Whenever speaking about a particular organization or management issue, people often use the term “hidden factory”. This phrase is used to describe activities or processes within an organization which cause activities decrease, quality drops, and prices getting higher. For example, the company has to spend more time on creating a certain product than required simply because employees do not know how to use a particular technology. As a result, the company loses time and money because it has to hire new people who would be able to use the technology. As a consequence, the initial price of the product increases because there were more efforts put into it, so hidden factory has a huge influence on the financial side of the businesses. It changes financial activities of the organizations allowing them to double prices which is a risky business caused by ineffective tools or techniques.
Hidden factories often go unnoticed by higher management because they are caused and take place within specific sectors of an organization.
For instance, there may be particular problems within production segment of a company, and that causes further complications for the entire business cycle. As a result, the company ends up spending more time on a product without understanding the reasons for such a change of plan (“What is hidden factory?”, n.d.). In order to make up to the losses, managers often decide to increase the final costs of a finished product as a way to make more money and keep the production running. The consequences of such decisions are not good for the company because it may lose the customers and competitive advantage, keep on repeating the same mistake again, getting unfavourable reputation, and decreasing the quality of the product and performance.
When speaking about hidden factories, experts often relate this issue to waste. It means that a hidden factory often results from wasteful strategies such as wasting time, money, or resources. In order to stop hidden factory from taking over the entire organization, it is important to understand the roots of the waste within it. The managers have to see the wasteful segments of a company in order to determine why they are such, and how this waste can be reduced or stopped. For instance, waste can be a low motivation of employees which causes slow production processes or low product quality. This is an initial reason for hidden factory to exist. In this situation, managers have to be the ones to put a stop to the waste in order to eliminate hidden factory. They have to motivate or encourage employees by communicating with them or improving work conditions which would lead to better performance and higher responsibility levels so the employees will perform in a better way and faster.
Another reason for hidden factories may be low professional qualifications of the employees that cause the production processes to slow down or make products worse. Also, technological imperfections, market shifts, or changes of attitudes among customers often lead to hidden factories.
Although prices increase looks like an effective tool for various managers when it comes to cost compensations, it is not a good decision for the company because it may lead to further complications in the future. For instance, there are new tools being bought for the company in order to create the product. Instead of training the existing employees, the company hires new ones doubling the salaries and increasing the spending on the product. As a result, the company loses money, and it also loses time for searching and finding new employees. The older employees, on the other hand, have nothing to do because their job is performed by others. Still, they cannot be fired because they are experts in other fields. This way, the company ends up having a double amount of employees who need double amount of salaries. It also spends more time than expected in order to create a specific product, and it ends up with higher prices. At that time, many managers view it as an only logical decision because the company still has to sell a product in order to keep on running and working. The organization must deal with an issue of hidden factory later on training the existing employees to be able to perform all of the needed functions without hiring new workers and doubling the prices, but that is something an organization can do only after selling the first part of the products. Thus, a hidden factory is something that may affect a company which is unprepared and has to deal with negative and unexpected issues quickly.
Hence, as it was mentioned before, the company still manages to survive by increasing the costs. Later on, it can reduce them by training employees and preventing possible complications from happening. Nevertheless, in this situation, it is important to say that the consequences of the hidden factory will still impact an organization at least at the initial stage. After the price increase, customers may get very unsatisfied to the point they will no longer buy/use the products or services the company creates. Hence, the company will end up losing some of its clients, and may also receive a negative reputation in the business circles. People may go buying to the competitors who sell the same or similar products with a lower price, or whose products/services cost the same, but provide customers with a higher quality. Some people may want to rebel against price increase just out of their principles. It means they take price increases to the personal level refusing to buy anything from a specific company simply because of its price policy. Such customers may not return to the company even when the prices drop choosing a new organization. These risks of losing people are the most important and threatening for the company that encountered hidden factory issues. They have to be taken into consideration while determining the company’s strategy and the future. Thus, instead of working on finding new customers, the company will have to fight for the existing ones in order to keep them buying from it.
Hidden factory is a serious problem for the modern businesses which becomes even more threatening in a globalized world with various economies and companies competing with each other. In the United States, for instance, the overhead value which is directly linked to hidden factories is increasing every year. First of all, the overall manufacturing costs are increasing due to currency change, economic development, and technological improvements. Nevertheless, with these increases, the same happens to overhead prices. The hidden factories add another extra to already high prices, and that causes doubling costs.
This chart has been created by Jeffrey J. Miller and Thomas E. Vollmann in 1985, and it shows the constant increase of overhead value.
While the direct labour has been decreasing due to various factors such as improvements in technological processes in production, overhead value has played a big role in increasing the general prices of different products and services (Miller, & Vollmann, 1985). While the chart is almost thirty years old, one can say that the situation nowadays is similar one with overhead value and hidden factory increasing the prices and making customers pay double or triple from what they should.
The hidden factory usually takes place between inputs and operation processes during the production. At that time, it is quite easy to make mistakes or wrong calculations which lead to hidden factory. As a result, the process has to be redone or started again from scratch, and that causes extra time, money, and more people being involved.
When it comes to industrial sector, one can say that there are many threats of hidden factories. For instance, when it comes to construction businesses, there is always a risk of buying overprices materials because of inefficient planning, and that increases the overall cost of the entire object. As a result, the business has to pay more on production, and it increases the spending. That is why the company has to increase its prices in order to make the same profit.
The problems may arise when a company does not hire professionals, but instead people who lack professional characteristics and work slower and with lower quality. They take more time and it means paying more money which leads to hidden factory and the same negative results as with a previous example.
When it comes to service sector, it is also not secure from hidden factory threats. Service sector such as the one involved in transport may suffer from hidden factory greatly. In case the company plans its routes well, buys necessary transportation machines, hires professionals, and gets all of the permits, it still can end up increasing prices simply because it may have to deal with gas issues or low amount of travellers using its service. The biggest threat for service sector companies is the necessity to deal with changes that come up constantly and which have to be taken into consideration. In this situation, a company has to have a plan in advance in order to avoid overhead prices and keep the existing customers satisfied as well as attract new ones.
In order to avoid hidden factory, managers have to plan in advance (Sprunck, 2013). They may use efficiency quantifiers in order to calculate possible profits, losses, and strategy. The manager has to calculate availability, performance, and quality; and he or she also has to take loading into consideration (Lichtenberg, n.d.). This way, the manager can calculate the desirable profit, possible losses, and determine the strategies to meet the profits and avoid the losses.
This report has shown that hidden factory had a strong negative effect on the businesses both short-term and long-term. It influences businesses for long periods of time because they have to deal with the hidden factories consequences. For instance, if there was a miscalculation or waste within a company, the organization needed not only to stop the waste immediately, but also analyse its causes and deal with them preventing the waste from ever happening again. It is a complicated process because in many situations, companies had to change the entire production processes establishing new rules and working on preventing waste from.
The company has to understand that hidden company is not merely a cost increase. It leads to unhappy clients and loss of perspective customers. It also leads to dissatisfaction of employees with their jobs. Even more, hidden factory may lead to serious problems in the production circle, and it may also affect the general financial situation of the company to such an extent that it will no longer be able to function. Even worse, it may lead to government and official sanctions. Hence, every manager has to have various back-up plans and options to reduce waste whenever the company is not functioning the way it should be in order to avoid hidden factory and negative consequences it causes.