Unlocking the Hidden Factory

A “Hidden Factory” forms when a defect flows downstream. When the defect is caught, a workaround is created as it is removed from the line, fixed, and placed back on the line. This may solve the problem in the short term, but when you do the same thing over and over again, the workarounds add up, and a hidden factory ultimately develops.

A hidden factory is rarely the result of one problem in a process–if this were the case, it would be easy to solve. Rather, it is usually caused by multiple problems in a mixed system that must be solved at the same time.

If a product goes through a hidden factory, it not only costs more to produce, but also decreases the value that the customer receives. The Hidden Factory creates a long, slow feedback loop when you would rather have shorter, smaller ones.

A sure sign that hidden factories are appearing is when inventory or WIP begins stopping because the system can’t keep up with demand–just like in this famous clip from the show I Love Lucy, when Lucy and Ethel can’t wrap the chocolate quickly enough and must deal with additional chocolate as it comes down the line.

Ironically, when we ask people to work faster as demand rises, the work actually slows down because the amount of inventory that diverts into the hidden factory increases.

You can solve or reduce a hidden factory by shortening the feedback loops within it. In order to reduce the hidden factory, you need a system in place to quickly identify what needs to be fixed and how to fix it quickly.

A few specific approaches to fixing hidden factories include:

Engage as many employees as possible. From the top of the company, Executives need to be involved in this work. They can provide necessary investment and properly measure outcomes. But strong leadership is not enough. Because hidden factories tend to be dispersed across many parts of a system, crafting an effective solution requires engagement with a large swath of a company. Importantly, when searching for hidden factories employees should focus on how time, not cost, is spent.

Focus on risk, not productivity. There is a conventional view of risk and productivity as tightly coupled: greater productivity implies greater risk, and vice versa. This is based on the assumption that the system is operating at its ‘efficient frontier,’ which is rarely the case. If you tackle risk in the right way — addressing the parts of a system that are overtaxed — then you can reduce the risk while increasing productivity. Hidden factories left untended, meanwhile, are both unproductive and unsafe.

Invest in the system, not new technology. Technology can, of course, help to shrink hidden factories, but at its root this problem is about culture and information, not technology. Before anything else, knots in the system must be worked out, and the informational gaps that led to those knots repaired. New technologies or algorithms can’t help if the system and the culture it has nurtured remain broken.

Look for duct tape, clamps … and spreadsheets. The hidden factory has its own set of tools – of the “get-'er-done” variety. In operations, it consists of duct tape, C-clamps, crescent wrenches, and the ratchet extension that someone bent using a blowtorch. In the office, the major culprit is the spreadsheet, where work that falls outside the workflow application — be it Jira or an SAP or Salesforce application — is funneled into the hidden factory of office work. This hidden work is then protected from detection by PowerPoint waterfall diagrams, meticulously prepared to smooth out any disturbing information that would be useful for addressing the factors behind the formation of the hidden factory.

Encourage open communication. Workarounds and quick fixes are unavoidable. Building a system free of defects would be prohibitively expensive, if not impossible. The key is to have rapid and routine feedback when workarounds occur, and to then respond accordingly. To this end, open and honest communication is essential. If you have a culture where employees are expected to report only good news to senior leadership, then they’ll just filter out information that they think they shouldn’t share. To paraphrase W. Edwards Deming, “You’ve just created the perfect system to institutionalize hidden factories.”

To maintain a competitive edge, manufacturers must constantly find ways to cut costs and improve efficiency. Hidden factories are actually good things because they are the system’s way of telling you where to focus. Correcting your systems by finding and eliminating the root causes of rework will result in a much smoother workflow. This will translate directly to bottom line improvements.