Acknowledgements:
I would like to thank dr. G.D. Soepenberg and dr. M.P. van der Steen of the Rijksuniversiteit Groningen for their contributions regarding the research project. Their feedback was very helpful in establishing the theoretical direction of my research and guiding me in the research process. Additionally, I would like mention the assistance in data provision and the supervision by the Industrial Cost Engineering Department of Philips in Drachten, The Netherlands. A special note of thanks goes out to Tom Weersink, who provided me with the necessary insights and contacts within the company.
ACHIEVING AUTOMATED MANUFACTURING TECHNOLOGY
IMPLEMENTATION SUCCESS: CONTROLLING FOR
CROSS-FUNCTIONAL INFLUENCES
Master Thesis, Msc B A, specialization Organizational Management and Control Master Thesis, Msc Supply Chain Management,
University of Groningen, Faculty of Economics and Business
January 24, 2014
HARMEN CLAASSEN Studentnumber: 1749145 e-mail: h.g.m.claassen@student.rug.nl
Supervisor University Dr. M.P. van der Steen
Dr. G.D. Soepenberg
Co-assessor University Dr. M.P. van der Steen
Dr. G.D. Soepenberg
Supervisor field of study
Page 2
Abstract
This paper contributes to building theory around the use of cross-functional teams in Automated Manufacturing Technology (AMT) implementations. The study focuses on the different functional
backgrounds of stakeholders in the adoption process, and how it effects AMT implementation performance, which is a concern for most manufacturers adopting new technology. In contrast to most AMT literature, this paper focuses on improving the adoption process rather than the outcome of the AMT adoption project outcome. The paper builds on the assumptions of agency theory regarding information asymmetry, divergence of interests and moral hazard as a theoretical basis to discuss the negative aspects of cross-functional team structures in AMT implementations. In this way, the paper contributes firstly to improve the potential performance of AMT implementations by explaining how the use of a cross-functional team structure causes failure with in-time adoption of AMT; Secondly, the paper contributes to increase the knowledge of agency theory by applying the theory to the fields of operations management/supply chain management. Additionally the study shows how agency issues can be practically observed within an organization, which is in contrast with most agency theory literature that most often describes abstract and theoretical situations. The findings of the paper confirms that using cross-functional teams in AMT increases the divergence of interests among the responsible stakeholders and increases information asymmetry. Because of the focus on realizing technical benefits associated with the technology, there is much information asymmetry between engineers and other stakeholders. This resulted in opportunistic behavior in a variety of forms. More importantly, in this study the link is directly made to process interruptions, an important theme in AMT adoption projects.
Keywords: Agency problem, information asymmetry, divergence of interests, moral hazard, Automated Manufacturing Technology, implementation performance
1. Introduction
In western economies, characterized by relative high labor costs, Automated Manufacturing Technologies (AMT) are being adopted in a growing number of manufacturing companies to achieve a competitive position (Patterson, West and Wall, 2004). AMT include various
categories of machinery: Computer aided design (CAD), computer aided manufacturing (CAM), flexible manufacturing systems (FMS), and robotics together with knowledge and
information/communication based systems (AlAhmari 2002).While AMTs offer several benefits to manufacturing organizations, they report many failures with the AMT implementation
processes (e.g. Lei and Goldhar., 1991; Sohal, 1996; Chung, 1996; Hottenstein, Casey and Dunn, 1999; Cardoso, De Lima and Gouvea Da Costa, 2012).
Page 3 the installing of the AMT (e.g. Co, Patuwo and Hu, 1998; Millen and Sohal, 1998; Meredith, 1987; Sohal, Samson and Weill, 1991). These team members are expected to focus on different aspects in the AMT adoption, and to show the relevance of their functional background in the process, thereby focusing their knowledge on specific outputs they expect from the adoption of the new technology (Hofmann and Orr, 2005).
While most AMT studies focus on the benefits associated with Automated Manufacturing Technology, the objectives of AMT investments, and the process and decision criteria related to the adoption of the right technologies (e.g. Yusuff, Yee and Hashmi, 2001; Chan, 1996; Troxler and Bank, 1989) , there is a lack of empirical evidence that actually describes the performance of these AMT teams and also their effects on the AMT projects performance. This study will look at the goals of the stakeholders that arise from their functional backgrounds, and their influence on the adoption process.
The principal agent theory could be useful as a theoretical framework in identifying what issues are important with the installment of such teams. In AMT projects, the cross functional team is responsible for managing the inverstment and installment in the AMT, which resembles the principal agent relationship. The agency literature includes the so called ‘agency problem that occurs when cooperating parties have different goals and division of labor” (Eisenhardt, 1989; p. 58), and when there is a difference in the amount of information available to the principal and the agent, called information asymmetry. These concepts are readily observable in the AMT
literature, as large organizations involve different stakeholders with an expertise in different fields (information asymmetry) (e.g. Co et al., 1990), who try to achieve goals that are in their best interest (divergence of interests) (e.g. Hofmann and Orr, 2005). The central aim of agency theory is to manage or control the relationship between a principal, often the shareholder or investor, and the so called agent, the organization responsible for the investment or increase in share price (Eisenhardt, 1989). This theory might be helpful in explaining why many companies still fail to implement these projects in time and within budget, or fail to implement these new technologies at all (Cardoso et al., 2012).
The aim of this case study is to show the involvement of different functional team members in the adoption process of AMT implementation, their different views that lead to decision making, and the tasks and responsibilities they enjoy. In the mainstream AMT literature the benefits of integrating various functional views in the investment decision are well argued. However, the disadvantages of integrating different functional views are rarely discussed. The disadvantages will therefore be discussed in this paper, using the issues in agency theory as a theoretical framework. The results will contribute to the following question:
Page 4 The rest of the paper is organized as follows. Section 2 will describe the agency problem in more detail and how this can be translated in the context of an AMT investment project. It takes into account the current established practices to achieve this using a cross-functional AMT adoption team and what is known about the influence of the cross-functional team and its stakeholders. The third section elaborates on the research methodology of this study. In the fourth section, the results and data analysis are listed. Section five and six discuss the findings and concludes the research.
2. Theoretical framework
In order to apply the agency theory to AMT adoption projects, an elaboration of both the agency theory as well as the important aspects regarding issues in AMT adoptions is required. A
framework will be proposed at the end of this paragraph that depicts the relationships between information asymmetry, divergence of interests and their implications for the profitability of investments in the AMT context. The positivist agency approach also discusses that the solutions of agency problems are associated with so called control mechanisms.
2.1 Principal-Agent Theory
2.1.1 Agency Problem
The domain of agency theory consists of “Relationships in which cooperating parties have partly differing goals and risk preferences” (Eisenhardt, 1989; p. 59). These cooperating parties refer to a principal and an agent. According to the agency theory, problems occur when one party, the principal, delegates work to another, the agent (Ross, 1973). In the context of AMT investments, this means a manufacturer adopts new manufacturing technology because of a belief this is assumed to be profitable for company investors. The agency theory is mainly interested in a problem that can occur in in agency relationships, which is the ‘agency-problem’. The agency problem arises because of the agent not willing to act in the best interest of the principal, called moral hazard, or not being able to act in the best interest of the principal, called ‘adverse selection’. The agency problem is of importance in AMT investment project and arises when there is a conflict (divergence) of interests between principals and agents, and when it is difficult for the principal to verify what the agent is actually doing, which is referred to as information asymmetry (Eisenhardt, 1989). The reason this is of importance is because the phenomena of ‘divergence of interests’ and ‘information asymmetry’ are apparent in AMT investments, as will be discussed below.
Page 5 2.1.2 Divergence of interest and information assymmetry
The need for governing the relationship between the agent and the principal exists because of assumptions central in the agency theory about people, organizations and information: People are assumed to have self-interest, are subject to bounded rationality and are risk averse;
Organizations have goal conflicts among members; and information in the organization is asymmetric, but can be purchased (Eisenhardt, 1989).
The assumptions of self-interest, organizational conflicts and information asymmetry are
perceived negative or problematic by principals, assuming his main interest is profitability. Self-interest is problematic when the agent pursues other goals in the organization than he is expected to do, which is a form of risk for the investor to a sub-optimal investment decision, as his
interests are not protected. Organizational conflicts among members are not necessarily problematic, as the opposing views could contribute to the organizational view. However, conflicts in general are believed to lead to a lower work efficiency. Information asymmetry is problematic because of the wish of an investor to seek the highest return on investment with the lowest risk. In general, information asymmetry therefore does not reveal full information and contributes to the risk of the investment. Information asymmetry has another function, which is to hide the decisions made by the agent. This is problematic, as it hides any sub-optimal decision not aligned with the interest of shareholders. Hence, in the formal literature, two central themes arise from the agency literature, namely ‘moral hazard’, which refers to a lack of effort on the part of the agent to protect the interests of the principal, and ‘adverse selection’, which refers to the misrepresentation of certain abilities and skills of the agent.
Following agency theory, principals are interested in two things: profitability of the investment and information about the certainty of the investment. Especially the stream of positivists agency theory has concerned itself with solving situations in which the agent does not comply with the interests of the principal. The main goal is to describe governance mechanisms limiting the self-serving behavior of agents (Jensen 1983). For example, one contribution of exploring these governance mechanisms is that ‘outcome based contracts’ are effective because they align the preferences of agents with the principal because their actions depend on the same actions.
2.2 Applications of the agency theory to AMT investment appraisals
2.2.1 Shareholder representation in AMT investments
Page 6 In general, the profitability of the investment depends on the investment, the costs and the
revenues associated with the AMT project (Azzone and Bertele, 1989). Without the conviction of the management layers that an investment in new technology will result in a positive return on investment, top management will be reluctant to commit to an investment in new technology. Hence, the agent has to undertake several activities to illustrate the risk and profitability of the investment in order to gain approval of the management layers. This can be achieved by a breakdown of investments costs, ongoing costs and revenues that are associated with the project (Azzone et al., 1989).
Activities that are associated with this breakdown and are commonly undertaken are captured in the mainstream AMT literature. Consequently, various models have been constructed over time that map these activities. However, no single model is used concurrently as ‘best-practice’ in AMT studies and there is no agreement on one model being more accurate than others, whether this concerns simple or complex projects. This is problematic for shareholders, as apparently there is no reference for management layers on a decision which is more profitable. Still, most models have similarities, since the objective of most of these projects is the same regardless of company, size and product: to capture the benefits of the AMT in order to achieve a profitable investment. To describe the AMT context, the process is often summarized in different phases in literature (Mohanty and Deshmukh, 1998; Kumar, Murphy and Loo, 1996; Chan, 1996;
Efstathiades, Tassou and Antoniou, 2002; Pandza,Polajnar and Buchmeister, 2005; Al-Ahmari, 2008).
2.2.2 Agents responses to shareholder representation
The activities undertaken in AMT adoption projects are mostly interdependent and start with a gap recognition phase where the need of the AMT is confirmed (Al-Ahmari, 2008). The objective of this stage is to decide to invest or not, taking into account the company’s strategic objectives, which are mostly defined in the top management layer on corporate levels, and the likely profitability. This is the phase where initial commitment of the top management is established. The agent is assumed to provide information on the potential of the investment and how the investment will likely to be contributing to profitability.
Next is the planning phase, in which the organization is strategically preparing for the
implementation and sets tasks and responsibilities (e.g Pandza et al., 2005). When the need for AMT adoption is established, a successful adoption of AMT requires that not only the
management layer understands the corporate and factory specific goals for the project, but the rest of the organization as well (Mize, 1987). While the decision to invest has mostly been taken by higher individuals (corporate management), they must designate key personnel to
Page 7 define tasks and responsibilities within the organization. This leads in most organizations to the selection of an AMT acquisition/implementation team.
In the AMT investment phase, the agent is to check whether the Automated Manufacturing Technology project is perceived to be possible, by checking whether there are suppliers available who can deliver and promise the performance aspects of the technology (e.g. Al-Ahmari, 2008; Kumar et al., 1996) and to evaluate the implications of this technology to the operational performance of the plant (Chan, 1996). This leads to a decision of investment by the management of the plant.
Afther the decision has been taken to invest in new technologies, a team will be responsible for collecting information regarding the investment, purchasing the equipment and executing the implementation in the existing process (Mohanty and Deshmukh, 1998)
2.3 Diffusion of the agency problem: Using a cross-functional AMT implementation team
According to several authors (e.g. Duimering, Safayeni and Purdy, 1993; Cardoso et al., 2012; Pinjala, Pintelon and Vereecke, 2006; Jones and Smith, 1997; Beatty 1992; Gupta, 1988), an AMT implementation team is the best organizational structure to deal with these projects. Such a team can effectively exchange valuable information and can contribute knowledge to each project phase when necessary. The reason that different functional areas are involved in AMT investments is because of the need to integrate different areas of expertise in making a business case about the investment and the commitment that is necessary from these areas in order for the project to succeed (e.g. Meredith, 1987; Co et al., 1990; Millen and Sohal, 1998). The division of labor in these project is the process that leads to a diffusion of the agency problem as explained below.
Basically, selecting the AMT implementation team can be seen as providing an organisational structure for the project, which is important because the lack of an adequate structure is the most frequent reason that AMT implementations fail (Attaran, 1996; Boer, Hill and Krabbendam, 1990; Hayes and Jaikumar, 1991; Meredith and Suresh, 1986; Meredith, 1987; Udoka and Nazemetz, 1990; Zammuto and O'Connor, 1992). Various articles have described the team members that should be included in the AMT implementation team (e.g. Cardoso et al., 2012; Hoffman 2005; Co et al., 1990); The departments that are most often mentioned are Engineering, Procurement (also called Supply Chain Management or Planners) and Purchasing (for
equipment), and Production staff. All other functional departments that are mentioned but not consistently are Human Relations Managers, IT, Research & Development, Finance, Sales and Marketing.
Page 8 areas by these management layers increases the two precursors for the agency problem, as it increases the work-relationships in which information asymmetry and divergence of interests can occur. Therefore we can conclude that in the AMT context, the following principal-agent
relationships exist: that between the investors (principal) and the management layers (agent), and after the installment of the AMT adoption team, between the management layers (principal) and the organizational AMT adoption team members (agents). This implies a dual role for the management layers, as both principal and agents.
As stated before, the problem we are looking for is the agency problem, also referred to as moral hazard or, i.e. opportunistic behavior caused by information asymmetry and a divergence of interest. In order to prove the importance of the problem in the context of AMT adoptions, there must be a cause and effect relationship with profitability and its risk. We must therefore link AMT profitability to moral hazard.
2.4 Plausible effects of moral hazard in AMT projects
In order to be profitable, most AMT projects are expected to increase the competitive position of the firm. The mainstream AMT literature is extensive on the benefits associated with AMT adoptions. The objectives and problems for AMT adoptions are often expressed as outcomes of the AMT adoption projects; outcomes such as quality improvements, cost reduction, better management control and capacity increase (e.g. Sohal, 1996) are often mentioned; and problems associated with AMT introductions being difficulty in achieving targets, delay in implementation time, a lack of systems integration and deficiencies in product management (e.g. Cardoso et al., 2012).
Page 9 product-to-market time, and optimal decision making, that focuses on the realization of technical benefits leading to quality improvements, increased capacity and cost reduction, are the expected consequences of the agency problem in this study.
In summary, by using cross-functional teams in AMT adoptions, the agency problem increases, as more and diverse principal-agent relationships occur. This can be problematic for profitability, firstly because of the expertise of these new agents leading to information asymmetry, and secondly, because of the assumption these agents have a divergence of interests between them asll as with the principal. These relationships are depicted in figure 1.
The proposed theoretical framework as is however needs empirical evidence, which could lead to propositions regarding solutions for these problems. A case study should help building theory around this agency problem and how it affects AMT adoption performance by describing the divergence in interests and information asymmetry in the process and by observing the
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3 . Methodology
3.1 Choice of methodology
In order to check whether what the influence is of cross-functional background variety in AMT adoption processes, a case study will be conducted. This approach is adopted because the built-up knowledge about divergence of interests and information asymmetry in the adoption process is underdeveloped. A case study allows the researcher to study the phenomenon in a natural setting and therefore be able to interpret why stakeholders’ actions happen with primary data (McCutcheon and Meredith, 1993). Secondly, case study allows us to interpret the rich context of the situation, which is hard to understand because of the many stakeholders involved. Case study allows us to ask more follow-up questions when the focus is shifts from one variable or construct to another, as they are perceived more important during the process, without having to send elaborate questionnaires in the meantime that do not capture the full meaning of the
stakeholders regarding why activities happened in the process.
3.2. Definition and measurement of constructs Principals interests
In the early literature on the role of principals, profitability is the main interest of the principal. However, this view evolved during time, as an important aspect of agency theory is the treatment of information as a commodity. Information is perceived to be a valuable interest of the principal as well, as it relates to the risk of the investment, an thus, the profitability. This study will treat information regarding investment decisions that relate to the profitability, as well as actual profitability the main interests of the principal. Whereas in other theoretical fields the profitability is often related to the stock price of the firm, stock price in this study does not represent a fair representation of the success of AMT adoption performance, because we cannot exclude all other factors represented in the stock price. Therefore, this study uses a similar view of other AMT literature. In this literature stream, all choices that can be related either to a decrease of the investment costs, a decrease in production costs, or an increase in sales revenues can be seen as profitable for the organization, and hence, be in the interest of the organization. This means that only quantifiable information would be in the interest of the shareholder. As stated in the theoretical model, the process leading to profitability can be measured in two logical phenomena, implementation speed and optimal decision making regarding the realization of the benefits of the automation technology.
Implementation speed
Page 12 that is not completed in time according to the schedule. This can be observed in a missed
deadline, the repetition of an activity and missing information or other resources for a decision. Optimal decision making
Optimal decision making means that decisions are being taken that contribute as explained before to either the decrease of production costs, the decrease of the investment and the increase of revenues. other decisions that cannot be quantified must possess a logical reasoning why they should be in the interest of the principal, e.g. the ability to meet demand more precisely if necessary.
Moral hazard
Moral hazard, the main issue associated to the agency problem referred in this study is any behavior of the agent that exploits the principals interests. In this study, any observation that can logically be explained as opportunistic behavior leading to sub-optimal decision making with negative effect to revenues, or a contribution of costs and investments, and leading to a process interruption is classified as moral hazard. According to the theory, moral hazard is dependent on a divergence of interests and information asymmetry.
Divergence of interests
Divergence of interests is about assumptions of two focal people in this theory, the principal and the agent. Divergence of interests means that there is a conflict in the desires of the two types of stakeholders. In this case, the goal is to group the interests per stakeholder, as we are interested in which stakeholders is able to conduct ‘moral hazard’. In this case it is possible to distinguish between two types of divergences in interests from the stakeholders point of view: a divergence of interest between stakeholders, hence, two agents, which rests on the assumption of
organizational conflicts in agency theory, and the self-interests of stakeholders diverging from the principals interests, that of profitability and risk information.
The interests of stakeholders are constructed by self-assessment trough interview questions about their personal goals in the project, what they hope to expect out of the project and which aspects they find important when they make project decisions, and how they perceive to be evaluated both officially and unofficially trough the company. The issue of the validity of self-assessment is often raised as a concern; However, evidence in prior AMT studies suggests that a
subordinate’s self-assessment correlates with objective assessments and can be used for measurement (e.g.; Venkatraman & Ramanujam, 1987).
Information asymmetry
Information asymmetry in this study is the opportunity for opportunistic behavior. Information asymmetry in the agency literature relates to the agent having more information than the principal, by which the principal cannot ensure the actions of the agent are in his best interests. Information asymmetry in this study means one stakeholder in the AMT adoption team having more information than the rest of the team, who as a whole are put in place to protect the
Page 13 your own functional background or external sources and is sustained as it is not shared with other stakeholders in the team. Information asymmetry is to be measured trough perceived
intransparency of processes by other stakeholders (e.g. no or unstructured documentation of process) and withholding of information as responsibility shifts to another shareholder (e.g. no access to documents, only restricted or summarized versions of information sets).
Variety in Functional Backgrounds
As is stated in the literature, people from different areas of the organization are being involved in AMT adoption projects. However, as organizational structures differ per company, there is a need to establish common ground on what the functional backgrounds mean.
The constructs of functional backgrounds are taken from the classical functional backgrounds that are mentioned in the literature. The studies of (Meredith, 1987), Co et al., (1998) and Hofmann and Orr (2005) talk about functional backgrounds in AMT projects and consider Production, Engineering (including project engineering, industrial engineering, plant engineering and quality engineering), R&D, IT, Sales, Marketing, HRM, and Finance and Control as separate backgrounds.
3.3 Case selection: Replication & Sampling
In case study research, case selection using replication logic rather than sampling logic should be used (Yin, 1994), in order to increase the pay-off of the study. With the exploratory nature of this subject and the unclear untested relationships between the theoretical constructs a literal
replication logic is the safe choice to establish external validity (Yin, 1994). In order to successfully execute a case study with replication logic, the objective is to select multiple representative cases that can be compared for similar results (Yin, 1994).
In the study I have tried to select three cases available in the focal company. These similarities regard to the amount of functional backgrounds are involved, the types of functional
backgrounds involved in the projects, the type of technology that is implemented, and from a practical perspective, cases that happened recently for the purpose of obtaining enough information. In practice, with recent cases, process participants are still working in the
organization and recall the events better and documents are still available. While the similarity of these cases remain, a small difference in the complexity perceived by the process participants of the project could not be avoided. What could be assumed is the more complex the technology, the harder the realization of its benefits and the integration with the current manufacturing systems. The consequences of the variation in complexity are uncertain, but will be investigated in the data-analysis. Secondly, across the cases the functional backgrounds should be represented by different people, to ensure that the divergence of interests is caused by functional
backgrounds, and not personal backgrounds.
Page 14 much observation is necessary and many stakeholders are involved, making it harder to track events. Additionally, i order to study the functional backgrounds in detail, functional
backgrounds must be “a longstanding feature of the focal company” (Adler, 1995, p. 151), meaning that the separations of functional areas e.g. such as between R&D and engineering are established and recognized over a long time in the organization. Moreover, AMT studies offer insight in the latest technology of the firm, making firms reluctant to share objective information of the project as is stated in theory, contribute to the competitive position of the firm.
Potential companies were contacted trough personal contacts. After initial interest, one company, Philips, a global manufacturer reacted with a positive interest for the subject and a visit was made twice to establish the goals of the study and to establish and confirm the criteria for mutual cooperation in the research, which were the interest in the problem and the dedication of the company and researchers resources. The firm offered insight knowledge and cooperation for a period of six months, and a number of retrospective cases to be examined, which allowed for efficient collection of data. This resulted in three cases, which are described more in detail in table 1.
Table 1: For literal replication purposes, the variables in the case selection are held as constant as possible
Case 1 Case 2 Case 3
Complexity of project Relatively low Relatively low Relatively high No of functional
backgrounds involved
7 8 8
Type of Technology Flexible
Manufacturing system
Flexible
manufacturing system
Flexible
Manufacturing system Timeframe Within last 5> years Within last 5> years Within last 5> years
Production line Shaving heads Shaving heads Shaving heads
3.4 Research instruments and research set-up: reliability and validity
For the purpose of testing the entire research model and answering the research question, the case study is executed in a local plant of the manufacturing company. A Case study protocol was built to enhance the reliability of the study (Yin, 1994), consisting of two round of questions. The first round of interviews was performed to establish the divergence of interests and
Page 15 answers of the interviewees are compared to documentation of the process available to reduce the bias of the observer in interpretation methods. By interviewing 26 process stakeholders from the organization the investment process was summarized (see exhibit 1 & 2). The average
interview time one hour, and semi-structured interviews were used to discover as much of the process as possible and to collect as much information for the study database as possible. The interviews in the first round were conducted over a period of approximately three months. In the second round of interviews, the objective is to investigate what agency problems occur in the process and to link them to the two performance indicators for AMT adoption performance, implementation speed and optimal decision making. Regarding performance, all process agents from the three cases are asked to describe process interruptions in the project phases they were involved in, the decisions that are made in these phases, the quantifiable decision criteria, what decisions were perceived to be contrary to their interests, what information they were missing in order to execute their tasks, why this was missing. Additionally they were asked to evaluate the same questions about the fellow process agents, in order to cross-compare views within cases. These interviews were semi-structured and lasted from 0,5 hours for minimally involved
stakeholders (sales, marketing) up to 1,5 hours for some stakeholders that had central roles in the process (project supervisors and engineers). These interview responses are compared to a
document study consisting of planning schedules concerning the processes and their deadlines; formal presentation documents agents used to convince the management layers of the
profitability of the projects, and formal evaluations of the projects regarding performance. This was done in order to match patterns in order to increase internal validity, to increase construct validity by using multiple sources of evidence (Yin, 1994). For the same purpose, the process map drafted in the first round was reviewed by key stakeholders in the projects.
Unfortunately, not every stakeholder was committed to the project from the beginning, therefore with some stakeholders an extra interview was necessary. This resulted in 27 interviews with 23 different stakeholders over a period of 3 months. In order to further ensure objectiveness of the researcher and the ability of the organization of what is said, all interviews of both rounds are recorded and field notes are taken to reduce the observer bias. All statements regarding performance are triangulated with documentation in the form of project schedules, investment proposal presentations, discounted cash flow analyses of the projects and evaluation reports of the projects in order to increase construct validity.
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4. Results and Data Analysis
4.1 divergence in interests4.1.1 The management layers
The Board of the company and the responsible business unit are interested most in the company image in terms with the current strategy and the sectors profitability. In practice this entails that the type of technology is not important, as long as it contributes to the profitability of the sector. This management layer evaluates the investment proposals based on a profitability indices as ‘ net present value’ and the ‘payback time’ to accomplish our strategic goal. This is done from a working-capital management perspective because the board level takes into account the competitive positions of their factories. One board member said:
“We try to balance our investments with all owned plants within the company. […] We do this for two reasons: we have a limited capital budget, which means that we cannot invest in all plants at the same time. This would mean a hit in our working capital management that would put us in such a high-risk position, which we cannot afford; and secondly, by pushing a local-for-local strategy we balance the capacity of our factories, meaning we grow more independent of local problems.[..] it could happen that one plant does all the research, but from a stability point of view, the proposed technology investment will be installed at a different factory” .
The board members only look at investments as a whole, and not for singular new technologies. What matters for the board level is the stability of the image of the firm. Their actions include safeguarding investments from macro-economic factors by diversifying their portfolio of investments at geographically dispersed factories. This can also be seen in the adoption process: The board level only sees capital budget expenses above a certain limit. In this sense, the interest of the Board of Management layer can be explained as protecting the stability of their work environment, and maintaining an image of good leadership; smaller investments that are not able to impact the firms (their ‘management’) reputation are not in scope. Their involvement in the project is minimal, as they only make the actual investment decision. In this process they deal with the senior and middle management.
The Senior Management’s interests were related to the relationships with important interfirm ties in the supply chain, and the capacity and competitive priorities of the plants altogether. One member said:
“ Per year there are only two opportunities to launch new products. This because our sales depend heavily on our largest partner retailers, who must fit our products to their shelf space and their advertisement campaigns. Our release dates must be carefully planned.”
Page 17 the long run. In these decisions the track records with meeting the time-to-market of new products are leading.
The Middle Management is located at the plant level and mainly interested in the competitiveness of their plant, which depends largely on the factory cost prices of the product outputs. Often, when volumes are allocated to plants by managers, it is preferable to allocate volume to plants with the lowest cost prices, in order to increase gross-margins. This means that for the middle management layer the components that make up the factory cost prices are important. Plant equipment such as AMT are major determinants of these factory costs prices. The investment costs relate direct to ‘fixed costs’ of the factories, costs that are independent of volume in this case. Therefore, volumes should be kept high for a relative low portion of fixed cost per product, lowering the factory cost price of the product outputs. Especially the volumes allocated of products producible in other factories, the non-plant-specific products, can be shifted away more easily by management levels. One manager explains:
“With each evaluation of projects, we need a positive Net Present Value at the factory level. We know that the upper management levels look for gross-margins and EBIT, but we look mostly at our FCPs”.
Another manager elaborated more clearly:
“Before we invest in any technology, we would like security of a certain production volume allocated to our factory. Because we need to compete with a factory in China (low cost wages), where the production process is based on low-cost labor, our factory cost price has a higher percentage of fixed costs (automation). These fixed costs can only go down with enough volumes in our factory to make us competitive”.
One important reason they have for the competitiveness of the plants is that the position of the plant is a major determinant for the employment levels in the region, thereby protecting the image of the plant. In adoption projects of new technology their role is to determine whether proposed technologies are competitive compared to other plants. Therefore, their role is to critically look at the investment with regard to whether the new technology is able to make operational plans that are competitive with the forecasted volumes, and to evaluate the portfolio of technologies applied in the factory as to be able to deal with innovative products, increasing the range of products that are plant-specific. In practice they are not involved with the actual implementation of the process, thereby only monitoring and approving the investments according to mainly budgetary restrictions.
The fourth and last management level is the project supervisor. This management layer is interested in staying within budget, providing top management with timely information and adhering to the time schedule, which practically means meeting the agreed-on volumes in time. In the process of adoption, this is the first manager in the hierarchy that is concerned on a daily basis with the realization of the technical specifications. Thereby, this supervisor in all factory projects has an engineering background. As one project leader explains:
“In order to do my job well, I must make the planning, keep everyone on track, and make sure I
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realize a project within budget, I have to explain this to the financial department, which is a lengthy process I would rather avoid”.
In the process, the project supervisor monitors all the decisions that have to be made, establishes a planning for all decisions and actions, and determines where the budget goes. He is involved in all stages of the adoption, from the research and development phase to the installation to the factory floor. in essence, he deals with all stakeholders directly in the process, except for the board level.
The interests of these four management layers is summarized in table 2.
Table 2: The interests of management layers, who perform both the agent and principal role
Management layer Interests other than maximizing shareholder utility
Board of directors / Board of management Maintaining a good attitude of management, thereby minimizing risks that could negatively impact the firms (hence, their management) reputation.
Senior Management Meeting the agreed upon time-to-market with downstream ties in the supply chain thereby choosing plants with reliable AMT adoption track records within budget rather than the most profitable, sometime, riskier adopters with mixed track records.
Middle Management Protecting the internal competitive pricing of non-plant-specific products as they affect the volumes, which in turn again affect the competitiveness of the plants as a whole.
Project Supervisors Staying within budget and time-planning as set by higher management levels, thereby avoiding complex decisions that could be profitable for the company in the long run by keeping the project simple
4.1.2 The Cross-functional team members
To protect the interest of the stakeholders up the hierarchy, the following functional backgrounds are involved in the factory’s performance and additionally, have different interests in the adoption process. Engineer
Page 19 role as an expert of the adoption process. They deal with a technical support group, the production
employees and managers, the financial control department, the purchasers of both materials and machine, the project leader and the R&D department.
Production manager
The Production manager is mainly interested in a smooth integration of the technology with the existing equipment in the production line, and the operating efficiency of direct and indirect labor costs per product. The production managers performance is based on the factors of the actual production cost that are within his control limits, which are the machine’s Mean-Time-Before-Failure, the amount of direct and indirect labor (per shift) they need to operate the machine, the cycle-time, and the reject rate of the output. Together these factors are used as the main contributors of the efficiency calculation, on which production managers and staff are formally evaluated. The production manager is in addition interested in the safe environment of the work floor, as is explained below:
“ People are the main drivers of this factory. We cannot have operators working unsafe machines that have sharp edges or exposed electric wires.[…] Also the angles in which the operators have to perform the handlings are important; an accident could happen in a split-second”.
These issues are important because illness and injuries cause inefficiency, as machines are operated inefficiently as a result. It becomes clear that the production manager is interested in the capacity and efficiency in output (cycle time and reject rate), safety and ease-of-use of the machine, and to which extent the machine is flexible in adapting production speed when necessary that compromises the
efficiency of both direct and indirect personnel, the reliability of the machines (cycle time and MTBF). In short, the production wants to keep equipment running at all costs, as this improves efficiency measures. To protect his interests, the production managers deals directly with the technical support staff, the engineers, the controller/cost engineer and the project lead and the middle management layer. (Financial) Control/Cost engineers
Controllers and Cost engineers are considered as ‘ support’ to the adoption team, as they try to quantify the information from different stakeholders into a financial terms, thereby estimating the financial impact. In this role, they are interested in information relating to the production costs, the total investment and the expected revenues. These roles are evaluated in terms of their accuracy in their analyses and the relating judgments and advice for the middle management layer and the supervisors of the project. This relates always to expected profitability of the new technology; hence, they are not interested in the realization of technical aspects of the technology. Their concern is to protect the interest of profitability, and to allocate costs associated with the new technology in a way that satisfies the interests of the stakeholders. In this sense, their interests are similar to that of the project supervisors.
Purchasing and procurement
The interests of the two purchasing functions were quite different., as will be described.
Page 20 technical support group, the equipment purchaser and the project supervisor. The materials purchasers are also referred to as Supply planners.
The equipment purchaser has one main interest, which is the initial investment price of the equipment, on which he is formally evaluated. However, as each technology is rather new, for most technology
acquisitions there is no reference as to which targets he can be evaluated on, rather the budget for the complete project is used. The purchaser is responsible for maintaining a supplier database, and
establishing relationships with equipment manufacturers, as they are scarce in an “innovative, risky and expensive environment”. It is in the purchasers interest to always have a good bargaining situation in business negotiations and to be able to sit down with multiple parties before a decision is made. In the adoption process, he deals directly with the engineers, the controller/cost engineer, the materials purchaser, the project lead and the middle management layer.
R&D
The R&D department is evaluated on identifying the latest technology, and to think of solutions for the company to be able to respond to market opportunities. In essence, they determine the potential new products, and propose these ideas to the middle and senior management levels. Their personal interests are the adoption of the best technology, to let their company to be the most competitive amongst its peers. Sales and Marketing
The sales and marketing divisions have two primary interests, which is the internal gross margin of the factory’s products that is responsible for acquiring revenues, and the ease of selling in the market: the more conform the product to the consumers demand, the higher the sales price; the lower the investment and production costs, the lower the costs of goods sold.
These findings suggest that in contrast to the principals interest, there is a large diversity of interests that either contribute to ineffective project management, thereby having an interest other than a speedy implementation, and sub-optimal decision making. These interests are listed in table 1.
Technical implementation and user Support (IT, Technicians and Maintenance)
Within the investigated plant, a technical support group is available to solve user issues regarding technical information. This groups interests are therefore partly aligned with the production manager, which is the runtime and the stability of the machine. This can be observed as they are formally evaluated on the mean-time-before breakdown and mean-time-to-repair. In the process they are responsible for the specifications necessary to smooth integration of the machine to the existing production lines, the execution of this implementation and the configuration of any adaptations to the new technology or the existing production lines if necessary. In order to do this effectively they deal with the engineers, the production manager and the project supervisors.
These interests of the cross-functional are summarized in table 3. The working relationships between both management layers and functional areas is depicted in figure 2.
Functional background/department Interests other than quantifiable information regarding profitability
Engineers Unnecessary expenses in new technology because
Page 21 Production managers Ease-of-use of machine that does not relate to
lower production costs, minimizing stoppage of equipment
Controllers/industrial cost engineers Gaining excess amount of information that establishes decision security, rather than AMT adoption speed; curbing expenses that are hard to quantify in benefits
Equipment purchasers Low machine price regardless of fit of technology in existing process
Procurement Unnecessarily being able to react to changes in suppliers input material batch sizes or quality R&D department Image of company being an ‘early adopter’
disregarding the costs of that image
Sales and Marketing Features of the products that increase the ease of selling in the market
Technical Support Stability and runtime of the machine.
Table 3: Divergence in interests of different process stakeholders who perform the role of agent
Figure 2: existing principal-agent relationships in the AMT adoption projects considered 4.2 information asymmetry
Process documentation available
All three cases followed a similar adoption process, which follows the process map as described in exhibit 1.From the 29 separate steps recognized, 17 steps had documentation available. This means that these steps goals are explained, the involved shareholders mentioned, had ‘standard templates’ and decisions to be made in this step were available. Most of these steps were part of a standard working procedures in the firm called ‘Materials, Products and Equipment Control, commonly referred to as MPEC by the involved stakeholders. These templates are shared in a plant-wide online environment. The steps for which
documentation was available is summarized in table 4, together with information asymmetry as a consequence of not sharing this information, as will be explained below.
However, there was a varying degree in the clarity of these templates, as many of these templates still required interpretation of the involved stakeholders as much functional specific jargon is used. For example, all AMT adoption planning milestones were given abbreviations were also commonly referred in an abstract manner to by the executing stakeholders of these steps. Thus, despite the online availability of the description of these processes, there was a varying degree in how this information was understood and interpreted by different groups (examples of this plant-specific jargon and an insight in the documents available is about the process is added in exhibit 3).
Passing on of information/data problems in process steps
Page 22 Gap Recognition phase
In the gap recognition phase, the engineers complained that the management layers were not clear on the level of detail about the requirements of the products allocated to their plants. The R&D department members involved of all three cases agreed on this. The information that they were missing concerned the levels of freedom they had to change the products over time, and how this would likely affect the sales volume of each product type.
At the end of the gap recognition phase, the management layers are required to do an assessment whether to pursue a new technology or not. However, a senior manager stated that:
“The only information we can go on is the outcome of comparable projects we had in the past. Our real challenge is just to find a comparable project and to use as an indicator for whether we can pull this off and with what kind of budget. ”.
The language of this manager shows that even though they receive information from various stakeholders regarding product features and volumes, the real information they are looking for is an indicator for a budget, which has not been collected so far. Especially the information regarding the existing technology was unclear.
Specifications development phase
In the starting phase of the specifications development phase, the engineers are responsible for deciding on the production methods, which requires information about a specified time-to-market, the product features and the volumes. In order to do this effectively, they need information about the implications for any changes in the product they make in terms of reactions of management and other stakeholders. Stakeholders would like to know from the managerial levels what happens if product features are not realized, and to what extent the production methods must be perfected in this stage. This is not given to them. One senior managemer confirmed this:
“If we cannot realize the launch of a new product, we must wait for six more months. This is bad because it means a large gap of missed sales. I don’t think that everyone realizes how important that is when they try to optimize every single technical detail.”
The decisions on the importance of the time-to-market of the products for which the AMT is responsible are not conveyed to the engineers properly. As a result, the decisions regarding the production sequence, the factory lay-out and required output rate are affected. One engineers explains:
“When we decide to go for full realization of the technical aspects, we will likely adopt the largest
most powerful machine available. On the other hand, if the management requires us to search for a solution quickly, we look for technology that processes quickly, or if it fits within budget, we will buy two. [..] Unfortunately, management requires us to do both”.
Page 23 terms of size, and how stable (mean-time-before-failure) they have. The engineers dignified these answers with responses as
“this supplier is the best with this technology, you will not find any better method in the market”.
Because of a lack of expertise, both Managers have to allocate a budget, and production managers space in their production line, based on these statements. However, this information is does not provide any alternatives to choose from.
AMT investment phase
The AMT investment phase starts with the equipment purchasers to look for potential suppliers for the desired AMT and to ask for a quotation. What they need is information regarding the flexibility of the specifications, in order to have several bargaining options, and to level with suppliers in terms of value in negotiations. In practice however, they receive very specific technical specifications, often agreed upon with the help of external experts in the AMT field working for a specific supplier. One purchaser explains:
“More often than less the engineer tells me where to purchase the equipment. On the one hand
this makes my job easier by having to negotiate with only one supplier; on the other hand the supplier has worked closely in developing the specifications with the engineer”.
This same missing information also had impact on the feasibility study the engineers had to perform, as well as the management layers that had to make the AMT investment decision. In this process, most information collected in the process was reduced to ‘static’ numbers, as with most steps only the output of decisions was forwarded. The management would have liked to receive all collected information, most engineers had reduced the amount of information to the level that there was only one solution left. Implementation phase
Page 24
Table 4: Information asymmetry regarding the AMT adoption process steps
Step no
Process step Process
Documen- tation available? information missing from step
1 Sales division and marketing make forecast of sales volumes for long time period
2 Management allocates volume to plant based on plant managers estimations of cost prices and time-to-market
3 R&D checks whether current equipment is able to produce products 1 2 4 Engineers decide on the product features of products 1 3 5 Management checks whether an investment of new technology is
necessary
6 Supply Chain planners translate long term sales plan into production input volumes per year per plant
yes 4
7 engineers decide on production methods (automated or manually) 2 4 6 8 engineers create production scenarios in terms of production sequence,
lay-out of factory and required output rate to match volume
yes 7
9 engineers analyze gap between existing production process and the required production scenario
10 financial estimation is made by management based on estimates so far for a 'go / no go' to change the production process
yes 7 9
11 Project leader divides budgets over all machinery to be acquired yes 12 Engineers and production managers agree on functional specifications
regarding cycle time, quality range of product outputs and total capacity of equipment
yes 6 7 8 11
13 Engineers develop technical specifications for equipment regarding features of the Automated Manufacturing Technology
12 14 Equipment purchaser sends technical specifications of desired AMT for
review to different suppliers
13 15 Engineers settle and analyze differences in technical specifications with
suppliers if necessary
16 Purchaser performs 'reliability scan' on potential suppliers and remaining suppliers offer quotations for their AMT solutions
yes 11 13 15
17 Engineers and Technical Support estimate system development, maintenance and system integration costs
yes
18 Materials purchaser checks available suppliers for input materials yes 6 7 8 12 19 Engineers analyze the feasibility and success possibility of AMT adoption
in terms of realization of technical aspects and default of supplier
12 18 20 Project leaders and controllers and cost engineers quantify all information
collected and submit this to the management layers
yes
Page 25 22 Controllers/cost engineer provide working capital for the execution of the
project
yes 23 Equipment purchasers communicate AMT choice to suppliers and
officially agree on payment terms
yes 24 Engineers work out implementation details and schemes with suppliers yes 25 Engineers and Technical Support check development activities at
supplier, test product samples and prepare plant for implementation
yes 26 Engineers and Technical Support install AMT on workfloor
27 Technical Support group adapts system and software configurations to existing process and a volume ramp-up phase is started
yes 28 Project leader facilitates training and learning of machines to operators
and Technical Support staff
29 Equipment purchasers facilitate all remaining payments to AMT supplier and Controllers/cost engineers consolidate all costs and start calculating performance of production process using new AMT
yes
4.3 AMT implementation performance
In the second round of interviews, the goal was to find whether these two precursors for the agency problem, divergence of interest and information asymmetry lead to either a delay in the process, or to a suboptimal decision of another stakeholder, the two negative contributors for AMT profitability. Below are the situations described where information asymmetry and divergence of interests occurred and lead to a suboptimal decision making or a delay in the adoption process
Case 1: the ‘doplijmer’
In the first case there were two situations that lead to suboptimal decision making. The first was at step 20 were the controllers/cost engineers collect all information about the impact on profitability and submitted this to the management layers. It turned out that there was only one supplier quotation available. Having less supplier quotation harms the position of the controller and cost engineer, as they have less sources of information of what could be reliable costs for the investment of the technology, thereby weakening the predicted accuracy of the input of their discounted cash flow model.
Another consequence of this problem was the negotiation position of the purchaser at step 23 where the material. Having only one supplier quotation in the case was derived from the fact that the supplier was involved in the production process. When the buyers returned with an offer for this machine, the supplier recognized the organizations dependence on them, and asked for a higher price.
Case 2: Suba/Suta project
Page 26 can be compared to the phases, where VPD stands for ‘Validated Product Design’, and AA for ‘Agreed on Assignment’, in exhibit 3.
Figure 3: planning of the SUBA/SUTA project
Case 3: ‘Sha 5’
In the third case again, the situation of having only one quotation in the AMT investment phase prevailed. This resulted in a delay of 13 weeks. The problem in this case however extended to the implementation phase, as the fitted technology could not be integrated to the existing production line. The production and maintenance employees noticed that the reject rate of this technology was really high and the agreed upon cycle time could not be achieved. This was because the supplier involved in the development of the specifications had built other machinery for this production line as well in an earlier project. The supplier assumed that these machines would be linked, and therefore no specific agreements were made with the engineers about the transportation lines between the two pieces of equipment. This resulted in the fact that another investment had to be made, called ‘Wukong’ that connected the pieces of equipment that were supposed to be connected, rather than the equipment the supplier assumed. The decision in this case was not caused by a preference in the technology, but in the preference of the supplier, as they promised the engineer to build a machine faster than other suppliers could do. The engineer hence had a motive, and an opportunity to trust this supplier.
Discussion and Conclusions
The agency literature is used to explain why using more stakeholders from different functional backgrounds can be an obstacle for effective an AMT implementation. Prior research has confirmed that different functional areas are involved in the adoption process and that they have different responsibilities and outcome objectives in the AMT implementation process. What not has been discussed is how these different views have implications for other stakeholders in the process, and for managerial decision making. This study shows that this opportunistic behavior, in the agency literature referred to as moral hazard, can be applied and translated to the field of operations.
Page 27 After the installment of the AMT adoption team it becomes clear that the principal agent
relationship issues now are to be found between the management layers and the stakeholders, as well as between stakeholders. Their different expertise was the source of information asymmetry, and evaluation structures, of performance criteria for the functional backgrounds, the source for the divergence of interests. Due to the interdependencies in AMT adoption projects, the ‘agents’ made decisions in their own interest that later compromised the ability of other agents to pursue their interests, as well as the capability of management to make efficient investment decision. Especially the decisions in the beginning of the cases regarding production methods show that the agency problem can be observed in the context of manufacturing technology adoption projects, and that the agency problem caused both sub-optimal decision making and a delay in the process. This is problematic for the profitability of AMT projects, which is the interest of the principal.
From a theoretical perspective, the positivist stream of agency literature has been most concerned with describing the governance mechanisms that solve the agency problem (Eisenhardt, 1989). The control mechanisms that could easily be observed in the cases were budgets, time schedules and reward structures based on the functional backgrounds. As the case describes, these were not enough to protect the principals interest of profitability at all decisions made by the agent. These control mechanisms are considered agreements about the projects outcomes, rather than the behavior. Their findings where that these control measures were not helpful in curbing all excessive capital expenditures and non-value adding activities. This study shows that especially early in the process, where engineers are in control of the adoption process, opportunities for moral hazard exist that cannot be controlled with a budget or time schedule, as their
opportunistic behavior led to sub-optimal decision making, and significant unnecessary delays in the adoption process. The reward structures, their formal evaluation criteria even provoked opportunistic behavior, and their expertise was the source for information asymmetry. The question arises is that if three output control mechanisms cannot solve this agency problem, perhaps control mechanisms concerning behavior are more effective to improve the performance of these projects? This paper suggest that there is a need for other control mechanisms than the existing control mechanisms, especially mechanisms aimed at the repression of opportunistic behavior with regard to preferences in suppliers of technology, as most behavior could be traced back to these issues. This is consistent with the view of Flamholtz, Das and Tsui (1985), who stated that “a proper management control system is necessary to increase the probability that individuals and groups will behave in ways that lead to the attainment of organisational goals (p.36)”. A good start therefore would be to distinguish between behavioral control mechanisms and outcome control mechanisms, with a focus on the behavioral controls. These control
Page 28 This study makes a first attempt at trying to explain why most companies still fail at
implementing Automated Manufacturing Technology using the agency theory. The paper tried to build theory and to find proof around the importance of the agency problem in the manufacturing context. Especially its use around information asymmetry was helpful, as specific actions could be traced trough the adoption process. This paper would therefore integrate well with modern AMT literature, as the focus in this literature stream is on the managerial decision making process, and the decision models (Wang and Chin, 2009; Mital and Pennathur, 2002; Diaz, Gil and Machuca, 2005; Aravindan and Punniyamoorthy, 2002). These models depend heavily on the information collected during the processes, as could also be seen in the cases.
However, these findings have some limitations. Firstly, this studies aim was to build theory instead of testing theory. The findings in this case are limited to a few cases. Further empirical testing is necessary to generalize findings and perhaps eliminate contextual variables.
Furthermore, the cases in this study were quite similar with regard to the variables of type of technology adopted, adoption process activities and functional backgrounds involved. The findings should be compared to cases with differentiating variables. Perhaps these studies can also introduce new variables in their cases based on new findings of this study or other new studies in AMT literature.
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