Abstract
This paper considers the problem of managing process improvement when resources are constrained. The paper develops a system dynamics model that formalizes the critical interaction between first‐ and second‐order improvements as options for governing production. Both first‐ and second‐order improvement are effective in boosting short‐term organizational performance, whereas only second‐order improvement builds sustainable capability. Analytical results characterize the optimal trade‐off between these options (working harder and working smarter). Simulation results show how pressuring the workforce to work harder can set off a vicious cycle of deteriorating process capability that squeezes out improvement activity. Results also highlight the key role of process capability as a form of organizational slack and demonstrate tipping points in the dynamics of process improvement. By moving from causal loops to a simulating model, this paper provides an example of how formal quantitative modeling can lead to important insights not discovered with causal loop diagramming alone. Copyright © 2012 System Dynamics Society.
