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What Is a Hidden Factory?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 22 November 2016
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    2003-2016
    Conjecture Corporation
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The term hidden factory is used in organizational operations to describe the types of activities that may ultimately cost the company financially. It may also lead to situations where the organization will put in more effort than required, ultimately leading to a waste in time and raw materials. The ultimate effect of hidden factory is to cause the company or organization to increase its final costs as a sort of compensatory measure, setting off a chain of unpleasant and unrewarding consequences. Hidden factory is also distinguished from other items that may cost a company due to the fact that they are not immediately apparent or tangible.

An example of this can be seen in a situation where the machinery that is used in the production process cannot be operated by a new employee. In such a situation, the inability of the employee to operate the machinery will set off consequences that include lost labor and lost man hours. During this, the company might keep a tally of all the hidden factory and add it to the final cost of the product. Assuming the product in question is a kitchen appliance and the company increases the price of the product in order to offset the hidden factory, this will further cost the company.

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In the situation described above, the company will still encounter more hidden factory in the form of unhappy customers who may rebel at the increase in the cost of the kitchen appliance. Where this is the case, such customers might take their business elsewhere, or they might launch a barrage of complaints against the move toward the company through its customer service. The rebellion by the customers is a hidden factory, because it will affect the bottom-line of the company. It will also tie up the company’s resources by keeping the customer service agents busy fielding their calls when they could have spent their time with prospective new customers.

The same applies when the company fails to exercise tight process control during the production process, leading to the production of substandard or defective material. For instance, if a company that packages and sells fresh eggs fails to observe proper process control, and tainted eggs are sent into the market, such a move will cost the company. Not only will it have to contend with unhappy customers, recalls, possible government sanctions, and the cost of destroying the eggs, but it may also have to deal with lawsuits.

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