Economists prove that operations management matters!

I have to admit that I don’t usually pay that much attention to Stanford Business, the Cardinal’s alumni magazine. Be true to your school and all that, but it rarely has anything that I find all that interesting. The current issue, however, has an intriguing cover story asserting that management matters (Good Management Weaves Gold into the Bottom Line, Winter 2010-2011). The article reports on a very ambitious research project carried out by a number of Stanford faculty together with academic co-authors, the World Bank, and Accenture. The basic question is “Does management matter?” That is, do standard management techniques make a difference in performance? That is a broad question and could incorporate any number of nebulous, potentially ill-conceived management fads. What they end up focusing on though is largely basic operations management blocking and tackling. And, yes, it does matter.

Here is the set up.

The researchers worked with Accenture consultants to expose 20 mid-size Indian textile plants owned by 17 firms to management practices commonly employed in U.S., European, and Japanese manufacturing plants. The factories, a small fraction of those in the towns of Tarapur and Umbergaon, India, were assigned randomly to a control group of 6 plants or to a “treatment” group of 14 plants. Based on their prior textile experience, the consultants chose to promote 38 practices such as routines for recording and analyzing quality defects, production, inventories, and order fulfillment. They encouraged preventive maintenance, clear job assignments, and incentive pay based on performance.

The consultants then spent a month in each factory gathering data and establishing base line performance. For the control group, they make sure that the firm can continue to collect data and then head for the door. For the treatment group, the consultants stuck around a little longer.

Next the consultants spent 4 months with the 14 plants randomly chosen for “treatment.” The consultants’ job was to persuade plant managers to implement the practices and also to help them implement, fine-tune, and stabilize the procedures so that they could be carried out readily by employees. For example, one of the practices implemented was daily meetings for management to review production and quality data. The consultant attended these meetings for the first few weeks to help the managers run them and provide feedback.

Here’s a visual of the kind of changes they helped implement:

They made similar changes in factory layout, inventory tracking, quality monitoring etc. All told, the project ran for two years and the average factory in the treatment group saw significant gains:

“The treatment intervention led to significant improvements in quality, inventory, and production efficiency,” the researchers wrote in a summary. “The result was an increase in productivity of about 10%, a 60% reduction in defects, and a substantial increase in profitability of about $200,000 on estimated average-plant sales of $7.5 million.” In contrast, the control group factories registered less than a 1% gain in productivity.

So I find this really interesting. It is just an impressive piece of research to bring together such a large project. But what I really like is that it is so squarely related to operations management. Yes, they tweaked how workers were paid and encouraged owners to delegate more responsibility, but much of what they implemented is straight up operations management. It’s nice to know that what I like adds value.

And to have some economists back that up!