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Affluent Investor | July 22, 2017

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Too Big to Succeed: Why America Should Swap Smarts for Scale

Take a standard in industry for over 50 years and chuck it. British economists George Maxcy and Aubrey Silberston in 1959 developed and published a cost curve which describes the relationship between the total cost per unit and annual production volume.[1] It has been an industry standard ever since. But two industry pioneers launched this standard and created something different; something much more efficient and profitable.

Taiichi Ohno of Toyota and Frank Woollard of Morris Motors understood and implemented production based on a different cost curve. Ohno and Woollard’s production cost curve is a “flow cost curve,” while the Maxcy-Silberston cost curve is better characterized as a “scale cost curve.”[2]  This translates to Ohno and Woollard driving down time – throughput or production time, material handling time, labor time (via fewer workers per unit output), storage time, and capital expenditures[3] (less capital per unit output) – in order to nearly completely flatten the cost curve at the beginning of the curve – at the lower volume of output.  (See figure below.)

SOURCE: Adapted from Bob Emiliani, April 2009, “Toyota’s British Influence,” Superfactory.com.

SOURCE: Adapted from Bob Emiliani, April 2009, “Toyota’s British Influence,” Superfactory.com.

In Toyota’s case Taiichi Ohno called his system a “limited volume” system,[4] and stressed that the fact it was a limited production system was the critical difference between Toyota and scale production manufacturers.[5] The entire concept of Kaizen, or continuous improvement, was based on leveraging people’s knowledge, skills and experience to improve the system closer and closer to one-piece flow[6] – or ideal limited production.[7] This operational view was the exact opposite business model of scale production or the opposite of economies of scale thinking. Ohno stated that “[e]fficiency is never a function of quantity and speed.”[8]

The concept of improvements over time versus volume over time was literally beat into one of my colleagues’ heads. Bob Emiliani, PhD, and professor of engineering at Central Connecticut State University, was a former engineer at Pratt & Whitney Corporation. During a discussion he had with his Japanese mentor, Mr. Doi, about the relationship between cost and production volume (in reference to the Maxcy- Silberston cost curve), Mr. Doi “sternly admonishes Emiliani – actually rapping [Emiliani] on the head with his knuckles – telling [him] that it was not the right way to think.” Mr. Doi went on to tell him, “If a manufacturer expects to meet customer’s expectations with respect to prices in competitive markets, then costs must decline as a function of time, not volume, by improving designs and processes from beginning to end.”[9] What Mr. Doi is saying is that economies-of-scale does not drive cost reduction, but improvements (Kaizen) over time are the true driver – or, at least, it should be. This notion is at the crux of this discussion – and, in essence, at the crux of a lean business system.

Essentially one-piece flow is the key to driving the elimination of economies of scale thinking; and, in turn, the very manner in which we design and operate manufacturing systems.  At the basic level designing for one-piece flow completely changes the design of equipment and systems.  Machines are designed to produce a batch of one, not a batch of many.  Utilizing this concept dramatically reduces the scale of the machines, which, in turn, dramatically reduces the cost of each piece of equipment.  Therefore, capital outlay is greatly reduced and the machine or system is set-up to produce one-piece at a time to the beat of the customer’s time.[10]

A price deflationary economy is perceived as a negative phenomenon, but as those organizations implementing a lean business have discovered, and as Toyota and the former Morris Motors also discovered, chucking an economies of scale operational practices will make your organization thrive.

[1] George Maxcy and Aubrey Silberston, 1959, The Motor Industry, London, England: George Allen & Unwin Ltd.), p. 94, see Figure 2.

[2] Bob Emiliani, April 2009, “Toyota’s British Influence,” Superfactory.com, http://www.superfactory.com/articles/featured/2009/0904-emiliani-toyota-british-influence.html.

[3] Capital cost reduction is the one aspect which is not time based as are the others listed.

[4] Taiichi Ohno, 1988 (Japanese edition originally published in 1982, Genba keiei), Workplace Management (Portland, OR: Productivity Press), pp. 30-31.

[5] The subtitle to Taiichi Ohno’s book Toyota Production System: Beyond Large-Scale Production in Japanese is 脱規模の経営をめざして and would be better translated as “Aiming for Non-Scale Management” or “An Escape from Scale-based Management” or “Towards Management Not Based on Scale”.  Ohno was clearly saying the Toyota Production System is a way out of scale or volume-based production.  (http://www.gembapantarei.com/2007/06/10_common_misconceptions_about.html).

[6] Any reference to one-piece flow, continuous flow, or simply flow means one-piece flow, not continuous flow in the sense of continually moving parts.

[7] Taiichi Ohno, 1988 (Japanese edition originally published in 1978, Toyota seisan hoshiki), Toyota Production System: Beyond Large-Scale Production, (Portland, OR: Productivity Press), pp. 10, 59, 68, and 109.

[8] Taiichi Ohno, 1988 (Japanese edition originally published in 1978, Toyota seisan hoshiki), Toyota Production System: Beyond Large-Scale Production, (Portland, OR: Productivity Press), p. 108.

[9] Bob Emiliani, April 2009, “Toyota’s British Influence,” Superfactory.com, (emphasis added), [http://www.superfactory.com/articles/featured/2009/0904-emiliani-toyota-british-influence.html].

[10] This idea, called Takt Time is the demand rate of a product from the market (from customers) calculated for production typically on a per shift basis, and is calculated by (customer demand per shift)/(time available per shift).

Jim Huntzinger began his career as a manufacturing engineer with Aisin Seiki (a Toyota Group company and manufacturer of automotive components) when they transplanted to North America to support Toyota. Over his career he has also researched at length the evolution of manufacturing in the United States with an emphasis on lean’s influence and development. In addition to his research on TWI, he has extensively researched the history of Ford’s Highland Park plant and its direct tie to Toyota’s business model and methods of operation.

Huntzinger is the President and Founder of Lean Frontiers and a graduate from Purdue University with a B.S. in Mechanical Engineering Technology and received a M.S. in Engineering Management from the Milwaukee School of Engineering. He authored the book, Lean Cost Management: Accounting for Lean by Establishing Flow, was a contributing author to Lean Accounting: Best Practices for Sustainable Integration.

 

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