lecture note 7

E 2 million plus for foundry forging and pressing in

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Unformatted text preview: illion plus for foundry, forging and pressing, in conjunction with multiple plants for assembly operations – the “least common principle” – incur decisive unit-cost savings over smaller manufacturers who are able to achieve MES levels for final assembly operations but not for others. The least common principle is simply the least common denominator for each operation. Thus if MES for assembly is 250,000, for engine and transmission 1m, and for forgings/foundry and pressings 2m, the least common principle suggests that the optimum configuration for a manufacturer would be to have eight assembly plants and two powertrain plants for each pressings and forging/foundry plant. It is clear that only the largest manufacturers will have resources for this. Such manufacturers are few in the motor industry – just two in the USA (GM and Ford); two in Japan (Toyota and Nissan); and possibly three in 40 Importance of economies of scale in the automotive industry European Business Review Rumy Husan Volume 97 · Number 1 · 1997 · 38–42 Europe (VW, Fiat and PSA)[3]. Dunnett provides figures to show that for the pressings operation, between 1947-77, no UK manufacturer was anywhere near able to exploit all scale economies, and that for example, in 1977, total production of pressings was only two-thirds of the MES level, while that of the largest manufacturer was one-third of the 2m MES level (Dunnett, 1980, Table 2.4, p. 23). What are the cost penalties associated with sub-MES production? Again, estimates vary. Pratten (1971, p. 271), in a study of various UK industries (on the basis of interviews and examination of the technical literature) estimated that, for the passenger car, the percentage increase in cost at 50 per cent MES level was approximately 6 per cent per unit. White provides the following estimates for total production cost penalties at sub-optimal scale of production (see Table II): Waverman and Murphy, in a more recent survey, provide the following estimates of cost penalties (in 1984)[4]. White’s estimates are the least penaltyincurring, while Pratten’s (1971) and Waverman and Murphy’s (1990), assuming MES of 250,000, are similar, at approximately 6 per cent; a significant sum, given the highly competitive nature of the international market, and an explanatory factor in the difficulty of smaller manufacturers to remain independent (see Table III). For manufacturers operating at below 50 per cent MES, cost penalties increase exponentially. This corroborates a commonly observed phenomenon in developing countries: that, despite lower labour costs, average unit costs tend to be substantially higher for similar vehicles in comparison with those produced by MES manufacturers. EOS also accrue in just the same way for component manufacturers and other suppliers. If all these operate at their respective MES levels, then ceteris paribus, costs to OEMs[5] will be optimal. Whether suppliers are able to achieve MES levels will, above all, depe...
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