Management of flexible manufacturing: An international comparison

OMEGAInt. J. of Mgmt Sci., Vol. 20, No. 1, pp. 11-22, 1992 Printed in Great Britain. All rights reserved

0305-0483/92 $5.00 + 0.00 Copyright © 1992 Pergamon Press pie

Management of Flexible Manufacturing: An International Comparison B CARLSSON Case Western Reserve University, Cleveland, Ohio, USA (Received May 1991) The purpose of this paper is (1) to examine the current status of flexible manufacturing in the United States and Sweden, (2) to survey the historical reasons for existing differences, and (3) to explore the impact of flexibility on various aspects of performance, particularly international competitiveness. The most recent data on the use of certain hardware associated with flexibility, such as numerically controlled machine tools, industrial robots, and flexible manufacturing systems, are presented for several industrial countries. An analys/s is made of organizational structure and management practices ('software') relating to flexibility in manufacturing in the United States and Sweden. This analysis is based on firm interviews, supplemented with recent findings in the literature. The historical analysis traces the evolution of manufacturing technology over the last century. The discussion of the impact of flexibility on economic performance is based upon recent research findings.

Key words--flexibility, manufacturing, management, international comparison

1. INTRODUCTION

flexibility differs markedly among countries. It will also be shown that differences in hardware represent only the tip of the iceberg: differences in the 'software'--management practices, the philosophy, nature, and role of manufacturing in the overall strategies of firms, and the kinds of contingencies which management perceives should be dealt with--are not only of equal importance; they are also likely to be much more persistent than hardware differences. After defining some basic concepts in Section 2, we briefly survey the current status of flexible manufacturing techniques (as represented by the diffusion of hardware) in various countries in Section 3. Next, we examine the reasons for the existing differences between two highly industrialized countries at opposite ends of the spectrum in terms of use of flexible techniques, namely the United States and Sweden. In the fourth Section we explore the impact of flexibility on various aspects of economic performance, particularly international competitiveness. Section 6 concludes the paper.

PRIOR TO 1980, there was only a handful of publications in economics, management science, and engineering dealing specifically with the issue of the relationship between flexibility and economic activity. Now, only ten years later, management and engineering journals are full of articles on flexibility, and even economics journals are beginning to contain such acronyms as FMS(flexiblemanufacturingsystems), CAD (computer aided design), and CIM (computer integrated manufacturing). What happened? Why did flexibility suddenly come to the forefront as a topic worthy of analysis? It is the contention of this paper that the answer to this question lies in a confluence of factors relating to changes in the world economy, certain technological trends, and the historical experience which has shaped the structure and specialization of industry, and the expectations for the future, in various courttries. It will be demonstrated that the diffusion of hardware devices embodying manufacturing 11

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Carlsson--Management of Flexible Manufacturing 2. DEFINITION OF FLEXIBILITY

Flexibility may be defined generally as the ability to adapt to changing circumstances. In a previous paper [5], I have distinguished three aspects of flexibility: operational, tactical, and strategic, Operational (short-term) flexibility refers to a short enough time period so that not only the hardware capital in the form of plant and equipment available to the firm is fixed but also the 'software' associated with it: the set of standardized routines and procedures, schedules, etc., which guide the daily operations, A company which is flexible in the operational sense is one which has built-in procedures which permit a high degree of variation in sequencing, scheduling, etc. Tactical (medium-term) flexibility is built into the organization and production equipment of the firm and enables it to deal e.g. with changes in the rate of production or in product mix, as well as moderate changes in design over the medium term. Thus, tactical flexibility incorporates hardware and software as well as certain aspects of infrastructure, Strategic (long-term) flexibility, by contrast, is related primarily to infrastructure and reflects how the firm positions itself with respect to a menu of choices for the future, e.g. in terms of the types of products it wants to manufacture and/or sell, where it wants to locate production, what geographical markets to target, what types of threats to guard against, what type and magnitude of effort should be devoted to research and development, etc. Strategic flexibility thus refers to the ability of firms to reposition themselves in a market, change their game plans, or dismantle their current strategies when the markets they serve are no longer as attractive as they once were. Each of these aspects has two dimensions: static and dynamic. Static flexibility refers to the ability to deal with foreseeable changes (i.e. risk), such as fluctuations in demand, shortfall in deliveries of inputs, or breakdowns in the production process. These are the kinds of contingencies for which firms build inventories and backup systems, arrange for alternate suppliers, etc. Dynamic flexibility refers to the ability to deal with uncertainty in the form of unpredictable events, such as new ideas, new products, new types of competitors, etc. [17, p. 223; 16,

pp. 46-47]. In such cases, backup systems will not work; what is needed is alertness, quick reactions to opportunities and threats, and effective integration of the firm's activities. Static flexibility involves primarily operational and tactical flexibility, whereas dynamic flexibility directly involves strategic aspects but indirectly also tactical and operational aspects. In static flexibility the main emphasis is on cost containment, whereas in dynamic flexibility the time dimension is of primary importance. Statically efficient systems tend to emphasize mechanization, i.e. reduction of labor input and hardware integration, whereas dynamically efficient systems emphasize automation in the form of software integration. Static systems are characterized by control and accountability aspects (both financial and operational), while dynamic systems are characterized primarily by integration and coordination. For these reasons, static flexibility is associated with mechanized systems incorporating certain backup routines or devices, whereas dynamic flexibility is linked to certain types of computerized equipment: primarily numerically controlled (NC) or computer numerically controlled (CNC) machine tools, industrial robots, and flexible manufacturing systems (FMS). An FMS is usually defined as a group of CNC machine tools, served by an automatic parts feeding and tool changing device (such an industrial robot), all controlled by a single computer. 3. INTERNATIONAL DIFFERENCES IN THE

USE OF FLEXIBLE TECHNOLOGY In spite of the fact that the emphasis on flexibility is of relatively recent origin, even a casual and superficial overview reveals considerable differences among countries, not to mention industries and firms, in the application of flexible technology. Thus, Table 1 shows that in the late 1980s, the share of NC machine tools in total machine tool production varied from around 20% in the newly industrializing courttries to 30-35% in the United States and the United Kingdom and around 55% in France and Japan. While the technological breakthrough of numerical control came during the late 1940s (see [3] for an account of the historical circumstances), the commercial breakthrough was delayed until the late 1960s. The United States took an early lead, followed by Sweden

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Table 1. Share of NC machine tools in total machine tool production in various countries, 1968-1987 (%) United

Year

States

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

20.5 17.4 13.5 14.5 13.4 15.2 17.5 20.6 23.1 20.4 21.6 25.0 28.5 28.7 30.1 32.1 31.5 30.2

Sources:

Japan

12.2 12.6 15.2 18.7 24.2 32.4 39.1 41.0 44.4 50.7 55.6 55.4

West

United

Germany

Kingdom

10.0 11.0 12.1 14.3 15.1 23.4 29.6 34.2 38.2 43.9 44.7

7.8 8.5 7.9 9.6 6.0 6.5 6.3 7.0 8.0 8.0 10.0 12.0 15.0 19.0 23.0 25.0 32.0 32.0 33.0 35.0

Table 2. Share of NC machine tools in total machine tool investment

in the United States, Japan, United Kingdom, and Sweden, 1978-1984 (% in value terms) United

United Kingdom

States

Japan

1978

n.a. n.a. 27.8 30.2 38.1 43.8

27.2 28.3 29.3 38.3 47.5

22.5 30.9 44.9 40.8 54.6

31.1 28.6 30.6 31.4 55.0

40.1

54.3

62.4

59.4

1984

11.1 12.2 16.5 22.6 22.4 19.8 25.7 31.0 45.4 59.9 54.3

South Korea

7.0 13.4 15.0 20.4 17.8

4.8 12.6 13.3 16.9 21.7

15.6

19.0

Table3. Density ofindustrialrobotsinvaricountries, 1984 (per million employees ous in engineering industries) Country Density Japan 122.6 Sweden 70.1

Sweden

26.0

Edquist C and Jacobsson S (1988) Flexible Automation: The Global Diffusion of New Technology in the Engineering Industry, p. 25. Basil Blackwell, Oxford.

Belgium Italy

28.1 27.2

West Germany

16.2

United States

14.8 14.7

France

United Kingdom 8.5 Source: Edquist C and Jacobsson S (1987). The diffusion of industrial

robots in the OECD countries

andthe impactthereof.Robotics 3 (March). the numerical control unit, i.e. as hard-wired NC units were replaced by CNC (computer numerical control). As shown in Table 2, the share of NC machine tools in total investment in machine tools has increased sharply in recent years. It reached about 60% on the U K and Sweden

in 1984, with somewhat more modest

shares reported for Japan and the United States. Table

Year

Source:

Taiwan

US, France and Japan: NMTBA, Economic Handbook (various issues). West Germany: VDMA. UK: Metalworking Engineering and Marketing (March, 1988). Taiwan: Metalworking Engineering and Marketing (July, 1988). South Korea: Metalworking Engineering and Marketing (November, 1988).

and Great Britain, with West Germany somewhat behind [18, p. 55]. By the late 1960s, NC machine tools represented about 20% of the total production of machine tools in the United States. Then the share actually fell during the first half of the 1970s (in connection with a sharp decline in total machine tool production) and did not exceed 20% again until the late 1970s. Nevertheless, until the latter half of the 1970s the United States was unquestionably the leading producer of NC machine tools. The NC shares of the value of machine tool output were significantly lower elsewhere. But as Japan, West Germany and France surged ahead in the 1980s, the US and U K were unable to respond, The widespread diffusion of NC machine tools did not start until after 1975 when the microcomputer began to be used as the basis for

1979 1980 1981 1982 1983

France

3 provides

information

on the number

of industrial robots per million employees in the engineering industries in various countries and Table 4 on the stock and density of flexible manufacturing systems (FMS). B o t h t a b l e s show considerable variations in the extent to which these technologies have been adopted in various countries. Sweden and Japan seem to

have substantially higher density of industrial

Carlsson--Management o f Flexible Manufacturing

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Table 4. The stock and density of flexible manufacturing systems (FMS) in some OECD countries, 1984 and 1988 [Number of FMS per million employees in the engineering industry in 1980 (ISIC 38)]

West Germany Stock Density Japan Stock Density Sweden Stock Density United Kingdom Stock Density United States stock Density

1984

1988

25 6 100 19 15 55 10 3 60 7

73 18 160 30 40 146 9O 27 140 16

Sources: 1984: Edquist C and Jacobsson S (1988) op. cir. 1988: Ranta J (n.d.). Economics and

benefitsofflexiblemanufacturing systems: Conclusions for practice, mimeo.,IIASA,Laxenburg, Austria. robots than other industrial countries, and Sweden's density of FMS is considerably higher than that in other countries. The densities tend to be lower in the United States than in most other industrial countries, 4. REASONS FOR OBSERVED DIFFRENCES IN THE USE OF FLEXIBLE TECHNOLOGY Why are there such marked differences among countries in the use of flexible technology? The short answer is: path dependency. Countries follow different growth trajectories, conditioned by historical circumstances and resource endowments. A somewhat more elaborate answer will be provided in what follows. In order to limit the discussion, the presentation here will refer explicitly to only Sweden and the United States. As shown above, these two countries are at opposite ends among industrial countries when it comes to adoption of flexible technologies, But similar arguments to those put forward here are likely to hold for countries in the middle of the spectrum, 4.1 A briefldstory o f machine tools ~ Machine tools have been an integral part of the industrial growth process since the Industrial Revolution in Britain in the latter part of the 18th century. Until the middle of the 19th ~A more detailed account is available in [3].

century, by far the dominant contributions to machine tool technology originated in Britain. From then on the United States was the technological leader until the Japanese took over that position in the mid-1970s. The presentation that follows concentrates on the development in the United States, since that is most pertinent in the present context. From its beginning in the early 19th century, industrial development in America has been closely linked to certain principles which constituted the so-called 'American System' of manufactures. Based originally on the gun factories of Eli Whitney, Simeon North, and the US armories, the American System involved the manufacture of interchangeable parts. This

required breaking down the manufacture of each product into a set of tasks; each laborer specialized on a particular operation; the use of simple devices such as patterns or 'jigs' made it possible to increase the degree of accuracy of manual operations and also to mechanize them, thus opening up possibilities of using power tools; the invention of several new machine tools, including the milling and grinding machine, further enhanced the system [3, p. 94]. Thus, standardization, mechanization, and mass production were the key ingredients in American industrial technology from the very beginning. One of the driving forces was a shortage of skilled labor, partly the result of a British embargo on the export of skilled labor to its former colonies. Standardization was opposite to the practice of industry in Britain, where the emphasis was on using highly skilled labor to produce customized goods. Therefore, the fledgling American industry was on its own in developing the required tools. This gave the impetus to the development of a domestic machine tool industry. The pattern was the following: specific needs of a succession of particular industries led to the creation of machine tool building units within firms in the originating industry, later spun off as separate establishments as the acquired technical skills became applicable to production problems in other industries [20, pp. 420-421]. By the latter half of the 19th century, America had become the world's leading producer of machine tools. It is noteworthy that the history of machine tool development is one of 'demand pull': new technology has been developed in response to technical needs specified by major users

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[3, 9, 20]. First it was the shortage of guns in the US Army. Then the American System of manufactures spread into other mechanical industries with similar technical needs, such as clock making, and later the manufacture of entirely new devices like sewing machines and typewriters, These were typically durable consumer goods which, by the application of mass production methods in their manufacture, became cheap enough to be affordable to a large number of people rather than just a select few. In the 1880s, as the building of railroads peaked, mass production methods spread to the building of locomotives, and at the same time into the making of bicycles. All of these industries required both precision tooling and high-speed machines, At the turn of the century, many bicycle manufacturers and other machine shops began making automobiles. After Henry Ford's introduction of the moving assembly line in 1913 posed new challenges for machine tool builders, mass production technology made another jump forward. During the 1920s it diffused to a whole variety of consumer capital goods industries, especially household appliances, The new technologies which emerged during the Depression (transfer machines and cemented carbide tools) were diffused extremely rapidly and effectively in connection with the massive build-up, re-orientation, re-organization, and equipping of American industry to play the role as the Arsenal of Democracy, supplying the allied forces with military hardware throughout the Second World War. Thus, for example, the production of aircraft increased tenfold within two years, requiring the transfer of production methods and organization from the automobile to the aircraft industry; similar increases were noted for guns, tanks, ships, etc., requiring similar changes in both hardware and software, When this enormous new capacity was converted to civilian production shortly after the war, the result was a 'production machine' for mass production of capital goods far superior in terms of both technology and production capacity to that anywhere else in the world. Many of the machine tools installed then are still in use--or, to the extent they have been replaced, have largely confined changes in plant 2For an elaboration of the role of leading users in machine tool development, see [9].

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organization and layout to the production concept embodied in them. The further development of this production concept in the form of 'Detroit Automation' (the linking together via mechanical devices of a series of transfer machines such that the system is capable of operating with very limited manpower) in the early 1950s represents another step in the same direction. As far as machine tool technology is concerned, World War II constituted a watershed in two ways. On the one hand, machine tool development became heavily oriented to military needs. The war itself posed enormous challenges, as already noted. And soon afterwards, the introduction of jet engines required entirely new aircraft designs, and the space program issued demands in terms of precision, new materials, and complexity of parts never heard of before. Following its historical tradition, machine tool development responded to the specific challenges issued by the leading users. 2 Another important development originating during World War II was the invention of computers. With the advent of commercially usable computers and their application to machine tools in the late 1940s, technological change in manufacturing began to take a new direction. It was linked to military needs: the need for new technology to manufacture complex parts and components for jet aircraft and other military hardware led to the development of numerically controlled (NC) machine tools. In the beginning, these machine tools incorporated hardwired circuitry (i.e. were not very flexible) and were extremely costly. They were highly versatile machines geared for low-volume production of high-precision, complex parts. Only large firms making complex parts for the military on costplus contracts could afford them. For this reason, the diffusion of NC machine tools was very slow. Even as late as the early 1970s, some 20 years after the first commercial application of NC machine tools, only 13-14% of the total machine tools produced in the United States were numerically controlled, and only 2-3% of the total stock of machine tools were numerically controlled. These percentages were significantly lower in other countries [6]. But around 1975 some Japanese firms began using microcomputers as the basis for the numerical control unit, replacing the earlier hardwired NC units by CNC (computer numerical

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Carlsson--Management of Flexible Manufacturing

control). This increased the versatility and flexibility of the machine tools and simplified their programming. Even more importantly, due to the fact that in Japan the demand for improved technology was driven by the automobile industry and its suppliers, as well as other consumer-oriented capital goods industries (rather than by defense needs, as in the United States) operating under intense competitive pressure, there was a greater need for highly productive, reliable, general-purpose, standard machine tools. By simplifying the product, making it more general-purpose, and aiming it for small and medium-size firms, the Japanese machine tool producers completely changed the market. The potential number of users now suddenly numbered in the thousands rather than the hundreds. This allowed the Japanese sharply to increase the volume of output and thus to take advantage of scale economies to an extent not possible with the small batches prevailing before, thereby significantly lowering costs (Ibid.). Thus, suddenly smaller manufacturers, or those producing relatively small batches of products, were the main beneficiaries of technological change. This is in sharp contrast to the trend during the previous 150 years, when technological change in machine tools primarily benefitted mass production as machines grew bigger, faster, more accurate, and more highly mechanized, 4.2 Different history in the United States and Sweden The key characteristics of United States industrial growth in the 19th century were standardization, mechanization, and mass production of relatively simple, utilitarian consumer durable goods for a rapidly expanding domestic market as vast natural resources (particularly in the form of land) attracted huge immigration, Foreign trade played a limited role in American economic growth, at least until steam ships made it feasible to export grain to Europe in the 1880s. Exports did not exceed 5 percent of GNP until the 1960s. For all practical purposes, the United States was a closed economy, at least in the sense that it was self-sufficient in virtually all goods, By contrast, Sweden was not only a relative latecomer to industralization--its economic 'take-off is usually dated to around 1870---but

also a small country with a small domestic market. Autarky was never a viable option. From the beginning, Swedish industrial firms were forced to specialize and internationalize. The annals of early Swedish industrial history are filled with stories of new ideas, technology, and capital being imported from abroad, applied at home and almost simultaneously in foreign markets (via both exports and direct foreign investment). (See for example [12].) Throughout its modem history, Sweden has been an exporter of raw materials: silver, copper, and iron for several centuries; oats during a couple of decades in the late 19th century, and forest raw materials from the 1840s on. Even as late as the 1950s, over 60% of Swedish exports consisted of raw materials and semi-manufactures. Over the course of the postwar period, Sweden's exports have shifted from dependence on raw materials to engineering goods. More than two-thirds (and frequently even more) of Swedish industrial products are exported. To offset the disadvantage of a small domestic market, Swedish firms have specialized narrowly and striven for dominant positions in the world market. Swedish exports are typically highly specialized producer goods (e.g. large trucks, luxury automobiles, and telephone exchange equipment) where quality (uniqueness)matters more than cost. As a result of their foreign activities, Swedish firms have largely become integrated into the European Communities, even though Sweden as a country is not a member. The United States, too, has become increasingly integrated into the world economy. In the early 1980s, the exports/GNPratioreached9%, and about one-quarter of US industrial output is now exported. This is a result of two concurrent trends: (1) continuing globalization of business, and (2) technological change of the kind described above, which undermines mass production and forces a higher degree of specialization. Thus, because of its historical orientation to mass production in combination with the strengthening of medium and smallscale batch-type production technology vis-fi-vis mass production technology, the United States has gradually lost the technological advantage in production technology that it had at the beginning of the postwar period. The loss of comparative advantage has been greatest in standardized consumer goods (both durable and

Omega, Vol. 20, No. I

non-durable), but capital goods other than automobiles have also been affected. 3

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largely by diversification into extremely large units. Elsewhere, especially in smaller countries such as Sweden, where firms perceived them4.3 Different experience, different assumptions selves as being continually exposed to new and Because of their different history and experi- unpredictable threats, specialization became the ence, it is not surprising that business firms strategy of choice. in Sweden and America make rather different In the late 1970s, a study of Swedish manuassumptions about the environment which they facturing firms [10, pp. 155-175] showed that face and develop different business philosophies these firms viewed their business climate as and strategies, having become more severe during the precedIn a large domestic market, firms tend to ing decade. In response, their business strategies develop strategies to deal with risk. In situations had become more defensive than earlier. They where the link between decisions and outcomes were pursuing 'niche' strategies: concentrating is probabilistic, the expected value of the objec- on core business, divesting businesses outside tive is generally taken as the measure over which the core, and filling 'gaps' in their core to optimize [13, p. 10]. Therefore, firms try to businesses. What happened in Europe ten years diversify; this stabilizes the expected value of ago appears to be occurring in the United States their income stream. At the same time, they now. Whereas during the 1960s and 1970s there strive for low unit cost (i.e. static efficiency) was a tendency for firms to diversify into in each of their lines of business. Here cost is businesses which were only remotely or not at a strategic variable. This may lead to what all related to the core business (i.e. conglomerAbernathy [1] has called the Productivity ation), there has clearly been a reversal of this Dilemma or what Skinner [22] has referred to as trend in the last ten years. The business environthe Productivity Paradox: the harder companies ment is now often perceived as being considerpursue static efficiency, the more entrenched ably tougher than a few years ago, partly they become in their current activity, and the because of increased foreign competition--the more vulnerable to new kinds of competitive result of internationalization of business, threats, globalization of competition, and increased rate In situations characterized by uncertainty, on of technology transfer via multinational firms the other hand, the possible outcomes are not [4, p. 29]. Many firms have divested themselves predictable. Firms therefore tend to specialize, of activities or businesses which they do not By concentrating their resources on specific consider to be part of their core business. types of competence, they can increase the Scherer [21, p. 76] has pointed out that while the probability of positive outcomes generally and merger wave of the 1960s and 1970s largely of making decisions that are no worse than involved conglomerate mergers (more than those of competitors. But they may hedge their doubling the number of lines of business of the bets by scanning the horizon widely in order to average company surveyed), "the 1980s have be able to detect potential threats (in terms of seen a high incidence of 'bust up' takeovers new products, new technologies, and new corn- - - t h a t is, acquisitions followed by the sell-off petitors) as early as possible. Here the crucial of numerous target company divisions". The factor is time, not cost: to act rather than react; mood now is to prune back the proliferation of and if forced to react, to react faster than others, businesses in order to protect and nurture more This involves dynamic efficiency (and flexibility) crucial lines of business. Bounded rationality as opposed to static, in the form of limited managerial ability and It seems as though the former situation is time appears to be the key constraint; if a probmore applicable to the United States than to lem occurs in a non-crucial business activity, it Sweden, and that the latter is more character- may simply take too much managerial talent istic of Sweden than of the US. As long as US away from solving more important problems firms viewed their chief problem as being that of [4, p. 29]. dealing with fluctuations in demand, they grew It is also noteworthy that despite the recent merger wave in the United States, the total num3For a more complete analysis of United States and Swedish ber of employees in the largest 500 industrial trade and specialization in the postwar period, see 17]. companies (the Fortune 500) has declined s i n c e

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Carlsson--Management of Flexible Manufacturing

1979. As a share of total manufacturing employment, their share has declined since 1975. Perhaps even more surprisingly, the Fortune 500 share of total manufacturing shipments declined from 89% in 1980 to 77% in 1985 (Ibid.). Preliminary findings in a study of the 25 largest US industrial firms suggest that most of them have adopted focus as contrasted with diversification strategies during the last ten years. It also appears as though the net impact on US business of the emergence of the so-called junk bond market has been to break up large conglomerates into more cohesive, synergistic business units, despite the huge takeovers and leveraged buy-outs which were their initial result. This may be viewed as a part of the restructuring and specialization which is both a necessary result of and requirement for increased participation in world trade. To a large extent, the turmoil and volatility of the US stock market in recent years probably also reflect the necessary revaluation of US businesses in view of their degree of success in dealing with new threats and taking advantage of new opportunities opened up in connection with the further integration of the US market into the world economy, The international differences in the application of automation hardware observed earlier partly reflect the development just described, The United States and Sweden came into the 1980s with very different historical experiences which made it relatively easy for Swedish firms to adopt the emerging automation technologies and relatively difficult for US firms. Sweden happened to have a relatively large number of firms specialized in the types of production (low to medium volume, batch processing of a variety of complex parts) which benefitted most from the technological changes taking place. By contrast, the United States had a relatively large number of firms engaged in mass production for the domestic market who were now suddenly exposed to foreign competitors using new technology. But despite the obvious differences displayed in Tables 1-4, they obscure the even larger differences in managerial approaches ('software') to which we now turn.

4.4 'Software' differences A few years ago, Jaikumar [14] studied 35 flexible manufacturing systems in the United States and 60 in Japan (representing more than

half of the then installed systems in both countries). The systems were similar in the kinds of products made, in size and complexity, numbers of tools, precision of parts, and number of machines in each system. Yet he found that whereas the average number of parts manufactured in the US systems was 10, the Japanese average was 93, i.e. almost ten times greater. The conclusion Jaikumar drew is that US companies were using their FMSs poorly--for high-volume production of a few parts rather than for lower-volume, high-variety of many parts at low cost per unit [14, p. 69]. In other words, the US systems were being used according to the traditions created by several generations of engineers and managers oriented to mass production. Similarly, Osterman [19] studied several automobile assembly plants in 1986 [one new, one old General Motors plant; Honda, Ohio; Nissan, Tennessee; NUMMI (joint venture between GM and Toyota), California; and Toyota, Japan] and found that the degree of automation was highest in the new GM plant, lowest by far in the old GM plant, and in between in the other plants. In terms of reforms in the human resource or labor-management relations system, both GM plants were found to be significantly less advanced than the others. Osterman found that despite its high level of automation, the new GM plant had only half the labor productivity and twice the defect rate compared to the Japanese-owned plants; what was worse, it showed a higher defect rate and no increase in productivity compared to the old GM plant [19, pp. 42-3]. Thus, without changes in the human resource management system, the level of automation has little or no impact on performance in terms of productivity and product quality. Another illustration is obtained by comparing Just-in-Time (JIT) and Materials Resource Planning (MRP) systems. While JIT and MRP are similar concepts in many ways--the main idea being to ensure continuous operation of the production system with reliable output quality --they operate in very different settings. Central to JIT philosophy is the idea of reducing manufacturing setup times, variability of output quality, inventory buffers, and lead times in the entire production system, from vendors at one end to customers at the other, in order to achieve consistently high product quality, fast and reliable delivery, and reasonable cost. Thus,

Omega, Vol. 20, No. 1

the JIT philosophy is to pursue flexibility through integration between various functions within an organization [13, p. 4]. By contrast, MRP systems emphasize reliability of supply through redundancies and inventory buffers at critical points. The basic idea is to avoid idleness of the production line and thereby to reduce costs. Thus, while many of the principles underlying the two systems are similar, the practical implementations are quite different. The differences are even bigger when it is considered that MRP relates only to the physical production, whereas JIT is usually a part of a company-wide philosophy in which manufacturing is integrated with other functions (engineering, marketing, finance, etc.), This is not to suggest that JIT (pull) systems are always superior to MRP (pull) systems, In fact, some kind of hybrid system combining features of both may be the most effective [15]. But the practical difficulties encountered in integrating the two approaches illustrate the main point made here, namely that the choices of systems made by firms depend on management approaches, attitudes or 'philosophies' which are extremely difficult to change. As technology and/or other conditions change, one type of system may prove to be more easily adaptable than the other, The upshot here is that the fact that US firms use predominantly MRP systems rather than JIT reflects the historical traditions in US manufacturing, hampers the implementation of JIT systems, and makes it likely that US users of JIT systems will have more difficulty implementing them successfully than many of their overseas competitors. As Hyun and Ahn point out: "[t]he most powerful weapon of the Japanese manufacturers in international competition is perhaps not the Japanese excellencein creating and maintaining taut production systems s u c h as Just-in-Time inventory control, but rather their dynamic flexibility which encompasses continual improvements in manufacturing." [13, p. 381 The idea of continual improvement is fundamental to dynamic flexibility. In interviews with Swedish and American major machine tool users, it appears that one of the main differences between dynamically flexible and inflexible firms is the acceptance or non-acceptance of continuous change. Companies which expect their technology (both product and process) to continue

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to evolve tend to select strategies involving both strategic and tactical flexibility. The former emphasizes management attitudes and organizational change, whereas the latter focuses on the interface between technical and organizational change. The approach to tool changes (machine setup) is a good example. If the production batch is large, setup is infrequent and can usually be handled between shifts; it presents no problem as long as it can be carried out in the interval between the shifts. But if the production batch is of such size that the setup must occur during shifts, the setup time becomes critical, since the equipment is idle during setup. Virtually all the Swedish (and some of the American) firms interviewed expressed concern about reducing setup times. The typical mode in US firms was to perform setup between shifts, whereas in Sweden it was done during shifts. A setup which took two hours in Sweden was said to take only 20 minutes in Japan, and in some cases only 3-4 minutes, due simply to better organization. It was felt that the Japanese performance levels could be achieved in Sweden as well, and efforts were being made to accomplish this. Here, certainly, time reduction translates directly into cost reduction. Yet another illustration of the importance of management and engineering traditions involves what is now being referred to as concurrent engineering [2]. Rather than developing new products in the traditional way, i.e. in a sequence of steps starting with design and engineering, then contracting for various materials, parts, and services, and finally going to production, some companies are now trying to carry out the same process with each step taking place simultaneously. This saves both time and costs: changes made at any post-design stage no longer ripple back through the project, causing everything that had gone before to be reworked, thereby causing delays and cost increases. Japanese firms seem to be ahead in the application of this approach, but American and European firms are following suit. Obviously, the more dynamically flexible the company is, the easier it is to apply concurrent engineering. A step in the direction of concurrent engineering is the integration of CAD (computer aided design) and CAM (computer aided manufacturing); this integration is now often referred to as CIM (computer integrated manufacturing). In the early 1980s, when most of the interviews

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Carlsson--Management of Flexible Manufacturing

for this study were conducted, CAD/CAM integration was still in a very early stage. One of the leading firms was Volvo; it is interesting to note that the primary driving force seemed to be quality enhancement rather than cost reduction. Similar views were expressed at Boeing, where it was claimed that the 757 and 767 airplanes had been put together with much closer tolerances and fewer redesign problems than earlier models because of this integration. This obviously saved both time and money. Changing from cost management to time management requires an entirely new accounting system, as pointed out by Peter Drucker [11]. Conventional cost accounting methods tend to equate 'cost' with direct labor costs and treat everything else as overhead--even though direct labor cost rarely reaches 25% in manufacturing [11, p. 97]. Incidentally, such accounting conventions lie at the root of many misguided efforts to increase productivity. The most vigorous programs are often directed to direct labor, whereas the greatest savings potential lies in reducing overhead, especially the cost of idle resources caused by machine downtime, poor designs resulting in quality defects that require scrapping or re-working a product or part, and poor integration between marketing and production, resulting in either oversized inventories or shortages of products, As long as the main focus of cost accounting is on direct labor cost--and this seems to be more rigidly enforced, the less flexible the firm --it will remain difficult to justify purchases of automation equipment, such as numerically controlled machine tools or industrial robots. It is only when the emphasis is shifted to take into account the reduction of non-producing time by improving quality (i.e. by getting it fight the first time) and by curtailing machine downtime via reduced setup times and better integrated production planning that the true savings of automation become apparent [11, p. 97]. This is much more likely to happen in a dynamically flexible than in a static or statically flexible environment, In order to achieve flexibility, it is necessary to take a systems view: the various activities within the enterprise must be closely integrated and coordinated. Activities which are not viewed as part of the system are not really controllable, at least not on the same time scale. Thus, for example, in a statically flexible firm, manufactur-

ing may be regarded as a separate or expendable activity, whereas a dynamically flexible firm would strive to integrate it as closely as possible with all of its other activities. 5. I M P A C T OF FLEXIBILITY ON

COMPETITIVENESS

What evidence is there that flexibility makes a difference in terms of economic performance? There are no data readily available to answer this question directly; a data collection at the firm level is currently being made. But there is some indirect evidence at more aggregated levels; this will be summarized here. Table 5 shows the development of United States net exports by metalworking (engineering) industries between 1973 and 1983, ranked by the magnitude of net exports in 1983. (Net exports = e x p o r t s - imports.) Two things are evident: (1) The industries with the largest net exports include complex 'high technology' products such as aircraft and parts, office and computer machinery, engines and turbines, and scientific instruments--products which are often engineered or adapted to the needs of individual customers and which are characterized by a high rate of technological change. At the other end of the spectrum are the industries with the largest net imports: radio and TV receivers, watches and clocks, motor vehicles and parts, electronic cornponents, and household appliances-commodity-like, standardized products whose manufacture is characterized by either mass production or large input of relatively skilled labor. (2) The industries at the top of the ranking improved their net export position between 1973and 1983, while those at the bottom saw their positions deteriorate even further. In another paper [8] I have examined the relationship between the use of flexible manufacturing equipment (NC machines and industrial robots) vs inflexible equipment (especially transfer machines) and net export performance

Omega, Vol. 20, No. 1

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Table 5. United States net exports by metalworking industries (SIC 34-38), 1973 and 1983 (current prices)

SIC industry code 3720 3530 3570 3721 3510 3811 3580 3440 3560 3760 3840 3480 3690 3620 3462 3531 3743 3730 3520 3610 3752 3410 3640 3861 3430 3832 3541 3540 3420 3450 3630 3672 3710 3552 3660 3873 3650

Aircraft Construction machinery Office machines and computers Aircraft parts Engines and turbines Engineering and scientific instruments Refrigeration and merchandising machines Fabricated structural metal products General industrial machinery Guided missiles and space vehicles Medical instruments and supplies Ordnance and accessories nec. Misc. electric equipment and supplies Electrical industrial apparatus Forging, stamping and misc. products Materials handling machinery Railroad equipment Ship and boat building and repair Farm and garden machinery Electrical distribution equipment Misc. transport equipment Metal cans, barrels, drums and pails Electric lighting and wiring equipment Photographic equipment and supplies Plumbing and heating Optical and ophthalmic instruments Other metalworking machines Machine tools Cutlery, hand tools, etc. Screw machine products Household appliances Electronic components and accessories Motor vehicles and supplies Special industrial machines and misc. machines Communication equipment Watches, clocks, etc. Radio and TV receiving equipment

SIC 34-38 Total

Net exports 1983 $ Billion (1) 6645.4 5402.3 4807.9 3586.0 3177.5 2563.9 1202.3 1036.2 915.5 902.1 817.6 766.6 431.5 361.9 349.4 258.2 253.1 235.6 211.3 163.7 74.9 49.5 -11.0 -66.9 -83.3 - 159.7 -159.8 -243.8 -337.2 -371.7 - 661.6 -726.8 -755.5 -771.8 - 836.6 -968.1 -5772.2 22,286.3

Rank 1983 (2) l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Net exports 1973 $ Billion (3) 2896.5 2543.9 1278.4 618.9 1244.8 768.0 554.4 318.2 580.1 101.9 224.7 164.2 30.2 291.4 351.3 165.0 182.2 127.3 81.5 107.4 -754.0 3.2 -7.4 375.6 68.2 - 133.5 182.2 258.8 -19.7 -132.3 - 221.1 685.0 343.0 738.0 213.0 -302.4 -1920.1

Rank 1973 (4) I 2 3 8 4 5 10 14 9 25 17 22 28 15 12 21 20 23 26 24 36 29 30 11 27 33 19 16 31 32 34 7 13 6 18 35 37

12,006.9

Sources: US Department of Commerce, Bureau of the Census, US Exports (FT 610), 1973 and 1983 Annual Reports. US Department of Commerce, Bureau of the Census, US Imports (FT 210), 1973 and 1983 Annual Reports. Note: Data have been aggregated from the 8-digit level.

in these industries. The main conclusion was that the use of flexible technology made a consistently positive and statistically significant contribution to explaining the net exports of US engineering industries, while the use of mass production technology seemed to have no influence at all on trade performance, Because of the lack of data on machine tool use in Sweden, it has not been possible to perform a similar analysis for Swedish engineering industry. However, it has been shown elsewhere [7] that the differences in trade performance between the United States and Sweden in the postwar period can be explained by their historical orientation to different ends of the manufacturing spectrum. The US, relying heavily on mass production of standardized

goods, has faced greater problems adjusting to globalization of competition and advances in flexible technology than Sweden which has always depended on small and medium-scale batch-type production of industrial goods whose manufacture has benefited the most from this technological trend. It was also found that the increased rate of product and process innovation resulting from increased research and development expenditures throughout the industrial countries, as well as the development of technologies for better organization, coordination, and management of industrial innovation, have led to sharply reduced product life cycles and increased product diversity. This has generally benefited flexible firms with a high degree of integration

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Carlsson--Management of Flexible Manufacturing

between p r o d u c t d e v e l o p m e n t a n d the production p r o c e s s - - p r e v a l e n t in Sweden a n d J a p a n - at the expense o f more vertically integrated, less flexible firms more prevalent in the U n i t e d

States.

6. CONCLUSIONS The conclusions which follow from the preceding analysis can be p u t rather succinctly: (1) Flexibility is achieved as a result of a proper mix of certain kinds of hardware on one h a n d a n d certain organizations a n d m a n a g e m e n t attitudes a n d

practices ('software') on the other. (2) The hardware alone is certainly n o t sufficient for flexibility and m a y n o t even be necessary; the 'software' is certainly necessary a n d m a y even be

sufficient. (3) A hardware deficiency is relatively easily fixed; 'software' development is m u c h more difficult a n d time c o n s u m ing because it is heavily path dependent. The larger a n d more centrally p l a n n e d the o r g a n i z a t i o n in need of re-orientation towards flexibility, the more difficult the problem. ACKNOWLEDGEMENTS

2. Business Week (1990) A smarter way to manufacture. Bus. Week (30 April), 110-117. 3. Carlsson B (1984) The developmentand use of machine tools in historical perspective. J. Econ. Behav. Org. 5, 91-114. 4. Carlsson B (1989a) The evolution of manufacturing technology and its impact on industrial structure: An international study. Small Bus. Econ. 1(1), 21-37. 5. Carlsson B (1989b) Flexibility and the theory of the firm. Int. J. Ind. Org. 7, 179-203. 6. Carlsson B (1989c) Small-scaleindustry at a crossroads: US machine tools in global perspective. Small Bus. Econ. 1(4), 245-261. 7. Carlsson B (1990) Technologyand competitiveness:The micro-macro links. A comparison between the United States and Sweden. Paper prepared for the OECD Conference on Technology and Competitiveness, Paris, 24-27 June. 8. Carlsson B (1991) Flexiblemanufacturing and US trade performance.Weltwirt. Archiv 127(2), 300-322. 9. Carlsson B and Jacobsson S (1991) What makes the automation industry strategic? Econ. Innov. New Tech. Forthcoming. 10. Carlsson Bet al. (1979) Teknik och industristruktur. 70-talets ekonomiska kris i historisk belysning (Technology and Industrial Structure. The Economic Crisis of the 70s in Historical Perspective). IUI and IVA, Stockholm. 11. Drucker PF (1990) The emerging theory of manufacturing. Harvard Bus. Rev. (May-June), 94-102. 12. Gustavson CG (1986) The Small Giant: Sweden Enters the Industrial Era. Ohio University Press, Athens, OH. 13. Hyun J-H and Ahn B-H (1990) Flexibility revisited: Review, unifying frameworks and strategic implications. Department of Management Science, Korea Advanced Institute of Science and Technology, Mimeo., April. 14. Jaikumar R (1986) Postindustrial manufacturing. Harvard Bus. Rev. (November-December), 69-76. 15. Karmarkar U (1989) Getting control of just-in-time. Harvard Bus. Rev. (November-December), 122-131. 16. Klein BH (1984) Prices, Wages and Business Cycles: A Dynamic Theory. Pergamon Press, Oxford. 17. Knight FH (1921) Risk, Uncertainty and Profit. A.M. Kelly, New York. 18. Nabseth L and Ray GF (Eds) (1974) The Diffusion

Financial support for this study from the Swedish National of New Industrial Processes: An International Study. Board for Technical Development (STU), the Institute for CambridgeUniversity Press. Economic Historical Research at the Stockholm School of 19. Osterman P (1991) New technology and work organizEconomics, the Marianne and Marcus Wallenberg Founation. In Technology and Investment: Crucial Issues dation, and the Industrial Institute for Economic and Social for the 1990s (Edited by Deiaco E, H6rnell E and Research is gratefully acknowledged. Earlier versions of this Vickery G). Pinter, London. paper were presented to the Conference on Technology 20. Rosenberg N (1963) Technological change in the Management and International Business, Stockholm, 1 7 - 2 0 machine tool industry, 1840-1910. J. Econ. Histo. June 1990, and to the Hungarian Academy of Sciences, XXlll(4), 414-443. Budapest, 3-5 October 1990. I would like to thank the 21. Scherer FM (1988)Corporate takeovers: The efficiency participants in these seminars for helpful comments, arguments. J. Econ. Perspectives 2 (winter), 69-82. 22. Skinner W (1986) The productivity paradox. Harvard Bus. Rev. (July), 55-59. REFERENCES Professor B Carlsson, Department of Economics, Case Western Reserve University, Cleveland, OH 44106, USA.

ADDRESS FOR CORRESPONDENCE:

1. Abernathy WJ (1978) The Productivity Dilemma. Johns Hopkins University Press, Baltimore.