http://www.slideshare.net/johncleveland/lean-manufacturing-2753881 Lean vs.

Economies of Scale & Excess Capacity One of the less-well understood ways in which lean manufacturing transforms the logic of cost management is in its approach to economies of scale and excess capacity. Traditional manufacturing designs production systems for high volume, low variety manufacturing. This kind of production tends to favor large, dedicated machines and other fixed costs. A high fixed to variable cost ratio in turn favors over-production in order to reduce the marginal costs of each additional unit produced. In traditional manufacturing companies, excess capacity is allocated to current product lines in order to full absorb all overhead. This, of course, grossly distorts the actual cost of producing products, since the unused capacity is unrelated to a specific product. A core principle of TPS and other lean manufacturing systems is to match production capacity to customer demand (embodied in takt time, or the pace of production that exactly matches required delivery schedules). Excess capacity or worse, excess production, are treated as serious wastes to be avoided at all costs. This philosophy seeks to achieve the same product costs regardless of volumes, thereby eliminating the entire concept of economies of scale. This, in turn, leads to the design of small, flexible production units with smaller, flexible machinery that can be rapidly adapted and reconfigured. As high a variable to fixed cost ratio as possible is sought. This enables a company to be profitable during a downturn in sales, as well as during a growth period. Critical to this concept of right-sizing of production capabilities to meet demand, is the elimination of large tombstone machinery dedicated capacity such as heat treating, painting, washing and other common processing equipment. A continuous struggle in lean enterprises is the elimination of these constraints and bottle neck through the design of new manufacturing processes and equipment innovations. Adding the cost of excess capacity to a product line can greatly distort actual costs, leading to inaccurate information, and in turn, poor decisionmaking. Whether excess capacity exists or not should have nothing to do with the costs of individual product lines. In the scope of the enterprise as a whole, excess capacity must be understood and accounted for, but charging it to individual products is misleading and inaccurate. (Huntzinger, P. 179) Lean and Company Strategy There are people out there who are big in the lean world in the U.S. and still dont understand the strategy part. They feel that no matter what the situation, add a little lean and your going to fix it. If you dont have a good business strategy, lean alone wont solve your problems...You have to look at the markets youre in, the business, your technology and your competitive advantage. Ive seen some businesses without good strategies that have done very well with lean and not perform. Without the fundamentals of strategic planning and the right business, its

useless. There are a lot of manufacturing guys out there who dont understand strategy and conversely there are a lot of marketing guys out there who dont understand lean. You need a good mix. (Mark DeLuzio, Lean Horizons, quoted in Manufacturing News , 6.29.01) Lean is primarily an improvement technology, not a business strategy it focuses on doing things right vs. doing the right things. It is not, at its core, a discipline that helps companies formulate their broader business strategies and answer such strategic questions as: What business do we want to be in? What markets do we want to be in? What customers do we want to serve? What products and services do we want to offer? How do we want to be positioned in the market? What is our basis for market differentiation? Lean does, however, eventually become closely linked to company strategy in two dimensions: Strategic flexibility. The new performance capabilities of a lean organization (quality levels; costs; delivery times; production flexibility) give it greater flexibility to make strategic choices in the market. Eliminating the waste of having the wrong products for the wrong customers in the wrong markets. When lean thinking begins to be applied at the extended enterprise level, not just the manufacturing level, (for instance, Womacks principle of understanding quality from the customer point of view), it forces the company to revisit its strategic positioning, as well as its product and service scope, and its choice of market segments and customers. ***************************************************************************** http://www.netobjectives.com/blogs/economies-scale-dont

Economies of Scale (Don't)

December 2, 2008 Posted by Guy Beaver "Economies of Scale" is a phrase that is often mentioned as a desirable state for growing enterprises. After all, being large enough to drive cost down by sheer purchase volume is a logical progression of successful companies. But what is the price paid for achieving this milestone? This blog post exposes hidden waste that must be controlled when economies of scale take over. I'll touch on how Lean approaches can prevent and eliminate the wasteful belief systems that clog the flow of product delivery.

Jeffrey Liker describes the motivation for Lean in his very excellent book, The Toyota Way. The post-World War II economy was so limited that manufacturing enterprises could not afford inventory, so they had to find other ways to manufacture. While Ford and GM used mass production, economies of scale, and big equipment to produce as many parts as possible, as cheaply as possible, Toyota's market in post-war Japan was small. Toyota also had to make a variety of vehicles on the same assembly line to satisfy its customer.

Thus, the key to their operations was flexibility. This helped Toyota make a critical discovery: when you make lead times short and focus on keeping production lines flexible, you actually get higher quality, better customer responsiveness, better productivity, and better utilization of equipment and space. (p. 8) With good intentions, business success and growth is often accompanied by a focus on cutting costs. Increased size creates opportunities to reduce costs by volume purchases and the ability to store inventory. But, too often, the ability to purchase and store inventory creates unintended opportunities to hide waste and wasteful activities. Since the cost of inventory is reduced, its perceived value is also reduced. In the manufacturing world, this is manifested by organizational focus on further reduction in cost, which de-focuses the enterprise from its fundamental purposeadding value to their customers. A common result is that wasteful behavior creeps in. In the interest of keeping large, expensive machines (or processes) running, inventory is allowed and even encouraged to grow. Cost accounting even values inventory as an asset. The cost reduction achieved through large volume purchases can create a wasteful culture that hides inefficiencies, defects, and non-value-added activities. A reoccurring pattern that I've discovered in large organizations is what I call "The Professional Syndrome." It occurs when large groups of highly skilled professionals are individually tasked with multiple projects and make progress each and every day against what they individually perceive as the "most valuable" way to fill their productive time. With large batches of nonprioritized (but important) work "pushed" through the professional organization, individuals can easily be blocked due to waiting, delays, etc. But their professional behavior (and skills in multitasking) drives them to work on the next most important task. Integrate this over time for the large number of projects that are pushed through the organization and the unexpected result is the biggest cause of unnoticed waste everyone "almost" working on the most important thing. There is even a well-documented approach for managing this pattern known as "project portfolio management," which by its very nature, batches up large volumes of work with little or no visibility into priority, other than "it all has to be done." If parts are cheap then it becomes OK to waste them. If requirements are plentiful, then the same behavior creeps in. Hidden in each day's task-shifting activities are wasteful delays and impediments which the organization has no motivation to address. If instead, small batches of highest priority requirements are worked on to completion, any delays are instantly made visible, and the organization can "inspect and adapt" on a regular basis. The Lean approach was created by the need for sustainable manufacturing practices that did not require inventory. In doing so, the unexpected outcomes were optimized approaches that maximized flexibility and created structures that brought immediate attention to wasteful activities and behavior. This "line-of-sight" seems to be missing in most large enterprises that organize around skill sets. Transparency and focus on value-added activities should be the structure of the delivery organization if Lean methods are to take hold.

Lean production

It aims to combine the flexibility and quality of craftsmanship with the low costs of mass production
Oct 19th 2009

Lean production is the name given to a group of highly efficient manufacturing techniques developed (mainly by large Japanese companies) in the 1980s and early 1990s. Lean production was seen as the third step in an historical progression, which took industry from the age of the craftsman through the methods of mass production and into an era that combined the best of both. It has been described as the most fundamental change to occur since mass production was brought to full development by Henry Ford early in the 20th century. The methods of lean production aim to combine the flexibility and quality of craftsmanship with the low costs of mass production. In lean-production systems a manufacturer's employees are organised in teams. Within each team a worker is expected to be able to do all the tasks required of the team. These tasks are less narrowly specialised than those demanded of the worker in a mass-production system, and this variety enables the worker to escape from the soul-destroying repetition of the pure assembly line. With lean production, components are delivered to each team's work station just-in-time, and every worker is encouraged to stop production when a fault is discovered. This is a critical distinction from the classic assembly-line process, where stoppages are expensive and to be avoided at all costs. Faulty products are put to one side to be dealt with later, and a large stock of spares is kept on hand so faulty components can be replaced immediately without causing holdups. With such a system, workers on the assembly line learn nothing and the faults persist. When a lean-production system is first introduced, stoppages generally increase while problems are ironed out. Gradually, however, there are fewer stoppages and fewer problems. In the end, a mature lean-production line stops much less frequently than a mature mass-production assembly line. Lean production gains in another way too. In typical assembly-line operations, design is farmed out to specialist outsiders or to a separate team of insiders. Gaining feedback from both the production-line workers and the component suppliers is a long and awkward process. With lean production, designers work hand-in-hand with production workers and suppliers. There is a continuous two-way interchange. Snags can be ironed out immediately and machine tools adapted on the hoof. With the assembly-line model, the communication is linear. Lean-production methods have been introduced by many companies without sacrificing economies of scale. Japanese car manufacturers have achieved unit costs of production well below those of more traditionally organised European and American manufacturers with twice their volume. These same Japanese companies have also been leaders in the speed and efficiency of new product design, a crucial skill in a world where time to market is an important competitive lever.

According to Michael Cusumano, who wrote a book on the Japanese car industry, the high productivity achieved by the lean-production methods of Japan's car manufacturers depends not as some have maintained on a peculiarity of Japanese culture or of Japanese workers, but on technology and management. He wrote:
The methods challenged fundamental assumptions about mass production. These consisted of revisions in American and European equipment, production techniques, and labour and supplier policies introduced primarily in the 1950s and 1960s when total Japanese manufacturing volumes and volumes per model were extremely low by US or European standards.

Criticism of the idea has centred on the feeling that it is possible to be too lean. Beyond a certain point, a sort of corporate anorexia sets in. The total absence of surplus stock or labour can become a serious liability when there is even the slightest disturbance in normal processes or procedures. Further reading Cusumano, M., Manufacturing innovation: lessons from the Japanese auto industry, Sloan Management Review, Vol. 30, 1988 Womack, J., Jones, D. and Roos, D., The Machine that Changed the World, Rawson Associates, New York, and Maxwell Macmillan International, Oxford, 1990 More management ideas This article is adapted from The Economist Guide to Management Ideas and Gurus, by Tim Hindle (Profile Books; 322 pages; 20). The guide has the low-down on over 100 of the most influential business-management ideas and more than 50 of the world's most influential management thinkers. To buy this book, please visit our online shop.

http://businesscasestudies.co.uk/business-theory/strategy/methods-of-growth-economies-ofscale.html#axzz2SPQqcMIy

Strategy theory Methods of growth, economies of scale

Businesses can grow either organically i.e. through internal growth where profits are ploughed back into the business, or through external growth such as through take-over or merger with another business e.g. when Cadburys and Schweppes joined together. Growth enables a business to benefit from economies of scale with profound implications for the economics of production. Technical economies are when businesses are able to benefit from improved techniques involved with large scale production. For example, a company like Gillette or BIC operate with very large

modern factories using automated production technology. The result of using these technologies is that costs of production are reduced significantly while quality control is kept to a very high level with virtually zero defects. Managerial economies of scale involve these firms in employing skilled production managers with the experience of working with modern technologies enabling them to manage highly sophisticated state-of-the-art factories.
Just-in-time

Commercial economies are concerned with the purchase of stocks (and the selling of end products) using a large scale approach. Modern production plant are able to operate using components and materials that are purchased just-in-time for their use. The production line is managed at the speed required to meet the needs of end consumers just-in-time. Because companies like BIC and Gillette use mass production techniques they are able to operate their plant at high levels of capacity, while benefiting from bulk purchasing of components, equipment and materials. Risks spreading economies of production mean that plants are able to produce a wide variety of products. For example, in a modern confectionery plant run by Cadbury Schweppes, it is possible to switch part of factory capacity from lines where demand is falling, to lines where demand is rising through well organised production management. By growing a business so that it operates on a large scale it is possible to benefit from a variety of production economies of scale. These economies enable large scale production at much lower costs per unit than would be possible in a small plant.

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ASCAR, Toyota, and Economies of Scale

Feb 21 Posted by Joe Wilson In honor of the upcoming Daytona 500, Im going to touch on a couple stock car topics this week. In 2007, Toyota began racing its Camry in the top NASCAR series. A year later, Joe Gibbs Racing switched brands and began racing Toyota branded vehicles. For the first 4 years of the

partnership, JGR built their own engines while TRD made the rest of the engines for the Toyota teams. That arrangement is changed and TRD will now supply the engines for the Gibbs teams. That, in itself, is not particularly interesting especially as it relates to Lean. The part that I find most interesting is in a quote about the change from TRDs president Lee White who says in this article, Building for three teams or less is extremely expensive and inefficient. Were hoping to recognize the tremendous economies of scale by spreading these costs across six or more teams in the future. As Lean Thinkers, one of the things we initially try to cut out of our vocabulary is the phrase economies of scale. The phrase carries a stigma of filling warehouses with product to satisfy an outdated accounting metric. What this highlights is that there is some real value to the thought as long as we arent using it to justify avoiding changeovers and over producing to keep machines busy. The reality is that there is a significant investment to obtain a facility, outfit it, and hire and train the people that work in it. A company can be the most Lean operation in the world in terms of their variable costs, but if the fixed costs are too high at the volume they run there isnt much left to work with in looking at the Profit = Price Cost equation. Instead of banishing the words economies of scale, maybe we should just move them out of the micro level (process and operation) and in to the macro level (overall customer demand). There is another Lean theme that comes up in the article. Both TRD and Joe Gibbs Racing representatives talked about the impact of this change on the people that work for them. Both went out of the way to say that it would provide stability for the employees and that there wouldnt be any layoffs as a direct result of the change. I can only take those statements as face value, but it was refreshing to read about a move like this that wasnt directly correlated to layoffs. http://beyondlean.wordpress.com/2012/02/21/nascar-toyota-and-economies-of-scale/