Economies of scale and lean are two separate concepts that I have always thought sometimes seem to be at odds with each other.
Lean focuses on one-piece flow and on making only the quantities that your customers need. By using lean approaches to improve your processes, you should be able to reduce their cost, making it not only feasible but profitable to produce small quantities.
On the other hand, the basic definition of economies of scale is that the marginal cost of production decreases as your volume increases. The more you produce, the less each unit costs.
In any operation, there probably is some minimum volume you need to produce to be profitable. And your marginal cost may go down as you produce more – provided you can sell what you manufacture.
I am pondering these issues because of a comment I heard at a recent high-level Energy Conference hosted by Forbes magazine. The comment occurred during a panel discussing electricity, and it came from Charles Gay, Ph.D., vice president and general manager of the solar business group of Applied Materials.
Gay’s group manufactures solar panels and related products. He said that the cost of electricity produced by solar devices would be competitive today – without any improvement in existing solar technology – as soon as the volume of production increases. “We’re taking manufacturing economies of scale and applying them in the solar sector,” he said.
You may be tempted to ask, so what? Sure, the price would be competitive if they sold more. And if pigs had wings, they’d be pigeons.
Still, I thought his statement provided an interesting insight into the challenges of going green. The day I spent at the conference brought home the fact that, from a business standpoint, going green is all about crunching numbers. What is the cost per kilowatt of electricity from solar vs. wind vs. nuclear power? How do you calculate the ROI on a green initiative? What is the payback period? What will happen to the cost of oil in the future?
You could say that all of business is about crunching numbers. The difference here is that green issues involve crunching numbers in ways that most people haven’t experienced before, and that also involve a lot of uncertainty as to what many of those numbers are or will be.
And for me, this reinforces even more strongly the relationship between lean and green, which I’ve written about before. A lean approach can remove waste from green approaches (which are themselves about removing waste), and can therefore move up the day (or lower the minimum production point) where those initiatives become profitable.
That is good for both business and the environment.
Some interesting points and common misconceptions come to mind through this discussion.
ReplyDeleteThe economies of scale - volume purchasing - can be achieved while applying lean thinking. We must simply get past our current paradygm - taking delivery of all the product when we order it. Work with your suppliers and develop an annual purchase agreement that allows periodic shipments in smaller quantities (your supplier ships to you when you have customer orders). Many of my customers suggest "our suppliers won't do that" - without even asking. You are the customer and you may be surprised what your supplier will do - ASK!
The other similarity that comes to mind with green and lean is that traditional accounting methods do not support either initiative. We must rethink how we calculate return on investment if we are to implement lean or go green.
Norm Bain
www.normanbain.com
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