Thursday, September 21, 2006

Root Cause Analysis

I have received some questions from students about the concept of efficiency. Efficiency involves finding alternative ways to produce a good that result in using fewer resources to produce the same or greater quantity of a good without reducing quality.

A couple of days ago I attended the bi-monthly meeting of a group of local quality managers. The members of the group are quality auditors and engineers who work in manufacturing. Interestingly, I find that with my economics background I easily fit in with this group despite the fact that my career has been entirely in banking and education. This is not really surprising considering that Adam Smith, who is often referred to as the Father of Modern Economics, and was a college professor himself (his subject was moral philosophy), devoted a whole section of his book, The Wealth of Nations, to a discussion of the steps involved in the manufacture of pins. It was Smith who pointed out that by dividing the job of making a pin among a very large number of people, each specializing in one tiny part of the process, the total number of pins produced was many times greater than if each of the workers had spent their work day making complete pins.

One of the discussions at the workshop involved describing a problem solving process called Root Cause Analysis. When a production problem arises or when management feels that costs are too high or quality too low, it is important to investigate to find the real reason why the problem exists instead of blaming it on worker incompetence, laziness, etc. Ninety percent or more of the time, workers are dedicated and trying to do their jobs well. The problem is generally not the worker but it is the process or system used in production that is the source of the problem. After the facilitator gave a textbook example of root cause analysis one of the participants, who was the President and owner of a small, 25 employee, manufacturing company in Tucson, gave a real life example of the process.

This company manufactures parts which are then sold to other companies who use the parts in other products that they sell to consumers. This is much like the way Firestone Tire Co. manufactures tires which it sells to Ford and GM who, in turn, add the tires to the cars which they then sell to consumers. As part of the quality system used by both this company and the companies that it sells the parts it produces to, a work order is drawn up which describes what is to be produced and the specifications to which it is to be built. At each step of the production process the worker responsible for that part of the production is required to sign off on the work order when the worker finishes her part of the process and moves it down the line to the next worker. This provides both accountability for the work and provides a history of how it was built which can be used later to trace the source of quality problems with the product. When the product reached the end of the line and the work completed, it was sent to shipping where the part and its work order were packaged and shipped to the buyer.

The problem this company experiencing was that the completed product and work order were arriving in shipping with signatures missing from the work order. Since the process required a signature on the work order for each step of the production process, the shipping people had to constantly stop their work and run around the factory floor getting signatures on the work orders. This, of course, delayed shipping, wasted the time of the shipping people and made customers - who were waiting impatiently for their product - upset.

The problem obviously lay with the assembly line workers who were neglecting to sign the work orders. So, management took time away from their work, shut down the assembly line for a half hour or so, and lectured the workers on the need to sign the work orders. Simple solution, except that work orders continued to arrive unsigned in shipping. More time was diverted from productive work as managers called the workers together again, and again, and again..., to lecture them on the proper procedures.

The problem was not only NOT being solved, but the company was paying management to spend time lecturing workers and paying workers to listen to the lectures all the while that product was not being produced during these lecture sessions. This was not an efficient use of resources (time is a resource and, since workers and management are paid for their time, it is an expensive resource).

At this point one of the members of the management team decided to find out WHY the workers were not signing the work orders despite having been clearly and frequently told to do this and why it had to be done. So, at the next session with workers, instead of lecturing on the need to have work orders signed, the workers were asked "Why don't you sign the work orders?" And the answer was, "We do sign them when they accompany the product, but most of the time the product comes without the work order attached". The problem (root cause) was not the workers ignoring the command to sign the work order but rather the lack of a work order to sign. This was a problem with the document control process and NOT a problem with the production process. Attempts to fix the production process were futile because that was not the process that was broken. Once the document flow process was fixed things ran smoothly.

Modern American manufacturing has become obsessed with continually studying work processes and continually seeking the root cause of problems. As a result of this continual tweaking of processes and fixing of minor problems is that literally millions of hours of work time have been freed up for workers to produce what they are paid to produce rather than wasting time fixing problems and struggling with inefficient processes. Thus, while American manufacturing workers are the highest paid in the world, their superior productivity is such that when you divide the output of an American worker per hour by what they are paid per hour the labor cost per unit is among the lowest in the world.

Tuesday, September 19, 2006

Labor Market Issues - Outsourcing

Click Here for Today's Course Update Information


Today I am starting the posting of information relevant to one or all of the courses. These postings are an attempt to help you better understand the course and serve in place of the lecture I would give if this were a class that met in a classroom at a specific time every week. For today's update on the three classes click on the link above.

Outsourcing refers to paying someone else to do what you are currently doing. The term applies to businesses or other organizations (including government) that take work being done by their employees and contract with an outside firm to do the work instead. The current debate over outsourcing involves U.S. businesses closing down a division and contracting with a foreign firm in a foreign nation to do the work.

Domestic outsourcing (i.e., hiring a local firm to do the work) is commonly accepted today but was a hot topic a few years ago – Unions hurt when say, maintenance workers at XYZ corp are covered by the contract with the company and then the company outsources to a low bid company and lets its own maintenance workers go – Union now has to negotiate contracts with numerous small companies rather than one big one.


Domestic outsourcing benefits company by reducing costs (is also good bargaining chip when negotiating labor contracts), it is also more efficient for economy as a whole and can be beneficial to individual workers. Peter Drucker in 1970s Op Ed piece in The Wall Street Journal described hospital maintenance workers as having limited advancement potential since hospitals are geared toward doctors and nurses. Job advancement for maintenance people in a such a situation is limited to supervisory positions - middle and top management positions are beyond their reach. But when the work is outsourced, a worker, doing the same job in the same hospital, but as an employee of the maintenance company, now has potential to advance as company focused on just maintenance people.


Foreign outsourcing is criticized because of belief that jobs "lost" to foreigners. But companies outsource when demand for labor by other companies in other industries make wages too expensive in their industry. A couple of years or so ago, AOL in Tucson planned to outsource one of its tele-services lines and lay off a number of workers. There was big outrage in the local computer community in the weeks leadingup to the cut. However, when AOL went through with the plan and closed the line, only one or two people were laid off – the rest were assigned to other AOL divisions that were short of people. Also, creating jobs overseas means jobs and incomes for those people which translates into demand for more goods many of which come from the U.S. A recent entry in a tech blog illustrated this phenomonma of outsourcing creating more jobs in the U.S. A consultant was visiting a tele-services center in India and commented to his host that the operation was very good for India but had cost the U.S. jobs. The Indian manager immediately objected and began to point out that practically everything in this state of the art operation came from the U.S. The computers were made in the U.S., the design of the building was done by U.S. consultants, the phone lines and networking had been done by U.S. firms and even the bottled water was purchased from Coca Cola. The U.S. had "lost" the teleservices jobs but the need to build and support the operation in India had created more jobs in other U.S. industries. So foreign outsourcing is like domestic outsourcing in that it really results in new jobs being created in U.S. (i.e., more jobs than before) but not necessarily in the same companies, lines of work or geographic areas.

For More information on outsourcing and jobs in the U.S. see More Jobs Despite Outsourcing.

Friday, September 15, 2006

Economics Classes - Today's Update

Here is today’s update:


ECN 200 - A suggested assignment and test submission schedule has been posted. It can be found by clicking here. A link to this schedule will be posted on my course home page http://nofreelunch.bravehost.com/ later today or this weekend. I will also be posting this same schedule, with extra credit points next to each date, later today or over the weekend. Click on the ECN 200 Extra Credit link on the course web page for this. Also, I plan to start posting grades in the gradebook in WebCT. I will begin this weekend by posting 5 extra credit points for each student from whom I have received the syllabus acknowledgment form and 7 points for those who BOTH submitted the syllabus acknowledgment AND responded to the email I sent them in WebCT (NOTE: you have to go into WebCT to get this email). THIS OFFER OF EXTRA CREDIT WILL EXTEND ONLY UNTIL MIDNIGHT ON MONDAY SEMPTEMBER 25TH – after this date there will be NO extra credit as well as no assignments being graded or returned until I receive the syllabus acknowledgment)

ECN 201 – A suggested assignment and test submission schedule has been posted. It can be found by clicking here. A link to this schedule will be posted on my course home page http://nofreelunch.bravehost.com/ later today or this weekend. I will also be posting this same schedule, with extra credit points next to each date, later today or over the weekend. Click on the ECN 201 Extra Credit link on the course web page for this.

ECN 202 – A suggested assignment and test submission schedule has been posted. It can be found by clicking here. A link to this schedule will be posted on my course home page http://nofreelunch.bravehost.com/ later today or this weekend. I will also be posting this same schedule, with extra credit points next to each date, later today or over the weekend. Click on the ECN 202 Extra Credit link on the course web page for this.

ALL STUDENTS – please check this blog daily for announcements. Until I receive all of the Syllabus Acknowledgment forms with email addresses on them, I cannot communicate with the classes by email and this is my only forum to reach everyone. Individuals can obviously reach me via email at: nugentwork@yahoo.com. All students can leave messages for me at my message phone 24/7 me by dialing 206-6464 and asking for extension 76115. Since all 3 classes can call me on this line, PLEASE indicate in your message WHICH class you are enrolled in. ECN 200 students can also reach me via WebCT internal email.

Email is checked before 6:30 a.m. M – F so anything sent after that time will wait until the next day.

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