Inefficient systems – why do they exist [Manufacturing] [Economics]

Inefficiencies are built inherently into every system we interact with but this is not necessarily a bad thing. For starters, it’s better to have an inefficient system than not one at all, especially when your system is the best the market offers (or with most government services, the only service providers).

This is one of the key things I’ve learned as a process engineer, and that is you always start off making something (poorly) & then slowly, you end up getting better and better at doing/making that special something. Private companies in this day and age have realized that focusing on becoming a lean company is imperative to future success (& survival). When bidding for products/services becomes more competitive, companies that did their due diligence and created an efficient system to deliver products/services will be the ones who bear the fruits of the market of the future. So the obvious question is what is “due diligence” and why would this be important? I’ll answer the latter question in this article and leave what is due diligence for another.

Why is becoming lean important?

Imagine, globally there are 3 companies that offer snowblowers and consumers are customarily willing to pay $500-$600 for those snowblowers. Now imagine that an autonomous snowblower comes out onto the market and is superior to the old style snowblower in every way. This is because historically snowblowers have low utilization rates – which means that if 1 snowblower was used 100% of the time rather than the 10% they are currently used, people would need less snowblowers. Imagine buying a snowblower with your neighbours and using it collectively – similar premise.

It’s important to remind yourself, what do snowblowers actually do? Their fundamental purpose is to remove snow from the ground, so it’s reasonable to say that rather than shelling out $500-$600 in upfront costs for a snowblower (as well as the 1 hour it takes to remove snow after a heavy snowfall) there might be a better system that solves the snow removal process with less time and effort by the user. What if in the immediate short term future, rather than everyone owning their own separate snowblower, an autonomous community snowblower was able to take the market by storm. It was able to run autonomously and safely (& since it’s quiet, it could even run at night) removing snow from several driveways along a programmed route, and let’s say that the snowblower didn’t cost anymore than a traditional snowblower either. These scenarios could present themselves in a competitive market where multiple vendors come to market with a similar product at the same time. At the end of the day, let’s say you were able to replace 8 snowblowers with 1 snowblower, affecting the bottom line of snowblowers’ manufacturers, since their market would effectively decrease by close to 85% (since 7/8 snowblowers would be replaced).

Now those 3 companies who provided snowblowers at a cost of $200 would likely face hard times as their sales would presumably drop. Their margins would be squeezed and unless they were innovative, they would risk their company’s future. So here’s why it matters to be lean. Companies that adequately prepared for the future and have costs under control will swim, while those who have never heard of a PFMEA or Control plan will sink. Companies that are able to profitably reduce their $200 price to $100 would survive with organizational flexibility being tantamount to success. The ability for large scale organizations to pivot from one product to another is not child’s play and requires constant focus on the organization’s end. PFMEA & control plans are the key documents that allow manufacturing firms to contain costs, manage risk, and change their organizations on the fly.

Along with those key concepts, today’s companies deem “continuous improvement” as a key performance indicator for employees and it’s a skill that is in high demand today. Companies now track and reward employees for contributing to continuous improvements and some even require their employees to take part in some kind of CIP program. In next week’s article, I’ll cover what exactly a PFMEA & Control plan are and how they actively help companies contain costs.

 

Article was written by gtareguy (Greater Toronto area real Estate guy) . I release a new article every Friday and I write about economics, the nba and real estate in the GTA. 

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Author: gtareguy

Real Estate Investor Raptors fan (don't cry for me this year) Mech Eng Graduate

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