PRODUCTION/OPERATIONS MANAGEMENTKEONG LEONG, Feature Editor, Fisher
College of Business, Observations on manufacturing management in Siberia*by Peter William Stonebraker, Northeastern Illinois University Alexander Arcentovich Lobut and Sergei Nicholaevich Polbitsyn Urals State Pedagogic University The end of the Cold War opened many opportunities for exchange between Russia and the West, particularly in the areas of manufacturing and distribution. As Russia moves toward a Western-style market economy it is interesting to see the impact on an area like Ekaterinburg (during the Soviet period, Sverdlovsk), formerly a closed city and a center of heavy industry in Western Siberia. This article describes current manufacturing conditions in Ekaterinburg from a Western perspective and offers several key, but less understood, strengths of Russian manufacturing and distribution methods. There is a certain irony that the first co-author, a teacher from Chicago and former army intelligence and nuclear officer, is now teaching a production operations management course at several universities in Ekaterinburg. This city, like Chicago, the third largest in the country, is historically an industrial center and a key distribution link. The following description of the industrial history and various manufacturing management topics is based on discussions and an interview questionnaire with 25 presidents or vice-presidents for operations of manufacturing and service firms in the Ekaterinburg area, a region that was closed to Western visitors less than four years ago. A key, and unresolved, issue of this paper is that it describes what the research team was permitted to see by responses to requests to major companies. Some high-technology industry may not have been included here because of continued defense- or military-related production. Ekaterinburg resembles Chicago in many ways, both positive and negative. Rural residents in the area quickly note that Ekaterinburg has a crime problem and reference is made to the Chicago gangster, Al Capone. After Moscow and St. Petersburg, Ekaterinburg is the largest educational center in Russia, with some 20 major public universities and numerous private schools. Additionally, the Sverdlovsk region, roughly 200 miles by 400 miles (75,000 square miles) in the central Urals, has a long history as an industrial and distribution center. INDUSTRIAL HISTORY OF THE SVERDLOVSK REGION The extensive resources (various minerals, gems, and timber) drew interest to the region in the late 1600s. From that time, serfs, run-away serfs, prisoners (both criminal and political) were used for low-cost labor in mining and metal-working industries. However, the major expansion of the city occurred in the early days of World War II, when much of the industrial, research, and academic activities of the Leningrad (now St. Petersburg) area and several other western Russian cities were evacuated behind the Urals to protect them from advancing German forces. With the onset of the Cold War and until 1991, the area was closed to Westerners. Railroad passenger cars on the trans-Siberian express were locked and windows shuttered as Western visitors crossed the region. Because of the advanced chemical and metallurgical industries, the region became the center of the Soviet defense and space production, and thus of interest to foreign intelligence services. In 1960, the American pilot, Francis Gary Powers, was shot down about ten miles east of the city by missiles manufactured locally. Salaries in most businesses (contrary to an otherwise egalitarian Soviet standard) were some 20% higher due to the importance of the work here. The city gradually opened to Westerners in late 1991 and 1992. An American consulate and information service office were established in 1993. Today, though there are few constraints on travel, the region is struggling with the effects of this new, and not-fully-understood, openness. Significant reductions of military production have resulted in a major reallocation of resources, perhaps amounting to two to three times the corresponding impact on similar military-supported areas in the U.S. The transition is more difficult because the area was closed, limiting travel by residents and Westerners alike. Though some of the newness has worn off, strangers still want to shake hands and welcome Western visitors to their city. Similarly, there is little familiarity with, or preparation for, the notions of individuality and entrepreneurship. Waitresses become angry and refuse tips because of a long tradition of viewing the acceptance of tips from Westerners as a bribe, once a punishable offense. Additionally, there has never really been a democratic tradition in this area; historically, forced labor and harsh conditions were a way of life. CURRENT MANUFACTURING PRACTICES IN SVERDLOVSK Western manufacturing practices are often defined as a series of activities and decisions about such topics as strategy formulation, forecasting, scheduling, equipment and maintenance, human resources, quality control, and continuous improvement. These criteria are used here to describe Russian manufacturing practices, followed by a commentary on several more relevant and appropriate Russian criteria. Business Strategy During the Soviet period, factory and commercial directors and state administrators received their component of the national plan from the central state planning agency, or GOSPLAN, under a system of directive planning. That plan provided guidance for various short-, mid-, and long-term periods to integrate the national economy, using methods pioneered by Vassily Leontief. The management job was to accomplish the plan, in fact or on paper. Managers often tried to decrease their plans or force the increase of others. Many managers of that era complained of freight cars and entire train loads that were documented as containing various goods, but which in fact were shipped empty. Today, as one corporate president noted, managers must formulate their own business plan in an environment of rather high turbulence and uncertainty. For example, manufacturers of pharmaceuticals were significantly affected by a tax on alcohol in 1993. That tax, intended to discourage alcoholism, was sufficient to make production of all alcohol-based products infeasible. After several months of complaints from many public and private sectors, the tax was abandoned. Most managers, particularly those whose businesses have survived, have a clear intuitive sense of their business strategy. Often this strategy involves multiple and unrelated businesses (construction and candy distribution; aluminum molding, furniture manufacture and distribution, and gasoline distribution; and toy distribution, automobile hubcap manufacture, pipe distribution, and jewelry manufacture are several specific examples). Roughly one-third of the firms in our sample have carefully prepared working drafts of their business plans, though these efforts may be designed primarily to encourage capital investment. Forecasting Only two of the firms interviewed had a published forecast, and those forecasts were not developed as part of a systematic forecasting process, rather they were forecasts for a single product, at best, judgmental estimates and probably a residue of Soviet-period planning processes. Those "forecasts," to date for 1995, were in error by 400% and 30%, the latter in an extremely stable sector of business. Many executives scoffed at the idea of preparing a forecast, and were even more amused with the concept of long-, mid-, and short-range forecasts. Factors such as the instability of the ruble, changing government regulations, particularly taxation, and the changing availability of raw materials and components make forecasting irrelevant in the opinion of most executives. The only interest shown in forecasting topics came from executives who work for former and presently state-owned activities, where some residual bureaucracy may be sufficiently powerful to minimize the effects of environmental turbulence. The area of power and heat generation appeared to be particularly stable and, alone in the sample, was amenable to planning methods of forecasting. Scheduling of Resources Labor is currently in surplus, and most people want work; thus labor scheduling is not a problem. However, materials and component parts are a scheduling problem, primarily because of the lack of ability to pay. The strategy of most businesses is to hold as much raw materials and key components as they can pay for. With the depreciating ruble, resources hold their value better than currency. Many sources for required materials dried up or became uneconomical in the ``post-break-up'' period. One company reported that the most economical way to import computers from its Austrian distribution center was to convert currencies (from rubles to dollars to marks) through a Singapore bank. Sporadic shortages along the entire supply chain have caused a secondary, dealer-to-dealer market to develop in many commodities. This supplemental flow is important because the exchanges in some commodities are not yet organized. Some companies use barter as a means to resolve payments; a large state-managed company, for example, used barter as a means of resolving as much as 70% of its payments due and collectibles. The key to resource management is the ability to pay; many suppliers are short of cash and the terms of delivery are usually payment in full within 20 working days. Equipment and Maintenance Most production equipment is either imported or produced here using designs from abroad (either under license or sometimes not). Many durable goods, such as automobiles and refrigerators, bear distinct similarities to Western or Japanese designs. The production equipment is generally old and labor-intense. With the exception of former state or defense industries, most businesses do not have robotics or computer-controlled machines. Maintenance is generally done only when the equipment breaks down, though the maintenance necessary for such old equipment is impressive. A Parkinson lathe, received by an engine manufacturing company in 1932 under the U.S. lend-lease program, is still preferred for many operations over the more recent Russian, Belgian, French, and German computer-controlled equipment. Locally manufactured replacement parts for automobiles and industrial equipment are used to extend equipment that today is obsolete in the West. With the exception of a few computer-controlled machines, information systems, an engine building plant, and a power plant, computers are only used for some accounting functions, and often only because they are required for some government mandated tax programs. Human Resources Management In many businesses, people can not presently be fired because of very high welfare program expenses. However, many workers, primarily those of former military and industrial plants, are owed back pay (three to six months), and in some cases, those workers are offered ownership of the company instead of cash. State-supported training programs teach unemployed persons various job-retraining skills such as computer programming and software systems services; but there is little effort to match prior education and background. Little corporate training exists because businesses expect a significant downsizing in the currently labor-intense operations when changes in the law make it financially feasible. Many assembly operations that would be mechanized in the West are manual here because of the need for jobs and the availability of low-cost labor. Additionally, manual operations are preferred because component variances are sufficiently high that assembly machines would jam too frequently for mechanized processes to be economical. Safety rules are often ignored. For example, visitors and employees are permitted in high noise areas without protection (the explanation was that the exposure was of short duration, and thus permissible). Numerous violations of local, as well as American, safety and health policies were observed. A woman manually placed parts on a stamping machine activated by a single foot pedal with no protection for her hands except, according to the supervisor, her head. Published newspaper data from the Ministry of Critical Situations reported that there were 1159 ``technical'' accidents with 1734 deaths and 3549 injuries in Russia during 1994, but that data is not analogous to compiled Western data. Pay averages $45 to $65 (4800R = $1) per month for high skill workers in various industries, though one industry reported a $110 per month average. This means that a family generally must have at least two incomes to cover minimal living expenses (approximately $80/month). Benefits often include free meals at work because both employer and employee get tax reductions. Medical care is usually paid by the employee, and employees usually can buy company products at cost. Because of the deflation of the ruble, government retirement plans have little value (a retired 50-year employee gets $29 per month), and there is an active market to turn personal savings into dollars. This has created several lost generations, those of recent retirees and of 35- to 50-year-olds who were well trained during the Soviet period in skills that are no longer appropriately rewarded. There are many examples of people with an advanced technical education who can not find jobs in their fields. Quality Control Quality is the responsibility of workers, not supervisors, and is achieved intuitively. On-line quality measurement was performed only in former state and defense businesses, and proactive statistical process control was not observed. In several instances technical quality assessment was conducted off-line in laboratories with old and generalized equipment. The alignment of colors in a multi-color printing process deviated by as much as 3/16ths of an inch, but the designs were prepared to accommodate such deviations, and the product appeal was not affected. Small engines were run for a surprisingly long 20 hours each as part of the break-in process. Diagnostic equipment was used and the plant supervisor suggested an ``if it will run for 20 hours, it's OK'' strategy. Small details are sometimes ignored. For example, because many labels are manually glued to bottles, they are not precisely aligned. Thus, little concern is given to exactness of machine label-glueing operations. Continuous Improvement The term ``continuous improvement'' is really not understood here. The one exception appears to be in the area of quality, where small entrepreneurial firms are developing improvement programs. Generally, workers and managers pursue a strategy of maintaining and stabilizing existing operations processes. New product models and production technologies are not encouraged because of the turbulent economic conditions. In fact, the introduction of a new forklift model in 1993 failed because of overly optimistic forecasts and significant price changes. THE STRENGTHS OF RUSSIAN MANUFACTURING MANAGEMENT In summary, Russian manufacturing processes would appear, by these Western criteria, to be very limited. By each of these measures, operations observed evidenced what Western management would call þshortfallsþ; yet these operations are, in many regards, superior to those of the Third World. Of all the plants and facilities, only the power and heat generation plant was superior in many regards to corresponding American facilities. Yet, such a summary does not do justice to some very excellent attributes of Russian manufacturing practices. Initially, it must be noted that the present political, economic and cultural conditions in Russia do not favor manufacturing. Politicians, bankers, and, in fact, all Russians, are gradually learning to understand and operate in open political and market systems. As one director of a large manufacturing corporation noted, ``This is not the time for producers, it is the time for speculators.'' However, as the methods of open systems become better understood, and the Sverdlovsk area adapts those methods to function here, several little-understood and very significant factors will contribute enormously to industrial growth. Russian labor is among the most professional in the world, and is certainly a low cost resource. Most companies that were visited had an average labor tenure of some 20 years or more, and all indications pointed to a highly skilled, capable, and disciplined labor force, though in some areas (computer and information system skills) training is necessary. This city, as the gateway to Siberia, is a ``melting pot'' of peoples and ideas; it has historically shown tremendous resilience and is expected to continue to do so. Business at all levels--from top management to work teams--is accomplished through friendships, relationships, and teamwork in ways that would be impossible elsewhere. Because of the previously insular nature of this area, most directors have contacts that are best described as life-long friendships. These relationships facilitate most business dealings. Supply of scarce resources, required training and equipment maintenance, and new business contacts are all based on such personal relationships. ``To do business in Russia, and particularly in the Sverdlovsk area, you must become friends first.'' The developing open markets have spawned a new breed of hungry and hard-working managers, some of whom have traveled to the West and understand intuitively, though not academically, the functioning of Western markets and the competitive requirements for Russia to enter those markets. These individuals are highly interested in American operational methods and education systems. Simultaneously, many small firms are emerging to support local industry. These firms will be the basis for the majority of long-term growth in the area. The area has huge unexploited resources, including timber, mineral wealth, and semi-precious gems. These resources are readily available at low costs. Most goods are light in weight and readily amenable to added-value types of activities; for example, aluminum automobile replacement parts or jewelry may be readily manufactured and shipped to Western markets. Shipment of heavier goods, such as lumber, might currently be cost prohibitive, but the manufacture of competitive wooden furniture for local consumption and export is presently under development. The transition from a planned to a market economy and from military to civilian production is well underway. The extent of this transition is perhaps best represented by the fact that five years ago 90% of local production was military; today that number is approximately 40%. After an initial influx of foreign consumer goods in 1993 and 1994, Russian consumer goods from smaller companies appear to be entering local markets with comparable quality and notably lower costs. Like a Phoenix that is reborn from its ashes, the area is in the process of being reborn. For the first time in its history, the area has a chance to develop a democratic society. Skilled workers and managers can intervene in ways that move this area toward Western markets using Western methods. Given a sufficiently stable ruble, an improved infrastructure, political and administrative certainty, particularly of taxes and government regulations, and the resulting foreign investment, this area has the economic and industrial potential of post-WW II Germany or Japan.
Peter W. Stonebraker is an Associate Professor of Operations Management at Northeastern Illinois University. He earned his doctorate in 1981 at Arizona State University and has served on the faculties of Boston University and DePaul University. He is the author of four books, including Operations Strategy: Focusing Competitive Excellence (with Keong Leong of Ohio State University) and over fifty journal articles. He was the winner of the Decision Sciences Institute's Innovative Instructional Award in 1989. Alexander Arcentovich Lobut is the Dean of the Economics Faculty of Urals State Pedagogic University in Ekaterinburg, Russia. He holds the degree of Candidate of Science in Economics, and has punctuated a thirty-year teaching career with progressive committee and professional assignments at regional and national levels of the Soviet and Russian academic organization. Professor Lobut is the author of over 35 articles and professional presentations. Sergei Nicholaevich Polbitsyn is the Associate Dean of the Economics Faculty of Urals State Pedagogic University in Ekaterinburg, Russia. He holds the degree of Candidate of Science in Economics, and has published numerous articles, research papers, and theses. Prior to becoming an educator, he served for ten years in industrial and commercial positions as the Director of the State Committee for Forest Industries, and as the Marketing Director for several state and private firms. *The authors would like to express their appreciation for support in this project from the United States Information Service, the Soros Foundation, Northeastern Illinois University, Urals State Pedagogic University, and Urals State Vocational Pedagogical University.
Dr. G. Keong Leong
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