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Why not all manufacturers need economies of scale

Why not all manufacturers need economies of scale

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How the benefits of microfactories challenge conventional wisdom

In economics, economies of scale are often hyped as the way forward. It is the idea that by producing higher volumes, the cost of production per unit is reduced. The emergence of microfactories threatens to shake this pillar of established thinking. Here, John Young, APAC director at an automation parts supplier, EU Automation, takes a closer looker at the trend toward microfactories and the benefits for manufacturers.

If you are a manufacturer, you could scale up your operations to receive a proportionate decrease in the cost per unit of output. This staple of economic thinking has been true for much of the past 100 years and is the reason we have so many large factories producing for a global market. Yet the past decade has seen the emergence of several innovators who are demonstrating that manufacturing on a much smaller, more localized scale offers great benefits. Are they exceptions to the rule, or are they providing us with a glimpse into the future of manufacturing?

The term microfactory was first introduced in 1990 by the Mechanical Engineering Laboratory of Japan. The concept is sometimes used interchangeably with the idea of small footprint manufacturing. It captures the notion of a small but agile manufacturing space, which relies on higher levels of automation but is ideally suited for innovation and custom designs.

Doing things differently

Perhaps the best-known example of this counter-intuitive approach to manufacturing is US automaker Local Motors. Founded in 2007 by Jay Rogers, the company specializes in autonomous and electric vehicles. It has taken advantage of 3D printing to build more environmentally friendly cars through a network of microfactories.  In 2014, the company produced the world’s first 3D printed car, Strati.

3D printing is one technology that allows manufacturers to adapt more quickly and easily to changing market demands. Rather than mass-producing a product and then hoping to find or create a market for it, it allows manufacturers to be nimble in reacting to changing consumer preferences. They can make changes to production more easily and experiment with new designs, in a relatively short space of time.

Closer to home, we can find the world’s first microfactory for the recycling and reclamation of components in e-waste. At the University of New South Wales in Australia, scientist  Veena Sahajwalla has championed the microfactory approach to decentralize the process of recycling and reclamation. Rather than having to send all of our used phones and laptops to large facilities in China, localized networks can carry out the task on a smaller scale, helping generate jobs locally and change attitudes toward sustainability.

Professor Sahajwalla’s microfactory can operate on a site as small as 50 square meters, using one or more machines to help reform discarded computers and phones into reusable materials. The first module breaks down the e-waste, while the second uses robots to identify potentially useful parts. A microfurnace is then employed to transform parts into valuable materials. For example, plastics from e-waste can be used to create smart filaments for 3D printing.

Benefits of a small footprint

We are all familiar with the benefits of economies of scale, so what are the advantages of microfactories? Firstly, although economies of scale can reduce the cost per unit, there are cost benefits to manufacturing with a smaller footprint. A smaller shop floor means savings in materials, rental costs and energy used.

Similarly, if you introduce automated processes by working with suppliers of automation parts such as EU Automation, you can also save on labour costs with fewer upfront costs. After all, it costs less to automate a small factory than a large one.

Above all, having a distributed network of smaller manufacturing facilities means production is much closer to the customer. That means less money stuck in inventory and paying for expensive distribution networks to get your product to the market.

Secondly, this set up is clearly geared toward greater innovation. Microfactories are the ideal manufacturing set up for high mix, low volume production that breaks conventions. Product requirements can quickly and easily be changed to achieve greater levels of customization or experiment with new designs.

Furthermore, as smaller factories have lower start-up costs, this is a more viable approach to manufacturing for entrepreneurs and disruptive startups. In future, entrepreneurs and startups may well be able to establish their own manufacturing footprint much more readily than before.

This approach also entails a different marketing and sales strategy. Large scale production relies on a smaller number of standardized products with extensive supply and distribution networks, to bring these to market on a large scale. In contrast, small footprint manufacturing allows for greater levels of customization, to create products that are tailored to local consumer preferences and changes in demand.

Smart factories are also a far more sustainable way to manufacture. Smaller shop floors mean fewer materials and energy are wasted. Closer proximity to suppliers and the reliance on local markets leads to less energy being used transporting products across the globe. Rather than having a single large factory in China, companies could move toward a distributed network of more nimble production facilities.

Future trends

If all of this still sounds counter-intuitive, it is worth observing a few trends that will play out in favour of microfactories in the coming years. Firstly, labour costs in many parts of Asia, are likely to increase. Microfactories might require more skilled workers, but they also require less of them.

Secondly, the trend toward automation will also benefit microfactories. It is not hard to envision a positive feedback loop where greater uptake of new technologies drives down costs, allowing more and more manufacturers to enjoy the benefits of automating factory processes.

Finally, manufacturers will have to react to the growing consumer preference for greater levels of customization. Research has shown that consumers are generally willing to pay extra for products that are customized to their liking. It is a small footprint manufacturing that will reap the benefits of this consumer trend quicker.

The logic of economies of scale has long dominated our common sense thinking when it comes to manufacturing. The emergence of microfactories is a trend that shows us it is sometimes good to question common conventions. Large scale production will always have its benefits, but many manufacturers may find they can provide more innovative and customizable products in more efficient and sustainable ways, by exploiting the opportunities of microfactories.

About EU Automation: EU Automation stocks and sells new, used, refurbished and obsolete industrial automation spares. Its global network of preferred partner warehouses, and wholly-owned distribution centres, enables it to offer a unique service within the automation industry, spanning the entire globe.  It provides worldwide express delivery on all products meaning it can supply any part, to any destination, at very short notice.