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Sources and Forms of Flexibility
When we examine the concept of flexibility within the global factory, context is imperative. This is because the global factory is characterised by its adoption of network relationships: it is not an autonomous entity undertaking all elements of the value chain itself. It is linked into, and reliant upon, other organisations. In addition, it has international scope and is involved in a number of national markets. These two characteristics, partial externalisation and locational diversification, may themselves contribute to flexibility. For these reasons, existing classifications of the sources of flexibility may be of limited value when applied to the global factory.
There have been a number of important efforts to identify and classify sources of organisational flexibility. Atkinson (1984) focusing on labour flexibility, highlighted the following four key forms of flexibility: functional; numerical; financial, and temporal. Functional flexibility addresses the utilisation of skills with greater flexibility resulting from cross- or multiskilling of employees. Numerical flexibility results from changes in the level of labour input, utilising part-time workers for example. Financial flexibility may be achieved by aligning payment and reward systems to achieve flexibility objectives. Temporal flexibility refers to hours worked. While useful, this taxonomy suffers from its restrictive applicability (primarily to internal employees) and its view of the organisation as a predominantly closed system. Other scholars have attempted to broaden the concept of flexibility to look at systems, particularly manufacturing and supply chain systems (Upton, 1994). This work highlights similar ideas— functional, strategic, time horizon, and hierarchical concepts—underpinning system flexibility (D’Souza & Williams, 2000; Duclos, Vokurka, & Lummus, 2003; Lummus, Duclos, & Vokurka, 2003). While these studies do extend thinking to consider system flexibility (Olhager & West, 2002), they are still of limited value when analysing the global factory. In part, this is the result of conventional classifications, for example Zhang, Vonderembse, and Lim (2003) divide flexibility along two dimensions— flexible competences—those attainable within the internal producing organisation, and flexible capabilities—those perceived by the buying organisation. While it is recognised that external flexibility is likely to have a more significant impact than internal flexibility initiatives (Jordan & Graves, 1995), such taxonomies pay scant regard to the organisational and governance complexity of the global factory.
A central theme of the firm flexibility literature is the internal separation of employees along the lines of a core and a periphery (Kalleberg, 2001). The pursuit of functional flexibility with cross-skilling and enhanced responsibilities creates a privileged group of core employees enjoying high levels of job security and favourable employment conditions. Numerical flexibility, in contrast, produces a group of employees on less favourable employment and payment conditions whose numbers can be readily adjusted because they are part-time, temporary, or contracted through outside agencies. Core employees contribute to firm flexibility because they possess multiple skills and can be readily redeployed. Their commitment is assured because of their favourable treatment, links between pay and firm performance, as well as their increased employability that results from access to greater responsibly and development opportunities. Peripheral employees contribute to flexibility, primarily to operational flexibility, because of the ease of adjusting numbers and hours worked as well as through their engagement on less costly terms. Peripheral workers are seen as assuming some of the ‘risk’ of volatile markets (Jacoby, 1999).
A dilemma for the firm is the successful combination of these two forms of flexibility. Workforce segmentation with groups on contrasting employment conditions is likely to create resentment and conflict (Geary, 1992) . While the concept of dualism, with a core-periphery workplace divide, is well established (Doeringer & Piore, 1971), studies of their compatibility report mixed results, ranging from a negative relationship (Cully, Woodland, O’Reilly, & Dix, 1999; Osterman, 1999) to a positive one (Morishima, 1995). One of the ways to overcome internal workforce conflict based on segmentation is the use of network relations, to externalise one group, typically peripheral employees. This is achieved through the use of subcontracting, widespread in manufacturing, and back office service activities, in a growing number of industries. Networks replace duality within organisations with distinction between organisations.
For our purposes, existing work on flexibility suffers a number of key weaknesses. First, much of it focuses on technical systems and how to optimise such systems. In a global factory where superior cross-border coordination or interface competence may be the key source of advantage, technical effectiveness is likely to be a small part of overall system optimisation.
Second, the focus of much of the flexible firm work is internal. It is based on a view that traditional hierarchical organisations, adopting Fordist pro?duction principles, forego flexibility in the pursuit of scale and cost minimisation. Such principles of production require stable, predictable, and ideally, growing markets. Where these conditions cannot be assumed and markets are volatile, greater flexibility is desirable. From this perspective, flexibility can be achieved by internal restructuring through initiatives such as multi-skilling, job rotation, and the increased use of contract or part-time workers. In essence, flexibility can be pursued through changes in the employment terms and conditions of current resources.
Third, as discussed above, this literature pays insufficient attention to interdependencies between the various sources of flexibility. While it is recognised that enhancement in one flexibility dimension does not necessarily result in an improvement in overall system flexibility (Gupta & Somers, 1996), the diversity of potential sources of flexibility and the relationships between these, have not been fully researched. For example, attempts to inculcate both functional and numerical flexibility within the same organisation (effectively a dual labour market), is likely to lead to conflict. Spatially separating or distancing these activities, and their associated workforces, is a capability that exists within global factory systems.
Fourth, the flexible firm literature pays scant regard to the issue of how a network of collaborative firms is managed. Implicitly, the network is seen to offer mutual benefits and is coordinated through market forces. In practice, such networks are more likely to be consciously directed and this is certainly true for the global firm. The focal firm builds, directs, and manages a complex network in its own interests, part of which is the pursuit of enhanced flexibility.
Finally, any conceptualisation of flexibility within a social system as complex as the global factory needs to acknowledge the likelihood of trade-offs. Achieving greater flexibility is clearly not costless: doing so may be at the expense of other organisational dimensions, for example commitment, coordination, uncertainty, information capture, or innovation. These are relevant considerations that need to be incorporated into any meaningful analysis.
In the light of these weaknesses, we offer a conceptualisation of flexibility within the global factory system, summarised schematically in Fig. 2.1.
Fig. 2.1 Conceptualisation of uncertainty and sources of flexibility in the global factory
In this simplified conception, the centre of the global factory is the lead or focal firm internalising key activities such as innovation, branding, and critical management tasks. The focal firm is likely to be hierarchical to some degree in its organisation. For the sake of exposition, the focal firm is shown to be involved with just three external partner organisations. These may be upstream (suppliers for example), or downstream (distributors, retailers, after sales service providers). Both the focal firm and its partners exist within a wider international business environment, shown by the orange boundary line in Fig. 2.1. This implies that transactions between the focal firm and its external partners cross national borders.
Figure 2.1 suggests that the firm faces three types of uncertainty, termed primary, secondary, and tertiary uncertainty (Buckley & Carter, 2002). Primary uncertainty arises in the business environment and may be the result of social, economic, technological and political changes, or competitor actions. Primary uncertainty encourages broad environmental scanning as such changes create both opportunities and challenges for business. Scanning results in the collection of significant volumes of information, much of it pertaining to exogenous changes. It is the collation, integration, and synthesis of such information that gives rise to secondary uncertainty. Secondary uncertainty is an internal management issue that occurs because of incomplete or unproductive synthesis of knowledge. It results from the ineffective combination of knowledge where, for example, managers are not aware of intentions or actions of other members of the management team. In Fig. 2.1, secondary uncertainty is depicted as an internal management problem but is likely to involve a wide range of knowledge inputs drawn from a variety of international sources. Secondary knowledge problems may be addressed through changes in organisational structures and incentive and reward systems. A third type of uncertainty, tertiary uncertainty, arises from interactions with external parties and can create opportunism (Williamson, 1996), where those holding valuable knowledge fail to reveal or share it, misrepresent it, or use it for their own benefit. These sources of uncertainty create a series of organisational problems involving the effective acquisition of information (primary uncertainty), its synthesis and integration within the management task (secondary uncertainty), and ensuring its effective deployment (tertiary uncertainty) (Buckley & Carter, 1996).
For the global factory, flexible structures and systems contribute to resilience and a reduction in the costs of these forms of uncertainty. Systems are resilient if they can absorb shocks. Flexibility is developed in three key areas.
The first, termed external or environmental flexibility, is concerned with the acquisition of knowledge about environmental conditions and how these can be used to the advantage of the firm. The global factory is likely to invest heavily in environmental scanning, in part because of the significant options it enjoys in location choice. It is able to access optimum locations, selected in terms of cost, resource availability, and quality. We would expect flexibility considerations to be factored into location decisions, for both the firm’s own operations and in the selection of partner organisations. If the pace of environmental uncertainty increases, location switching might be expected to rise. The more diverse are the operations of the global factory—both geographically and number of partner organisations—the more environmental information the focal firm can secure, contributing to more efficient location decisions. Access to overseas locations can bring significant flexibility gains as the example of Apple illustrates. For iPhone manufacture in 2013, Apple used suppliers in more than 25 countries, who, collectively undertook more than 767 fabrications. Of these, 637 fabrications (83 per cent) were undertaken in Asia. China was the most significant source country responsible for 330 fabrications (FinancesOnline, 2013). Part of China’s attraction to Apple was the flexibility it offers, with one estimate suggesting that ramping up production where 8700 engineers are needed to manage 200,000 factory employees, would have taken 9 months in the USA, but just 15 days in China (FinancesOnline, 2013).
The second form of flexibility shown in Fig. 2.1 is termed operational or internal flexibility and refers to the deployment of labour within establishments, by both the focal firm and its suppliers. We have discussed the most likely scenario under which this might occur, labour market dualism based on a core-periphery division. There is evidence that such dualism occurs both within focal firms and between the focal firm and suppliers. Amazon provides an example of a company that apparently uses labour intensification in some of its secondary activities that it directly controls such as warehousing (Soper, 2011). However, recent reports suggest that the company encourages a highly competitive, even ruthless, work culture throughout all its operations, negating the argument of a core-periphery division (Kantor & Streitfeld, 2015). Reports of dualism between plants in global factory networks encompass a range of industries including clothing, footwear, electronics, cut flowers, and even false eyelashes (Balch, 2015; Chamberlain, 2013). Industrial accidents, such as the Rana Plaza fire in Bangladesh in 2013, illustrate the dangerous working conditions that some suppliers offer (Burke, 2013). As mentioned in the previous section, it is more likely that the global factory will use its locational differentiation to utilise core-periphery divisions between plants (both owned and contracted) enabling it to avoid the challenges of duality within a single establishment.
The third type of flexibility identified in Fig. 2.1 is strategic or boundary flexibility that arises from the ability of the global factory to exploit global locational and governance differences. In this case, the focal firm gains flexibility advantages through placing activities in less regulated locations, or managing operations in ways that provide enhanced flexibility.
Locational differentiation contributes to flexibility in several ways. One is simply the pricing advantage that access to lower-cost sites provides. In the event of a decline in product demand or an increase in competition, the firm could exploit the gap between (lower) costs and retail prices since it has access to lower costs of production. In addition, offshore locations may offer more favourable production and regulatory conditions where, for example, there is a plentiful supply of skilled labour, a competent supply base, or fewer restrictions on labour utilisation. It is perhaps not surprising that global factory systems are heavily focused on China and South-East Asian economies where there are fewer operating restrictions than in areas such as Europe. State-led capitalism, characteristic of many of the most popular Asian locations, helps underpin competitive operating conditions (Amsden, 1992; Leftwitch, 1995).
A second flexibility benefit of locational differentiation results from a more effective application of segmentation. The global factory conceives of segmentation in terms of activity fragmentation or ‘fine slicing’ rather than simply labour deployment. This type of segmentation allows the firm to avoid many of the difficulties that arise when dualism is introduced in a single location. For example, the focal firm is able to implement distinct knowledge strategies with exploration occurring in higher value-based locations and exploitation within assembly or distribution plants where flexibility is provided by efficient routines (March, 1991). Appropriate and differentiated leadership styles and corporate cultures can be operated across plants, particularly where ownership is not shared. Trying to operate dual cultures or leadership styles within the same establishment is likely to be extremely challenging. In addition, locational differentiation enables a network to work in a matching fashion, where core and peripheral workers complement one another and the latter is not simply a buffer protecting the former, as conceived in core-periphery labour models. Such differentiation can also be taken further where the focal firm opens its internal markets to competition, perhaps requiring internal units to service both inside and outside customers. This can bring benefits of both scale and market discipline. A third benefit of locational differentiation is in increasing information sources and facilitating adjustment to change. A network offers multiple sources of information, increasing awareness of volatility. It also provides specialist suppliers who, because of their high- quality knowledge, may be better able to anticipate change. This attenuates adjustment costs and increases flexibility in a cost-effective way.
Strategic flexibility can also result from governance advantages enjoyed by the global factory. Establishment differentiation based on ownership helps to overcome some of the challenges of implementing flexibility strategies. These include the difficulties of overcoming inertia or administrative heritage, violation of employee perceptions of psychological contracts, and internal conflict (see below). In addition, governance differentiation brings risk advantages. Externally sourced suppliers and partners provide more strategic options than growth based on vertical integration and allows for real option strategies, joint ventures or contractual supply relations. While the core-periphery labour market literature suggests that employers are seeking to pass risk onto employees, we would argue that more accurately this risk is being assumed by supplier and partner organisations within a global factory network. Ownership or governance separation also reduces reputational costs in the face of adverse events. Heavy investments in technology and brand building may be better protected where membership of a global value chain is less than transparent.
Our discussion highlights a number of features of flexibility strategies within the global factory. First, we suggest that flexibility is a complex and diverse concept, stemming from several sources. The global factory enjoys a number of distinct sources of such advantage, some of which are not available to the domestic or more traditionally organised international business. Second, the structure of the global factory enables it to better exploit the various forms of flexibility and to minimise conflict that usually arises when increased flexibility is sought. The analysis also highlights the advantages that the global factory enjoys in managing continuous disequilibrium. The challenges of balancing stability and change are considerable, particularly when the two are pursued simultaneously within a single organisation. Our model highlights the possibly of relative stability within the focal firm coexisting with continual disequilibrium within other parts of the factory network. The challenge for the focal firm directing the network is in balancing differential rates of change within elements of the system. This is a quite distinct management task.