Strategies for Managing Process Change Uncertainty in Manufacturing Environments

Abstract

Manufacturers increasingly recognize the crucial role of process change to create and sustain competitive capabilities. However, the benefits of process change are frequently uncertain due to technical problems, worker resistance to change, and limited resource availability. Complicating the situation, empirical evidence indicates that the extent of uncertainty is often linked to the amount of process change undertaken. Specifically, it has been argued that large scale process changes offering the highest potential gains are also associated with the greatest amount of uncertainty.

To combat uncertainty and to realize the potential benefits from process change, managers must recognize the importance of creating and applying knowledge. Empirical evidence indicates that the extent of uncertainty associated with the benefits of process change is mitigated through knowledge-creating activities including preparation and training. Furthermore, the expected level of benefits derived from process change increases due to the application of existing knowledge.

In this paper, a comprehensive stochastic analysis is provided to aid managers develop process change and knowledge creation strategies. While a variety of benefits may be sought through process change, we focus on the potential gain derived from increasing the level of effective capacity. Two models are formulated and analyzed characterizing different views of process change uncertainty. Each model captures the various impacts of knowledge on the outcome of process change. In particular, as a firm's relevant knowledge increases, the ultimate gain in effective capacity derived from process change increases and the level of uncertainty associated with that gain decreases. While both models focus on maximizing profit, each presents a different view of process change uncertainty. Insights are obtained depicting the impact of the manager's view of uncertainty on knowledge acquisition and process change strategies. Furthermore, the results of the alternative formulations are contrasted offering insights on a firm's performance in relation to key issues including the valuation of process change uncertainty, budget constraints, and firm size.

JEL Classification: L23, L60