While many make-to-order manufacturers are highly successful at guiding the economic side of their businesses, most have yet to discover the secret to managing production. Errors, inefficiency, and waste still plague the shop floor. Orders ship late, scrap and waste drain profit, and non-productive time is a constant drag on output. These fundamental flaws and missed opportunities hold back the business.
While known problems in production hold the business back, many companies remain reluctant to face their obstacles head on. However, studies have found that there may be a very human reason for this reluctance according to economic theory and decision science.
Prospect Theory and Manufacturing
In 1992, Daniel Kahneman and Amos Tversky wrote a paper on the science of decision making called, “Prospect Theory: An Analysis of Decision under Risk.” In it, they describe the method people use to choose between alternatives that involve risk – a process called prospect theory.
According to prospect theory, people organize the potential outcomes of a decision. Each outcome will be sorted as a gain (positive outcome) or a loss (negative outcome). A value, determined by the favorability and likelihood of the result, is placed on the prospective outcomes. The outcome with the highest value, according to this mental algorithm, is selected.
In studying and evaluating prospect theory, Kahneman and Tversky noted humans don’t always act rationally during decision-making. Fallacies and irrationality, especially when determining the value of outcomes, have a profound effect on the decision. For example, we weigh the avoidance of negative outcomes over the acquisition of positive outcomes. Even when there is a significant benefit to a selecting a gain, we still choose to avoid loss rather than pursue gain.
Some companies see any cost factor or potential process change as a potential risk (or loss). For these companies, the option to avoid loss by doing nothing is inherently more appealing than actually solving the problem and improving the business. This is why many businesses wait until the last possible moment to embrace a manufacturing solution to a critical issue – when the cost of scrap is too high to ignore or a failed audit is about to shutter operations – despite growing need and an ROI.
For many manufacturers, scrap, late shipments, inefficiency, and waste are the cost of doing business. They accept problems rather than embracing change to increase profit and success. Even though these problems have the business in a stranglehold, and affordable software solutions with a low-risk and high ROI are readily available, some companies still prefer to wait. It may not be logical, but as Kahneman and Tversky explain, we don’t always let logic guide our decision-making processes.
Embracing a Shop Floor Solution
According to prospect theory, this is simply human nature. We fear loss more than we crave the benefit from a solution.
The problem is amplified for manufacturers because the decision maker is rarely directly impacted by the problems the solution will address. As the decision maker groups the possible outcomes, they are obscured from the complete picture. They may see the scrap on an expense report, or initiate customer contact to explain a late shipment, but they don’t feel the struggle against inefficiency. They aren’t the one wandering the shop floor looking for a critical specification that’s missing or waiting in line at a machine because of a scheduling bottleneck.
This results in the company focusing on other initiatives, which puts production on hold. Continuing to wait puts the entire business at risk. Waiting to address these critical problems leaves money and profit on the table, and hurts the long-term health of the company.
Fortunately, once a problem is identified, there are simple, manageable steps that can be taken to overcome human nature, reduce risk and embrace a shop floor solution:
- Build a Team: Look at involving both the front office and production in the decision-making. There needs to be open, honest communication early in the process so the impact of production problems can be properly understood.
- Identify Core Requirements: Project scope can quickly balloon and become unmanageable as input is collected for the project. Costs can escalate and the project collapse without a list of core requirements providing the project basis and ROI focus.
- Utilize a Pilot Program: Build excitement for the project and test the deployment using a low-cost pilot program. Many companies see so much benefit and savings from the pilot; they will rapidly roll out a full deployment.
- Partner with a Provider: Find a manufacturing software company you can trust, and partner with them on the project. See if they can offer timeline and cost guarantees, and learn how they work with your team to deliver the project.
Taking Production and Business to the Next Level
There is a high price for manufacturers who ignore shop floor problems. Companies that wait, doing nothing as scrap, inefficiency and waste negatively impact their business, put success at risk, especially as competitors continue to improve and modernize. Ignoring problems and hoping a solution magically appears is a decision based on a logical fallacy, and no company should let a fallacy guide their business. Learn from prospect theory.
Recognize the problem and take strategic actions toward a solution. Build a team, set goals and find a software partner you can work with to implement a strong solution.
If you’d like to know more, or see a demo of what modern manufacturing software can do for you, contact CIMx Software today and see how you can eliminate scrap while accelerating production.