In today's global, fast-paced environment, it seems that capital intensive projects are hard to "get off the ground." This goes for nuclear power plants, oil and gas pipelines and so on. Another area of application is manufacturing. As appears to be true in many markets, any initiative appears to take one into a sandbox with many other players. Perhaps global competition for sales, talent, and ideas makes a person wary of risking too much. If there is a new widget to produce, how much should one risk to produce it? How much capital should a company spend getting started? How does one get investors interested?
This is the provenance of producer theory, a topic in microeconomics with analogies to consumer theory. For consumers, utility is king, that is, how much happiness can I get for X dollars? For producers, the question is how much profit can I make from fixed and non-fixed assets? A professor Nolan Miller from Harvard has written some notes at http://www.hks.harvard.edu/nhm/notes2006/notes5.pdf that remind us of:
1) sunk costs -- once you construct a manufacturing plant for producing widgets Y, at most you can recover a small portion of the capital if production of Y never happens due to a lack of market size or market share. Remanufacturing or flexible manufacturing may allow you to make Z, but remember there is ... (see next point)
2) no free lunch -- everything you do in pursuit of a buck is going to cost something, or at least risk something of value. Otherwise, you could just ramp up the operation to huge levels and be wealthy beyond measure!
3) possibility of inaction -- although this seems very uncool to Americans, there is something to be said for doing nothing rather than doing the wrong thing and losing your shirt!
4) Free disposal -- this part is probably just for mathematical purposes, but a lesson here is don't make something just because you have employees sitting around doing nothing or some extra raw material lying around.
Some notes from "in the news", below
A quote from Wired makes it clear just how expensive the investments in manufacturing capability and capacity can be ...
Solyndra’s $535 million loan guarantee closed in September 2009. The firm had no problem putting the funds to use, starting construction on a second factory, expanding its workforce to 1,100 employees, and paying millions for a custom machine designed to put the finishing touches on the cells at a rate of 60 per minute. As part of an ongoing “Main Street tour” highlighting the nation’s manufacturing prowess, Obama scheduled an appearance at the Solyndra factory in May 2010. After a tour of the facilities, the president gave a speech on the factory floor in which he called Solyndra “an engine of economic growth.” “The future is here,” he added.
source: http://www.wired.com/magazine/2012/01/ff_solyndra/all/1
The Wired box about manufacturing start-up costs puts some numbers up that can be used in a back of the envelope type analysis:
This is the provenance of producer theory, a topic in microeconomics with analogies to consumer theory. For consumers, utility is king, that is, how much happiness can I get for X dollars? For producers, the question is how much profit can I make from fixed and non-fixed assets? A professor Nolan Miller from Harvard has written some notes at http://www.hks.harvard.edu/nhm/notes2006/notes5.pdf that remind us of:
1) sunk costs -- once you construct a manufacturing plant for producing widgets Y, at most you can recover a small portion of the capital if production of Y never happens due to a lack of market size or market share. Remanufacturing or flexible manufacturing may allow you to make Z, but remember there is ... (see next point)
2) no free lunch -- everything you do in pursuit of a buck is going to cost something, or at least risk something of value. Otherwise, you could just ramp up the operation to huge levels and be wealthy beyond measure!
3) possibility of inaction -- although this seems very uncool to Americans, there is something to be said for doing nothing rather than doing the wrong thing and losing your shirt!
4) Free disposal -- this part is probably just for mathematical purposes, but a lesson here is don't make something just because you have employees sitting around doing nothing or some extra raw material lying around.
Some notes from "in the news", below
A quote from Wired makes it clear just how expensive the investments in manufacturing capability and capacity can be ...
Solyndra’s $535 million loan guarantee closed in September 2009. The firm had no problem putting the funds to use, starting construction on a second factory, expanding its workforce to 1,100 employees, and paying millions for a custom machine designed to put the finishing touches on the cells at a rate of 60 per minute. As part of an ongoing “Main Street tour” highlighting the nation’s manufacturing prowess, Obama scheduled an appearance at the Solyndra factory in May 2010. After a tour of the facilities, the president gave a speech on the factory floor in which he called Solyndra “an engine of economic growth.” “The future is here,” he added.
source: http://www.wired.com/magazine/2012/01/ff_solyndra/all/1
The Wired box about manufacturing start-up costs puts some numbers up that can be used in a back of the envelope type analysis:
Ramp-Up Costs
Gearing up to manufacture a new consumer product is notoriously expensive. In the energy sector, the costs can be crushing, as Solyndra found out: It spent at least $87 million to outfit its first factory and get to market, $290 million in research and development, and $733 million on just the first phase of its second factory, which was necessary to manufacture at the required scale.
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