Process Theory by unknow

Author:unknow
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2018-01-22T00:00:00+00:00

One might argue that complexity arising from scale and scope is inevitable for any operation that grows from a start-up to a successful firm. Exposure to complexity is inevitable, but it is the managerial response that determines how the organization performs. Let us consider scale, scope, and the ensuing complexity challenge in more detail.

5.1 The Role of Scale

It is frequently stated that large companies enjoy a competitive edge over small companies because of the inherent advantages of economies of scale. The phrase has a strong appeal, and large companies with sizable operations have a certain aura about them. The phrase draws nods of recognition, yet few people can define it and fewer still have thought critically about it. The original definition of “economies of scale” discussed four basic scale-related effects, which lead to a reduction in unit cost: (1) if the production volume (throughput) increases, (2) if the capacity utilization increases, (3) when process repetition leads to learning, and (4) when process repetition leads to a reduction in stochastic effects (e.g. defects, breakdowns).1 In short, arguments around economies of scale rest on the assumption that the more that is produced, the better existing fixed costs can be spread across the units produced, and that the more often the process is repeated, the more efficient it becomes. This is the theory.

In practice, however, all too often you hear a company president nonchalantly say something like, “If we increase the size of our operations here, we’ll naturally enjoy some economies of scale.” There is nothing natural about economies of scale, and certainly nothing to be nonchalant about. Confusion about the term is understandable because it serves as an umbrella for a number of real, but quite distinct, concepts. Because it is an umbrella term, “economies of scale” often loses its usefulness in making management decisions on plant size and capacity.

In fact, the term “economies of scale” suffers from irredeemable ambiguity. As we have said, it is based on “levers” that are very different depending on one’s interpretation of “scale” as volume, capacity, or process technology. Even then, there are a variety of ways to effect these economies. Instead of inviting confusion by using the term “economies of scale,” we argue that operations managers should think of volume, capacity, and process technology separately. Learning curve effects due to the repetition of the process, in our view, are matters of process improvement and not economies of scale. They are dealt with in Chapter 8.

Moreover, as we will discuss in Section 6.2, there are diseconomies of scale, as well as these economies of volume, capacity, and process technology. With scale come complexity challenges that can escalate. The levels of management can multiply and, with that, control can become more difficult. The ability to be nimble in reaction to competitors’ initiatives, or even to enact a company’s own initiatives, can diminish. Logistics becomes more complicated and inventories can balloon. Small can be beautiful and big can be ugly.

But first, we will discuss the three specific types of economies: volume, capacity, and process technology.

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