2007/11 Research & Review

Theory of Open Manufacturing and its Application

Faculty Fellow, RIETI

Professor, Faculty of Economics, the University of Tokyo
Executive Director, Manufacturing Management Research Center
Senior Research Associate, Harvard Business School

Returning to the basics of manufacturing

At the start of this century, Japanese industry appeared to have lost its confidence. As the recession lingered, one school of thought argued that Japan should follow the standards set mostly in the United States. Other observers warned that China was an emerging threat. At the time, the author put forward the hypothesis that Japan possessed competitive manufacturing facilities with organizational capability in integration-based manufacturing, disproportionately accumulated in Japan due to its historical trajectories, and that those industries and companies with integral product architecture matching this capability are generally solid.

Based on the open view of manufacturing, which combines design theory with industrial competitiveness theory, this argument is grounded on a theory of architecture-based comparative advantage in which competitiveness derives from the consistency between organizational capabilities, or the organizational routine system that creates an effective flow of design information to the customers, and the architectures of goods, services and processes. This means that the hypothesis applies solely to those production bases, firms, and industries that make consistent efforts to build up their capabilities. The integral architecture is preferable to those products under severe social constraints, including customers' functional demands, scarcity of raw material supplies, as well as environmental and safety regulations, and which are required to keep pace with rapid technological change. Ex post facto selection of the integral architecture products by the market does not conflict with engineers' prior efforts for modularization.

In other words, this hypothesis is premised on dynamic fit among organizational capabilities, architecture, market conditions, and other constraints. It maintains its distance from the naive proposition that Japanese will win automatically by focusing on the integral model.

Regarding that generic manufacturing (monozukuri) technologies can be applied to different industries, we set up the Manufacturing Management Research Center at the University of Tokyo under the 21st Century COE (Centers of Excellence) Program, in an attempt to encourage the exchange of manufacturing knowledge among multiple businesses and industries. We have worked together with the government sector to the fullest possible extent. As a result, the hypothesis that manufacturing will be one of the strengths of Japanese businesses in the 21st century is now accepted to a certain degree by industry, government, and academia.

On the other hand, some elements of the media still adopt narrow view of manufacturing, focusing solely on production in the manufacturing industry, and especially on craftsmanship or sophisticated specific technologies, in any discussion of manufacturing. What is essential is a concept of monozukuri (open manufacturing in a broad sense) that encompasses production, development, procurement, sales, and even non-manufacturing sectors. Proposed by the author, open manufacturing is a broad concept based on design theory. It refers not to the making of goods but to incorporation of design information into artifacts. It is an economic activity with good design and good flow to achieve customer satisfaction.

Implications for managers and policy-makers

Setting aside the details of open manufacturing, this article looks at the implication for business managers and policy-makers of industrial economics and strategies based on open manufacturing.

Selecting locations to allocate the right facilities to the right places:
First, the theory of comparative advantage in design (architecture) should give business managers a clue about international business management, namely about allocating the right operational facilities to the right places. In this era of globalization, it may be impossible and undesirable for all of a firm's manufacturing functions to remain in Japan. In an ideal industrial structure, those functions that should be located overseas would be found outside Japan.

Today, many businesses operate across industrial and national boundaries. One industry in one country is defined as a cluster of production sites of the same type, not a group of companies. The industrial structure of a country is heavily dependent on decisions made by corporate managers concerning the location of manufacturing facilities. For example, several years ago, many businesses seemed to impetuously transfer their manufacturing functions to overseas sites, following other companies or a faddish trend without evaluating shop floor capacity from a long-term perspective. If management makes the wrong call on a long-term policy, production facilities that could normally survive in Japan will disappear before the markets make their selection, and industrial hollowing-out will be a self-fulfilling prophecy. The point is that headquarters now faces a test of its ability to evaluate the shop floor.

Focusing on regular multi-skilled employees:
One outcome of the excessive shifting of manufacturing facilities to low-wage countries is that many of the facilities remaining in Japan increasingly depend on low-wage workers in non-regular, short-term forms of employment.

To a certain extent, hiring non-regular workers is a viable means of dealing with an emergency situation or with economic fluctuations. But what Japanese manufacturers should be doing is making a long-term commitment to developing multi-skilled workers, as a means of offsetting the disadvantage of comparatively high wages through high productivity and as a way to exhibit integrated organizational capabilities. And this should be done mainly on the basis of regular, stable employment. After all, this has long been the objective of efforts to improve productivity and develop strength. Japan's manufacturing sector is erring in its excessive and chronic reliance on single-skilled workers employed on relatively low wages under non-regular, short-term agreements. It must instead bolster productivity and quality rather than lowering wages. An overdependence on non-regular employees may seem inevitable response to the global competition at the moment, but it should be regarded as a necessary evil to be redressed in the long run. At the very least, it must not be seen as the ultimate goal.

Transmitting accurate information from the factory floor:
For their part, shop-floor workers will have to consistently provide information to prevent management from making the wrong choice with respect to facility location. This reflects the reality that workers will not be able to survive unless they are highly regarded by management. In some cases, they should do more than simply wait for management to visit them. If they hold back, their very survival will be at risk. Another implication of open manufacturing is that the shop floor must be open to the headquarters and communities in terms of monozukuri knowledge.

Promoting competition in capability building:
The author proposes front-runner-oriented industrial policies, to promote competition in capability building as a government approach essential to creating a robust industrial structure.

Anti-monopoly policy is a traditional means of stimulating competition and is basically aimed at encouraging price competition on the surface of the market. To achieve an industrial structure in which Japan retains critical manufacturing functions, however, it is also important to encourage competition among different fields at deeper levels of manufacturing. This is called the capability-building competition.

Dispensing with the "convoy system" in which the government supports failing companies, the proposed initiative will remove the obstacle to further capacity development by leading companies and improve the environment for capability building competition. This will in turn increase the speed of the lead group and help it compete in the international race to build capability and competitive advantages. Although faltering companies may be given support as a matter of social policy, in industrial policy the emphasis must be solely on the front-runners. The author believes that industrial policy in the era of global competition should provide dynamic support for building organizational capability. This is not conventional anti-monopoly policy, but nor does it constitute a simple exemption from it.

Encouraging a supply of instructors:
Businesses are the main players in capability building. One thing the government can do to help them is encourage innovation in manufacturing. For instance, adopted innovations, in which the improvements accomplished by other industries are introduced as sources of new ideas, are widely believed to have a greater impact on economic growth than gigantic science-based innovations characterized by the application of advanced scientific technologies.

Capable of giving advice on improving manufacturing technologies across industry boundaries, "manufacturing (monozukuri) instructors" are well placed to serve as mediators for this type of innovation. These instructors are mostly experienced shop-floor leaders and members. To create an open market for such instructors, the maximum possible number of manufacturing workers aged 60 (official retirement age) and above should be retrained in some ways or others in the firms (or at least on its periphery) so that they can help other industries. The author believes that open manufacturing workplaces, in which manufacturing instructors can play a significant role, will help foster manufacturing innovation in Japan.

Supported by the Ministry of Economy, Trade and Industry, the University of Tokyo operated a school for training monozukuri instructors on a trial basis for two years. With this trial period now ended, the school operates independently. An increased exchange of human resources among different companies and industries will be the starting point for sustainable economic growth that originates from innovations on the shop floor.

December 6, 2007

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