Please read the case study and answer questions.

How was "resistance to change" managed?

What do you think Zobrist and Verlent should do now to respond to the three challenges at the end of the case?

Selected Cases The Evolution of Mini-Factories at FAVI*

FAVI is a small automotive parts manufacturer in Hallencourt, France. In addition to other products, it is the European leader in the production of key components for gearboxes (manual transmissions) in such cars as Renault, Peugeot, Citroen, Fiat, Opel, Audi, Volvo, and Volkswagen. Employing about 400 people, this socit anonyme (public limited company) was founded in 1957 and is part of the AFICA Group, which purchased FAVI in 1971.

FAVI has been a consistent performer with profitability ratios exceeding 15 percent over the last 25 years. In 2010, FAVI generated sales of more than 75.5 million, 32 percent from export markets. Sales to the industrial sector account for about 13 percent of revenues and 5 percent of sales come from the high-performance electric engine rotor market. Today, FAVI generates 80 percent of its sales through the automotive sector.

FAVI's central purpose is unusual: to remain in operation in Hallencourt and protect jobs in the local area. While most of its competitors moved operations to low cost labor regions, the quality of the company's products, its specialist skills, and its competitiveness explains most of its success. Except for rising raw materials costs, FAVI has not increased its prices since 1995.

FAVI's innovation strategy has three axes: products, processes, and organization. Product innovation has been an important part of FAVI's history. After World War II, FAVI sold washbasin siphons before moving into water meters, for which there was huge demand at a time when the construction industry was booming. In the 1970s, Asian competition in these markets forced FAVI to identify new opportunities. It developed a brass gearbox fork for the European automotive industry. This new product guaranteed continued growth for FAVI from 1989 to the present, with the workforce expanding from 140 to 440 employees at its height.

FAVI also competes through continuous improvement. It achieved ISO 9001-2000 and after becoming the first European foundry to gain ISO 14001 certification in 2000, FAVI also became the first French company to obtain OHSAS 18001 health and safety at work certification. In 2008, FAVI was the first European foundry to obtain ILO OSH 2001 certification and in 2010 the company was awarded the Peugeot Quality Trophy. Today, FAVI is working to reduce its carbon footprint and extend its advantages in this realm.

Finally, FAVI competes through work organization innovation. Over the years, FAVI has introduced and implemented a series of changes in its production management and work system called "mini-factories."

A Changing Work System

The seeds of a new way of working began in 1989. FAVI's new technical director, Jean-Franois Zobrist, who would go on to become FAVI's president, became worried about the way the company functioned. He believed that FAVI was too mechanistic in its operations and people management. A traditional organizational approach, complete with technical directors, foremen, team leaders, workers, and an array of support functions, was overly focused on the internal functioning of the enterprise rather than the needs of the customer. FAVI's capacity for responding to customer demands ranged from poor to nonexistent. For example, salespeople had to wait weeks before the design office, a team responsible for scheduling and capacity planning, informed them whether it was possible to fulfill an order. Support function processes slowed the system down rather than adding value. Workers received messages of distrust, job insecurity, and reward akin to piece work. An advocate of Douglas McGregor's "Theory Y," which proposed that people are innately good and enjoy working, Zobrist wanted to establish individual autonomy and trust between operators and managers.

At the same time, Peugeot placed a large order for FAVI's gearbox forks, which would eventually account for 20 percent of sales in 1989. But how should this order be managed? Should successive eight-hour shifts be organized to keep the factory running around the clock? Should the foundry be enlarged? Should additional foremen be hired? Zobrist decided to create a specialized and autonomous unit dedicated to the Peugeot contract so that it could respond to the customer's needs without interfering with other production processes. The concept of the mini-factory was born.

During the initial implementation phase, between 1989 and 1996, FAVI's introduction of the mini-factory system and the values that it represented was accompanied by a new organizational vocabulary. "Teams" became "mini-factories," "workers" became "operators," and "supervisors" became "leaders." The values Zobrist imposed involved an unconditional focus on customer service, being autonomous and responsible, trusting operators to maintain high quality standards, a commitment to continuous improvement, and keeping the company's prosperity top of mind. Responsibility for production, planning, investment, and HR functions was decentralized to the teams. Sales, procurement, quality control, and maintenance remained centralized. Over the next few years, new mini-factories were set up as contracts were obtained.

Managers from the decentralized functions were generally opposed to the change. Zobrist insisted that they become experts in their functions and work with mini-factory leaders as advisors. If managers who preferred a traditional hierarchical system wanted to stay at FAVI, they had to become experts in a support function. Meanwhile, those who rejected the system were invited to leave the company.

Training programs for operators and leaders supported the implementation of the new system. They emphasized safety, operating digitally controlled equipment, market-driven product design concepts, and total quality management. A large number of meetings between mini-factories and their customers also were held at Hallencourt or on client sites to familiarize each partner with the other's operations. FAVI organized annual study trips to Japan, Poland, and Latin America for around 20 salespeople, leaders, and operators to discover how successful foreign firms work. Conferences, training sessions, and visits to trade shows and enterprises were regularly organized to "bring the outside inside" and find new ideas to increase productivity, improve quality, and unearth new market opportunities.

A second phase, between 1996 and 2004, served to embed the new system. Zobrist continued to work with the company's employees and visited the factory frequently to talk to operators at their workstations, constantly reminding them of the values and the objectives. Relationships among peers also played a key role. One operator commented, "Established employees show the interns and the new recruits how to fix the machines; people help each other a lot, we explain how things work at FAVI." In addition, the leaders in the mini-factories no longer had to work in tandem with functional experts and former managers. By 2004, the last managers to have worked within the old system retired.

The final implementation phase, between 2004 and the present, represented an important set of refinements to the model. Dominique Verlant, who had been selected as Zobrist's successor, initiated a new series of innovations. His goal was to decentralize or eliminate any support function hindering the autonomy of the mini-factories as rapidly as possible. "Every time there's a separation [between functions], there's a risk that the devil might wriggle into the gap." By 2011, he had decentralized procurement, quality control, maintenance, and sales into the mini-factories.

The first moves were made in 2004. Minifactory autonomy was increased by decentralizing procurement and integrating warehouse space into the factories' operational areas. Previously, the warehouse was frequently "out of stock" on too many key components. Under the new system, the leader, using a Kanban system, sent an order directly to the supplier who delivered the product. The mini-factories controlled their own output and ensured that stock levels were correct. The centralized warehouse was eliminated.

In 2008, and after losing an important contract because of poor communication between a salesman and his mini-factory, Verlant decentralized the sales department. The salespeople became directly integrated into their mini-factories to ensure that any issues relating to quality and customer service could be addressed immediately. Having their offices inside the mini-factory allowed salespeople to make changes and adjustments on a day-to-day basis. Although the move did not go over well with the sales manager, who resigned shortly thereafter, salespeople believed that this change facilitated communication with operators and the leader. The following year, the quality control function was also integrated into the mini-factories. Client complaints had become rare (less than two per month), so salespeople became the quality control manager and were able to leverage their role as the client's unique point of contact.

In 2011, maintenance functions were integrated into the mini-factories. The introduction of maintenance functions in the mini-factories caused several problems linked to their technical specializations. Most technicians are not multi-skilled; a hydraulic maintenance technician is unfamiliar with electrical maintenance. To get around that problem, the maintenance agent fulfils a varied role in the mini-factory, and whenever his expertise is called upon by another mini-factory, he knows that his input will be reciprocated later.

The Mini-Factory Today

In an automotive parts sector hard hit by offshoring, FAVI is the undisputed leader in the gearbox market. Guided by the imperative of protecting local jobs and safeguarding the company's future, the mini-factories serve their clients efficiently and effectively. Zobrist coined the motto "Par et pour le client" ("By and for the customer").

Each mini-factory is an island of production located in a particular area of the factory, and it contains all of the equipment and processes necessary to serve a particular customer. Often, the logo of the client, painted in distinctive colors, is displayed in the mini-factory. The hierarchical structure of the factory consists of only two levelsa factory director and the "leaders" of the 12 mini-factories. As a result, it fosters close, direct relationships between the members of a mini-factory, increases learning, and encourages mentorship. It also improves response time to clients, limits risks of conflict between functions, and accelerates the decision-making process. Lastly, the remaining centralized functions, the design office, the laboratory, R&D, and IT, support the continued technical expertise of the mini-factories.

The mini-factory must organize itself so that it can deliver the right pieces to the client at the right moment. Each mini-factory contains 20-35 operators, a leader, and a salesperson, and everyone is encouraged to monitor the quality of their own work as most forms of monitoring have been abandoned. FAVI believes that trust is more productive than monitoring.

The operatorThe autonomy of the operators is the cornerstone of the FAVI system. As Verlant put it, "They take a piece in their right hand and return it, finished, in their left; they are the people who provide all the added value." Everything is organized to ensure that operators can make decisions in real time and give clients the best product and service possible. Operators are responsible for maintaining their supplies and equipment.

The leaderThe leader's mission is to protect existing jobs. They are always former operators who have shown potential in terms of organization and leadership. While they manage their mini-factories in an autonomous fashion, they are responsible for health and safety issues, planning, talent management and salary administration, investment and procurement processes, managing and improving quality, maintenance, and defining and running "progress plans" (see below). The leader decides, for example, if the mini-factory should work with one, two, or three operator teams. If a leader requires more operators, colleagues in other mini-factories are asked to supply them. If there is a lack of personnel, leaders work with the factory director to recruit and hire new operators. The success of the overall system depends on a form of mutual adjustment between leaders.

The salespersonThe salesperson is constantly in touch with the client and passes customer requirements on to operators in the mini-factory. The salesperson is the client's "one-stop shop" and has complete responsibility for the client relationship cycle. Depending on the various phases of this cycle, the salesperson can be a technical salesman, a project head in the implementation phase, or a productivity sponsor of the mini-factory tasked with ensuring that the prices agreed with the client make it possible to achieve the desired margin. Salespeople have a global responsibility for all projects and are entitled to act autonomously. They only sell what can be produced, which prevents the emergence of traditional tensions between salespeople and the production team.

The mini-factory is supported by a non-traditional HR strategy, and represents an important reason why operators and leaders support the FAVI system. HR practices related to management by objectives, support of company values, and coordination between functions are very informal but strongly embedded in cultural expectations. There are a couple of exceptions to this informality, notably with regard to health and safety, areas in which the rules are respected at all times.

The main recruitment criterion is an ability to meet FAVI's managerial principles: being client focused, being autonomous and responsible, and giving the best of oneself to ensure that the company succeeds. Although there are no formal career paths, opportunities for promotion do exist. Thus, operators know that FAVI provides opportunities for advancement and is capable of expressing its recognition. As one employee explained: "Yes, we can always progress. I began as an operator and then became a quality control agent." Nevertheless, these possibilities are restricted by the fact that there are so few hierarchical levels. Operators believe that this disadvantage is compensated for by the autonomy that they enjoy.

The mini-factory system changed the structure of employee compensation. In the old system, middle managers had the power to assign bonuses to the operators based on productivity levels. During the first implementation phase, Zobrist got rid of all bonuses. Middle managers resisted the decision as it went against long-established practice in the classical organization and they feared disorder, a loss of productivity, and a decrease in their personal authority. The objective of the new system was to strengthen the unity of the employees as a group. Zobrist established a reward system based on a profit-sharing scheme: 7 percent of the profit before taxes is shared equally. The way it is administered means that employees could receive between 13 and 15 months of salary annually. Moreover, individualized forms of recognition, in the shape of various "trophies," are solemnly and publicly handed out to deserving employees. Employees appreciate these bonuses because they reward the spirit of initiative and are aligned with the culture of the company, in which innovation plays a central role.

Finally, members of a mini-factory must work to ensure that their unit "does more, better, and for less." Operators are encouraged to submit " progress projects." These projects can improve product quality, productivity, security, or work conditions. Every month, a jury hands out prizes to two of these "progress projects" (a 1,000 first prize and a 500 second prize), and at the end of the year the mini-factory that has suggested the largest number of ideas receives a reward. The jury is composed of a rotating group of leaders, salespersons, and operators. One operator won a 1,000 prize for modifying the machining system used for gearbox forks. Previously, machining a gearbox fork required two machines. The operator's project modified the first machine so that the second machine wasn't required. The change substantially increased gearbox manufacturing productivity.

The Challenges Ahead

The managerial innovation underpinning the FAVI system appears to have been implemented successfully. The lessons that can be drawn from it are linked both to its "people friendly" approach to organizational life, a commitment to a high standard in the field of production, and sustained product and process innovation. There are three challenges to ensuring the continued existence of this innovation.

The first challenge is growth. FAVI has expanded and its system has adapted to that growth by regularly adding new mini-factories dedicated to new clients. There is an open question about how many mini-factories can be introduced, and will informal communication still be viable if the firm continues to increase in size? In addition, how will the relationship between the factory director and the leaders and operators be affected? In effect, the replication of various functions like procurement, HR, and sales in the individual mini-factories leads to a loss of specialization and to less expertise being shared between mini-factories. However, it should be possible to continue to share expertise in an informal manner.

The second challenge concerns the interface with the customer. FAVI has retained its management system in spite of significant changes in the automotive industry. In the automotive industry, purchasing decisions are increasingly made by the purchasing department rather than the production department as it was until a few years ago. It is becoming increasingly difficult to keep in close contact with clients. As one leader noted, "We're no longer able to 'bring the outside inside' because the structures of our customers have changed. Orders are not placed the same as they were. We now have to deal with organizations that are increasingly 'run by the numbers.' So, I worry that customer relations and human contact is somehow no longer a priority for them." Can FAVI continue to focus customer care responsibility on the leader of the mini-factory and the salesperson?

Third, the current workforce is aging. The question of their replacement will inevitably be posed in the near future because their average age is now rather high. One of the leaders interviewed commented that it was hard to imagine being replaced by someone other than a person from the inside: "I think that someone who had always worked in the old way would find it difficult here. I'm not saying that he wouldn't be able to adapt, I just think that he would find it hard to."