Manufacturing variability

Too wide,reject.

Perfect,pass.

Too thin,pass. But…

Reliability problems,weak and failure

Question: Does higher quality cost money?

Scrap – or rework

Six quality

Part too small Part too large

~ four quality

~ one quality

Inside the Oreck (1)

Inside the Oreck (2)

Reducing costs through higher quality

► Quality• TQM, Six sigma

► Less re-work► Lower costs

• Careful Measurement• Incentives• Involvement • Teams• Supplier relationships (get higher quality inputs)• Design for manufacturability (or service delivery)

Lowering costs

Lower costs

PROFIT

Efficiency

Innovation

Quality

Customer responsiveness

V P C

Higher customer value and prices

The Experience Curve

► Studies during WWII uncovered a relationship between the number of ships produced and the cost of production

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24Months

Cos

t (re

lativ

e to

sta

rtin

g co

st)

The Experience Curve

► The relationship between the number of ships produced and the cost of production became known as “the experience curve”

► This can be subdivided into two distinct effects with different causes -• Scale• Learning

• Defraying fixed costs

• Greater specialization

Unit cost

Production volume

c0

c1

v0 v1

Economies of Scale

Why does this matter?

►Scale anyone can achieve►Competitors will seldom if ever be able to

match your cumulative volume even if they can get the same market share

►Learning is one source of first mover advantage

►Knowledge is often ‘sticky’ and leaning is hard to replicate