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Technology Stocks : VALENCE TECHNOLOGY (VLNC)
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To: William Epstein who wrote (11544)5/29/1999 4:06:00 PM
From: Razorbak  Read Replies (1) of 27311
 
Large Batch Quantities Often Lead to Decreased Profits

Bill: I don't agree with your statement that small quantity runs are not profitable. This is a central fallacy of full-absorption cost accounting, and it has often led to the long-term decline of many manufacturing plants around the world. Read some of Eli Goldblatt's work (e.g., The Goal, Theory of Constraints, et al), and you will begin to appreciate how the popular accounting concept of full-absorption costing is actually a poor manufacturing policy to embrace since most set-up time is performed by direct labor manpower that is already on the payroll (whether the plant is currently producing product or not), and large batch quantities often only increase inventory rather than throughput (i.e., the rate at which a system generates money through sales).

Goldblatt argues that it is critical to distinguish sales from production. While manufacturing operations traditionally measured production at each stage of production, the only throughput that counts is that which comes off the end of the line to be sold. Why? Because "the goal" of any manufacturing company is to make money. (Hence the title of Goldblatt's first book.) Mathematically, throughput is expressed as sales minus the raw material inventory content of the sales. In generic terms, throughput is a quantitative measure of the entity that the organization seeks to maximize. Unfortunately, running large batch quantities often decreases profitability rather than increasing it due to the increased carrying costs of inventories and the inherent knock-on effects on overall throughput.

See the following links for more details.

rogo.com
amazon.com
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