Economies of scale" are characterized by costs per unit falling as the speed and volume of output rise. This definition has become the mantra of the manufacturing industry throughout the 20* century and continues today. The economies of scale mentality works as long as output growth is consumed by the market, but as soon as the market slows too much, levels off, or declines, scale economies begin to fail. Companies face two fixed obstacles when attempting to respond to their threatened economies of scale. First, managers are not trained to deal with this type of situation, so they apply economies of scale remedies and close plants or lay people off. second, economies of scale manufacturing systems are not designed for changes in demand and cannot adjust to deal with markets slowing or shrinking.
Most managers, executives, and engineers do not understand the underlying principles of TPS before they pick up the tools and attempt to apply them. As a remedy for this lack of understanding, people need a much deeper understanding of what rightdesigning for the lean enterprise really strives to accomplish-properly designing the complete system to give the customer just what they want, exactly when they want it, while maintaining superior quality at a minimum price-just as Toyota has always done. In this case, the minimum price means both an acceptable customer or market price and a manufacturer cost to support acceptable margins. Simply removing waste from the current systems is an improvement, but from the larger, long-term lean perspective the entire enterprise system needs to be completely redesigned.
Counter to this comprehensive perspective, the scale economies mindset leads managers to focus on cost reduction at point locations rather than system improvements. Cost reductions are not the issue-establishing continuously flowing (one-piece flow) value streams is the path to be pursued. A focus on point location improvements may seem to make sense at the micro-department level, but it reinforces the everdemanding increase volume mentality, which is the crux of failure for economies of scale.
In contrast to a lean, made-to-order design, economies of scale rely on batch production. To maintain favorable costs, managers push output through their local areas or departments and create an environment of speed and volume. These managers need to increase output because more product "absorbs" overhead creating the illusion of reduced costs. This mentality can be so ingrained that even if product is being produced in a cellular-value stream flow operation, the managers still plead with their people to bring down costs. "We need more cost reduction projects!" The demand to produce more to decrease costs creates a vicious cycle that confuses and deflates operations employees. Dr. Johnson explains that:
The main cause of overhead cost is kept to a minimum by minimizing the unit costs of output produced in every individual process. In other words, total cost is assumed to be the sum of individual costs in all the parts. Thus, the strategy for achieving minimum total cost is to produce as much output as possible in each and every part of the organization. Minimizing the cost per unit of output from every individual operation presumably ensures the lowest total cost for the products assembled from that output.
An inevitable but usually overlooked consequence of this cost minimization strategy is that it requires a company to produce more output in every period. The usual rationalization for requiring more output to achieve lower unit costs is the concept of scale economies.10
This speed and volume mentality creates overproduction. Taiichi Ohno famously professed that overproduction was the worst of all wastes: "the waste of overproduction- our worst enemy-because it helps hide other wastes."11 Ohno also states, "this kind of waste is definitely the result of pursuing quantity and speed."12 Overproduction is simply a waste manifestation of economies of scale.