White Paper on Institutional Approach to Operations Management

Description
An important change in the socio-economic environment of industrial firms is the increasing diffusion of Internet Technologies in production processes. Applications of Internet Technologies may be directly implemented on the shop floor, e.g. in networking dislocated assembly lines, as well as in assisting management processes, e.g. in production planning and control.

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An Institutional Approach to
Operations Management
in Internet based Production Concepts
Thorsten Blecker, “[email protected]“, University of Klagenfurt


Abstract

An important change in the socio-economic environment of industrial firms is the increasing diffusion
of Internet Technologies in production processes. Applications of Internet Technologies may be directly
implemented on the shop floor, e.g. in networking dislocated assembly lines, as well as in assisting
management processes, e.g. in production planning and control. This leads to a strong approximation
of the traditional production and operation systems and the Internet Technologies. While traditional
production concepts, such as Lean Production, World Class Manufacturing and Agile Manufacturing,
inevitably disregard this development, new production concepts arise that fundamentally consider the
application of Internet Technologies on the shop floor. However, from a business management perspec-
tive, industrial firms have to accomplish new operating requirements deriving from this technological
change. This paper provides a discussion of the consequences of Internet Technologies on operations
management, as well as of production concepts based on Internet Technologies from an institutional
point of view.


Introduction

Currently we have to realize a major change in the technological basis of manufacturing or even all production
processes. The diffusion of new information and communication technologies, especially Internet Technologies, on the
shop floor increases and enables an accelerated evolution of decentralized concepts, e.g. in Production Planning and
Control (PPC). It seems as if Internet Technologies may reach into the automation and control level of every assembly
line, as well as interconnect business and technological levels of the firm in the sense of vertical integration.

Both, formal and empirical studies have verified a significant increase in productivity of manufacturing proc-
esses by intraorganizational applications of modern information and communication technologies (Barua/Lee 2001, pp.
37). Therefore, this change has a high influence on operations management. While traditional Production Concepts such
as Lean Production, World Class Manufacturing and Agile Manufacturing inevitably disregard this development, new
Production Concepts arise that fundamentally consider the application of Internet Technologies on the shop floor. How-
ever, these concepts focus on the implementation of Internet Technologies in the production system and induce thereby
massive consequences in the information and coordination processes, which will be analyzed in new institutional eco-
nomics.

Advances in Internet Technologies and Internet based Production Concepts

Usually we understand the term Internet Technologies in the context of the well-known Internet as the techno-
logical basis of global information and a communication network. However, the term ”Internet Technologies” does not
prejudge an external relevance. The term Internet Technologies describes a family of technologies suitable for exchang-
ing structured data about package-oriented transmissions on heterogeneous platforms, in particular protocols, program-
ming languages, hardware, and software. Yet, the internal application of these technologies focuses on Intranets for of-
fice information systems. In the future, the main industrial application area for Internet Technologies is in Field Area
Networks (FAN). This means the interconnection, as well as networking of automation infrastructure and machine con-
trols on the shop floor (Blecker/Haber 2001, pp. 338).

Yet, fieldbuses as a traditional, but competing network technology are still dominating in production processes,
e.g. the ProfiBus concept of Siemens. In the future, Internet based FAN will complement or even replace fieldbuses.
Since 1985, industrial firms have utilized Ethernet on the shop floor. Due to new standards, Industrial Ethernet reduces
Blecker, Th.: An Institutional Approach to Operations Management in Internet based
Production Concepts, in: Proceedings of the European Applied Business Research
Conference 2003 - EABR’03, June 9 - 13, 2003, Venice/Italy, Western Academic Press,
Littleton 2003, S. 1 - 17
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the technological limits that have existed up to now to the applicability of Internet based FAN or even the replacement of
fieldbuses. Industrial Ethernet is based on the relevant international standards (e.g. IEEE 802.3). It is adjusted to the spe-
cific environmental conditions, for example regarding electromagnetic compatibility, shaking, moisture, and chemical re-
sistance (Siemens 1999, pp. 20). In some sectors Ethernet and Industrial Ethernet are already the de facto standards, e.g.
in the automotive industry, process industry and in plant engineering.

The technological improvement of Industrial Ethernet and/or Internet Technologies in general does not neces-
sarily enable a total replacement of fieldbuses. On the one hand, some applications or existing machinery still need FAN
based on fieldbuses. On the other hand, fieldbuses such as ProfiBus evolve towards a convergent, interconnective infra-
structure, e.g. as in ProfiNet. Hence, even where Ethernet cannot replace fieldbuses, Internet Technologies connect the
different assembly lines together and transfer detailed data from the shop floor to the office et vice versa. Consequently, a
comprehensive application of Internet based FAN enables the expansion of existing Intranets in office automation to all
production processes, especially manufacturing. Enabling technologies, such as Web Services, Active Technologies, and
Industrial Frameworks (based on .NET or Sun ONE), will support intelligent manufacturing technologies and a homoge-
neous network from office to manufacturing. These platforms have an enormous potential to reduce (transaction) costs
within the production system (Blecker 2003a, pp. 39). Therefore, Internet Technologies become an ubiquitous network
respectively an omni-present information infrastructure in the complete industrial firm.

In sum, Internet based Field Area Networks (FAN) may connect office information systems with the automation
and control level of every assembly line. It is not surprising that applications of Internet Technologies in production
processes increase and that many automation technology suppliers combine Internet Technologies with their products.
This leads to a convergence of the traditional production systems and Internet Technologies (Blecker 2001, pp. 19). It ex-
plicates the unification of technologies with different features to a homogeneous service bundle, which enables the revi-
sion of traditional Production Concepts or even the development of new Production Concepts.

The considerable advantages of Internet Technologies are noncontroversial for the technological infrastructure
of communications and information in production processes. According to Atherton’s (1999) idea Java-based applica-
tions should support planning and control of all production processes. In this scenario Internet Technologies integrate the
technical CAx-Systems with the economical Enterprise Resource Planning (ERP). This means that Java connects differ-
ent technological environments and acts as a gateway between automation technology and information technology. This
scenario reminds one of the already known basic idea of Computer Integrated Manufacturing (CIM). The application of
Internet Technologies is set into the center of the considerably extensive and heterogeneous functionalities that are inte-
grated in a homogeneous web-interface. Nevertheless, this attempt does not achieve new advantages vis-à-vis the CIM-
concept and not quite a new Production Concept. It only centers the attention towards industrial applications of Internet
Technologies. However, in the literature some self-contained Production Concepts exist, which more or less consider
Internet Technologies in production processes. We define Production Concepts as an (in theory) well-founded guiding-
idea, based on empirical knowledge where appropriate, on the organization, planning, control and evolution of produc-
tion systems with the main objective to enhance the competitiveness of the firm (Blecker 2003a, pp. 12). It consists of the
definition of an optimal state of the technological and economic elements of the production system, as well as their rela-
tionships to each other in their practical (application-near) recommendations for achieving the aimed state, as well as a
description of required methods and instruments for their realization. Therefore, we discuss the different approaches to
Internet based Production Concepts following these four criteria: 1. the guiding idea presented in the literature, 2. the
aimed conditions of the production system, 3. (general) recommendations for achieving the aimed conditions and finally
4. the discussed instruments.

E-Manufacturing or Electronic Manufacturing are keywords, which have been discussed recently in connection
with terms like E-Commerce and E-Business. The main guiding ideas of E-Manufacturing are the control of the entire
value chain with E-Technologies as a central task of industrial firms and a comprehensive optimization of the supply
chain (Wildemann 2000, pp. 22). For realizing these ideas, E-Manufacturing aims the continuous alignment of manufac-
turing at the individual customer requests, high quality of products and low costs. E-Procurement, cooperative manufac-
turing operations in production networks, flexible and decentralized planning and control systems, as well as a direct net-
working of decentralized production units are seen as a general framework in which industrial firms have to operate.
Therefore, sophisticated build-to-order concepts, the integration of customers and suppliers, as well as the application of
E-Technologies are recommended. Additionally, an integration of dislocated information systems is required. E-Manu-
facturing fills the different demands through the application of instruments such as Internet based PPC, a product data
management / engineering data management (PDM/EDM), as well as newer CAx-Technologies. However, this is in our
understanding not a new manufacturing concept, but only a relatively non-structured collection of approaches and tech-
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nologies that focus on the application of so-called E-Technologies. It outlines only qualities of manufacturing in E-Com-
merce.

The Information-Based Manufacturing shows a higher reference to production processes. This approach de-
scribes as a guiding idea a highly information-dependent production, which is distributed throughout several enterprises.
As aimed conditions, it refers a strong customer relationship, a high velocity of (re)actions, networking of decentralized
production processes and synchronized demands (Shaw 2001, pp. 8). Similar to E-Manufacturing the Information-Based
Manufacturing recommends build-to-order concepts, supply chain coordination and optimal information sharing. There-
fore, exemplary instruments are an optimal synchronization of production factor appropriation and scheduling between
the firm and their partners in the entire supply chain. Companies must have agent systems, decentralized planning and
operation systems, as well as integrated information and automation technologies in the dislocated production processes
for the realization of Information-Based Manufacturing (e.g. Veeramani/Wang 2001, pp. 246). Thus, the commitment of
Internet Technologies does not occur in an intraorganizational way, but mainly interorganizationally, for example based
on WebEDI, or during communication with the customers. The focus of the analysis differs obviously from our intraor-
ganizational perspective.

Beavers’ examines manufacturing and the different production processes within his concept of the e-Factory
and considers the necessary qualities of industrial firms. He formulates as a guiding idea for the e-Factory, that it is an
upright element of an electronic supply chain in E-Business and defines this approach as ”a new, all-encompassing term
for all of the electronic control, automation, and intelligent machines that occupy today’s factory environment” (Beavers
2001, p. 14). The main goals are a quickly reacting production system respectively low operation times, a high process
orientation, as well as the integration of one’s own enterprise into the supply chain. Therefore, in addition to the applica-
tion of E-Technologies, Beavers recommends a cooperative production process in the network structures of a supply
chain (Enterprise Extension) and a strong coordination between outsourcing and inhousing. Discussed instruments are
electronic control systems for all automation technologies and an extensive application of information systems, e.g. ERP,
Warehouse Management and PDM/EDM. We share the fundamental opinion that modern information and communica-
tion technologies penetrate the production processes and pass the production up to the automation level, as well as to the
machine control. However, we criticize the delimitation of the e-Factory on electronic supply chains and/or the E-Busi-
ness. On the one hand, we absolutely see a high application potential of Internet Technologies within industrial firms,
which were not subjects of the E-Business up to now and would traverse a material production in the classical sense. On
the other hand, we criticize Beavers’ perspective, which is at least partially enterprise-external. However, it is more seri-
ous that Beavers writes generally about ”electronic control“, without a specification, e.g. on Internet Technologies.
Therefore, the definition encloses almost all modern control mechanisms in manufacturing. Even NC, CNC or DNC ma-
chinery contains an electronic excitation and/or control. Thus, the definition is not selective enough and does not provide
a suitable explanation of an Internet based Production Concept.

Positive approaches for the application of Internet Technologies in manufacturing are observable in context with
the keyword ‘Web-Integrated Manufacturing’ in engineering research. Web-Integrated Manufacturing describes the gen-
eral application of Internet Technologies in manufacturing, for example, agent based systems, Java, Jini and SOAP (e.g.
Kuehnle/Klostermeyer/Lorentz 2001, pp. 463). Even the international research project ”plant automation based on dis-
tributed systems” (http://www.pabadis.org/) uses this approach as a theoretical basis. The project goal is the application
of decentralized, distributed systems of office communication within the machine control on the shop floor in order to
survive within turbulent environments. This is supposed to lead to certain aimed conditions, namely highly flexible,
adaptive and simply reconfigurable production systems. Reconfigurable production systems combine the respective ad-
vantages of high-productive and high-flexible systems, because they may be adapted immediately regarding their struc-
ture, functionality, and capacity, as well as their inherent technology to changed demands. For the realization of this sce-
nario, this approach recommends distributed computing and distributed problem solving in automation on the shop floor.
Therefore, the instruments of Web-Integrated Manufacturing focuses on a decentralized agent system in manufacturing
and embedded systems in automation technologies. Furthermore, these agent systems have to substitute occasionally ex-
isting Manufacturing Execution Systems (MES). However, up to now, the different projects analyze the Internet Tech-
nologies only as a basis of the Web-Integrated Manufacturing and examine their applications in technical systems. A
definition of a Production Concept occurs just as little as a strategic substantiation.

Additionally, Huang/Mak use the term Web-Integrated Manufacturing during the preparation of a special edi-
tion of the International Journal of Computer Integrated Manufacturing. Both Huang/Mak (2001a, pp. 3; 2001b, pp. 125)
as also the other contributors to this journal only describe individual, dislocated applications based on Internet Technolo-
gies for the product design and manufacturing. Therefore, the main idea of this approach is the application of interorgani-
zational CAx-technologies, especially CAD/CAM systems, e.g. for the distributed product design (Chang/Pan/Harrison
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2001, pp. 14). The aimed condition of Web-Integrated Manufacturing is a flexible, distributed production process be-
tween two ore more collaborates. Hence, the recommendations for realizing Web-Integrated Manufacturing are the
development of interorganizational information systems for a dislocated product development, rapid prototyping, the ap-
plication of automated production systems based on so-called Web-Applications. The authors discuss mainly CAx and
CAD/CAM, quality function deployment and the integration of the dislocated intra- and interorganizational information
systems in the sense of EAI as instruments. While Huang/Mak does not systematize the term Web-Integrated Manufac-
turing exactly, they define the term ‘Web Application’ as the essential element of Web-Integrated Manufacturing
(Huang/Mak 2001a, p. 4; 2003, pp. 56). However, with this definition Web-Integrated Manufacturing is considered
merely very general as the application of Internet based technologies in the production and does not lead to any Produc-
tion Concept.

Figure 1 shows a comparison between the different approaches related to Internet based Production Concepts
following the discussed criteria. We can diagnose that both scientific research and industrial practice impose the impor-
tance of the Internet Technologies for manufacturing. Nevertheless, we criticize that the individual island solutions, as
well as the first more comprehensive concepts concentrate primarily on technical aspects.

E-Production /
E-Manufacturing
Information-
Based Manufacturing
e-Factory
WIM
(IFF / PABADIS)
WIM
(IJCIM)
Guiding Idea • production in
e-commerce
• optimization of the
Supply Chain
• integration in Supply
Chain Networks
• distributed, information-
dependent production
Aimed
Conditions
Recommen-
dations
Instruments
• production as
vertical element
of the Supply Chain
in e-business
• decentralized, agent-
based automation
as technical reply to
turbulent environments
• interorganizational
CAD/CAM combined
with Internet
Technologies
• customer focus
• high quality
• low costs
• build-to-order
• e-technologies
• integration of
customer &
suppliers
• e-procurement
• decentralized CAx
• decentralized
production planning
• PDM/EDM
• customer focus
• high velocity of
(re)actions
• networked production
• synchronized demands
• build-to-order
• Supply Chain
coordination
• information sharing
• web-EDI
• agent systems
• decentralized
production planning
• Integration of IT and
automation
• process orientation
• low operation time
• production in an
e-Supply Chain
• enterprise extension
• outsourcing
• inhousing
• cooperative manu-
facturing operations
• electronic machine
control
• business information
systems, e.g. ERP,
CRM, SCP
• (e-)procurement
• agent systems
• embedded systems
• mobile code
• reduction of MES-
System
• distributed
computing
• distributed
automation
• high flexibility
• adaptive
• reconfigurable
subsystems
• flexible
• interoperable
• high automation
• dislocated product
development
• development of
web-applications
• CAx or CAD/CAM
• quality function
deployment
• enterprise appli-
cation integration
Concept
Criteria

Source: Blecker (2003b)
Figure 1: Comparision between different Production Concepts based on Internet Technologies

A more comprehensive concept of Internet Technologies applications in production processes has to focus a
more consistent and continuous commitment of Internet Technologies in industrial firms and has to deal with the current
evolutions of the production technique, as well as operations management. Mainly we expect that such a concept focuses
not only on the dislocated usage of the Internet Technologies as a communication media between a company and their
partners, suppliers, and customers. Instead it has to concentrate itself on the consequences of Internet Technologies for
the shop floor, new options of Internet Technologies in operations management and their effects on the strategic and op-
erative management of industrial firms. Such a concept is Web-based Manufacturing (Blecker 2003a; 2003c). It is based
on the continuous and global application of multimedia Internet Technologies in the technical and managerial processes
concerning industrial production and reaches from the office into the automation level. Hence, Web-based Manufacturing
is a technology driven Production Concept, significantly based on the Internet Technologies. However, this does not
mean that it is inevitably technology centered. Instead, this concept focuses on a rigorous perspective from business ad-
ministration, as well as operations management and concentrates on the up to now unused potentials of the Internet Tech-
nologies in production processes. Thus, we define: Web-based Manufacturing is an Internet Technology based Produc-
tion Concept that is an (in theory) well-founded guiding-idea, based on empirical knowledge where appropriate, on the
organization, planning, control and evolution of production systems. It aims at easily reconfigurable, high flexible pro-
duction systems based on the comprehensive application of Internet Technologies on the shop floor. Due to the actual
developments in market structures and current competitive strategies the main goal of Web-based Manufacturing is to
achieve market- and resource oriented competitive advantages supported by the application of Internet Technology based
technological and/or conceptual procedures and processes in a decentralized coordinated, according to informational cri-
teria organized and ad-hoc structures forming production environment. Because of the coverage of the whole production,
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this concept should have been denoted in a strictly speaking sense as “Web-based Production”. However, we use the term
Web-based Manufacturing due to the below discussed uncertainty concerning the definitions of the terms production and
manufacturing and analog to the widely used term Computer Integrated Manufacturing, which covers more than manu-
facturing as well.

Web-based Manufacturing is still work-in-progress (Blecker 2003b; 2003c; Blecker/Graf 2003). Nevertheless,
we can consider that the application of an Internet based production concept may lead to the achievement of new, up to
now practically unrealizable approaches and structures of production processes. By now, it is impossible to predict com-
pletely the potential benefits of these modifications. However, due to the massive integration of Internet Technologies
into manufacturing in the future, some authors point out the necessity of elementary modifications in management
thinking, especially in industrial firms (Blecker 2003a; see crucially for this purpose Neumann 2002, p. 26).

New Institutional Economics as Approach to Operations Management

On the one hand, the analysis of the changes in operations management has to include the modification of the
production systems as a subsystem of the enterprise. Modifications in the production system induce adjustments in op-
erations management, because either operations management has to react to the modifications by forming an interven-
tion or the initial motivation for already selected and carried out management procedures changes. On the other hand, we
need an economic theory as a basis of the analysis since we have to examine the behavior of the different actors in the
production system and the arising consequences from the viewpoint of Business Administration respectively operations
management. Furthermore, we have to mention that just the application of modern information and communication
technologies, such as Internet Technologies, influences the optimal distribution of tasks between the elements of the
production system, as well as their coordination and cooperation for manufacturing operations. This is particularly im-
portant in systems with incomplete and/or asymmetric information, since the arising transaction costs are an economi-
cally important factor. For example, North (1991, pp. 97) refers to studies identifying that transaction costs represent
45% of the added value in the USA. Since these studies, they only consider marketable transactions with quantifiable
costs and do not analyze coordination and management activities in production processes, Fels (1992, p. 1047) assumes,
that the institutionally fixed transaction costs are economically more important as the usually examined production costs.
Consequently, we need a theory that investigates the organization and coordination processes in the internal structure of
an enterprise, as well as the resulting cost and efficiency effects.

Therefore, we will use the different theories of the new institutional economics as an approach for our examina-
tion. While the neoclassical microeconomics only considers organizations as monolithic units, the new institutional eco-
nomics are established approaches of the organizational research (see papers in Furubotn/Richter 1991). Though the new
institutional economics follow microeconomic theory, they (partially) override reality-far premises. The main thesis is
that abilities, knowledge and information of the individuals are heterogeneous. From this it follows that the assumption
of a walrasian auctioneer of the neoclassical competition theory (Walras 1874) is not tenable anymore. The walrasian
auctioneer should guarantee an economic balance in a system with completely flexible prices and actors acting on the
basis of complete information. Instead, acquisition and protection of information are not free. Friction and motivation
problems in the interaction processes also arise. New institutional economics based analysis is a solution for the prob-
lems occurring in economic systems. Institutions are defined as systems of norms and rules, which act as restricting con-
ditions, affecting the behavior of economic actors. For example, such institutions are (social) conventions and rules,
laws, procedures, property rights, and contracts, as well as organizational structures that evolve both evolutionary and
because of purposeful managerial actions.

The main goal of new institutional economics is to find statements about the efficient organization of institu-
tional arrangements. This means, economic decisions within and over institutions are examined. The new institutional
economics consist of three theories: the property rights theory, the principal-agent theory (agency theory) and the theory
of transaction costs. These theories allow a reunion of economic, in particular microeconomic approaches, and business
administration, exceeding the classical production theory and enclosing the general management as well. Fandel and
Lorth (2001, pp. 273), as well as Franck and Jungwirth (2001, pp. 273) show clearly the importance of institution eco-
nomical analyses in order to solve problems arising in operations management. For example, according to Foss (1998, p.
11) it is possible to describe the specialization of actors in a production system regarding the property rights theory as “a
subdivision of user rights over assets, so that each individual holds rights over a more narrow set of assets or holds a
more narrow set of rights over the same asset“. The modularization in production processes may be discussed as a real-
location of property rights in a specific organization (Picot/Schneider 1988, pp. 111). The eventual appearance of dis-
cretionary behavior results from unspecified property rights in the modules (Foss 1998, p. 13), whereas the arising trans-
action costs are determined by a specific organization, the specifity of the goods, as well as transaction conditions in the
6
production system, namely the information impactedness, the transaction frequency and the transaction atmosphere
(Williamson 1975). Optimal organizational structures and optimal transaction conditions may reduce transaction costs
and improve the competitiveness of the firm. Furthermore, the agency theory explains optimal leadership and controlling
mechanism in decentralized structures (Picot et al. 1998, pp. 237).

However, the different approaches of new institutional economics deal with the behavior and interaction of ac-
tors, e.g. whole companies or employees, in economic systems. In order to apply new institutional economics to opera-
tions management, it is useful to speak about actors referring to autonomous acting units within the production system,
which often endue local computational intelligence. We differentiate three types of actors in production systems. The
first type consists of human actors, e.g. planners and workers. Because of the increasing integration of modern informa-
tion and communication technologies into automation systems and their growing local “intelligence”, technical actors
build up the second type of actors in production systems. For example, facilities with embedded computational intelli-
gence may act autonomously in a production process. The third type of actors consists of composed units. We call this
type organizational actors, because they consist of a varying number of human and/or technical actors following organ-
izational principles, e.g. autonomous or virtual teams on the shop floor, and act as a whole. The actors of the production
system have a broad set of abilities to build up relationships with other actors. Thus, we can claim, that every actor may
interact with every other actor. These interactions can range from simple data transfer to complex coordination proc-
esses. Additionally, the interaction of actors is not limited to the production system, which means that they can commu-
nicate with actors outside the production system. We assume that qualities and capabilities of each actor change by ap-
plying Internet Technologies for their interconnection on the shop floor, as well as by converging different technologies.
Additionally, a decisive influence of modifications of the actors’ capabilities and/or of their coactions on operations
management is conjecturable. The exact content of contracts between the different actors, their organization and interac-
tion generally determine the physical and economic output of the production system. Therefore, only the discussed dif-
ferentiation between the three types of actors allows the institutional analysis of coordination and communication proc-
esses, as well as of consequences for operations management resulting from Internet based Production Concepts.

Operations Management in Internet based Production Concepts from an Institutional Point of View

Both, management and engineering literature define the terms manufacturing, production and operations (man-
agement) very heterogeneously. First, some authors understand manufacturing as an all-encompassing term, which in-
cludes production and operations. Rehg/Kraebber (2001, p. 2) define manufacturing as “… a collection of interrelated
activities that includes product design and documentation, material selection, planning, production, quality assurance,
management and marketing of goods”. For a second group production is the superordinate concept and manufacturing,
as well as operations management only describe subsystems or functions. For example, in this understanding the term
operations management includes “…creating, operation and controlling a transformation system that takes inputs of a
variety of resources and produces outputs of goods needed by customers” (Naylor 2002, p. 5; see also Black 2000, pp.
423). Thirdly, the term operation and operations strategy are broader than manufacturing or manufacturing strategy so
that operations management describes “…the activity of managing the resources and processes that produce and deliver
goods and services” (Slack/Lewis 2002, p. 5; see also Waller 1999, p. 1). We partially accompany the third group. In our
understanding production describes a function of a (industrial) firm consisting in creating a transformation system and
combining internal and external resources by applying technological and conceptual procedures in order to generate
goods and services for further possessing and/or as marketable output for serving the customer. Manufacturing is only a
specific form of production processes based on mechanical technologies and activities; whereas operations are the nec-
essary activities in production systems to provide services and/or goods in general. Therefore, operations management
describes planning, organizing and control of all resources and activities in operating production systems. In comparison
to production management operations management does not include the system creation and product design.

Additionally, we have to clarify the term production system. Some authors define production systems as a
broad system, covering “…all aspects of business and commerce including manufacturing, sales, advertising, and distri-
bution” (Black 2000, p. 423). Following the above definitions of production, manufacturing and operations, this expla-
nation is excessively extensive. We understand a production system as a subsystem of the enterprise for the transforma-
tion of input factors, e.g. goods and services, in output factors, e.g. tangible goods and services for satisfying customer
needs. We divide the production system into two basic subsystems: the management subsystem and the operation sub-
system. These subsystems are interconnected and interwoven by an information system. The operation subsystem deals
with the original transformation processes and includes all facilities, machines, logistical equipment and employees
(blue collar workers). The management subsystem is responsible for the short run (operational) design, planning and
control of the entire operation subsystem. This differentiation is the basis for the following analysis of the consequences
of Internet based Production Concepts.
7

Operation Subsystem

From the perspective of the operation subsystem we have to discuss the influences of Internet Technologies and
Internet based Production Concepts on the different elements of the operation subsystem and the operations itself. We
distinguish between the system elements machines & facilities, information system, and materials flow system, as well
as employees & work places. Figure 2 illustrates potential modifications and changes of these elements due to Internet
based production concepts.

• integration of
information systems
• standardized
interfaces
• accelerated machine
monitoring and
diagnostics
• high factor mobility
• low factor specificity
• parameterization and
configuration in IP-
based networks
• high flexibility
Machines &
Facilities
• integration of
information systems
• standardized
interfaces
• accelerated machine
monitoring and
diagnostics
• high factor mobility
• low factor specificity
• parameterization and
configuration in IP-
based networks
• high flexibility
Machines &
Facilities
Information
Systems
• integration of
disjunctive systems
• compatibility to office
systems
• high system
transparency
• high information
transparency
• low context
incommensurability
Information
Systems
• integration of
disjunctive systems
• compatibility to office
systems
• high system
transparency
• high information
transparency
• low context
incommensurability
Materials Flow
System
• integration with
machines and plants
• redesign
Materials Flow
System
• integration with
machines and plants
• redesign
Employees &
Work Places
• diffusion of high-tech
workplaces
• high information
availability, even in
decentralized work
places
• multi-media based
equipment
• changes in operating
interfaces
Employees &
Work Places
• diffusion of high-tech
workplaces
• high information
availability, even in
decentralized work
places
• multi-media based
equipment
• changes in operating
interfaces

Figure 2: Potential Modifications and Changes of the Elements of the Operation Subsystem
derived from Internet based Production Concepts
The main idea of all Internet based Production Concepts is increasing the application of Internet technologies in
production, especially in interconnecting and networking the different elements of production respectively operation
subsystems. This leads to a strong convergence of the traditional production and operation concepts, as well as Internet
technologies. Thereby the automation technologies receive their own, local data processing capacity in the sense of a
distributed artificial intelligence so that a distributed automation with high flexibility, adaptivity and reconfigurability
becomes possible (Pabadis 2001, p. 15). Furthermore, the application of Internet Technologies enables the acceleration
of the machine monitoring and diagnostics based on the application of standardized interfaces between specific system
elements, homogeneous human machine interfaces in web browsers, the possibility for the measure realization from a
single computer and IP based networks for the interconnection and routing of control information (Schueber 2001, p.
11). In sum a parameterization and configuration of automation technologies becomes possible and reduces set-up costs,
as well as idle costs. Additionally, the application of the open and highly standardized Internet Technologies reduces the
costs of the interconnection of automation technology per se.

Since we argue a convergence of the production and information technologies, we can assume that the qualities
of the information system partially determine the quality of the resultant super system. Networking with the aid of an In-
dustrial Twisted Pair, the application of standardized interfaces based on Industrial Ethernet up to interconnections on
the basis of Sub-D or even the RJ45 cables, usually applied in office networks, enormously increases the flexibility and
the usability of automation technology (Siemens 1999, pp. 21). Consequently, the specificity, defined as uniqueness or
unique usability of facilities and machinery, also decreases. In the ideal case, the movement of facilities and machinery
becomes possible, similarly to local area networks in offices, where computers can be connected nearly at any time and
at any place. From an economic or even an institutional perspective this means that the factor mobility increases (Schu-
mann 1993, p. 389).

This leads to the institutional interpretation of the modifications and changes in the operation subsystem. At
first, standardized interfaces and/or the reduction of changes in media formats due to a higher integration of the ma-
chines and facilities allow a reduction of the searching costs and time for information. This corresponds to the reduction
of transaction costs due to the application of information technologies in general, already discussed by several authors in
connection with cooperation forms such as virtual enterprises. The fix and variable costs of information processing are
reduced and the diffusion of knowledge on the shop floor is accelerated. Consequently, specificity on production proc-
esses is reduced and (internal) transactions are standardized. This means, market coordination forms become more use-
8
ful in opposition to hierarchical coordination forms even in the operation subsystem (Picot et al. 1998). However, stan-
dardized interfaces and the convergence of the production and information systems are useful from the viewpoint of the
property-rights theory and the agency theory as well. The mentioned local intelligence in the machines and facilities
achieved by Internet Technologies is in fact an increase of the information processing capacity of every single unit. By
defining machines as (artificial) actors in the operation subsystem we may interpret this increase of the information
processing capacity as a potential improvement of the rational behaviour in the terms of the new institutional economics.
The new intuitional economics assume that actors attempt to behave rationally. But because of both limited information
retrieval and small respectively restricted information processing capacity, only limited rational information behaviour is
possible (Picot et al. 1998). From this it follows, that (artificial) actors due to the convergence reduces the problems of
limited rationality. If the local intelligence is considered in connection with the parameterization and configuration with
the aid of web browsers and/or the better machine monitoring and diagnostics, it is noticeable that the problems of po-
tential principal agent relationships are reduced as well. Principal agent relationships are not fixed fundamentally onto a
specific role distribution, but vary in a context-specific way. This means, that an (artificial) actor acts at a particular time
as a principal and at another time as an agent. In both cases, the local intelligence has a useful influence. Both the im-
proved search and interpretation of information about partners in interaction processes (screening through the principal),
as well as the improved information presentation and transfer (signaling of the agent) reduce the risks in principal agent
relationships, e.g. of a moral hazard, and enables pareto-efficient structures of interaction. Simultaneously the shown re-
duction of the factor specificity and the improvement of the factor mobility lead to a reduction of opportunistic behavior,
as well as a decrease of the risk of a hold up. Thus, a situation results in which on the one hand the insecurity and the
specificity decrease and on the other hand, the rationality of the actors increases in the whole production system. In a
traditional consideration of the new institutional economics, it follows immediately that market coordination forms are
optimal for production processes based on the division of labor (Dietl 1993, pp. 155). However, the dichotomous consid-
eration of market and hierarchy is obsolete for more than ten years and is replaced by a differentiation of a large contin-
uum of coordination forms between market and hierarchy (e.g. Sydow 1992, pp. 103). Since we concentrate on com-
pany-internal aspects, an externalization of functions is not relevant here as a condition precedent for market coordina-
tion forms. We rather assume that in case of the above-discussed modifications of the operation subsystem no externali-
zation occurs and cooperative and/or modular organization principles are optimal in production processes. This conclu-
sion is supported by the fundamental results of the organization research on modular organizations in general (Picot et
al. 1998, pp. 233). However, in contrary to this research, we do not consider the division of existing organizations into
modules, but we justify the forming of modules from single (artificial) actors in the operation subsystem. With this un-
derstanding of modular structures, modules are no solution of existing institutional and organizational problems, but a
consequence of the modifications due to the application of Internet Technologies and Web-based Manufacturing. How-
ever, we have to point out that there is a risk that the artificial actors become so-called plastic factors and/or that their
plasticity increases. The plasticity of factors denotes the attribute of factors that they require a broad administrative dis-
cretion for the production of high-quality results (Schuman 1993, p. 443). Indeed, this administrative discretion is guar-
anteed by the local intelligence and the shift of property rights to the specific actors. However, it cannot be formalized
and is hardly controllable by third parties. Therefore, contracts cannot define the type and extent of the usage of produc-
tion factors and cannot force an efficient usage (Alchinan/Woodward 1987, pp. 115). The problem is that on the one
hand the administrative discretion must be created inevitably, but on the other hand a hold up or a moral hazard may oc-
cur (Schuman 1993, p. 443). New institutional economics propose either a contraction at the market or a vertical inte-
gration, depending on the importance of the production factor for the quality of the entire product (peripheral vs. central
positioning) (Bonus 1987, pp. 87). For the examined case of the internal organization in the transformation process this
means for example that peripheral plastic factors are controlled in decentralized form, whereas central plastic factors are
linked closely to the respective planning authorities, for example to the principal.

The described modifications of the machines and facilities due to the application of Internet Technologies and
the Web-based Manufacturing occur fundamentally within the information system as a part of the operation subsystem.
For example, the interfaces are reduced between up to now disjunctive subsystems and the compatibility, as well as the
interconnectivity with the office systems are increased. For the operation subsystem and information technologies used
there follows, transmission time of the information from the shop floor, for example about the machine states, decreases.
Due to the homogeneous protocols and standards and the homogeneous network structure in the whole firm, the trans-
parency of both the information system per se and the transformation process related information increase. The transpar-
ency is a condition precedent for the reduction of incommensurability, often existing in the business practice between
different application contexts, for both the convergent machines and facilities, as well as the information systems per se.
Additionally only a description of the relevant contexts and systems is necessary. This is simplified by the application of
unified and highly standardized Internet Technologies as well.

9
Obviously many effects occurring due to the application of Internet Technologies within the machines and fa-
cilities also occur within the information system. Particularly the homogeneous networking infrastructure and the com-
patibility with office systems reduce internal transactions costs and increases factor mobility. Furthermore, Internet
Technologies enable a high transparency of the information in the entire production system and of the system per se.
Consequently, the insecurity of transactions is reduced so that transaction costs are lowered and a decentralized alloca-
tion of property rights becomes possible. Additionally the integration of up to now disjunctive subsystems in the infor-
mation system, as well as in the entire production system improves the transaction conditions. Due to the rapidly achiev-
able and more extensive information base for decisions in the production system, their substantiation is qualitatively
more high grade and much more secure. The modifications lead altogether in the information system to a decreases in
the incommensurability of potential contexts of the operation subsystem. Thus, conscious measures, such as typing and
standardization, which are often recommended from a transaction costs perspective as a solution for incommensurability
induced organizational problems (Picot/Schneider 1988, pp. 111), are not necessary. Actually the application of the
Internet Technologies leads to a modification of the quality of the overall system which corresponds to the recom-
mended measures.

The next element of the operation subsystem is the materials flow system. Here we have to emphasize the inte-
gration with the machines and facilities, as well as with the information system. In addition to the facilitated physical
integration, e.g. by standardized means of transport, unit load conveyor, and cases, the data processing integration is im-
proved. Through the combination with the information system it is possible to determine the state of the materials flow
system at any time and from nearly any place. This information can be used in the entire production system in real time
and enables fast redesigning of the materials flow itself. The layout of the operation subsystem becomes much more
flexible, because the materials flow can be arranged regarding the requirements of the single machines and facilities,
without losing efficiency. Thereby the materials flow system becomes a subsystem, which is adaptable to the optimal
layout of the operation subsystem. From an institutional perspective the construction of the materials flow can be inter-
preted as the physical networking of two actors. According to our definition the actors of the operation subsystems are
employees, organizational units or (intelligent) machines. In order to generate the materials flow, these actors have to
conclude agreements. The objects which are exchanged between the actors can be completely described by the possibili-
ties of the Internet Technologies. This complete description prevents information asymmetries and the often resulting
problems, which are discussed in agency theory. Due to the high dynamic environment and changing customer needs,
the layout of the operation subsystem and therefore the layout of the materials flow system often changes in industrial
practice. Regularly, this implicates new contracts in the operation, respectively the materials flow system. In this case,
not only every single sub process is under consideration as an object of the agreement, but also each specific transaction
process between two or more actors. Through the available complete information, an acceleration of the contract conclu-
sion is to be expected, which decreases the transaction costs. It follows that changes in the materials flow system are at-
tainable faster and with low-costs. The materials flow system becomes flexible and adaptive.

The assistance supplied by information technologies for the employees and/or the equipment of work places is
a central component of Web-based Manufacturing. The application of Internet Technologies enables multimedia facili-
ties on the shop floor. Together with the aforementioned modification of machines and facilities new human machine
interfaces arise. These interfaces allow an intuitive, visual operating of automation technologies. Additionally, due to the
internet based networking in the whole firm it is possible to decouple controlling tasks from the automation technologies
and to operate the machinery from any place in the firm. The emerging (omnipresent) information availability enables an
improvement of the information base of each employee. Due to the higher information availability, the improved infor-
mation base and the interconnection between working places, an improved decision potential and/or a higher influence
sphere of the employees arises.

An institutional perspective has to define the work places and employees as human and organizational actors of
the operation subsystem. The comprehensive multimedia abilities and the high information availability decrease agency
problems based on information asymmetry. For example, actor’s rationality increases due to a reduction of inadequate
and/or incomplete information. The broader information base, the solution of interface problems and the standardization
of information (technologies) significantly reduce the potential problems within the cooperation between the actors. This
enables the already mentioned more rapid transmitting of property rights between the actors, as well as the modification
of particular contracts between the actors in the operation subsystem. Human actors are usually not limited in the num-
ber of potential contracts, but in production environments a small number of contracts are appropriate. In the operation
subsystem these contracts include transfer and allocation of tasks, as well as of the relevant material, authorities to de-
cide and to conclude contracts with other actors. Additionally, the more unspecific the definitions of tasks are the mer-
rier the authorities are in deciding on delivered contracts. In connection with the broader information base of the em-
ployees this leads to an inverse information asymmetry. Usually institutional analyses assume an information asymme-
10
try, where the principal or any other controlling actor has more detailed information than the agents. Now we have a
situation, where the agents have more information as the principal (Reiss 1998, p. 124). Thus, planning, organization
and control of the operation subsystem, respectively the entire production system, also changes.

Management Subsystem

Based on the discussed (technological and organizational) changes in the operation subsystem and their institu-
tional impacts, we can analyze the managerial aspects by evaluating the changes in the management subsystem in order
to approach operations management from an institutional point of view. This is legitimate, because a main function of
operation management is the (pareto-)efficient configuration of the operation subsystem. This illustrates the proximity of
operation management to organizational research, which evaluates alternative organization forms and generates recom-
mendations for efficient organizational structures based on institutional analyses.

Changes in management subsystem may occur because of two aspects: a direct influence of the Internet based
Production Concept, e.g. through the recommendation of (new) management instruments, or an indirect influence de-
riving from changes in the operations system, because the management subsystem has to represent the structure of the
operation subsystem. Due to the massive changes in the operation subsystem and the actual existing emphasis of Internet
based Production Concepts on the operation subsystem we concentrate on the second aspect. For the analysis of the
management subsystem, we examine the task-relevant differences between an operation subsystem without Internet
Technologies and an operation subsystem after the introduction of an Internet based Production Concept. Moreover, we
use the already introduced differentiation between the system elements as actors and we examine the changes for the
specific tasks in the management subsystem. Furthermore, due to the very heterogeneous organizational objects and
goals regarding the individual subtasks we divide the influencing parameters in each case. We distinguish on the one
hand with the original parameters, which are based on the commitment of the Internet Technologies immediately and
correspond to the modifications of the potential elements of the operation subsystem. On the other hand, we distinguish
derivative parameters, which are based on business (and organizational) relevance of these modifications. The derivate
parameters have to be differentiated into the interpretive characteristics of the actors of an operation subsystem, this
mean qualities based on an economic interpretation as plasticity, and concrete organization of their relationships from
the viewpoint of the new institutional economics, for example due to modifications of the transaction costs.

An important task in operations management is a medium- to short-term capacity management, especially ca-
pacity allocation and capacity smoothing. The output of these tasks can be defined as the concrete fulfillment of the
qualities and requirements determined in the strategic production management. In detail, tasks are the fine planning, co-
ordination and protection of the medium- to short-term resources of the operation subsystem (capacity dimensioning),
the determination of the maintenance politics and measures, as well as the period and process related assignment of the
resources (Capacity disposition).

The listing of the subtasks during the capacity allocation and capacity smoothing of resources respectively pro-
duction factors shows that the original parameters primarily correspond to the modifications of technological system
elements. From this it follows that consequences mainly occur for the capacity allocation and capacity smoothing of re-
sources in case of any changes in the quantitative and qualitative availability of these resources or in other words during
the selection and (qualitative) evolution of the actors of the operation subsystem. Therefore, we assume that there are no
fundamental modifications of original parameters resulting from Internet based Production Concept.

However, the consequences for the derivative parameters are more serious. The modifications of interpretive
characteristics determine the capacity allocation and capacity smoothing of the resources in the operation subsystem. An
important factor is the factor mobility. In national economics, this describes the spatial, qualificational and sectoral mo-
bility of resources and is an essential condition of an efficient economy structure and/or efficient allocation mechanisms
(Schuman 1993, p. 389). In business administration, it approximately corresponds to a highly used variety and/or a high
flexibility of the production factors in an operation subsystem. From this it follows that an important consequence of
Internet based Production Systems ceteris paribus consists in a variation of the quantitative and qualitative demands for
production factors. Such modifications of the capacity allocation and capacity smoothing of production factors due to
new technologies and/or production concepts are neither for business administration nor for the business practice new.
However, microeconomics and/or institutional economics enable an analysis of the effects, e.g. coordination mecha-
nisms between economic actors, deriving from the modifications. Furthermore, it is possible to evaluate heterogeneous
objects as machines and facilities, and employees, as well as organizational units, each interpreted as actors in the op-
eration subsystem. Actually, the increased factor mobility tends to result in a lower demand for production factors. Yet
another result is that usability of the factors increase and therefore firms are able to reduce their reserve inventory re-
11
spectively their organizational slack without reducing flexibility. However, the economical analysis points out the risks
and costs of mobility (Schuman 1993, p. 389). They are to be included in the decision-making of capacity allocation and
capacity smoothing of production factors, e.g. as additional variables in Production Planning and Control (PPC).

A further interpretive pattern is the plasticity of the production factors. A highly used variety and/or a high
flexibility of the actors in the operation subsystem are a necessary, but not sufficient condition for that (Dietl 1995, p.
579). This means, it is to be assumed that an increase of the flexibility and possibly and even an increase of the mobility
induce an increase of the plasticity of already existing plastic actors; but it does not cause any generation of plastic ac-
tors. For a generation of plastic factors additional to the already existing flexibility high control costs are necessary (Al-
chinan/Woodward 1987, p. 115). From an institution-economical perspective, this is important since plastic production
factors are to be controlled only heavily due to the discretion room needed for high-quality results. Therefore, capacity
allocation and capacity smoothing have to aim at reducing the danger of the plasticity and/or at generating measures for
reducing and/or the handling of existing plasticity. In case firms could not implement plasticity as criterion in capacity
smoothing and coordination they have to choose analog to institution economics between externalization and market co-
ordination mechanism (purchasing of goods and services to be produced). In case the occurrence of plastic production
factors is not to be prevented and/or due to strategic considerations, (peripheral) plastic potential factors are not exter-
nalized, they have to considered as a restriction in the design of the operation subsystem. In sum, results from the ex-
plicit consideration of the plasticity during the capacity allocation and capacity smoothing that a conscious and/or in-
duced increase of the flexibility of production factors does not represent any positive modification of the operation sub-
system. With that, we contradict the opinion (implicitly) represented in many research projects that flexible production
systems are fundamentally positive. Yet, this does not mean that the increasing flexibility causes fundamentally negative
consequences. Rather we have to point out that with decisions for the capacity allocation, potential problems of plastic-
ity occurring under specific conditions of Internet Technologies in production processes have to also be considered.
Since these problems can compensate the advantages of flexibility, for example in the situation of a hold up or a moral
hazard (Alchinan/Woodward 1987, p. 115), the design of the operation subsystem and layout planning have to consider
existing plasticity and select the appropriate structures.

The design of the operation subsystem in general and the layout planning in particular constitute the relation-
ships between the actors in the operation subsystem. Since technological and/or process-related innovation fundamen-
tally have an organizational dimension, essential effects of the application of Internet Technologies and the Internet
based Production Concepts are to be stated and analyzed with the aid of new institutional economics. Through the modi-
fications found in the analysis of the effects of the Internet based Production Concepts a general expansion of the com-
petences of the actors seems to be useful. Therefore, an appropriate allocation of property rights as a benchmark for
competence enlargement is necessary. For this purpose, it must be determined how the hierarchical structures are to be
designed in order to keep down transaction costs and reduce problems discussed in agency theory. For example, modu-
larization often occurring from Internet based Production Concepts, increases the complexity of the organization itself.
However, the already discussed enhancement of the information processing capacity, as well as the ability, to place a
greater number of mutual contracts in the sense of property-rights theory, enable the actors to deal with the high organ-
izational complexity. Thus, additional and until now unknown optimization problems result, e.g. a structural overload
(Stolz/Tuerk 1992, p. 853).

However, the consequences of the application of Internet Technologies and Internet based Production Concepts
for the design of the operation subsystem can be explained by an analysis of organization theoretic causalities. From an
institution economical perspective, the application of Internet Technologies inside and between organizations induces a
shift of the optimal organization from hierarchical to cooperative and/or market mechanism. Therefore, essential deriva-
tive parameters are the potential cutting of the internal transaction costs due to the improved information flow, a de-
crease of the insecurity, the improvement of the actors’ rationality in the operation subsystem, as well as a (partial) re-
duction of the information asymmetries. In the examined case of the internal organization, modular structures are to be
recommended (Picot et al. 1998, pp. 56 and pp. 233). These are supported by the combination of the data and process
organization to be implemented in Internet based factory structures particularly easily. Furthermore, the increased in-
formation processing capacity of actors in the operation subsystem, faster reallocation of property rights due to the re-
duced transaction costs and information asymmetries, as well as the ability for an efficient conclusion of contracts
maintain modular structures in the operation subsystem. From the perspective of the management subsystem, the trans-
fer and the utilization of property rights are considered as an assumption of production order, materials handling, as well
as semi-finished or finished goods. From this it results that a decentralized secondary distribution of property rights
complies with an enlargement of decentral assignments of employees. However, we have also to emphasize that the pro-
duction segmentation concept achieves the re-integration of formerly dived processes, in particular of up- and down-
stream functions in small production units, and the institution economical benefit of modular and/or decentralized
12
structures that are also in production systems. Manufacturing segments are defined as decentralized, product-oriented
organizational units in the production, which contain several logistic stages and take on indirect functions, as well as
cost responsibility (Wildemann 1987, pp. 36; Corsten/Will 1993, pp. 320). They reduce lead times, delivery times and
inventories, as well as increase flexibility. Furthermore, transaction costs are lowered. A further advantage of the manu-
facturing segments or any other modular respectively decentral organizational approaches in manufacturing is the re-
sulting process orientation leading to a significant reduction of nonconforming goods and waste at the manufacturing
level. Our institution economical analysis confirms that it is useful to transmit enlarged decision and action competences
to the decentralized units. It is conceivable to allocate inventory management and in-house transportation together with
the specific production operations to the decentralized actors in the operation subsystem. The reduction of the up to now
prohibitory transaction costs with the aid of Internet Technologies in production processes enables this reallocation of
functions.

The consequences of the factor mobility are more comprehensive. Mobile and therefore variable actors in the
operation subsystem are an essential condition of flexibility. Nevertheless, the mobility and/or the variability actors were
examined in the previous production research for flexibility only in relatively narrow confines. In institutional econom-
ics, the mobility of actors determines a dynamic and very flexible, but although stable operation subsystem. This means,
that in an existing operation subsystem within given boundaries for example batch sizes, series specification, customer
specification etc. may vary. However, the operation subsystem does not change itself. For example, in the case of work-
shop production the processing steps between the single tasks are changeable; but the composition of the workshops are
unchangeable. In the same way, neither the group composition nor the boundaries of the group change during group
manufacturing. However, if companies apply Internet based Production Concepts the communications network and the
interaction between actors are in the center of the consideration and have a high influence on operations management.
With the aid of the communication network, actors continuously form new (bi- and multilateral) interconnections. The
resulting volatile transaction networks formed between the actors in the operation subsystem enable "fluid" structures or
even intraorganizational spherical networks (Miles/Snow 1995, pp. 7). Flexibility then means even variability of the op-
eration subsystem in themselves. For example, many actual research projects aim at the development of high flexible in-
frastructures that enable even the spatial mobility of heavy load facilities (e.g. http://www.mobile-produktion.de).

In case the discussed modifications and the decisions that are necessary for local operations are accomplished
with the aid of the local intelligence of the actors, autonomy of the actors arrives. For example, Reinhart (1997) already
proposes so-called autonomous production systems in which human and artificial actors act cooperatively and widely in-
dependent of central PPC. We understand the presupposed autonomy of artificial actors as the ability of machines or fa-
cilities, to execute jobs independently according to presupposed strategies and provided, local goals without direct action
of employees. Thus, autonomous production cells have for example a numerically controlled processing unit, as well as
the necessary cell-periphery and operate according to presupposed strategies and/or provided, local goals. They execute
dispositive and functional tasks autonomously or in cooperation with the responsible human actor in spite of possibly
occurring problems and within a determined degree of freedom (Reinhart 1997, p. 250). From the perspective of institu-
tion economics the modularization and decentralization of tasks in the production system and the (re)allocation of deci-
sion competencies in the operation subsystem is optimal in situations with low transaction costs and a sufficient ration-
ality, as well as a high information processing capacity of the actors.

However, the possibly occurring factor, namely specificity is not based on prohibitory transaction costs and
mobility barriers, but on special profits in a concrete application (Schuman 1993, p. 442). The factor specificity or in a
more general formulation, the specialization of the actors in the operation subsystem automatically leads to specializa-
tion-conditional dependences. These dependences have to be considered during the capacity smoothing in general, as
well as during the design of the layout operation subsystem in particular. Such dependences arise in practice for example
as process-specific restrictions onto the organization of the operation subsystem. From an institution economical per-
spective, organizational restrictions may additionally occur to the known technological restrictions. As a solution ap-
proach, the institution economical influenced organization research defines dependent and potent resources (e.g. Dietl
1995, pp. 579), respectively in our terminology dependent and potent actors. Dependent actors cooperate with other ac-
tors and provide a higher benefit than as is with an autonomous behavior. Actors are potent if other actors of them are
dependent. These qualities can occur alone or common.

In case an actor is dependent but not potent, the risks for example of a hold up rises. Therefore, organizational
research analyses alternative organization forms concerning their transaction costs efficiency, as well as their suitability
regarding dependentand potent, as well as the already discussed plastic actors. The result is, that both from an organiza-
tional, as well as from an production-economical point of view a central coordination is always necessary, when due to
process-specific and/or specialization-conditional dependences the sum of the local optima (in the subsystems) is lower
13
than the optimum of the super system of the whole production process. However, Dietl (1993) shows that the flexible
specialization is a suitable strategy for managing specialization-influenced dependencies and for the increase of the eco-
nomic adaptability respectively the flexibility as well. For example, an expansion of the qualification and/or an increase
of the information processing capacity enable a partial decoupling of actors from central planning authorities and in-
crease actors’ autonomy.

On the base of the discussed modifications in the operation subsystem and the consequences of the Internet
based Production Concepts for the management subsystem discussed until now, conclusions about the optimal produc-
tion planning and control (PPC) from an institution economical perspective are possible. The PPC aims at the applica-
tion of mechanisms for economical planning, operation and control of production processes in general. Mechanisms and
approaches to the production plan and operation are for example Optimized production Technology (OPT), KANBAN
and Manufacturing Resource Planning (MRP II). Main tasks of these concepts are goal-oriented operations’ planning
and control. Since the operation subsystem is represented for this purpose in the PPC, it follows that modifications of the
operation subsystem due to Internet Technologies or Internet based Production Concepts also lead to modifications of
the PPC. In other words: The concrete organization of an operation subsystem is important for the design of the produc-
tion planning and control.

The conditions’ precedents for optimal PPC are first of all functioning information processes within the opera-
tion subsystem (Kurbel 1999, pp. 53). However, the necessary data quality significantly depends on the data preparation
in the operation subsystem. Therefore, the actors in the operation subsystem should be enabled for processing of the in-
formation corresponding to PPC locally. The decentralized information processing capacity of the actors postulated in
many Internet based Production Concepts allow the required information quality, as well as quantity. However, from an
institution economical point of view, the already discussed modifications in the operation subsystem lead to changes in
information asymmetries between the planning and operating actors. For example, through the greater transparency of
the processes and/or the information about the processes, control costs sink and with that, the transaction costs in the
whole production system. In sum, the application of Internet based Production Concepts enables a qualitative, quantita-
tive and chronological optimal information supply for PPC. This means that the coordination costs (ex-ante transaction
cost), as well as motivation costs (ex post transaction cost) are lowered (Erlei/Jost 2001, pp. 38).

One further relevant field for the PPC where modifications occur due to Internet based Production Concepts is
the organization. We consider not only the single organization processes per se, but also we examine the consequences
of Internet based Production Concepts for the PPC. Therefore, we concentrate on the result of the organization process
that is the organization as a system of organizational arrangements.

As shown above, essential organizational consequences of Internet based Production Concepts are the tenden-
cies towards the decentralization and modularization in the operation subsystem. These tendencies constitute because of
increasing local information processing capacity, as well as the high connectivity of the applied technologies. According
to Reiss (1998, p. 117), we assume therefore an enabling of the organization. This means that the organization uses that
demanded decentralization potential of the technology for the construction of decentralized structures. From the point of
view of the property rights theory, the enabling of the organization combined with the (enlarged) decision rooms cause
also a necessity to allocate decision competences and property rights to the decentralized units. A transaction costs per-
spective shows that Internet based Production Concepts enable the immediate reduction of transaction costs due to the
application of information technologies. Furthermore, they enable the generation of potentials for the further reduction
of the transaction costs due to the reduction of the transaction frequency and the standardization of the interfaces. For the
PPC it follows, that a reallocation of tasks and functions from a (in most cases existent) central unit to the decentralized
units is appropriate. Reiss (1998, p. 117) even formulates that without a decentralized PPC ‘the autonomy of the decen-
tralized units exists only on the paper’. This situation is intensified by the continuous reorganization of the operation
subsystem enabled by the application of Internet based Production Concepts and induces modifications in PPC, e.g. in
capacity smoothing.

Positive effects are induced by the implementation of convergent technologies in the operation subsystem. They
lead to congruence between system design and organization; enabling a better fit between PPC and organization. The
introduction of convergent systems and/or the increase of the local intelligence enable the realization of the concepts of
the distributed problem solving as proposed by many Internet based Production Concept, e.g. Web-based Manufactur-
ing, and the re-integration of dispositive tasks into the decentralized units. According to Gutenberg (1983, pp. 147), this
means particularly the ‘planning as a condition of optimal productivity of production processes’. Furthermore, the tech-
nologies allow an improvement of the communication of every decentralized unit with the upstream and downstream
units because of the integration of information technologies on the shop floor. All actors in the operation subsystem are
14
interconnected so that the continuity of the systems and the availability of information increase. The research on PPC
often neglects the optimal use of human resources (Reiss 1998, p. 113). However, the influence of the reduction of coor-
dination processes and the resulting reduction of transaction costs enables the consideration of this criterion in PPC. It
takes effect affirmatively that the generation of small manageable structures decreases the problem of the moral hazard
in hierarchical operation subsystems from the point of view of agency theory (Picot et al. 1998, pp. 238).

However, for PPC follows considerable consequences from the application of Internet based Production Con-
cepts. Classical design of (central) systems of PPC assume explicit or implicit, that information asymmetries exists for
the benefit of a (central) planner (Reiss 1998, pp. 124). Only this planner has the information necessary for an optimal
planning and operation in production processes, whereas employees have the information necessary for the execution of
the plans. Agency theory considers the planner principal and the executive units (the actors in the operation subsystem)
as agents. An exactly turned around information asymmetries is postulated in this case for the benefit of the agents so
that for example the risk of hidden information exists (Elschen 1991, p. 1004). In sum, the effect of Internet based Pro-
duction Concepts are an improvement of the information structures, the tendency towards the generation of decentral-
ized units and the increase of the local intelligence. According to Reiss (1988), we conclude from these effects that a dif-
ferentiation between the theoretical knowledge of the PPC, that is only available in a central planning unit, and practical
knowledge, that is available in the decentralized units, becomes necessary. Whereas theoretical knowledge “can be ex-
plicitly expressed in rules, formulas, and theories”, the practical knowledge is the action-oriented knowledge on the shop
floor (Nilsson 1998, p. 64). The differentiation between these two types of knowledge in PPC allows in addition to an
enabling of the organization by Internet based Production Concepts the empowerment of organization resulting from the
(organizational) modifications in the operation subsystem.

Therefore, we can conclude from an institution economical perspective for operations management in Internet
based Production Concept that a decentralized system of PPC is needed. This decentralized PPC must assist the decen-
tralized actors in the operation subsystem with the decentralized decision-making, the perception of the autonomy for-
mulated in the Internet based Production Concept and the realization of the production processes. In other words: The
organizational and technological modifications caused by Internet based Production Concept in general and Web-based
Manufacturing in particular induce a demand for a (partially) decentralized production planning and control.

Conclusion

In sum, Internet based Production Concepts offer in comparison to the current production concepts many ad-
vantages. They apply new technologies widely in order to generate options in production, which were up to now un-
available and in order to realize competitive advantages. However, the application of Internet Technologies leads to
modifications in the production system inducing modifications in operations management. A situation emerges, in which
planning and control functions are transferred into the operation subsystem, and communication demands between the
management subsystem and operation subsystem increase.

If coordination tasks are transferred into the operation subsystem, then additional coordination mechanisms are
necessary. Particularly we have to consider an increase in the problem complexity for the actors in the operation sub-
system since they take on parts of the management system tasks. In this context, the coordination aims at the optimizing
of the relevant subsystem respectively the (cooperative) achievement of superior management goals. But this is prob-
lematic because of the complexity of the coordination processes increases with the number of the involved actors. There-
fore, it is important to find an appropriate mechanism for the coordination process. We assume that the opportunistic co-
ordination discussed in connection with (technical) multi agent systems is an appropriate approach. The opportunistic
coordination follows a principle of the maximum freedom degrees in selection problems (principle of opportunism) and
a principle of the least commitment (Fox/Kempf 1985, p. 489). Therefore, it enables a direct interaction and communi-
cation of the actors in the operation subsystem (Corsten 1999, pp. 319). Yet, commercial PPC systems do not consider
the opportunistic coordination.

However, Holstroem/Milgrom (1990, pp. 85) already have shown that immediate contractual relationships be-
tween agents (actors) are useful from an institution-economic perspective. Therefore, an institution economical approach
to operations management in Internet based Production Concepts must conceptualize the direct communication and the
decentralized coordination between actors in the operation subsystem.

15
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