Mihkel M. TOMBAK, Assistant Professor of Production and ...flora.insead.edu/fichiersti_wp/Inseadwp1988/88-34.pdfMihkel M. TOMBAK N° 88 / 34 Mihkel M. TOMBAK, Assistant Professor of

"FLEXIBILITY: AN IMPORTANT DIMENSIONIN MANUFACTURING"

byMihkel M. TOMBAK*

N° 88 / 34

* Mihkel M. TOMBAK, Assistant Professor of Production and OperationsManagement, INSEAD, Fontainebleau, France.

Director of Publication :

Charles WYPLOSZ, Associate Deanfor Research and Development

Printed at INSEAD,Fontainebleau, France

FLEXIBILITY: AN IMPORTANT DIMENSION

IN MANUFACTURING

BY

MIBREL M. TOMBAI(

EUROPEAN INSTITUTE OF BUSINESS ADMINISTRATION (INSEAD)

JUNE 1988

FLEXIBILITY: AN IMPORTANT DIMENSION IN MANUFACTURING

ABSTRACT

This paper examines the question of whether flexibility in

manufacturing is an important decision variable for management.

Due to the advent of a new manufacturing technology, flexible

manufacturing systems (FMS), flexibility is an issue which has

received an increasing amount of attention in recent years. The

results of an analysis of the Profit Impact of Marketing Strategy

(PIMS) database show that the amount of flexibility has significant

impact on firm performance.

FLEXIBILITY: AN IMPORTANT DIMENSION IN MANUFACTURING

=7:Z

In a society of ever-changing needs and wants in the products we

buy, modern manufacturers have necessarily become concerned with their

ability to adapt to frequently changing demands in product

characteristics, levels of output and in the manufacturing process

itself. They now need to forecast changes in the market - a complex

and difficult process - in order to ensure that they do not make

unwise investments in manufacturing systems that are costly and that

will possibly be obsolete soon. The term "flexibility" is heard more

and more in defining the competitive edge. In the executive offices of

firms, managers are increasingly aware of the value of long-range

planning. Flexibility is an integral element of such strategic

thinking. The firms that survive in the long run are those able to

adapt to the changing market environment because they have been

flexible in their manufacturing facilities, and have not had to open

and close plants.

While the profit impact of production costs is direct and clear,

the effects of factors such as quality, dependability and flexibility

are more indirect, as they depend on such extraneous factors as buyer

behaviour and the costs involved in creating the system.

Nevertheless, these factors do make a difference in firm performance

and we now know that the correlation between firm performance and

flexibility has been considered an important decision variable in

manufacturing strategy in recent years.

The pursuit of flexibility has led many large firms to invest in

sophisticated plants known as Flexible Manufacturing Systems (FMS) to

the tune of 10 to 12 million dollars apiece. These wonders of modern

technology make it easier for managers to deal with predicting market

changes by their ability to quickly and economically adapt to such

changes. An investment in a large hi-tech system such as an FMS is

indeed a costly venture. We find the manager faced with an enormous

and difficult decision: whether to make the large investment in an FMS

or to turn to more static, less expensive machines dedicated to

- 2

certain, fixed types of products. In mapping corporate strategy, the

modern manufacturer must consider the intricate problem of future

utility of such a system. Let us examine more clearly what these new

manufacturing systems are.

WHAT IS AN FMS?

Flexible Manufacturing Systems are characterized by:

1) Numerically controlled (NC) machine tools which have automated

tool changers,

2) Automated materials handling, and

3) Centralized computer control.

FMS Machine Tools

These systems are flexible with respect to product designs in

contrast to "hard automation" since FMS tool set-up does not require

mechanical limits and adjustments which would necessitate human

intervention during operation. Numerically controlled machines and

computer integration facilitate this flexibility because of the high

speeds with which they can transmit changes in procedure. These

changes in procedure are expedited through the use of automatic tool

changers. The tool changers have an inventory of tools contained in

tool magazines. Thus, a wide variety of operations can be carried out

without someone stepping in and changing tools. Flexibility is even

further enhanced when the numerically controlled machines in an FMS

are multiple axis machines. This allows the system to perform the

operations necessary from different angles to the part often

eliminating the necessity of reorienting the part.

Automated Materials Handling:

Flexibility is also heightened significantly by automated

materials handling. In order for the production system to retain its

flexibility, the materials handling system must:

- allow random, independent movement of workpieces,

- provide temporary storage of workpieces,

- provide access for the loading and unloading of workpieces,

- be compatible with computer control, and

- be adjustable for changes in machines and capacity.

Examples of various types of materials handling systems are: conveyor

mechanisms, towline mechanisms, and at the most sophisticated level,

automatically guided vehicles.

Centralized Computer Control:

Perhaps the most important element in the FMS is the computer

control system. The computer is responsible for: the storage and

distribution of numerical control part programs, production

scheduling, traffic control for the materials transfer line,

production monitoring, and tool control. It is essential for the

central computer to be able to communicate with all the

microprocessors within the NC machines, within the automated guided

vehicles, etc. As a result, a considerable amount of effort has been

spent to develop a standard interface, namely, the Manufacturing

Automated Protocol (MAP).

MAP is a communications standard for factory applications

developed by General Motors. MAP satisfies two of the main

requirements of FMS: the capacity to transmit a tremendous volume of

data that must be transferred to a variety of machines, robots, and

sensors; and the high speed capability with which the data must be

transferred in order for the system to retain its flexibility. Since

its development MAP has been accepted by a number of vendors (i.e.

IBM, Allen-Bradley, Gould, Honeywell, Hewlett-Packard) as a standard

protocol.

3

THE EVOLUTION OF FMS

The roots of FMS can be traced back as far as the early 1950's

when numerically controlled machine tools (NC machines) were first

developed at the Massachusetts Institute of Technology. This

technological breakthrough was followed by the development of the NC

programming language APT in the late 1950's, and computer controlled

industrial robots in the late 1960's. With the advent of the

microprocessor in the late 1970's and its rapid improvement in

price/performance came the increased use of digital control in machine

tools. Once the stand alone computer controlled machines became more

prevalent in the 1980's, firms began to turn their attention to

integrating these machines into systems.

The machine tool systems which were first called FMS were built

in 1965 by Sundstrand Machine Tool Co. in the United States, and by

Molins Machine Co. in the United Kingdom. Kearney & Trecker built a

system in 1970 in the United States. Other early FMS' include a

system built in 1969 by Heidelberger Druckmaschinen in cooperation

with the University of Stuttgart in the Federal Republic of Germany,

the "PRISMA" system built by VEB Werkzeugmaschinenkombinat Fritz

Heckert in the early 1970's in the German Democratic Republic, a

system installed in 1972 by Fuji Xerox in Japan, and a system

demonstrated at the 1972 "Stanki-72" exhibition in Moscow, U.S.S.R.

WHERE ARE FMS'S USED?

The early attempts at developing FMS in the 1970's were to a

large degree experimental. Many such attempts met with failure. As a

result of the apparent risk and the large capital expenditures

necessary, FMS was slow in being adopted by firms. With the

increasingly better performance of microprocessors, with some of the

software and systems level (i.e. MAP) problems gradually being solved,

and with a larger number of firms having gained experience with

smaller scale automation, the population of FMS experienced a

relatively strong rate of growth in the early to mid-1980's. Table 1

shows the population distribution of FMS from 1980 to 1987 and how it

changed.

- 4

Table 1: Installed FMS

1980 1987

Japan 40 112

United States 25 72

Eastern Europe 25 41

Western Europe 25 141

Other countries 10 36

TOTAL

125 402

Despite some of the more recent technological successes of FMS,

firms are still wary of the large investment. As a result, investment

in the smaller scale flexible manufacturing cells (FMC) is more

widespread and has outstripped investment in FMS in the U.S. In 1985,

according to the Yankee Group, a market research group in Boston, FMS

vendors earned $143 million, based on 12 new units sold and revenues

derived from customer services. In contrast, a total of 250 FMCs were

installed in 1985 and vendor revenues were $300 million (Krouse,

1986).

Most of the above listed implementations of FMS have occurred in

the metalworking sector with some notable exceptions (for example,

there has been some implementation in the clothing industry). The

following table shows the implementation of FMS by industry.

- 6 -

Table 2

Distribution of FMS by industry sector

in 1987

Industry Sector Percentage by number

W. Europe United States Japan

Light automotive (cars, motor cycles) 27 9 8

Heavy automotive/Heavy machinery 21 28 21

Aerospace 15 33 0

Machine tools 16 12 38

Electronics 6 6 22

Other sectors 15 12 11

It is interesting to note (from Table 2) that FMS implementation

is concentrated primarily in five certain industries. These same

industries have been characterised by intense competition and a need

for large-scale modification of their manufacturing infrastructure.

To survive in the market, there has been increasing pressure within

these industries to introduce their new product designs more rapidly.

The investment in FMS by firms in these industries indicates a strong

desire for increasing manufacturing flexibility. We explored the

motivation of increased interest in manufacturing flexibility in

American firms over recent years.

THE IMPORTANCE OF FLEXIBILITY

Our recent analysis of over 5,000 businesses showed that the

decision of whether or not to invest in increased flexibility in

manufacturing had a statistically significant effect on firm

performance.

The sample of 5,879 business units was taken from the Profit

Impact of Marketing Strategy (PIMS) database - an impressive

collection of data from 7,265 strategic business units using 500

variables which has been called "the best current attempt to gather

and analyze data on strategic actions of businesses". (Anderson,

Paine, 1978). Our sample included all those which manufactured at

least 70% of their products.

A study by Newell and Swamidass (1987) of 35 Pacific northwestern

machine tool manufacturing firms found a high degree of correlation

between firm performance and flexibility. Our study using the PIMS

database showed that this relationship holds more generaily - for a

variety of industry groups throughout the U.S.A. A second insight we

gained was that manufacturing flexibility is more important in the

growth phase of the product life cycle than in the mature phase.

Measures of Flexibility and Performance:

Although the database did not yield information about how many

actual FMS' were in operation, we extracted several variables which

indicate some aspect of flexibility in manufacturing. These items

were:

- frequency of product changes

- technological changes

- customization

- development time for new products

- percentage of small batches in production

- total R&D/revenue

- 8

Each item was treated as a separate independent variable.

For measures of firm performance, five measures (averages over

the five-year period 1980-1984) were amalgamated to produce an overall

measure.

1) return on sales corrected for inflation (ROS) (%)

2) return on investment corrected for inflation (ROI) (%)

3) real sales growth (%)

4) cashflow/revenue (%)

5) market share growth (%)

Testing Procedure:

Our sample of 5,879 business units was divided into six groups by

type and then into two groups by stages of their "life cycle"-i) the

growth phase, (ii) the mature phase. Observations which yielded

extreme values in any of the performance measures or in R&D/revenue

were eliminated, as they do not represent the vast majority of cases.

The firms were split by type of business into six groups:

1) consumer durables

2) consumer non durables

3) raw materials

4) components for finished goods

5) semi-finished goods

6) supplies manufacturers

When dividing the firms into the two groups "growth phase" and

"mature phase", the distinction was made using both qualitative and

quantitative criteria. The quantitative measure was market growth.

The qualitative measure was the point at which the respondents

perceived themselves to be in the product life cycle. If market

growth was greater than 4.5% per year and the respondent perceived the

firm to be in the growth phase, then it was classified as being in the

growth stage. Similarly, the respondents who reported that they were

in the mature phase and showed a market growth rate between - 1% and

4.5% were classified as being in the "mature" stage.

- 9

The following graph illustrates how important manufacturing

flexiblity is to each of the six industry groups in both the growth

and mature phases. The measure R2

- the "coefficient of

determination" is the proportion of the variation in firm performance

explained by manufacturing flexibility. This can be interpreted as a

measure of how important manufacturing flexibility can be to firm

performance.

S1G(11FICAFICE (R

55

50

45

35

30

25

20

15

10

5

OW TH

).<

Co

—IF-4

IMPORTANCE OF MANUFACTURING FLEXIBILITYHY INI)USTRY GROUP

COUS DUR CART) CODD RAW MAILS COMPONE NTS SUPPLIES

INDU'_ FRY GROUP'7,

It is not surprising to observe a greater importance attached to

flexiblity during the growth phase. This is due to several factors.

First, during the initial stages of the product life cycle,

manufacturers are unsure of the market demands for specific product

features, necessitating frequent modifications in the product design.

Secondly, because the volumes demanded are uncertain, manufacturers

may find that frequent process changes are necessary. Thirdly, during

the growth phase, the rate of learning about the production process is

greatest, leading again to more frequent process changes. In the

mature phase, flexibility continues to be important - although to a

lesser degree. Changes in the market will still occur, but not as

rapidly as before.

But what do these results really say about the importance of

flexibility? In order to grasp the significance of our findings, it

is helpful to take a glance at other published reports on the effects

of various factors on firm performance. Using the same PIMS data

other researchers have obtained R2s within the same general area as

our own within the range of 2% to 55%. For example, Buzzell and

Wiersema (1981) showed R2's of 28%, 30% and 39% in their models of

factors affecting changes in market share. In a 1983 study, Galbraith

and Stiles obtained R2s ranging from 6.0% to 24% for relative firm

1power and its association with firm profitability. So it appears

that our own R2s show that flexibility can be at least or more

important than firm power in the market in its effects on firm

performance.

But is flexibility always beneficial? Our study shows that it is

possible to have too much manufacturing flexibility for the given

production system. This is due to the fact that there is a cost

associated with each aspect of flexibility. Higher set-up costs for a

greater percentage of small batches as well as more funds poured into

development costs for new product introductions can mean that

investment in flexibility is simply not worth the cost. These results

1. Firm power was represented by entry barriers and by concentration levelsin both the input and output markets in this study.

- 12-

show up in our study as negative coefficients in many of the

regression models - negative returns for investment in the particular

aspect of flexibility. But technological development plays a role,

reducing the costs of frequent product changes, small batches and new

product development time. The implication is that flexibility will

become more and more important for many more types of businesses as

time goes on.

In the struggle for the lead in the competitive race, American

manufacturers are up against a tough contender for market share -

Japan, where by 1987, 105 flexible manufacturing systems had been

implemented as opposed to 72 in the U.S. The writing on the wall is

clear - flexibility is now an integral component for large

manufacturing firms if they are to survive. At the present time, it

appears from our study that the industries for which flexibility is

essential are machine tool manufacturing, aerospace, heavy machinery,

automobile and electronics but we very well may see flexible

manufacturing systems spread into many other types of industry - and

even to smaller scale operations - as technological breakthroughs

continue to create more varied and financially accessible systems.

Our study shows that flexibility has already proven itself

effective in many major manufacturing industries. In a market of

rapidly changing demands in consumer products, manufacturers have

realized that short-term planning is no longer a viable method of

operation. Flexibility in the manufacturing process has become the

key to more effective long-range strategy with an eye to the future.

- 13 -

REFERENCES

Anderson, C., and Paine, F., "PIMS: A Reexamination", Academy of

Management Review, Vol. 3, No. 3 (July 1978), pp. 602-612.

Buzzell, F., and Wiersema, F., "Modelling Changes in Market Share:

A Cross-Sectional Analysis", Strategic Management Journal, Vol. 2,

(1981), pp. 27-42.

Galbraith, C., and Stiles, C., "Firm Profitability and Relative Firm

Power", Strategic Management Journal, Vol. 4, (1983), pp. 237-249.

Krouse, J., "Flexible Manufacturing Systems begin to take hold", High

Technology, October 1986, pp.26.

Newell, P., and Swamidass, P., "Manufacturing Strategy, Environmental

Uncertainty and Performance: A Path Anayltic Model", Management

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INSEAD VORKINC PAPERS SERTES

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1987

87/12 Fernando BARTOLOMEand André LAURENT

"The Janus Head: learning froc the superiorand subordinate faces of the manager's Job",April 1987.

87/30 Jonathan HAMILTON "Spatial coupetition and the Core", August

V. Bentley MACLEOD and 1987.

Jacques-François TRISSE

87/31 Martine OUINZII and "On the optimality of central places',

Jacques-François TIIISSE September 1987.


87/33 Yves DOZ andAmy SIIUEN

07/34 Kasra FERDOWS andArnoud DE MEYER

87/35 P. J. LEDERER andJ. F. 18155E

87/37 Landis GABEL



87/40 Carmen MATUTES andPierre REGIBEAU

87/41 Cavriel HAVAVINI andClaude VIALLET

87/42 Damien NEVEN andJacques-F. TIIISSE

87/43 Jean GABSZEVICZ andJacques.F. 'HISSE

87/44 Jonathan HAMILTON,Jacques-F. THISSEand Anita VESKAMP

87/45 Karel COOL,David JEMISON and

Ingemar DIERICKX

87/46 Ingemar DIERICKX

and Karel COOL

"Germon, French and British manufacturIngstrategies less diffluent than one thinka",September 1987.

°A process framevork for analyzing coopérationbetveen firme, September 1987.

"European manufacturersr the dangers ofcomplacency. Insights from the 1987 EuropeanmanufacturIng futures survey, October 1987.

"Competitive location on netvorks underdIscriminatory pricing", September 1987.

"Privatisation: its motives and likely

consequences", October 1987.

"Strategy formulation: the impact of national

culture", October 1987.

"The dark side of ce() succession", November1987

"Produet compatibility and the scope of cntry",

November 1987

"Seasonality, size premium and the relationshipbetveen the risk and the return of Frenchcommon stocks", November 1987

"Comblning horizontal and verticaldifferentiation: the principle of max-mindifferentiation", December 1987

"Location", December 1987

"Spatial discrimination: Bertrand vs. Cournotin a model of location choke", December 1987

"Business strategy, market structure and risk-return relationships: s causal interpretation",

December 1987.

"Asset stock accumulation and sustainability

of competitive advantage", December 1987.

88/01 Michael LAVRENCE andSpyros MAKRIDAKIS


88/03 James TEBOUL


88/05 Charles WYPLOSZ

88/06 Reinhard ANGELMAR

88/07 Ingemar DIERICKXand Karel COOL

88/08 Reinhard ANDELMARand Susan SCHNEIDER

88/09 Bernard SINCLAIR-DESGAGNé





88/14 Alain NOEL

88/15 Anil DEOLALIKAR andLars-Hendrik ROLLER


88/17 Michael BURDA

"Factors affecting judgemental forecasts andconfidence intervals", January 1988.

"Predicting recessions and other turningpoints", January 1988.

"De-industrialize service for quality", January

1988.

"National vs. corporate culture: implicationsfor human resource management", January 1988.

"The svinging dollar: is Europe out of step?",January 1988.

"Les conflits dans les canaux de distribution",January 1988.

"Competitive advantage: a resource basedperspective", January 1988.

"Issues in the study of organizationalcognition", February 1988.

"Price formation and product design throughbidding", February 1988.

"The robustness of some standard auction gameforms", February 1988.

"When stationary strategies are equilibriumbidding strategy: The single-crossingproperty", February 1988.

"Business firms and managers in the 21stcentury", February 1988

"Alexithymia in organizational lite: theorganization man revisited", February 1988.

"The interpretation of strategies: a study ofthe impact of CEOs on the corporation",March 1988.

"The production of and returns from industrialinnovation: an econometric analysis for adeveloping country", December 1987.

"Market efficiency and equity pricing:international evidence and implications forglobal investing", March 1988.

"Monopolistic competition, costs of adjustmentand the behavior of European employment",

87/36 Manfred KETS DE VRIES "Prisoners of leadership", Revised versionOctober 1987.

88/18 Michael BURDA "Reflections on "Vait Unemployment" InEurope", November 1987, revised February 1988.

88/19 M.J. LAWRENCE andSpyros MAKRIDAKIS

88/20 Jean DERMINE,Damien NEVEN andJ.F. TRISSE

88/21 James TEBOUL

88/22 Lars-Hendrik ROLLER

88/23 Sjur Didrik FLANand Georges ZACCOUR

88/24 B. Espen ECKBO andHervig LANGOHR

88/25 Everette S. GARDNERand Spyros MAKRIDAKIS

88/26 Sjur Didrik FLAMand Georges ZACCOUR

88/27 Murugappa KRISHNANLars-Hendrik ROLLER

88/28 Sumantra GHOSHAL andC. A. BARTLETT

88/29 Naresh K. MALHOTRA,Christian PINSON andArun K. JAIS

88/30 Catherine C. ECKELand Theo VERMAELEN

88/31 Sumantra GHOSHAL andChristopher BARTLETT

88/32 Kasra FERDOWS andDavid SACKRIDER

88/33 Mihkel M. TOMBAK

"Individual blas in judgements of confidence",

March 1988.

"Portfolio selection by mutual funds, anequilibrium model", March 1988.

"De-Industrialize service for quality",March 1988 (88/03 Revised).

"Proper Quadratic Functions vith an Applicationto AT&T", May 1987 (Revised March 1988).

"Equllibres de Nash-Cournot dans le marchéeuropéen du gaz: un cas où les solutions enboucle ouverte et en feedback colncident",

Mars 1988

"Information disclosure, means of payment, andtakeover premia. Public and Private tenderoffers in France", July 1985, Sixth revision,

April 1988.

"The future of forecasting", April 1988.

"Semi-competitive Cournot equilibrium inmultistage oligopolles", April 1988.

"Entry game vith resalable capacity",April 1988.

"The multinational corporation as a netvork:perspectives from interorganizational theory",

May 1988.

"Consumer cognitive complexity and thedimensionality of multidimensional scalingconfigurations", May 1988.

"The financial fallout from Chernobyl: riskperceptions and regulatory response", May 1988.

"Creation, adoption, and diffusion ofinnovations by subsidiaries of multinationalcorporations", June 1988.

"International manufacturing: positioningplants for success", June 1988.

"The importance of flexibility inmanufacturing", June 1988.

Mihkel M. TOMBAK, Assistant Professor of Production and ...flora.insead.edu/fichiersti_wp/Inseadwp1988/88-34.pdfMihkel M. TOMBAK N° 88 / 34 Mihkel M. TOMBAK, Assistant Professor of

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