transferring world class production to developing countries: a strategic model

production economics

ELSEVIER Int. J. Production Economics 56-57 (1998) 433-450

Transferring world class production to developing countries: A strategic model

Robert N. Mefford”,*, Peter Bruunb

a McLaren School of Business, University of San Francisco, Ignatian Heights, San Francisco, CA, USA b Technical University of Denmark, Department of Industn’al Management and Engineering, Building 423, DK-2800 Lyngby, Denmark

Received 20 June 1996; accepted 18 March 1998

Abstract

Strategic reasons for firms to transfer world-class production methods and technology to developing countries are discussed and the importance of the management aspects of technology transfer are emphasized. A five stage model of the technology transfer process which bases the choice of the production process on the strategic objectives for the plant is developed. This is followed by the selection of the type of production system and the operational methods which will support it. The final stage of the model concerns the human resource policies needed to implement the operational decisions. The barriers and challenges of implementation are considered, and a socio-technical systems approach is proposed as a way to adapt to local conditions. 0 1998 Published by Elsevier Science B.V. All rights reserved.

Keywords: Technology transfer; Developing countries

1. Introduction

As developing countries switch to outward-look- ing economic policies, and multinational firms increase their investments in these countries, the need to develop production systems that can compete against the best in the world becomes paramount. The opening up of their economies to imports and foreign investment has ended the period of protected domestic markets in many developing countries. No longer are inefficient plants producing low

*Corresponding author. Tel.: + 1415 422-6408; fax: + 1 415 422-2502; e-mail: [email protected].

quality goods able to compete at home against foreign joint ventures and imports, nor can they export to other countries. These economic and political changes are fundamentally changing the nature of the competitive environment firms face in their global operations. Consequently, many firms are rethinking their strategies for operating production facilities in developing countries. This paper looks at changing strategies for third world operations and the types of obstacles that arise in implementing world-class facilities in these countries. By examining both successful and unsuccessful at- tempts at transplantation of production systems to developing countries, we identify the key factors related to effective operations in emerging markets. A model that incorporates the interrelationships

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PII: SO925-5273(98)00085-l

434 R.N. Mefford, P. Bruun/Int. J. Production Economics 56-57 (1998) 433-450

among these critical factors is developed. Guide- lines for management and organizational structures

and implementation strategies that are applicable both for local firms and multinationals attempting to develop world-class production systems in developing countries are then offered.

2. Appropriate technology: hard versus soft

In recent years there has been a rather fundamental change in how developing countries view foreign investment. In the decades of the 1950s and 1960s many developing countries followed economic policies stressing development of indigenous technology so as not to be dependent on foreign firms, who, it was feared, would come to dominate local economies. Consequently, countries implemented import substitution policies to allow local firms to develop their own technology, or to license

foreign technology, while maintaining local owner- ship of the production facilities and achieve sufficient economies of scale in a protected domestic market. The fundamental fallacy of such policies is that they focus exclusively on “hard” technology; that is, the product technology and the equipment to produce them. This type of technology, it was felt. could be purchased, licensed, or copied and was all that was required to be competitive with multinational firms. Unfortunately, this approach completely neglects the “soft” elements of technology transfer, the management systems and organizational structures that implement the hard technology and make it effective. Since the soft technology is less tangible, its importance even in industrialized countries has often been neglected. Probably the most important event that has high- lighted the critical importance of the management and organizational factors in production systems has been the success of Japanese multinationals in global competition. Using similar equipment to produce the same products, many Japanese companies were able to achieve much higher levels of productivity and quality than their Western competitors. As Western firms came to realize how important the soft technology elements were, they began adopting some of the Japanese methods such as just-in-time production systems. To the surprise

of some managers, these methods worked as well in a Western context, with suitable modification, as in Japan. Japanese firms were often the ones implementing the methods in their subsidiaries, but non-Japanese firms have also had success in using this type of production system. Now these same firms are beginning to realize that the methods will also work in developing country facilities as well, again if properly adapted to the local context. A few local firms in developing countries are also coming

to the same realization and trying to use the Japanese methods also. These experiments in developing countries are leading to a few success stories; as well as to some failures. We will attempt to discern from these experiences what are the critical success factors to the implementation of world-

class production systems in developing countries and how they must be integrated into a management and organizational system to be effective.

From the host country perspective, the emerg- ence of local firms that can compete with imports, as well as export their products, is highly desirable to create an industrial infrastructure, increase employment and incomes, and reduce balance of payment deficits. The old strategy of import-substitution was unsuccessful in achieving these ends, in large part, we would contend, because it neglected the importance of the soft or disembodied elements of technology transfer. Local firms, on their own, were usually incapable of implementing an effective production system even when they had access to the product designs and modern equipment. They were unable to integrate the hard elements into an efficient, high quality production system without foreign assistance in most cases. Those foreign firms that were operating in the country often had little incentive to implement the latest and best hard and soft technology since they faced little competition in a protected domestic market. Con- sequently, many developing countries remained dependent on exports of commodities and low technology products such as clothing and toys to generate foreign exchange. They often used foreign debt to finance government sponsored infrastructure and industrial projects and cover balance of payments deficits. The bankruptcy of the import substitution economic strategy became obvious in the 1980s when the debt crisis of much of the third

R.N. Mefford, P. Bruunllnt. J. Production Economics 56-57 (1998) 433-450 435

world resulted in severe economic contractions. At the same time the success of many Asian countries spearheaded by Japan and followed by the “tigers” of Korea, Taiwan, Hong Kong, and Singapore offered another development model. These Asian countries generally pursued policies strongly sup- porting the growth of export industries and en-

couraging foreign direct investment as a way to achieve competitive outward-focused firms. Most of the other countries in Asia as well as many governments in Latin America are now adopting similar economic strategies. To date the export-

driven model of development has been less well received in Africa but a few countries are moving in this direction. The International Monetary Fund and the World Bank have been supportive of the paradigm shift, providing funding and technical assistance to some countries making the transition.

The change in economic policy in much of the developing world has created vast opportunities for multinational firms to expand their markets and their production bases. Huge markets such as China and Indonesia have opened up to both imports and locally produced goods of the MNCs. The new emphasis on direct foreign investments has created many different types of incentive programs for multinational firms to set up production facilities in the developing countries. Usually these incentives are designed to support export-generat- ing types of operations rather than facilities to serve exclusively the local market. These incentives, as well as the opportunity to develop a low cost pro-

duction site, have encouraged many multinationals to rethink their strategies for their developing country facilities. We now turn to strategic issues in production systems in developing countries.

3. Strategic issues in establishing production facilities in developing countries

There exist many reasons why a firm may decide to set up a production facility in a developing country such as market access, lower production costs, strategic alliances and so on. Whatever may be the reasons motivating the decision, the firm will need to consider some strategic issues important to

the design of a production system. Some major ones which we will discuss below are:

1. Plant strategy, 2. Production networks, 3. New product development, 4. Continuous improvement of operations.

In deciding whether and where to set up a production facility in a developing country, the firm

will have to consider the strategic intent of the plant. This will largely determine the size and type of production facility and the appropriate techno-

logy to use. For example, if the facility is primarily being installed to serve a protected domestic market, efficiency and quality concerns will play a Iess prominent role in designing the plant. However, if it is making components or selling products into export markets, the quality and efficiency issues will become much more critical. Of course, the scale and scope of the plant will also be predetermined by the strategic goals for the foreign affiliate. A long term perspective needs to be taken for these issues for the goals for the plant may change in a predict- able manner as it and the markets it serves evolve. For example, many plants being built in China initially focus on export markets because of government incentives or restrictions but may eventually also serve the domestic market. The reverse is also the case in many countries where initial production is for the domestic market, but the goal is to expand into export markets at some point. In such a situation, the multinational firm will want to implement a process that will allow such an expansion into exports.

As more countries open their markets to imports and foreign direct investment, it is probably short- sighted for a firm to think they will enjoy a protected market for very long. Also if a firm is able to

develop exportable products, that will often lead to tax and other benefits. The importance of the paradigm shift in developing countries’ economic policies is that it is wise for most firms to plan on implementing world-class production facilities in developing countries whatever their short-term goals are and the current situation of the particular country may be. Very few firms will have the luxury of profitably operating small scale plants producing low quality products inefficiently for much longer in most developing countries. This realization puts

436 R.N. Mefford, P. Bruunllnt. J Production Economics 56-57 (1998) 433-450

great emphasis on understanding the key issues whole operation as a system. All plants are viewed of technology transfer in both its hard and soft as integral parts of the network and thus cannot be components. neglected in optimizing the whole system.

Another key strategic issue for a multinational firm is the degree to which an operation in a devel-

oping country will be integrated into a global production network. A plant that is part of a global

supply network has many constraints on its technology choice as well as its management system and prerogatives, There appears to be an ongoing trend for MNC’s to be increasingly linking their operations throughout the world into a global production system with plants producing and sourcing from a number of other plants within the same company. When this occurs, these plants will need to integrate their production schedules and produce at a quality and cost level to make the final products competitive in world markets. There is no place in such a global supply network for an inefficient, low quality plant producing mainly for the local market in a developing country. The movement toward lean(just-in-time) production systems only furthers the trend toward global integration of

production. A contributor to competitiveness of multina-

tional firms is fast product development, often using the concepts of concurrent engineering. To do this successfully, each of the facilities that will be involved in assembly or supply of components for the new product will need to participate in the both the design of the product and the process to produce it. This to some extent also forces all of the production operations of the firm to be using the same basic production system with similar high standards of efficiency and quality. In implementing facilities in developing countries, this requirement will also serve as a constraint of the appropriate technology to implement.

The implication of these trends and shifts in global firms’ strategies is that no longer can foreign operations be seen as peripheral to success of the firm as a whole. They must be integrated into the firm’s overall strategy as Ferdows [l] points out. The local plant in a developing country is not just an outpost serving a small, isolated domestic market. Each foreign plant is now viewed as either contributing to, or detracting from, the overall success of the firm as a whole as it competes in a fast-changing and ever-more competitive global

environment. The multinational firm needs to clearly delineate its long-range strategy for each of its foreign operations and where they fit in the

global production network. The strategy for each plant will shape the decisions about product and process which determine a production system. These strategic issues must be resolved before the operational staffs can begin planning the technology and implementation strategy for the facility. We will present a model for identifying and coordinating this strategy which is based on experiences in developing countries, both successful and unsuccessful, in implementing modern production systems (see Refs. [ 19-281).

4. A model for selection of production technology

A further strategic issue in design of production facilities in developing countries is the necessity for these facilities to be involved in continuous improvement programs. If the firm has implemented a continuous improvement strategy, this will require all operations that are part of the global supply network to be involved, or they will fall behind and no longer be able to meet the ever- increasing requirements of others in the chain. A key part of continuous improvement is seeing the

We view the decisions that must be made con- cerning the appropriate production technology for a manufacturing facility as a stepwise process involving several levels of decisions. This model is seen as universal and can be applied in the selection of a production system in any country, but becomes particularly useful in the context of developing countries where the simple transfer of an existing production technology from another plant may not be appropriate. In developing countries it is extremely important to begin with a strategic perspective on the purpose for the plant and then proceed via a series of sequential decisions on the type of process to be employed, the production system philosophy, and operational methods. Each stage is guided by parameters established at the

R.N. Meflbrd, P. Bruun/Int. J. Production Economics 56 57 (1998) 433-450

Plant Strategy Choice Process Choice Production System Choice

Operational Methods Choice Human Resource Policy Choice

Fig. 1. The production technology selection process.

preceding stage leading to a production system design that meets the goals established for it and operates efficiently and at high quality levels.

The entire five-step production technology selection process model is shown in Fig. 1. The five levels of decisions are diagrammed as a series of matrices each one representing the criteria which will be used for that decision stage. At each step

a choice is made and this then guides decisions at the next stage. It is important to proceed in this sequential fashion to ensure that the plant meets the objectives established for it, and the operational methods selected are congruent with the production process and operations philosophy. Any short-cutting of the process is likely to lead to a “piecemeal” rather than a “systemic” production system where some modern and effective tech-

niques are chosen, but they are not deployed in an integrated and thorough way to achieve a true world-class facility. This is an important conclusion of the research to date on implementation of techniques such as JIT and TQM. The model presented here allows the production system, and the opera-

tional methods that implement it, to be chosen and applied in such a way that real systemic change results leading to a “continuous improvement (CI) organization” that will be, and will remain, world- class.

The first step in the process of selecting production technology for a plant is to specify what the strategic goals are for the facility. There are many considerations that go into this decision, but

among the most important in these days of global business are (I) the markets for the output of the plant and (2) the intrafirm coordination required; i.e. the extent to which the plant will be linked into a global production network. These two dimensions are viewed as axes on a matrix which allows the two criteria to be integrated into a joint decision of the strategy choice for the plant; the axes should be viewed as continua representing a range of choices along each dimension (see Fig. 2). In the plant strategy choice matrix, it can be seen that as the markets for the products manufactured in the plant move into export markets, the firm needs a more globalized strategy for the plant in terms of

438 R.N. Mefford, P. Bruun/Int. .I Production Economics 56-57 (1998) 433-450

Markets

Localize

Plant

Strateg

Global

Autonomous IIltrafiirlll

Coordination

Integrated

Fig. 2. Plant strategy choice

using international quality, cost, and delivery standards rather than local standards. In a similar fashion, as the output of the plant becomes supplies for other plants of the same firm, it needs to be integrated into the overall production scheduling and manufacturing planning of the firm. It no longer can be treated as an autonomous entity which can make production decisions without consider- ing the impact on other plants of the firm’s production network. This also requires the plant to meet global quality, cost, and delivery standards rather than local ones. As the matrix illustrates, the more the plant will serve global markets and the more it is integrated into a global production network, the greater the need to have a global strategy for the plant (i.e. the strategy moves down the diagonal toward the lower right portion of the matrix). Con- versely, if the plant serves primarily the domestic market, without significant competition in that market from other MNCs, and if it is not a supplier to, or is supplied by, other plants of the firm, the more it can follow a localized production strategy. Another strategy choice involves an export strategy where the firm serves foreign markets from a few plants. Since extensive coordination of foreign sub-

Globalin

Simple/

Standard

Products Complexi

Custom

Fig. 3. Process choice.

sidiaries is not needed for this strategy selection, this alternative would be located in the lower left hand corner of the matrix. Alternatively, the firm might pursue a “multidomestic” strategy where each foreign affiliate serves primarily the local market in that country, yet coordinates among the subsidiaries in terms of product development, marketing, and financial functions. This strategy requires some intrafirm coordination and thus would be located in the upper right hand corner of the matrix. Consequently, the first choice that must be made in the selection of production technology is the firm’s strategy for the plant.

In Step 2, the strategic choice made in the first step is now one of the criteria to be considered for selecting the appropriate production process (Fig. 3). The other criteria is the types of products to be produced in the plant represented as a continuum from simple and standardized to complex and customized. The interaction of these two criteria is represented in the process choice matrix by locating the plant’s strategic choice on the vertical axis and the products of the plant on the horizontal axis. The joint consideration of the two criteria will lead to a more appropriate process choice than the

R.N. Mefford, P. Bruunllnt. J. Production Economics 56-57 11998) 433-450 439

independent consideration of either or both. For

example, if the plant is pursuing a global strategy (e.g. it will sell its products in other countries) but is manufacturing simple, standardized products (e.g. steel), it may choose to use a fixed flow, inflexible

process such as a continuous process plant to achieve economies of scale and high volume. There- fore, it would be located in the lower left quadrant in the matrix. On the other hand, if the plant is serving global markets and needs to produce a variety of complex and frequently changing products, a flexible, varied flow process is more appropriate (e.g. computers and consumer electronics). Thus it would make a process choice in the lower right quadrant of the matrix. Once the process choice decision is made, then the production technology selection process moves to Step 3.

Step 3 is the Production System Choice matrix (Fig. 4). Two different types of production systems, mass production and lean production, are shown within the matrix on the diagonal from the upper left to lower right quadrants. At the upper left is the traditional mass production system using a line flow technology to produce large volumes of standardized and infrequently changing products. This

Fixed/ Line FIOW

Flexible Variab18

Flow

Simple/ Products Standard

Fig. 4. Production system choice.

Complex/ Custom

approach to manufacturing, which until recently dominated the production of most high volume consumer goods such as automobiles, appliances, and consumer electronics, is often described as Fordism (after Henry Ford’s pioneering development of the moving assembly line for automobile manufacture in the early 1900s) or Taylorism (after Frederick W. Taylor who developed “scientific

management” in the early part of this century call- ing for highly specialized tasks and a clear separ- ation of management and labor activities). We use the term “mass production system” quite broadly here to refer not only to traditional assembly line industries but also to batch and job shop environments that employ the mass production philosophy (i.e. functional layouts, specialized jobs, large lots, and inventory buffers). “Lean” production system refers to the approach to manufacturing which stresses minimization of the use of resources

throughout the process, i.e. equipment, labor, inventories, space, time. This approach was developed by Japanese firms in the 1960s and 1970s (it is frequently called the Toyota Production System after the Japanese firm that first developed it) and is now being widely applied in many industries including those that previously used mass production methods such as the automotive and electronics. Just-in-time production planning and total quality management are key elements of a lean manufacturing system. The firm has to make a choice between a production system stressing the philosophy of mass production or one utilizing the philosophy of leanness. The two systems are nob compatible since they employ very different methods of or- ganizing and managing the production process. The production system choice is very important because it establishes the parameters for the selection of operational methods and human resource policies that will determine the plant’s capabilities and performance.

The two continua that determine the production system choice are (1) the process choice on the vertical axis and (2) the types of products to be produced in the plant on the horizontal axis. This matrix is derived from the well-known product- process matrix of Hayes and Wheelwright [2], adapted for the production system choice. The process choice was made in Step 2 based on the plant


strategy and products considerations and now becomes a determinate along with the type of products in the selection of the production system. To

illustrate how these criteria determine the choice of a production system, consider a firm that has chosen in Step 2 to use a fixed flow process to produce a standardized product for a globalized market (e.g. color television). In the traditional product/process matrix this would suggest a mass production system emphasizing economies of scale and infrequent product changes. This would seem an appropriate choice, and, in fact, is the system choice made by many firms in this industry in developing countries, and it is consistent with the logic of the traditional product-process matrix. Plants making this production system choice can be efficient and competitive. But as the matrix suggests, if the firm wants to produce a variety of complex products and frequently introduce new products, a lean production system is the more appropriate system choice. As the experiences of firms using lean production principles are demon- strating, it is possible to achieve economies of scale and low unit costs without trading off flexibility. So even for firms where the conventional product- process matrix logic would suggest a mass production system is the best choice, they now can consider another alternative in JIT/TQM ap-

proaches in the lower right corner of the matrix. However, this requires a fundamental shift in the strategy of the firm and its production philosophy, a shift not feasible in the short-run for many companies, and therefore, the appropriate production system choice for some firms will be a mass production system. This has been the experience with the “maquiladoras” in Mexico. Many of these maquila are producing fairly simple and standardized products such as consumer electronics that require high volume production. Confronted with many prob- lems in Mexico such as poorly educated workers, high labor turnover, poor transport facilities, and a lack of qualified local suppliers, most of the firms operating the maquiladoras, including those owned by Japanese companies, have stayed with the mass production approach keeping jobs simple, providing little training, importing most materials, and maintaining substantial inventories. Just-in-time, total quality management, and continuous im-

provement programs have made little penetration of these plants [3].

Once the production system choice is made, the decision process now turns to how to operational- ize it. In Step 4, the Operational Methods Choice stage, decisions will have to be made on a range of operational approaches and procedures. This is illustrated in Fig. 5 with the two integrated dimensions that shape the operational decisions being (1) the production system choice and (2) the operational methods choices in the areas of inventory, quality, production control, supplier relationships, and job design. The result of these choices will determine whether the firm is a “homeostatic” organization, defined as organization that resists change and values stability and predictability, or an organization that stresses continuous improvement of its operations. Viewing the production system and operational methods decisions as continua re- flects the reality that a lean production system is not necessarily one of continuous improvement. In fact, as Kaplinsky and Posthuma [4] point out, there seems to exist in most organizations a

MtlS Production

Production

System

Push

JIC

End-of-Line

Arm‘s Length

Simple & Repetitive

Ocerational Methods

Production Control

lIlVE?ltO~y

Quality Suppbers

Job Design

Fig. 5. Operational methods choices.

R.N. Mefford, P. Bruun/lnt. J. Production Economics 56-57 (1998) 433-450 441

tendency to resist change and return to equilib- rium. They noticed in many organizations introducing JIT, TQM, and other aspects of lean production, that it is extremely difficult to institu- tionalize the changes and make them “systemic”. To do so requires moving beyond the techniques and changing the human resource environment. We will discuss this important point later in this section. Therefore, it is possible and even likely that a lean production system will not be practicing “kaizen” in a consistent or meaningful fashion. Conversely, a mass production organization may want to keep improving its methods, but the philosophy of mass production places much emphasis on stability and predictability, and this will serve as a barrier to kaizen. As the matrix suggests, various combinations of production systems and the emphasis placed on continuous improvement are possible.

The operational methods choices that will determine whether the organization is homeostatic or continually improving are in five major areas. The firm will have to make decisions in each of these areas, but it is important to realize that these are not independent decisions. They are very much influenced but not determined by the production system choice. How far the firm moves to becoming a continuous improvement organization will be essentially determined by these operational

methods decisions. An effective CI plant will be located to the right side of the horizontal continua on all five dimension, but the initial selection of method may not be there, nor necessarily should be there, until the appropriate human resource policies are implemented. The human resource policy choices will be discussed in the next matrix. There- fore, the selection of operational method may be at different places on the continua for each of the methods, and separate but interrelated decisions will have to be made in each area.

The first of these is the production planning and control approach used. If the firm is implementing a lean production system, this will necessitate

a “pull” approach to scheduling production. Ma- terials will be pulled into and through the plant only as needed and in small quantities. Mass production systems typically utilize a push approach where production is scheduled based on forecasts or to replenish stock and materials are ordered and

pushed through the plant based on expected rather than actual production. Inventory buffers are used to smooth production, and normally high levels of inventories of all types are found throughout the plant. A “just-in-case” mentality is common in this

type of production system and inventories are kept high to prevent production interruptions and assure high worker and machine utilization. The pull approach to production control is compatible with a “just-in-time” inventory system where stocks only are ordered or produced when actual production

requires them. If JIT methods are effectively utilized, mainly in the area of stressing improvement of the process to reduce the need for inventories, it can be a necessary, but not sufficient, condition to becoming a continuous improvement organization. Changes in the human resource environment will also be required. The decisions about production control and inventory are interlinked, as the above discussion suggests, and therefore need to be made jointly.

The approach used to quality control also is quite different in a mass production from a lean production organization. Most plants using mass production methods stress an inspection-based approach to quality utilizing inspectors or managers to assure “end-of-the-line” low defect rates. In contrast, lean production systems employ TQM principles to try to do away with inspection-based quality and build in quality “at-source”. This is accomplished with techniques such as making workers responsible for inspecting their own work. involving them in improving processes, and using statistical methods to eliminate the need for inspectors. If developed beyond an emphasis on monitor- ing quality to improving it continually, then TQM programs, in the same manner as JIT, provide a set of techniques to implement the transition to a continuous improvement organization. Again they are a necessary but not sufficient condition to becoming a CI organization.

Another important operational decision linked to the production system choice is the nature of supplier relationships to be developed. Firms pursuing lean production strategies quickly find that having efficient, high quality, and reliable suppliers is essential to effectively implementing these programs. Therefore, they devote substantial time and

442 R.N. Mefford, P. Bruun Jht. J. Production Economics 56-57 (1998) 433-450

attention to finding and developing supplier “partnerships”. In contrast mass production oriented firms usually do not see the need to develop such close relationships with their suppliers and prefer to have many different suppliers so as not to be too dependent on any single supplier and to force the suppliers to compete for the business, The supplier linkages are likely to be particularly prob- lematic and important in developing countries where often there are not qualified local suppliers and critical parts must be imported. This often forces a firm attempting to implement a lean production system to work closely with local suppliers to raise their performance or to entice foreign suppliers to build local plants. Success in developing supplier relationships can be one of the most important determinants of whether a world-class facility can be located in a developing country.

The final major operational methods choice is in job design. The types of jobs that will exist in the manufacturing facility will essentially be determined by the production system choice. If a mass production system is selected, the jobs will typically be narrow and specialized emphasizing primarily physical tasks. Conversely, in a lean production system job design is much more oriented to creating positions requiring the performance of multiple tasks and utilizing a variety of skills, both mental and physical. How extensively the mental components such as participation in process improvement, quality inspection, and training of other workers are developed will be an essential factor in how far an organization moves towards a continuous improvement orientation. Therefore, selection of human resource policies is developed as the last step in the sequence of selecting production technology for a plant.

The human resource policy choices are closely related to job design as Fig. 6 illustrates. How the human resource policies are formulated and implemented will likely be the most important determinant of the extent to which the firm becomes a continuous improvement organization. The types of policies in the areas of worker participation, the use of teams, training programs, and the organizational structure are strongly influenced by the ways jobs are designed. In turn, the human resource policies in these areas will determine how effectively

Simple &

Repetitive

Job Design

Multi-Skill

& Task

LOW

NOIK

Limited

Layered

Human Resource Policy

Employee Participation

Work Teams

Training

Hierarchy

Hi(lh

Self-Duected

Extensive

Flat

Fig. 6. Human resource policy choices

the multi-skill and task job designs work. There- fore, they are joint decisions. In the matrix on the vertical axis, job design is shown as a continuum from simple and repetitive at one end to multi-skill and task at the other. The extent of training, participation, amount of supervision, and the feasibil- ity of using work teams will largely be determined by job design. For example, work teams become more feasible for workers who can perform multiple tasks since job rotation is normally carried out in teams. Also if the teams are going to be involved in quality and process improvement activities, workers need to understand multiple jobs and have skills such as statistical and process analysis. This requires extensive training of the workforce to both develop the basic task-oriented skills as well as the more analytical ones, so training is also linked to job design. If the teams become developed enough to be fully self-managing, then the organizational structure will need to be modified. A flatter organization is called for, often eliminating the entire first level of supervision with self-managed work teams. The hierarchy is usually compacted throughout a continuous improvement organization allowing all management levels to have good communication with the shop floor. The Human Resource

R.N. Mefford, P. Bruunllnt. J. Production Economics 56-57 (1998) 433-450 443

Policy Choices matrix illustrates the interaction of the job design and human resource policy choices and how the joint decisions made in this area determine whether the firm will be a homeostatic or a continuous improvement organization.

By utilizing this sequential approach to the selection of the production system and the operational and human resource methods to employ in the plant, a firm will more likely choose a technology (in both its hard and soft dimensions) that matches the overall strategic goals for the plant and results in an integrated production system design. If the goal is to achieve world-class status for the plant, the operational and human resources choices made to implement a lean production system will be of critical importance in meeting benchmark quality, productivity, delivery, and flexibility goals. The model identifies what these choices are, how they relate to the process and production system choices, and when they must be made in the process of selecting the technology for the plant. Of course, making these choices, although important, is only the first step. Implementation of the operational and human resource methods selected will ulti- mately determine the success of the plant and its strategy. We now turn to implementation issues and what the empirical evidence suggests are the critical determinants of success in starting up and operating production facilities in developing countries.

5. Implementation of a world-class production system in a developing country

To have a successful startup and operation of a manufacturing plant in a developing country, not only must the technology (in both its “hard” and “soft” elements) be properly selected, but also the implementation process must be carefully planned out. A project management approach is a suitable way of doing this as Bruun and Mefford [S] suggest. This approach utilizes a framework for conceptualizing, implementing, and operating a production facility in a developing country that breaks down the project into three phases and considers the critical activities at each phase as well as the issues involved in the transition between the

phases. Since the activities are different in each stage, different types of skills and experiences are called for, and thus the project personnel composi- tion needs also to change as the project proceeds through its stages. Appropriate organization structures to carry out the project phases are suggested.

Selection of personnel to work in the project is critical to success. This brings up the issue of using expatriate or host country personnel in the project teams as well as when operations begin. There are advantages and disadvantage with both host country and expatriate managers and technical personnel that have been discussed extensively elsewhere, so we will not address them here. However, there are some issues particularly important in this re- gard if a firm is attempting to create a world-class production system in a developing country. Analy- sis of successful and unsuccessful transplantation experiences demonstrates that management understanding of and commitment to JIT, TQM, and CI efforts is essential to make these approaches work. The level of management involvement in the organization change effort goes well beyond simply a technical understanding of the methods requiring also “buying into” the philosophy and accepting that the roles of managers in the firm will fundamentally change. Unless a manager has been involved with such efforts previously or receives intensive training, it is unlikely that he or she will be able to successfully implement the lean manufacturing and continuous improvement techniques. This gives an advantage to expatriate managers, and Japanese firms tend to use a large number of expatriates in their foreign manufacturing ventures not only to impart the methods but, perhaps more importantly, to create the organizational culture to allow the lean system and kaizen to take root and grow. The requirement for knowledge and commitment does not rule out the use of host country managers, but the firm must expect to engage in intensive training often involving dispatching them to spend time abroad in plants using these methods. As several articles have pointed out, managers in developing countries often tend to hold traditional views of production systems such as “quality is a luxury” and “large inventories are an asset” which will need to be changed if they are to become implementers of a lean production system [6,7].


The experiences of firms implementing lean production and continuous improvement systems in their plants in developing countries reveal that a few key factors determine whether these plants become truly world-class or not. Extracting these factors from the cases reported in the literature, we can group them into four categories:

1. Process factors, 2. Supply factors, 3. Management factors, 4. Labor factors. Beginning with the process factors, we can ident-

ify several elements of the process design that have been shown to be critical to the ability of a firm to implement a world-class production system in a developing country. The first of these is to use the principles of lean production no matter what type of basic process is being utilized (job shop, batch, assembly line, continuous process). Many managers think that the philosophy of lean production really only applies to high volume, repetitive manufacturing such as in the automotive or appliance industries. In reality, firms in many different types of industries, including those employing job shop and batch processing approaches, are finding that these principles are also effective in their plants. Concepts like make-to-order (pull), low inventories, quality at-the-source, and supplier partnerships can improve the competitiveness of any company, including those in the service sector.

A second important process factor in setting up an effective production facility in a developing country is choosing the proper amount of automation. The five-step model discussed above should be helpful in deciding on the process design, and as an element of this, the type of equipment and information systems to use. It is important to realize that the lean production system does not require a high level of automation, in fact, in can be viewed in some situations as an alternative to automation. This is likely to be especially attractive in developing countries with the usual shortage of capital available to invest in equipment, and the difficulties in maintaining it. Lean production techniques place heavy emphasis on the use of human resources to improve efficiency and quality rather than on automation. This is not to say that using sophisticated equipment, robotics, and com-

puterized information systems is always inappro- priate for firms in developing countries, but rather that it is not the only way that a firm can achieve world-class status.

A third aspect of process design that is critical to the use of lean methods and continuous improvement is job design. As Fig. 6 illustrats, job design is linked to the type of production system chosen with multi-task jobs being emphasized in lean production systems to achieve flexibility and worker involvement. Fig. 7 demonstrates how appropriate human resource policies can develop a workforce performing a variety of different jobs requiring multiple skills, some physical and some mental, into a vehicle of continuous organizational improvement. Through encouraging worker participation and engaging in extensive training for all workers, the firm can develop the ability of employees to work successfully in multitask teams with a minimum of supervision.

A severe constraint for many firms trying to develop world-class manufacturing systems in developing countries is the lack of good local suppliers. If inventories are to be kept low, reliable suppliers producing consistently good quality is essential. This type of supplier is rare in most developing countries. The firm is then confronted with three alternatives: import materials, vertically integrate, or develop local suppliers. The quickest and easiest solution that is adopted by many firms operating in developing countries is to import materials from trustworthy suppliers abroad. However, this is not a viable long-run strategy as it exposes the firm to a continual foreign exchange requirement to pay for the imports and the risk of future import restrictions cutting off needed materials. Also many governments force firms to source locally through local content requirements and political pressure. Additionally, achieving the very low levels of inventory found in the best plants (e.g. 2 or 3 hours of inventory) is usually out of the question with imported parts and components.

The vertical integration alternative is often chosen by firms using mass production systems. This gives the firm control over quality and delivery of its supplies but depletes the firm’s capital and disperses its management resources. It also is con- trary to the prevailing view that a firm should focus

R.N. Mefford, P. Bruunllnt. J. Production Economics 56-57 (1998) 433-450 44s

on its core business. Companies implementing lean production systems typically increase their out- sourcing and shift away from vertical integration, instead developing supplier partnerships that allow them to insure quality, efficiency, and reliability of supply sources without having to invest in and manage these plants themselves.

Therefore, the firm may be forced to develop local suppliers. There are two approaches to doing this. The first involves identifying local companies with the potential to develop into capable suppliers and then working very closely with them to upgrade their quality and efficiency. It takes time and resources, both managerial and capital, to implement this approach causing many firms to avoid it. An alternative way to develop local supply sources is to entice foreign suppliers to locate a facility in the country. Unless the buyer firm is a major customer, this will probably not be economically attractive to the supplier firm. And even if foreign companies can be attracted to establish plants in the developing country, for complex products many local suppliers will still be needed. Therefore, in most situations some development of local suppliers will be called for.

Supplier linkages are undoubtedly one of the most important factors contributing to success or failure of factories in developing countries and, as we have discussed, there is no easy or quick solution to this problem. But there are effective solu- tions if the firm is willing to devote the time, effort,

and resources to establish and cultivate supplier partnerships. As we saw in Fig. 6, this is one of the operational methods linked to a lean production system and a continuous improvement organization. Suppliers can take over much of the design work on new products reducing costs and expedit- ing development if involved as partners with their customers (concurrent engineering). Also in some cases suppliers which have themselves adopted lean production and continuous improvement may be able to contribute ideas to help the buyer firm improve. And if the suppliers are improving their productivity and quality, this of course helps to make the buyer’s products into which they are incorporated more competitive as well. A dynamic may be established in the network of customer and suppliers that leads to constant innovation and

improvement. Suppliers become more capable through their expanded role in joint product and process development with the buyer, and soon technical assistance may begin to flow in both directions [8].

Management factors that are critical to the success or failure of developing country plants are

commitment to the philosophy of lean production and continuous improvement and a willingness to share decision-making authority with employees. Invariably firms which have successfully implemented a lean production system and developed a continuous improvement organization, have a chief executive who strongly believes in these

concepts and is personally very involved in establishing them within the firm. Since the key to mov-

ing to a continuous improvement culture involves fundamental organization change in authority and responsibility relationships, such change will just not happen unless the CEO is personally committed to it. Middle managers and first level supervisors often turn out to be the strongest opposition to implementing JIT, TQM, and CI methods. They bear the brunt of the organizational change by having their authority eroded and their roles drasti- cally altered as worker participation and teams take over many of the activities they traditionally perform. Unless the top managers are completely committed to changing the culture, the supervisors and middle managers will likely block the changes. By being involved, for example, in extensive training of all managers in the concepts of continuous improvement, and by establishing performance evaluation and reward systems to support the changes, the top managers can overcome this resistance.

In developing countries management resistance to worker participation in decision making can be intense. The culture may reinforce large status differences between managers and workers based on class, education, race, and family relations that hinder implementation of a participatory environment. Paternalistic relationships between employees and managers are common in developing countries and hinder worker involvement and transferring responsibility to workers. Although these cultural barriers are difficult to overcome, they are not insurmountable. They are likely to become a critical constraint at the last stage of


movement to a continuous improvement organization. Through training, workers attitudes can be altered and their skills and confidence developed to participate in decision making. In some developing countries, working collaboratively rather than indi- vidually is part of the culture, and this may facilitate the use of work teams.

Finally, as the last paragraph suggests, labor factors are critical to implementing a world-class production system anywhere, but particularly in a developing country. The attitudes of workers in these countries can be a significant barrier as well as low levels of education and industrial experience. Workers are involved at all stages of implementing JIT and TQM methods through Quality Circle activities and accepting responsibility for quality at-the-source. However, if the organization is going to move to a culture of continuous improvement, the level of worker involvement is ratcheted up. They now are expected to perform a wider range of tasks and take on some activities normally asso- ciated with management such as production scheduling, quality control, problem analysis, and training of other workers. The level of knowledge and motivation of employees must increase corre- spondingly. The methods to achieve this are through management persistence in revamping the organizational culture and extensive training for all employees. However, this effort may be hindered if labor turnover and absenteeism is high as is found in the maquiladoras in Mexico [3,9,10]. This problem will have to be dealt with before firms are willing to invest extensively in employee training and development.

For training programs to be effective, the firm must have a workforce with the education, skills, and attitudes to benefit from the training. This suggests that careful attention to selection of employees is essential, not only in a “greenfield” plant, but also in existing plants new workers should be chosen with care. Certain criteria become important for employees in a continuous improvement organization that normally might be overlooked for employees performing simple, repetitive tasks. The necessity for workers in a CI organization to acquire multiple skills, including mental activities like problem analysis and statistical quality control, requires a sufficient level of education to pro-

vide the literacy and numeracy abilities needed for the new types of training. This is likely to be, as a minimum, the level of a secondary school education. It may be difficult in some developing countries to obtain factory workers with this level of education, but in others it is not a problem. Also important for CI organizations is an ability to work in teams both in performing the production activities and in improvement efforts. This means that the screening of new employees should assess worker attitudes toward, and abilities for, group activities. As mentioned above, in developing countries this is often not a problem as the culture supports collective rather than individual efforts.

Even with an existing workforce, training is capable of radically altering attitudes and developing skills necessary for continuous improvement activities. This has been demonstrated at several world- class plants that converted an existing workforce from an antagonistic and alienated group into a committed participant in CI activities [4,8,11,12]. The type of training capable of converting apa- thetic and poorly skilled employees into committed change agents obviously has to be extensive and long term. In the case cited in Brown and Reich, as well as the Ford Hermosillo plant [13,14] substantial numbers of workers were sent abroad to work alongside local employees in plants operating in a lean production environment. Not all employees need to have this type of very expensive training, but a major benefit of sending employees (this applies to managers as well) to work in operational lean production/C1 environments is that they come to understand the type of organizational culture required in a world-class facility and can serve as change agents to help instill those values and attitudes when they return home. It has proven difficult, if not impossible, to convey the intangible organization culture aspects of continuous improvement through classroom training so the expo- sure to the foreign plants is invaluable. However, this is a very expensive type of training and for most of the employees, who are not given the opportunity to visit the foreign plant, in-plant training must suffice. This usually requires hundreds of hours of training in job skills, the production process, small group dynamics, and problem solving skills before being placed on the shop floor or line. Then there

R.N. Mefford, P. Bruun/lnt. J. Production Economics 56-57 (1998) 433-450 441

will be periodic training at regular intervals to upgrade existing skills and teach new ones. Train- ing in a CI organization is seen as permanent, and all employees will continue to be trained as long as they work at the firm.

Careful selection and extensive training of workers are necessary but not sufficient conditions to implement a continuous improvement culture. Also required is the management commitment to support employees as they participate more in product and process design and overcome obstacles that might arise: i.e. resistance from lower level managers, sales downturns, technology change. Equally important is a reward system that allows workers to benefit from the greater contri- bution they are now making to the firm. The re-

wards may be either intrinsic or extrinsic and both should be used. The greater variety of activities and the responsibility placed with workers in multiskill and multitask jobs is intrinsically rewarding. Par- ticipation in team activities, both in performing the job and in problem analysis and solution, also provides intrinsic satisfaction. Extrinsic rewards that serve to link employee and firm goals are the use of bonuses and payments for learning new skills. Recognition programs of both monetary and nonmonetary types can also be used as rewards to motivate employees.

Another type of reward that appears to be strongly linked to worker involvement in CI activities is job security. It is normal for employees to be concerned that if the improvement efforts they are encouraged to undertake are successful, there may be redundant employees and layoffs will occur. Unless assurances are given that no one will be dismissed because of productivity improvements, it is difficult to enlist worker commitment to CI activities. Job security can also be a method of linking the worker’s goals with the firm’s goals. If the worker expects to be with a firm for many years, he or she is more likely to believe that any contribu- tions they make will benefit employees for, as the firm gains competitiveness, bonuses and promotion opportunities increase. In turn, the more the firm invests in training its workers, the more incentive it has to retain them. Finally, if the firm is world-class, employees may feel pride in being affiliated with it, especially if they believe they are contributing to

that success through their participation in continuous improvement activities.

As the above discussion indicates, there are spe- cific operational methods and human resource policies that must be implemented if the firm is going to make its plant in a developing country into a world-class facility supportive of a globalized strategy. It is important to view these methods and policies not as a “toolkit” but rather as a philos-

ophy of production. Firms that implement a few of the methods of lean production may achieve bene-

fits, at times substantial, in improved quality and productivity, but they will never make the transition to a continuous improvement organization. They may be competitive, especially in the

domestic market, but they will always be playing catch up with competitors that practice continuous improvement and are constantly raising the standards. They will not be truly world-class until they are the firms establishing the best practice methods and the ones others “benchmark” against. Organ- izational change must be systemic if this is to occur.

6. Organizational restructuring using a sociotechnical systems approach

In attempting organizational change and improvement, it is essential to view a firm as

a sociotechnical system. Technological change occurs in a particular social system that, in turn, is embedded in a cultural environment that strongly influences it. Sociotechnical systems theory argues that the technical and social systems must be developed jointly for a production system to be appropriate to its environment [15,16]. Nowhere is this more true than in a developing country where the social environment is likely to be quite different from what the expatriate manager of a multinational firm is accustomed to. Since the cultural influences are pervasive, but often intangible and obtuse to a foreigner, introducing organizational change in another country is always challenging. How can a firm increase the probability of success for creating a continuous improvement culture in a foreign production facility?

The firm may transplant the home country methods to its overseas plants with minimal

448 R.N. Mefford, P. BruunJInt. J. Production Economics 56-57 (1998) 433-450

modification in an attempt to eliminate the effect of

the foreign culture on its production system. Japanese firms in particular like to use this approach. Large numbers of expatriate Japanese managers are used in their foreign facilities while many local

workers and managers are brought to Japan for training. As much as possible these Japanese MNCs try to transplant the Japanese organizational culture to the foreign site. They have had some success with this approach, as several of the case studies mentioned above indicate, yet it is very

expensive and time consuming and may not always yield the best results. A study of Japanese operations in the United States in auto components and assembly industries, consumer electronics and elec- tric appliances, and semiconductor industries found no correlation between productivity and the extent to which these companies transplanted Japanese methods [17]. In fact, some of the highest productivity plants in this study were the ones that had adapted to the American business and labor relations environment. In their study of the transfer of Japanese management techniques to developing countries, Kaplinsky and Posthuma [4, p. 3101 say, “even if it were technically possible to replicate the particular patterns of social organization which are to be found in Japan, these embody normative relations which are likely to be seen as unaccept- able in other environments”.

A better approach to organizational restructuring in developing countries may be the inherent sociotechnical systems application embedded in continuous improvement programs. Since CI is by design a “bottoms up” method, local employees and managers will be the ones coming up with and implementing the organizational changes, and these changes will likely be appropriate for the particular social and cultural environment of the plant. The technical system will be adapted to the local social system since it is indigenously developed. Of course, these local employees and managers will require extensive training in the philosophy and methods of lean manufacturing and continuous improvement to allow a world-class production system to be developed. But with sufficient knowledge and commitment, the CI approach will ensure that the organizational restructuring will be appropriate for the local environment. If the

new methods are imposed by expatriate personnel, there is much less likelihood that they will be successfully adapted to the host country environment. Conversely, without sufficient training and commitment of the local personnel, the production system design and organizational culture are likely to be adapted to local, rather than world standards.

Both are suboptimal outcomes, Continuous improvement provides an approach bridging the gap between foreign and local practices allowing the technology to be adapted appropriately to the host country culture by endogenizing the change

process. The model for selection of production techno-

logy presented above is a sociotechnical systems approach in that it stresses job design as the critical element in adapting a technical system to the social system. Multi-skill and multi-task jobs were identified in the model as one of the operational methods

needed to move to a continuous improvement organization. The last step of the model determines the human resource policies needed to make the multi-skill and task job design into the vehicle of

continuous improvement. The proper human resource policies (employee

participation, flat organization structures, work teams, and extensive training) are the key to instill- ing the proper attitudes and motivation in host country employees to allow continuous improvement programs to be the method to adapt the production system to the local environment. The local managers and workers then become the change agents for organizational restructuring in- suring a good fit of the social and technical systems. This by no means is to suggest that culture is determinant and cannot be altered. A production system and the organizational environment create a microculture in the firm that shapes relationships and attitudes and values. Through these influences a supportive culture can arise in the firm that may differ significantly from the indigenous culture. Continuous improvement programs allow for the melding of foreign “best practice” methods with the local social system to result in an effective production system.

Our conclusion is that continuous improvement is a sociotechnical systems approach that endogen- izes organizational restructuring. CI is particularly

R.N. Mejford, P. Bruun/lnt. J. Production Economics 56-57 (1998) 433-450 349

appropriate and needed in developing countries where the cultural differences with the industrial countries in which most MNCs are based can be large and political, economic, and technological change is rapid. Not only does CI increase the chan- ces of appropriate production technology being applied in the country, it also provides a mechanism by which constant adjustment of the production system to an evolving business environment will occur.

MeyerStamer [ 181 has argued that organizational restructuring alone is insufficient in achieving world-class competitiveness. He stresses the importance of attention to marketing, servicing, and investment in new equipment as also being essential to achieving global competitiveness. His concern is that the attention being placed on production system changes in developing countries overlooks these other determinants of competitiveness. Undoubtedly some firms are making this mistake and not implementing organization- wide changes to improve their competitiveness. However, properly applied the lean production system will achieve integration of the functions of marketing, finance, procurement, engineering, and administration into the production system. This

integration is achieved through a systems approach that sees the entire firm and all its activities as “the

system” to be optimized. A lean production system, fully implemented, links customer, suppliers, and the firm into a value chain whose goal is customer satisfaction at each stage of the chain and all parties view themselves as partners. Similarly, within a firm departmental barriers get broken down through procurement activities, creating information systems, and new product development. One of the keys factors identified above in a continuous improvement organization is a flat organization structure which allows the different functional areas to work more effectively together (often on cross-functional project teams). True systemic organizational restructuring involves every employee, not just those in production.

Meyer-Stamer’s concern about under-investment in capital equipment and research and development also has some validity. Lean production methods have proven that they can minimize the use of resources such as capital equipment by achieving higher rates of capacity utilization. Many

firms have been able to achieve low costs and high quality without investing in state-of-the-art equipment by using the lean production and CI methods. However, to remain competitive any firm will have to invest periodically in new plant and equipment, new communication and information systems, and re-

search and development. Any company that neglects such investments will lose competitiveness eventually.

7. Conclusions

This paper has presented a model for selection of production technology for facilities in developing countries. Drawing upon the experiences of firms which have attempted to implement production facilities in these countries, a five-step model is developed that allows for sequential decisions on product and process, a production systems approach, and selection of appropriate operational and human resource policies to support it. If the goal is to develop a world-class production facility. the model suggests the operational methods choices which must be made. Implementation challenges in developing countries are discussed with some guidelines offered to successfully overcome them and establish a world-class facility. A sociotechnical systems approach is recommended to facilitate adaptation of the production system to local conditions.

The increasing number of examples of manufacturing plants in developing countries becoming world-class indicates that the continuous improvement philosophy can be effectively transferred to these countries. Perhaps in the future, continuous improvement in some of the developing countries will create plants that other firms, even those in the industrial countries, will benchmark against. The developing countries may have a couple of inherent advantages over the industrialized countries that could cause this to occur. First, many of the developing countries do not have to overcome entren- ched attitudes resulting from many decades of operating under the paradigm of mass production. with its corollaries of arms-length supplier and customer relations and antagonistic labor management relations. Cultures in some developing countries comfortably support cooperative business

450 R.N. Mefford, P. Bruunllnt. J. Production Economics 56-57 (1998) 433-450

relations among firms and paternalistic attitudes toward employees (which has both negative and positive aspects but can create a sense of responsibility of the firm toward the employee and a loyalty on the part of the employee toward the firm). The paradigm is slowly changing in the industrialized countries, but some multinational firms have found it is easier to implement continuous improvement in developing country plants than in plants in their home country. A second factor that may contribute to the success of continuous improvement in developing countries is the willingness of people to work hard to advance. If properly channeled through CI activities, this drive and ambition will likely lead to rapid improvements in the competitiveness of developing countries.

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Acknowledgements

The authors would like to express their gratitude to Christine Sundquist for research assistance and preparation of the manuscript.

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