21: The Cost of Manufacturing Processes
Competition among manufacturers make it necessary for each to be on the watch to discover methods by which his production costs can be reduced to offer his products more cheaply, and still produce at sufficient quality to please buyers and at the same time make sufficient profit to cover the costs of manufacturing. In all, success requires a delicate balance of many factors.
The beginning of manufacturing requires close attention to a production process, to identify the steps in making an item and divide them into simple actions, then finding the methods by which each action can be performed most efficiently, and the hand-off between each step handled fluidly. Improving an existing factory takes much the same tactic: to determine whether tasks should be combined or divided further, how each task can be done more efficiently than it currently is, and how the hand-offs can be more frictionless.
The manufacturing process is not the only task to which the producer must attend: he must find efficient methods of procuring labor and materials, identify better methods of appealing and delivering to customers, manage his costs of capital, and other process that are peripheral to the making of things but necessary to the operation of his business.
He mentions the decrease in time in the example of a pin factory, where it was found that the time required for fixing on the head of pins could be decreased by a fourth, and the net effect was a 13% reduction in the labor cost - though in this instance the producer did not pocket the savings but instead moved laborers to other parts of the operation to increase his production.
He mentions the increase in revenue in the example of a cotton plantation in Java. When it was found that a measure of cleaned cotton would fetch more than four times the price of an equal measure of raw cotton, the producer undertook the expense of seeding and cleansing his product, whose labor cost was more than compensated by the increased revenue.
He speaks for a time of vertical integration in terms of cotton: raw cotton is increased in value by cleaning it, cleaned cotton increases by spinning it, spun thread increases by weaving it, raw cloth increases by dying it, and so on. These operations can be added to the process so long as their costs are repaid by the increased revenue that the ultimate product fetches.
(EN: In the present day, the process seems to be running in reverse as companies seek to outsource parts of their operations to those that can do them more efficiently. Ultimately, the decision should be financial - senseless devotion to integrate or outsource operations without considering the cost and risk involved is unwise.)
He also speaks of the possibility of the specialization of industry: if the cotton producer developed sufficient capacity to clean cotton for his neighbors, and if he found there to be greater profit in this operation than in the raising of the plants, then it would make sense for him to let his fields go fallow and develop a large cleaning operation - whether buying cotton from his neighbors and selling it to exporters or merely selling the cleaning service to other plantation owners.
This is particularly effective when the output of one farm is insufficient to justify the cost of a cleaning operation, but the output of several would be. But this is much in the way that a blacksmith provides the services of his forge and anvil to many townsmen whose need of metal work is too occasional for them to undertake the operation on their own.
Another qualification for manufacturing is that a standard product must be acceptable to customers: if each customer has his own needs and specifications, the cost of adjusting the process to accommodate them becomes too great -in terms of both the labor of readjustment, the time the facility is idle while it is being adjusted, and the lower level of output that results.
He then uses printing as an example of the economies of scale. The greatest expense of the printer is in configuring his equipment to produce identical copies of a book. Printing in small runs is highly unprofitable, so he must seek work that is produced in massive quantities and leave the smaller jobs to operations that can bear the expense of small runs - generally those that are less automated.