Rescaling the economies of scale

I’d like to work on rescaling the economies of scale. Let me start with a brief look at what’s meant by ‘economies of scale’. This is very simplified, and we could talk for days about different nuances and exceptions and such, and if you want to start that conversation, I’m up for it. But this model will suffice for me to explain what I mean by ‘rescaling’.

For any given product, we can find a number of ways to manufacture it. (A rubber ball can be fashioned by hand-kneading and rolling a bit of rubber, or by injection molding.) For each method of manufacture, we can separate costs into two buckets: setup and per-unit costs. (Hand-rolling balls has basically zero setup costs but pretty high unit costs, injection molding has high setup costs but quite a bit lower unit costs.) These costs mean that for any given product, there are a number of regimes, under each of which a particular manufacturing method is most economical.

So, at its simplest, the concept of rescaling the economies of scale means using the same ingenuity we use in devising those different methods of manufacture to improve upon the tools which are part of those methods, as well. We figured out how to make rubber balls cheaper by using injection molding, now let’s figure out how to make setting up molds for new products cheaper, too.

And of course, we do that. At least, whenever a production process is not completely vertically integrated, and the product is under competitive stress, then there are separate firms making tools for the process, and they are subject to competitive pressure to reduce their prices. The successful ball maker will seek and find cheaper alternative vendors for the mold making process.

So, not necessarily a radical idea, looked at that way. It might be a little more radical to say that my reason for wanting to rescale things is so that smaller producers are empowered to use more sophisticated production methods for smaller batches. To shrink the gap between the concepts of ‘prototype’ and ‘small production run’. To help bring the promise of mass customization to fruition. To allow more people to scratch their own itches. To give more little ideas a chance to come to life without having to appease the mighty powers of capital. OK, that last one is probably skirting radical, so I’ll stop there for now.

One comment

  • Nicholas Gaul
    2011/09/06 - 07:54 | Permalink

    Well, I’m certain you’re familiar with the emergent technology of 3D printing, seeing as you’re the person who first described it to me several years ago, and CAD/CAM, while not by any means a “mature” technology, has been on the market long enough that open-source solutions for it exist. So we may be on the cusp of an explosion of micromanufacturers testing and marketing their ideas without having to go through the trouble of securing corporate capital.

    But that’s really only one manufacturing solution being applied to many different small firms with different product ideas, rather than a proliferation of new manufacturing solutions. That’s somewhat more difficult to arrive at – there aren’t any current market incentives for such a thing to happen. An entirely new product is one thing, but an entirely new manufacturing process has some very high barriers to entry, and would be a highly speculative venture. Now, that isn’t to say that you can’t find a small firm willing to take the risks – but with the limited liability model, its the investors (or the bank) that takes the risk. Banks are not known for their love of highly speculative ventures – which is not to say that they still don’t manage to make terrible decisions anyway – and investor psychology can be all over the place – and both of these things are representative of the mighty powers of capital that you’d understandably rather not have to appease.

    The way to lower the barriers to entry would be the design and manufacture of tools by the current capital-holders that could be used by the new manufacturers to develop their processes – but that presents a chicken/egg problem; the current capital-holders have no reasons to design tools aimed at small firms developing new manufacturing processes until such firms exist and are ready to write checks; the small firms have no reason to open until the tools exist.

    One potential policy solution would combine the emergence of 3D printers and CAD/M, either open-sourced or licensed, to allow an initial proliferation, and then implement a small-business favoring change in the corporate tax code with a several-financial-quarter delay before implementation, giving the small boys time to announce their intent to get in the game and giving the big boys time to assess their new customer base and develop new tools to sell.

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