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Published: April 9, 2002

 
 

Reinventing Scale: How to Escape the Size Trap

What’s next? Our experience in industries ranging from aerospace to packaged goods, from pet foods to petrochemicals, leads us to believe the next step in the evolution of manufacturing will be some form of reinventing scale. As manufacturing organizations have decentralized all but core capabilities — while at the same time entering into dependent relationships with key strategic suppliers and partners — they have become more complex, not less. They resemble many-segmented organisms, to which no single, all-encasing concept is appropriate. Reinventing scale through value chain mapping and a deeper understanding of costs is a step toward adapting this important economic concept to new manufacturing realities. By escaping the binary thinking that has entrapped them, companies can unleash value, perhaps from places they didn’t know, or even suspect, contained it. Equally important, they can avoid paying to mine value from areas inaccurately assumed to hold it.

What does it mean to “revisit scale” and “unleash value”? The fundamental issue, obviously, is cost. After all, economies of scale are defined as cost savings due to volume. Therefore, only by understanding the real costs inherent in the flow of products and in the manufacturing processes themselves can we discover untapped value.

Most manufacturers continue to see themselves, mistakenly, as somewhat unitary, static businesses. But a large business is really a network of intertwined, small, value-adding functions and product flows, each of which may be subject to very different scale effects. Some steps in the value chain (e.g., canning) may indeed require a traditional bigger-is-better type of operation, while others (e.g., loining) definitely do not.

This core understanding underlies what we term the “Three U Framework” for reinventing scale. (See Exhibit 1.) The three elements of this schema, which are detailed below, are:

  1. Understand — map your value chain.
  2. Unbundle — break it apart.
  3. Unleash — put it back together in a different way, taking advantage of any real economies of scale.

Step 1: Understand and Map
The value chain should be thought of as extending from raw materials to final sale, consisting horizontally of multiple product flows and vertically of the value-adding functions, such as transportation, conversion, and selling. (See Exhibit 2.) Companies have become quite adept at parsing their value chains, but not — in our experience — in the context of looking for scale.

The horizontal dimension shows the flows of different products (from raw materials to finished goods) that are going through a series of actions (e.g., manufacturing, distribution, and, finally, sale) that increase their value, step by step. The company might do business in all, some, or just one of these categories, but it is important to understand all of them, building what is known as an “extended value chain.”

The reason for mapping an extended chain is that you might discover opportunities to collaborate, outsource, merge, acquire, or otherwise involve other firms in your operation to your advantage. Product flows are mapped by design, functionality, complexity, demand profile, service requirements, process technology, and other criteria relevant to the industry. For example, an aircraft landing-light manufacturer mapped its product flows prior to reinventing its own concept of scale. Years of treating each order as “a brand-new day” had saddled the company with prohibitive costs. By carefully charting its product flows, the company was able to locate areas in the production process that were duplicated across a large number of products — areas where achieving scale could drive down costs.

The vertical dimension describes the functional areas of the business (e.g., making a product, selling a product, R&D). In contrast to the horizontal flows, vertical operational flows are mapped by a separate set of performance criteria: labor intensity, scale, energy consumption, and others relevant to the industry.

 
 
 
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Resources

  1. Lawrence M. Fisher, “From Vertical to Virtual: How Nortel’s Supplier Alliances Extend the Enterprise,” s+b, First Quarter 2001 Click here.
  2. Tim Laseter, Pat Houston, Anne Chung, Silas Byrne, Martha Turner, and Anand Devendran, “The Last Mile to Nowhere: Flaws & Fallacies in Internet Home-Delivery Schemes,” s+b, Third Quarter 2000 Click here.
  3. Tim Laseter, Alex Kandybin, and Pat Houston, “Marketing and Operations: Can This Marriage Be Saved,” s+b, First Quarter 2002 Click here.
  4. Alfred D. Chandler Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Harvard University Press, Belknap Press, 1990)
  5. Adam Smith, The Wealth of Nations (The Modern Library, 1994)
 
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