The Future Of Manufacturing

Sept. 22, 1998
Peter Drucker: The management guru's take on manufacturing's next generation.

Peter F. Drucker needs no introduction. After more than a half a century of staying several steps ahead of current management thinking, his status as a highly sought-after speaker, writer, and scholar in near-legendary. Among other things, he is credited with establishing the study of management as a discipline; with anticipating the information-based economy; and with describing -- well before it happened -- the reengineering revolution that swept thorugh the corporate world in the 1990s.

For manufacturing executives, Drucker's The Emerging Theory of Manufacturing (Harvard Business Review, May-June 1990) is particularly notable. In it, Drucker specifies "the 'postmodern' factory of 1999," describing with alarming accuracy the transformation that manufacturing throughout the world is now experiencing. In sum, he writes: "Statistical Quality Control is changing the social organization of the factory. The new manufacturing accounting lets us make production decisions as business decisions. The 'flotilla,' or module, organization of the manufacturing process promises to combine the advantages of standardization and flexibility. Finally, the systems approach embeds the physical process of making things, that is, manufacturing, in the economic process of business, that is, the business of creating value."

Here, with characteristic intellectual vigor, Drucker expands upon his prescient theory and, in so doing, sets new standards for manufacturing management.

IW: Do you agree with IW's basic assumption that manufacturing is the most important part of any world-class economy? Drucker: No and yes. If you define manufacturing as the production of things -- and even if you extend the traditional definition to embrace the entire system of bringing a product to market, as IW does -- I would strongly disagree. But I emphatically agree if you extend the definition to read "the systematic process of production" -- whether the end product is a "thing" turned out in a factory, an "intangible" such as software, or a "service," such as a mutual-fund share.

Traditional manufacturing is likely to become less and less important to a developed country's health -- and actually in the emerging economies as well -- even though, as is almost certain, its volume will continue to go up, and go up fast (as it has in agriculture) while its contribution to employment and gross domestic product [GDP] shrinks. Systematic production, however, will steadily become more and more important and more and more central.

Let me explain: Manufacturing in the traditional definition, that is, making goods in a factory, has been shrinking worldwide for many years, and will continue to shrink. By the year 2015 or 2020, the volume of goods produced by traditional manufacturing worldwide will probably be at least twice what it is today. But in the U.S., employment in traditional manufacturing, already down to no more than one-sixth of the labor force, will have shrunk to no more than one-tenth. And the share of manufacturing in GDP, which is still around 15% or so, will have shrunk to 5% to 7%.

In that sense, traditional manufacturing in the U.S. is almost exactly where farming was around 1950. Farming still employed roughly one-fifth of the U.S. workforce, and produced something like one-tenth of GNP. Today, farming employs no more than 3% of the workforce and produces no more than some 2% to 4% of GDP. But farming production in the U.S. has increased almost sevenfold since 1950. . . .

If we redefine manufacturing as "the systematic process of production," manufacturing is indeed the most important part of any world-class economy. . . . The most important technical change in the last 30 or 40 years is that of the process of production, first developed in traditional manufacturing and now embracing more and more of the economy. It is becoming the process of production. It does not necessarily produce goods. But the new "goods" -- goods still usually classified as "services" -- increasingly are being organized on the principles of production that were first developed in manufacturing.

IW: Has the difference between a manufacturing company and a service company become so small as to be insignificant? Or do the two types of companies still differ significantly? Please explain.

Drucker: Again, the answer is both yes and no. The difference is still tremendous. And the difference is not in the process of production but in the basic theory behind it -- and that may be as important as the system of production, or even more important. What we call a "service company" does not, as a rule, see production as the process that adds value. It basically starts out with customers and service. The traditional manufacturing company still looks on the physical process of production as its center. But this will have to change. Increasingly traditional manufacturing companies will see the process of production as the means to an end rather than as the end itself. . . .

The service companies -- or most of them -- are changing so fast that the distinction between manufacturing company and service company is becoming totally meaningless. Producing software -- we still classify it as a service industry, but it is a production industry. And the more it is being organized on a systematic process of production, the more productive and the more successful it is. Handling thousands, if not millions, of credit cards -- we call it a service industry. But it is clearly a production process. So, of course, is check clearing. So is the handling of insurance claims. . .

Altogether, there are no more service industries in the traditional sense. There are only production industries. And to the extent that they apply principles of production that traditionally were considered manufacturing, they become competitive and successful.

IW: Please comment on how the new manufacturing has affected the traditional manufacturing industries: automobile, steel, food, pharmaceutical.

Drucker: The new manufacturing -- maybe I should call it the switch from manufacturing to production -- is rapidly transforming the traditional industries. In steel, which is perhaps the most representative industry of the peak age of traditional industrialization, the shift is from the now-antiquated integrated steel mill to the minimill, which is basically a shift from production based on machinery to production based on information.

Let me explain: What characterizes the minimill is the restructuring of the entire process around information. This, then, made possible (a) total automation -- the specs of the order program the entire process; and (b) the cut in the number of people employed by some 80% or more and their conversion from manual workers putting to work mostly brawn (and a little skill) into knowledge workers running an automated process through its controls.

The pharmaceutical industry learned that long ago. It has become a systems-based production industry in which the starting point is not making the stuff but serving the health service.

And perhaps the greatest change has been in the traditional industries that serve the infrastructure, whether they are the makers of heavy earthmoving equipment such as Caterpillar, the makers of locomotives such as GE, the makers of container ships, and so on. They have been restructured as systems companies in which the starting point is not making goods but service to enable the customer to get the fullest benefit from the goods.

The automobile industry has not yet learned that; it will have to or it will become a declining and money-losing industry. The automobile industry may be today's most antiquated industry precisely because until very recently it could operate the way it had been operating since William Durant [formed] General Motors in 1908 and first designed the modern automobile company. That no longer works -- and you can be reasonably sure that in the next 10 to 15 years the automobile industry will change more drastically than it has in the last 70 or 80 years. It will become an industry that focuses on service -- marketing the car, servicing the car, servicing and selling the used car -- rather than on the traditional profit center, which is making the new car. . . .

The Emerging Theory of Manufacturing

IW: In The Emerging Theory of Manufacturing, you present "four principles and practices that together constitute a new approach to manufacturing." Would you add any principles and practices today that are of equal importance to the four presented in 1990?

Drucker: No, I would not. But I would elaborate on them. In the almost 10 years since 1990, we have learned a great deal.

IW: What, for instance? Would you change any of the principles?

Drucker: I would add that we have begun -- and so far only begun --to develop the tools to make these principles operational.

IW: For example?

Drucker: I wrote then that "manufacturing accounting still faces the challenge of eliminating the fourth limitation of traditional cost accounting: its inability to bring into measurement of factory performance the impact of manufacturing changes on the total business -- the return in the marketplace of an investment in automation, for instance, or the risk in not making an investment that would speed up production changeovers."

We are not quite there yet. But we have moved much faster in the last eight or nine years than I would have thought possible in 1990. One example is economic-chain accounting, which is rapidly coming in, and which enables an enterprise to see the total costs and their yields throughout the entire economic process from supplier to ultimate consumer.

Traditional accounting still is based on the legal entity, the "firm." But even General Motors, at the peak of its power around 1970 when it produced about 70% of everything that went into a GM car, accounted for no more that one-tenth of what the ultimate consumer paid for the finished car. And GM had no idea where the other 90% went, nor had any control over it. This is being changed rapidly as economic-chain accounting enables an enterprise to know the entire cost stream from supplier until ultimate consumer (and perhaps even until the car is scrapped), and to move costs to where they produce the most yield. . . .

IW: To what extent have companies throughout the world adopted the principles you present in The Emerging Theory of Manufacturing?

Drucker: Some companies have gone very far. It is my understanding that a good many of the units of GE and a good many U.S. machine-tool companies have developed, quite independently, production as a system rather than production as a series of separate, discrete, and independent events. But so have a good many nonmanufacturing businesses, e.g., some leading-edge hospitals.

I think the model is still the one that is a hundred years old. In his 1912 testimony before the U.S. Congress, Frederick W. Taylor said that the Mayo Clinic was the one example of systematic scientific management. It probably still is. And what Taylor meant is that the Mayo Clinic succeeded in having a team of 10 exceedingly highly qualified specialists work together under a leadership defined by the individual patient's needs -- but work together in an organized and systematic process. That is still what the Mayo Clinic does. I know of no other business that yet has come remotely close to this example of production as a process.

IW: Many management experts suggest that Taylor's theories are no longer valid. Please explain.

Drucker: Contrary to what they may say, manufacturing is still totally based on Taylor. Deming's Total Quality Management, for example, is pure Taylor -- and runs exactly the same autocratic top-down way Taylor ran his Scientific Management. However, in respect to knowledge work and the knowledge worker we need to know what Taylor did in respect to manual work and the manual worker more than a hundred years ago. We know that it has to be quite different and even know in what respect: All work on the productivity of manual work asks how should the work be done. It never asks what should the task be. And that question must be the starting point of any work on the productivity of the knowledge worker.

By the way, the people who say that Taylor has ceased to be valid have never read him. They do, for instance, credit him with the invention of mass production -- and a) that came only during World War I after his death; and b) he was violently opposed to its basic principles when they were first being discussed around 1914.

IW: Are these theories of production valid descriptions of the approach manufacturers in other regions of the world have been following during the same time periods?

Drucker: Geography has little to do with this. In all periods for the last, oh, make it 150 years, a small group of enterprises have been pioneers -- and in all countries. In the 1830s a German manufacturer, the first non-British firm to build locomotives, invented apprenticeship. Henry Ford copied it almost a hundred years later. But when Ford invented mass production in the early years of this century, it was adopted rapidly by a few companies both in Europe and Japan.

It is industries rather than countries that change. In that sense, geography is not the main determinant. In an industry, one company changes and achieves major competitive advantage. Others in the same industry then follow. . . . For example, 80% or so of Japanese industries are still woefully backward, woefully antiquated, and totally noncompetitive. They have been shielded from competition. But the 20% that are in the world economy are quite different. . . .

The industry that has applied principles of production the most is the pharmaceutical industry. There are several reasons. One, all along it was way ahead of the traditional mechanical mass-production industries. It did not begin, after all, until well after World War II. And from the beginning it was not focused primarily on making things but on inventing things; that is, research on the one hand and marketing on the other. And it did not market goods, even though it sold goods and got paid for them. It marketed therapies -- concepts.

At the same time, the world's construction-equipment industry has been forced to change dramatically simply because it has been forced to start out with what the customer pays for, which is not equipment but the uninterrupted use of equipment. It has been forced to become a service industry in which manufacturing has been redefined as the support of service rather than as making goods. . . .

Altogether, the greatest impact on manufacturing industries has been that the power has shifted to distributors and retailers. And that, in turn, is forcing the makers of things to change and become suppliers of services. It is not that the service industries are becoming like manufacturing industries, though they are. The real change is that more and more the so-called manufacturing industries are redefining themselves as service in which the profit center is a service -- making things is a cost center.

The Human Dimension

IW: In your work you talk about how human-resource management has changed. How is that reflected in the New Manufacturing?

Drucker: The change is not primarily a change in technology. It is primarily a change in social organization. The mass-production revolution, on which most manufacturing has been based until now, considered the human being as servant to the machine and totally controlled by it. It also was based on the assumption that the machine produces while the human being is unskilled and basically programmed by the machine.

Increasingly, machines are tools to the human being. Increasingly, the human being does not work in mass production but in what might be called "team production." And that means that increasingly the producing human being is a knowledge worker. Workers, as they did before the Industrial Revolution, own the means of production. The means is between their ears. They can take it with them whenever they leave -- and increasingly workers know that, and therefore have mobility. They are, in fact, not employees but paid volunteers. This [implies] a totally new social organization.

Also, more and more of the so-called production is not necessarily done under the same roof, within a factory. It is being outsourced; it is done by temps; it is done by people who work on contract, whether full-time or part-time; it is done by people who work at home.

The social organization of the traditional factory assumed a homogeneous mass of anonymous workers who needed the jobs far more than the jobs needed them. The new production must assume a highly diverse work population, wherein workers are needed more by the production process than they need the jobs. And instead of one system of organizing people for production, we will have an enormous amount of diversity -- teams are just one example.

IW: What do you see as the future of teams: on the factory floor, in management, in traditional white-collar functions?

Drucker: I am always amazed that nobody seems to realize that teams have totally failed where everybody thought they would be most needed and most effective: in the top management job. Never before in many decades have we had such an extreme cult of personality and such extreme absence of teamwork as in the top management job. We are now going for the single and almost absolute monarch -- the Bill Gateses or Jack Welches -- with a concentration of power and visibility in one person that has never been seen before, at least not since the 1920s. . . .

As regards teamwork further down, the record is mixed. I probably was the first advocate of teams -- going back to 1953, when the very term was unknown. But what we have now is largely a misunderstanding. It is based on the belief that there is only one kind of team -- and that's the most difficult one, what I would call the "jazz combo" team. In fact, there are at least three and probably six or seven different kinds of teams. And each of them has its strengths, and each of them has its limitations. We are already beginning to see a backlash against teams as the latest fad. It will take another 10 or 15 years for us to learn to use teams properly.

The now-fashionable team in which everybody works with everybody on everything from the beginning rapidly is becoming a disappointment. It takes years to develop such a team and to make it work. And there are very real problems. The biggest of them is to whom the individual team member is accountable. Here is the engineer who is made a member of a team. Who is his boss? The head of engineering? Or the head of the team? Who appraises his or her performance? Who decides on his or her performance? On his or her compensation? These are not trivial problems. They go to the very heart of the organization. They can be resolved. They need to be resolved. We do need teams . . . for the simple reason that more and more of the people in the workforce are high-grade specialists. And specialized knowledge contributes only in teamwork with other specialists, with their specialized knowledge. . . .

IW: What will be the biggest change in the world of work as we move toward the knowledge era?

Drucker: That in every organization we will have to be able to be organized for three different tasks.

We need hierarchy. To talk of the death of hierarchy is nonsense. In a crisis there has to be somebody who makes the final decision. If the ship goes down, the captain does not call a meeting. He gives an order -- or everybody else perishes. You have to know who the person is, who has the right to be obeyed. This will become more important rather than less important as we enter a period of rapid change.

But then the same person also will have to act as a team leader . . . and in other situations will have to act as a team member and partner.

These are three different functions to be discharged by the same person as the situation demands it. And so far I know very few people who have learned which role they play, and how to play it, and under what conditions. Equally rare are the people who realize that it is their job to make it clear to their associates what role they are playing in a different and given situation. . . .

IW: How does production manage the workforce as it moves beyond the walls of its organization to form as-needed partnerships for strategic purposes?

Drucker: The key is the word "partnership." These are partners. And all partners are equal no matter how much money they have and how big they are. . . . One does not begin with the question "What do I want?" and then "How do I persuade these people?" One begins with the question "What do they want?" and "How can this be made to fit into our common purpose?"

The Outside World

IW: Do you agree with our basic assumption that there's been phenomenal growth in the presence of government, both U.S. and internationally, in the last half of the 20th century?

Drucker: Absolutely. The idea that government is shrinking is pure delusion. The more we have privatized, that is, moved out of government being the "owner," the more we have moved into government being the "regulator." And the trend is still accelerating.

One of my oldest complaints is that executives do not understand how government and the political system work. They believe in lobbying -- and that's stupid. If you have to lobby, it only proves that you have not done your homework. The few executives and the few businesses that have tried to understand the values of a political system and of a political elite don't need to lobby. They see government as a market, and it is their job to understand the market and to satisfy it.

IW: Lately, there has been a movement in some nations to reduce the role of government. What do you foresee in the first part of the 21st century -- a still greater role in corporate affairs, or less?

Drucker: What nation are you talking about -- China? Even there the shift is not toward reducing the role of government, but toward changing it from ownership to regulation. Ownership has been proven to be a very poor way to control the economy. It makes for a nonperforming economy. It also makes for government being controlled by industry. Privatization strengthens government. It does not reduce its role. It increases it. It frees it from having to worry about keeping people employed and managing them; about financing a business; about making it profitable (which government-owned industries rarely are). It enables government, therefore, to control and to regulate business and industry. Privatization is not a movement toward reduced government. . . .

We have learned that the Marxist idea that government controls by ownership has been proven to be as much of a misunderstanding as most of the rest of Marxism. We are now learning -- Hitler learned it long ago, all of 70 years ago, in fact -- that the most effective way to control industry is not by owning it, but by regulating it. And this is what all governments are doing.

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