Production economics

I'd be willing to bet that if I sent you a request for quote (RFQ) that specified various quantities, your quoted unit price would decrease as the batch size increased. However, you eventually reach a point at which increasing the batch size does not significantly lower the price. Your customer is very interested in that batch size threshold.

The price curve probably isn't a straight line, either. It looks more like a stair. These price plateaus usually are a consequence of material yield (number of parts that can be cut from a raw blank) or minimum charges for various processes. Your customer also is very interested in the quantities at the leading edge of those plateaus.

The relationship between price and batch size is driven largely by two factors: amortization of setup (fixed direct) costs and efficiency (learning curve). The learning curve benefit is subtle and difficult to predict and factors into your price only when you're pinching the last penny to woo the sweetheart client.

For one-time orders, your customer probably doesn't care to know too much detail about your setup costs. A few will ask for the setup to be quoted as a separate line item. Generally, if the customer is soliciting competitive bids, your (amortized) setup cost will differentiate you from the others.

For projects that repeat (weekly, monthly, quarterly), you and your customer are interested in dedicated fixtures and tooling that minimize the setup expense. This up-front cost is optional—the parts can be built without it. A dedicated process makes sense only when a long-term forecast is reliable.

Armed with that forecast, you benefit from both reduced lead-times and more consistency in production. An intangible (but significant) benefit is the investment in a business relationship.

When responding to an RFQ, part of your mission is to determine how firm the batch sizes are. Sometimes the customer must have exactly that quantity and no other. If the customer considers ordering to match your economies of scale, however, you both stand to benefit.

Obviously, the customer benefits from getting the lowest price for the smallest quantity. Doesn't it seem that your company would benefit instead from the largest quantity (that is, the biggest order)? No, and I'm not the first to say this. Throughput should be one of your obsessions.

You want maximum utilization of your capacity. This means having a diverse customer base over the long term (in the same way that you want your retirement fund to have a diverse portfolio to minimize risk and maintain steady income). If you run only big batches, you will have production clogs, which usually are directly related to loss.

Let's compare a job shop and a restaurant. Both offer the service of processing raw materials to meet a specific order. The waiter has an assigned section of tables and is particularly interested in tips. You can predict the payoff difference between a party of 20 (15 percent maximum) and five couples (at least a few will top 20 percent because of perfect service). Your "tables" are the processes that you offer. Just like a waiter, you get the biggest tip from happy customers. Fast, personalized service is highly valued by your customers.

If those five couples walk in right behind the party of 20, they wait longer than if they had arrived in the reverse order. It takes longer just to seat that many people. The waiter dedicates large blocks of time to taking the orders, presenting the meals, and busing. The other tables sit idle, as I'm sure you've experienced yourself. The more bills that are paid, the more tips will be given. Of course, you call them invoices and profits instead of bills and tips.

So what is the difference among just-in-time, lean manufacturing, throughput, and common sense? Metrology. (The measurement, not the weather—that's meteorology.) Be clear about how you measure your performance and regulate your processes. Communicate your production economics in meaningful ways to your clients. When in doubt, make customer delight your highest priority.

Let me know what you call your philosophy of manufacturing methodology.