting, and research and development expenditures. (Appendix B gives a full analysis of the changes needed in cost accounting systems and the capabilities offered by new manufacturing information systems and computer integration.) Changes in accounting procedures will contribute to the strong trend toward balancing short-term results against long- term prospects in determining the health of a manufacturing firm. New criteria will be developed to give stockholders and investors a basis for assessing the steps a firm is taking to ensure its long-term competitiveness. These criteria may include research and devel- opment expenditures, the amount and kinds of investment over a given period, training and recruitment patterns, and the activities of major competitors. None of these indicators will be conclusive, but as a package they will give stockholders more information than is common currently. FUTURE FOCUS In the new manufacturing environment, efficiency alone will not ensure success. Foresight will be the ultimate competitive weapon, because market share ant} profit margins are likely to be small for the followers. A long-term, future-oriented focus, extending beyond the next quarter or year, will be a competitive necessity. Manufacturers will need to devote an increasing amount of time, money, and energy to those parts of the business that will have a preponderant impact in the future, particularly product and process research and development. The pace of change is expected to be rapid, so emphasis on strong in-house research and development will be a necessity for firms seeking a leadership position. Manufacturers will need to

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59 accept the risks inherent in long-range research. Investments in scientific and engineering personnel, laboratories, and computers are expected to be a significant portion of total capital budgets. At the same time, the need to implement new technologies, introduce new products, and attract talented personnel will be expensive. Some companies wild share costs by participating in research con- sortia, which in fact may be the only viable method of research in some industries. Other companies will save research costs by using licensing agreements, but as product life cycles shorten, the value of licensing as a relatively inexpensive way to enter new markets can be expected to diminish. Companies will face difficult choices in striking a balance between spending for future and immediate competitiveness. Similar circumstances exist today. The major difference is that future manufacturers will probably have much less ability to milk profits from new products because competing entrants will be close behind. The costs of being a follower will be more apparent, so the weight given to future-oriented investments should be much greater than it has been traditionally. CONCLUSION With these changes in the human and organizational com- ponents of manufacturing, the factory will become a much dif- ferent factor in society. Although opportunities for unskilled or semiskilled labor will diminish, the jobs that will be created are expected to be challenging and of high quality. Also, manufac- turing jobs will be in demand among graduate engineers, who do not generally prize them today, and there may be too few to go around. Firms will have such large investments in people that they will make extraordinary efforts to retain employees, which will limit job creation at existing plants. This constraint may be countered somewhat by the trend in some industries toward microfactories, although the labor requirements of such facilities may be quite small. Employment opportunities also will arise in industries producing goods yet to be invented and in the vari- ety of services that can be expected to develop to support future manufacturers. These changes in the factory will permeate the social and eco

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60 nomic fabric of the nation. Changes in intern e] factory operations will affect relations with unions, subcontractors, wholesalers and retailers, producers of services, and other economic activities out- side but closely related to factory operations. The expectations and opportunities of workers at all levels will be affected by the cultural revolution that has already begun in manufacturing. For many companies, the rate and direction of change will be deter- mined through the collective bargaining process; for other firms, less formal approaches of labor-management cooperation will be used. None of the changes will be sudden, however, and no two industries will progress at the same pace. In fact, there may very well be a backlash from both man- agers and workers who have a strong stake in traditional relation- ships and organizational structures. Consequently, the changes in people and organizations will, at best, proceed in fits and starts, but the benefits in terms of manufacturing effectiveness and prof- itability are expected to be so clear that these difficult cultural changes will be implemented. The specifics of these changes are difficult to predict because they are based on individual decisions in a vast variety of circumstances. The direction of change, how- ever, is becoming increasingly clear, and the repercussions will be e W1C .e-ranglIlg. NOTES 1 The findings from field work conducted for a Manufactur- ing Studies Board report on effective practices in implementing advanced manufacturing technologies have been consistent with these predictions. See Committee on the Effective Implementation of Advanced Manufacturing Technology, 1986, Human Resource Practices for Implementing Advanced Manufacturing Technology, Washington, D.C.: National Academy Press. 2Kaplan, Robert S. 1985. Accounting bag: The Obsolescence of Cost Accounting Systems. Pp. 195-226 in Clark, Kim B., Robert H. Hayes, and Christopher Lorenz, eds. The Uneasy Alliance: Managing the Productivity Dilemma. Boston, Mass.: Harvard Business School Press.