[Last] Episode: What is changing in manufacturing

Usually when we refer to production, factories and industries, we all think about the production function. As we now an output is mainly made by Labor, Capital and Land. The way they combine together is called technology. As I reported in my previous posts technology is deeply changing. During the 20^th century technology had a lot of innovations. By thinking on processes we shifted from the mass production of the beginning of the century to lean production in the 1990s. Yet we needed a huge amount of capital, land and labor. Thus, companies moved from richer countries to poorer as the process of globalization gathered pace. Poorer countries allowed the same production level for less capital, land and labor costs. Costs not technology. Yes, the famous abroad outsourcing process wasn't a technological breakthrough. It was simply a movement, allowed by transport cost reduction and internet communication, from a high-cost place to a low-cost place. The technology of production didn’t change at all or so. But now something is changing. New production machines as 3D printing allows people to produce some products (even iPhone or car parts) directly at home (at $ 1,299 you can buy a 3D printer). Furthermore, people having ideas and no money now can go online and see their ideas produced and sold, and they gain 30% of the profit. I don’t know if this is a revolution but it seems to me. For sure is big change. Let’s see what and how is changing in production.

The figure of the entrepreneur and the role of capital in production could change. Henry Ford needed heaps of capital to build his colossal River Rouge factory; his modern equivalent can start with little besides a laptop and a hunger to invent.

The factory will change. The factory of the past was based on cranking out zillions of identical products: Ford famously said that car-buyers could have any colour they liked, as long as it was black. But the cost of producing much smaller batches of a wider variety, with each product tailored precisely to each customer's whims, is falling. The factory of the future will focus on mass customisation—and may look more like the 18th century weavers' cottages than Ford's assembly line.

The geography of supply chains will change. An engineer working in the middle of a desert who finds he lacks a certain tool no longer has to have it delivered from the nearest city. He can simply download the design and print it. The days when projects ground to a halt for want of a piece of kit, or when customers complained that they could no longer find spare parts for things they had bought, will one day seem quaint.

The role of labor in production will change. Labour costs are growing less and less important: a $499 first-generation iPad included only about $33 of manufacturing labour, of which the final assembly in China accounted for just $8. Offshore production is increasingly moving back to rich countries not because Chinese wages are rising, but because companies now want to be closer to their customers so that they can respond more quickly to changes in demand. And some products are so sophisticated that it helps to have the people who design them and the people who make them in the same place. The Boston Consulting Group reckons that in areas such as transport, computers, fabricated metals and machinery, 10-30% of the goods that America now imports from China could be made at home by 2020, boosting American output by $20 billion-55 billion a year.

Source: The Economist, Special Report on Manufacturing and Innovation, A third industrial revolution, April 21^st 2012.

Second Episode: From mass production to smart production.

Additive manufacturing is not yet good enough to make a car or an iPhone, but it is already being used to make specialist parts for cars and customized covers for iPhones. Additive manufacturing is only one of a number of innovative production equipment leading to the factory of the future. Conventional production equipment is becoming smarter and more flexible too.

For example, Volkswagen is implementing a new production strategy called MBQ. By standardizing the parameters of certain components they hope to be able to produce all its models on the same production line (Again economies of scale).

Factories are becoming vastly more efficient. Nissan’s British factory in Sunderland, opened in 1986 is now one of the most productive in Europe. In 1999 it built 271,157 cars with 4,594 people (59 cars per capita). Last year it made 480,485 cars with just 5,462 people (88 cars per capita).

As the number of people directly employed in making things declines, the cost of labor as a proportion of the total cost of production will diminish too. This will encourage makers to move some of the work back to rich countries, not least because new manufacturing techniques make it cheaper and faster to respond to changing local tastes.

The materials are changing as well. Carbon-fibre composites, for instance, are replacing steel and aluminum. Sometimes it will not be machines doing the making, but micro-organisms that have been genetically engineered for the task. Software are going smarter. And the effects will not be confined to large manufacturers, much of what is coming will empower small and medium-sized firms and individual entrepreneurs. Launching novel products will become easier and cheaper. Communities offering 3D printing and other shared production services are already forming online.

The consequences of all these changes amount to a third industrial revolution, as The Economist wrote in April 2012. The first began in Britain in the late 18^th century with mechanization of textile productions. The second  began in America in the early 20^th century with the assembly line and the era of mass production.

As manufacturing goes digital, a third great change is now gathering pace. It will allow things to be made economically in much smaller numbers, more flexibly and with a much lower input of labor. The first two industrial revolutions made people richer and more urban. The third?

Source: The Economist, Special Report on Manufacturing and Innovation, A third industrial revolution, April 21^st 2012.

Pilot: Additive Manufacturing & economies of scale

Today I was going through The Economist's special report on manufacturing and innovation (published in April 21st 2012) and I decided to start a set of posts to explore some interesting insights about what The Economist called a third industrial revolution. (Please note the "a" instead of "the", we will see if there will be a change about it in the next few years) 

Additive Manufacturing is the process of producing parts by successive melting of layers of material rather than removing material, as is the case with conventional machining. Hence, choosing an AM technology for production provides great benefits for the entire production value chain. The geometrical freedom allows you to engineer/design your part as you envision it, without manufacturing constraints. This can be translated to extreme light-weight designs, reduced part counts or improved bone ingrowth for a medical implant. It is also a fast production route from CAD to physical part with a very high material utilization and without the need to keep expensive castings or forgings on stock.

What could it mean?

Try today to go to a factory and ask to make you a single hammer to your own design. The producer would have to design and produce a mould, cast the head, machine it to a suitable finish, turn a wooden handle and then assemble the parts. You will be presented with a bill for thousands of dollars!

Thus, it would be efficient only if you produce a certain amount of items, as the well-known concept of economy of scale says.

What is a technology breakthrough? It is any significant or sudden advance, development, achievement, or increase, as in scientific knowledge or diplomacy, that removes a barrier to progress (i.e. the jet engine was a major breakthrough in air transport or internet was a major breakthrough for communication). When this happens usually a market structure changes as production changes.

Thanks to 3D printers and other additive manufacturing tools, economies of scale matter much less. In fact, its software can be endlessly tweaked and it can make just about anything. The cost of setting up the machine is the same whether it makes one think or as many things as can fit inside the machine. As a normal printer, it will keep going at about the same cost for each item (Obviously you would take into account the fixed cost and amortization of the machinery – so economies of scale still matters but much less).