Counterpoints
If a manufacturer can produce just in time then there is no inventory.
Not true. There is always WIP for a multi-staged production process. Please name one manufacturing company that operates as a going concern but has no inventory on it's balance sheet. I'd love to see it.
Nevertheless, small quantities don't work well in the North American market which is the largest market in the world. If nothing else, if delivery of product cannot meet demand it works against you.
I didn't say small total quantities. (Of course every company, including Valence, has to do it's best to meet overall market demand.) I was referring to desirability of large or small batch quantities from a manufacturing policy perspective. Imagine, for the sake of argument, a hypothetical manufacturing company with a production schedule that has a production run of 500,000 units scheduled for production beginning tomorrow, and the run will last for three weeks. Motorola calls and asks for a rush shipment of 50,000 units of a product that they have placed a blanket PO for, but they need it 2 weeks earlier than they thought, and they'll give you twice the profit margin if you can meet delivery. The only way you can do so is if you break your planned production schedule for the 500,000 units and run the Motorola rush order now. Full absorption costing might lead your production manager to refuse the Motorola order because it might make him run a smaller batch size than his economical batch quantity would dictate. But if you look at the impact on throughput, you might take the order because total cash contribution to fixed costs, overhead, and profits might increase. My point is that you need to look at the big picture and not suboptimize your manufacturing decisions over issues like economical batch quantities, else throughput and profit may suffer.
I have often seen financial statements that show a 5% increase in sales but it translates to a 20-30% increase at the bottom line. This is often referred to as the ramp. Ramping up production to peak profitability.
No argument there.
Flexibility is the dream of every manufacturer. To be able to produce in small but profitable quantities and yet, have the capacity for large scale production. Sometimes, it is achieved in the real world but more often, not. We haven't gotten that good yet.
Maybe not at Valence, but at other world-class manufacturers, it happens every day.
P.S. I know a man who invented, patented and made working prototypes of a polycarbonate engine that produced 300 HP and weighs only 50lbs. He couldn't sell it. One company gave him their reasons. They told him that planning and tooling for it would cost 3 billion and they didn't feel the market for it would be big enough to make it profitable. He finally went into production himself. He makes them now for racing cars and the Navy.
That's an entirely different subject. You're talking break-even costs now. I was talking about batch quantity size, not planning and tooling costs. Good point, but not relevant to my previous comments.
Razor |
