In manufacturing, costs fall into two categories: those that respond to volume or scale and those that are driven by variety. Scale-related costs decline as volume increases, usually falling 15% to 25% per unit each time volume doubles. Variety-related costs, on the other hand, reflect the costs of complexity in manufacturing: setup, materials handling, inventory, and many of the overhead costs of a factory. In most cases, as variety increases, costs increase, usually at a rate of 20% to 35% per unit each time variety doubles.
The sum of the scale- and variety-related costs represents the total cost of manufacturing. With effort, managers can determine the optimum cost point for their factories—the point where the combination of volume and variety yields the lowest total manufacturing cost for a particular plant. When markets are good, companies tend to edge toward increased variety in search of higher volumes, even though this will mean increased costs. When times are tough, companies pare their product lines, cutting variety to reduce costs.
In a flexible factory system, variety-driven costs start lower and increase more slowly as variety grows. Scale costs remain unchanged. Thus the optimum cost point for a flexible factory occurs at a higher volume and with greater variety than for a traditional factory. A gap emerges between the costs of the flexible and the traditional factory—a cost/ variety gap that represents the competitive advantage of flexible production.
Author: George Stalk Jr.
Source: “Harvard Business Review”
Subjects: Finance, Management, Operations
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