Complementarity and Cost Reduction: Evidence from the Auto Supply Industry

Over the last 20 years, the success of Japanese manufacturing firms has brought renewed attention to the importance of cost reduction on existing products as a source of productivity growth. This paper uses survey data and field interviews from the auto supply industry to explore the determinants of average-cost reduction for a sample of 171 plants in the United States and Canada between 1988 and 1992. The main result is that the determinants of cost reduction differ markedly between firms which had employee involvement programs in 1988 and firms that did not. The two groups of firms achieved equal amounts of cost reduction, but did so in very different ways. Firms with employee involvement saw their costs fall more if they also had such involvement gained no cost-reduction benefit from these programs; instead, their cost-reduction success was largely a function of increases in volume. These results provide support for Milgrom and Roberts's concept that certain production practices exhibit complementarity.

Complementary and Cost Reduction: Evidence from the Auto Supply Industry

Over the last 20 years, the success of Japanese manufacturing firms has brought renewed attention to the importance of cost reduction on existing products as a source of productivity growth. This paper uses survey data and field interviews from the auto supply industry to explore the determinants of average-cost reduction for a sample of 171 plants in the United States and Canada between 1988 and 1992. The main result is that the determinants of cost reduction differ markedly between firms which had employee involvement programs in 1988 and firms that did not. The two groups of firms achieved equal amounts of cost reduction. but did so in very different ways. Firms with employee involvement saw their costs fall more if they also had "voice" relationships with customers and workers. Firms without such involvement gained no cost-reduction benefit fkom these programs; instead, their cost reduction success was largely a fiction of increases in volume. These results provide support for Milgrom and Roberts's concept that certain production practices exhibit complementary

Supplier Relations and Adoption of New Technology: Results of Survey Research in the Auto Industry

Using an original data source, this paper investigates the circumstances under which fmns adopt computer numerical control (cNC), an important type of flexible automation which can significantly increase production product variety and quality. The paper shows that arms'-length supplier/customer relationships are a significant barrier to CNC adoption, even where CNC would improve efficiency. For firms where CNC would be efficient. but who currently receive little commitment through their customers,an increase in contract length of one year would increase the adoption rate by 30%. These results have theoretical implications in two areas. First the paper integrates questions of appropriability into the technical change literature by adding supplier relations as a determinant of technology adoption. Second, the paper extends transaction-cost analysis, by relaxing the assumption that agents' private maximizing behavior will always produce organizational forms that may social efficiency

Supplier Relations and Adoption of New Technology: Results of Survey Research in the U.S. Auto Industry

Using an original data source, this paper investigates the circumstances under which firms adopt computer numerical control (CNC), an important type of flexible automation which can significantly increase productivity, product variety and quality. The paper shows that arms'-length supplier/customer relationships are a significant barrier to CNC adoption, even where CNC would improve efficiency. For firms where CNC would be efficient, but who currently receive little commitment from their customers, an increase in contract length of one year would increase the adoption rate by 30%. These results have theoretical implications in two areas. First, the paper integrates questions of appropriability into the technical change literature, by adding supplier relations as a determinant of technology adoption. Second, the paper extends transaction-cost analysis, by relaxing the assumption that agents' private maximizing behavior will always produce organizational forms that maximize social efficiency.

International Differences in Lean Production, Productivity and Employee Attitudes

The study examines US-European productivity and worker attitude differences, focusing on changes in incentive structures. We analyze productivity and worker attitudes in five plants in the UK and US belonging to the same multinational producer of automotive sensors and actuators. We examine the firm's efforts to make complementary changes in product strategy and human-resource policies. In particular, we look at the impact of a Value-Added Gainsharing plan (VAG) that was introduced at different times among the four plants. Our analysis draws on multiple plant visits, surveys of almost all of the workforce, and confidential financial data. Our study offers a rare look inside a low-wage, non-union firm. We find that the VAG had an impact on productivity and profitability. We find that the UK plant's productivity and worker satisfaction was well below that of the US plants. However, neither our analysis nor interviews with managers suggest that differences in national institutions play a key role in explaining these results.

Supplier Relations in Japan and the United States

This working paper was originally printed in the Working Paper Series of the MIT International Motor Vehicle Progra

Creating Lean Suppliers: Diffusing Lean Production Through the Supply Chain

Hon& of America has developed a comprehensive approach to teaching the principles of lean production to its suppliers. The centerpiece of these efforts is a program called BP (for ?Best process?, ?Best Performance ?, ?Bs Practice?), in which a crossfunctional team of persomel born Honda and the supplier work intensively for week or even months on narrowly-targeted improvement projects in the supplier?s plant. BP has been quite successfid in enhancing supplier performance; suppliers participating in the program in 1994 avmge~ productiviw gains of 50?/0 on lines reengineered by BP. However, Honda found there was high variation in the extent to which suppliers were able to transfer the lessons taught beyond the line or plant where the BP intervention occurred. We explore the reasons for this variatio~ touching on how the BP process interacts with the broader relationship between customer and supplier, organizational learning, technology transfer, and the transplantation of Japanese management practices to the U.S. The case studies we present of three of Honda?s U.S. suppliers illustrate the dynamics of the learning process and the complex relationship that emerged between ?teacher? and ?student?. We found that achieving self sufficiency with the lean production techniques taught by BP is more likely when the supplier has a moderate degree of identification with and dependency on the customer. If these are too hi~ the supplier will be tempted to continue to rely on the customer for assistance; if they are too low, the learning relationship may break down. It appears that Honda has achieved the most supplier self reliance with larger U.S.-owned companies, who have an identity as strong, competent actors, and thus try to reduce dependence on Honda by mastering the new knowledge quickly. Yet these larger suppliers may be less responsive to Honda?s needs that small-to-medium suppliers whose capabilities can be boosted through Honda?s supplier development activities.Funding for this research was provided by the International Motor Vehicle Progam at M.I.T., the Jones Center for Management Policy, Strategy, and Organization at Whartou and the Center for Regional Economic Issues at Case Western Reserve University

Management Practices, Relational Contracts and the Decline of General Motors

General Motors was once regarded as one of the best managed and most successful firms in the world, but between 1980 and 2009 its share of the US market fell from 62.6 to 19.8 percent, and in 2009 the firm went bankrupt. In this paper we argue that the conventional explanation for this decline – namely high legacy labor and health care costs – is seriously incomplete, and that GM’s share collapsed for many of the same reasons that many of the other highly successful American firms of the 50s, 60s and 70s were forced from the market, including a failure to understand the nature of the competition they faced and an inability to respond effectively once they did. We focus particularly on the problems GM encountered in developing the relational contracts essential to modern design and manufacturing. We discuss a number of possible causes for these difficulties: including GM’s historical practice of treating both its suppliers and its blue collar workforce as homogeneous, interchangeable entities, and its view that expertise could be partitioned so that there was minimal overlap of knowledge amongst functions or levels in the organizational hierarchy and decisions could be made using well-defined financial criteria. We suggest that this dynamic may have important implications for our understanding of the role of management in the modern, knowledge based firm, and for the potential revival of manufacturing in the United States