Advantages and disadvantages of consolidating production

By | June 23, 2013

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1.        Advantages and disadvantages of consolidating production

 

1.1    Advantages of consolidating production

 

1.1.1            Significant manufacturing economies of scale

 

Figure 1 Manufacturing economies of scale

Source: Boyes & Melvin 2011, p. 526

 

Economies of scale are said to exist with respect to a particular input, or to all inputs, when the appropriate elasticity of the cost function evaluated at constant relative factor prices and incorporating a given technology is less than unity over some or all of the range of attainable scale (Norman 1979, p. 45). And actually there more reasons of the economies of scale rather than the technology alone, some other factors include more advanced management techniques, bigger market, increased bargaining over the suppliers, more intensified usage of equipment and so on. The most significant benefit is the lower production cost per unit with the increase of the production capacity as the above figure demonstrates, a small factory produces products at the unit price of P2 while a large factory producing along ATC2 will be able to produce products at unit price P1 which is lower than the P2.

 

1.1.2            More complete hierarchy

 

At the very beginning, let us look at the definition of a hierarchy in the business environment. A hierarchical organization follows the layout of a pyramid. Every employee in the organization, except one, usually the CEO, is subordinate to someone else within the organization. The layout consists of multiple entities that descend into the base of staff level employees, who sit at the bottom of the pyramid (chron.com 2009). When employees recognize defined levels of leadership within the organization, there are a number of advantages. First of all, a more complete hierarchy facilitates better decision making. In the hierarchy model, superiors are responsible for decision making. This means that complex decisions are only dealt with by people who are high on the hierarchy. The people in such a system are aware of which person is responsible for making the decisions. The benefit is that it makes the process of decision making more efficient and quick (benefitof.net 2010). Secondly, besides the more efficient and quick decision making caused by the more complete organizational hierarchy; another benefit is the better organization of employees. As we know, there are various tasks and functions to be carried out in an organization, take a typical white good producer as an example, activities such as R&D (Research and Development), human resource management, market survey, operation management, company policy enactment and implementation and so on are all tasks should be done by the employees of the company. And because of the consolidating production, more people are put to carry out a specific task rather than multi tasks resulting in the so called “job specialization”. And specialization would further bring work efficiency and professionalism in the work place. Thirdly, a more complete organization hierarchy will help build up a sense of prestige in the higher management level. As reflected in the Abraham Maslow’s Hierarchy of Needs which remains valid today for understanding human motivation, management training, and personal development because of its concerning the responsibility of employers to provide a workplace environment that encourages and enables employees to fulfill their own unique potential (businessballs.com 2012), the fourth hierarchy is self-esteem and respect which is relevant to achievement, mastery, independence, status, dominance, prestige, managerial responsibility, therefore it is understandable that a more complex hierarchy in organizations would provide more chance of such satisfactions of needs in this level, in particular among those managers in the higher management level.

 atc2

Figure 2 Maslow’s hierarchy of needs

Source: Frey & Shearer-Cooper 1996, p. 106

 

Fourthly, together with a more complex hierarchy, employees in the executive level and lower management levels would also be offer greater chance to move up the hierarchy and as people are able to move up the hierarchy, they would be able to achieve the finding of self-fulfillment and realization of the individual potential and thus motivating the employees to work harder and offer better performance. Though not mentioned in the case, with the merger of the European production capacity under different products lines, we can imagine that a more complete hierarchy would be there for new integrated factories and thus the above benefits would be possible because of the more complex organizational hierarchy.

 

1.2    Disadvantages of consolidating production

 

1.2.1            Diseconomies of scale

 

Economies of scale, however, have a dark side, called diseconomies of scale. The larger an organization becomes in order to reap economies of scale, the more complex it has to be to manage and run such scale. This complexity incurs a cost, and eventually this cost may come to outweigh the savings gained from greater scale. Frederick Herzberg, a distinguished professor of management, suggested a reason why companies should not aim blindly for economies of scale: “Numbers numb our feelings for what is being counted and lead to adoration of the economies of scale. Passion is in feeling the quality of experience, not in trying to measure it” (economist.com 2008), and some features of the diseconomies of scale will be talked above in the following.

 

1.2.2            Slow responses to the changing customer needs

 

When Whirlpool concentrates its productions in European market, for example it concentrates its production of refrigerators for EU customers in Italy’s Trento, one disadvantage would be the reduced flexibility to get adapted to the changing customer needs. Before the concentration, a production center in smaller scale could be to rapidly observe the changes in the consumer market and make relevant adaptations to their products to satisfied the new changed needs; but in contrast, while the production of the same product category is made in the same production center, even the changes of the customer needs in several countries are spotted, the production center would not dare to change the current product design because of changes of customer needs which are still not yet popular among the whole EU market. Hence, the production consolidation will tend to cause inflexibility to the changing customer needs.

 

1.2.3            Poor communication especially horizontal communication

 

Formal and informal communications among the business entities play an important role in sending information and coordinating tasks across different departments and different levels of employees and management. Since the products supplied to the whole EU market under the same product categories would be manufactured in the same single place and hence as mentioned above the production scale would be enlarged significantly and tasks would be done by dedicated people with professional knowledge and skills under different functional departments; and here come another issue: the communication problem. Because different functional departments are focusing in different task, therefore there might be a lack of communication and coordination between them and this communication will cost not only monetary expense but also time which slow down decision making and tasks implementations.

 

1.2.4            Lack of a big picture of the company

 

It is common sense to us that in a large firm, there are various different departments in charge of different types of tasks. For example, sale departments would be in charge of the sale of the product while the employee compensation would be handled by the human resource departments. Usually different departments would have different targets and aims; as a result a larger and more complex hierarchy in an organization would probably result in individual employees’ focusing on their own jobs assigned by their ling management and hence lack a big picture of the company. Lack of big picture of the whole process or company situation could be negative to the employee performance. It’s long discovered that employees focusing only on a separate part of the production or business procedures such as employees in the assemble lines could be demotivating because employees are not knowing what are the purposes and goals of their jobs and how important their jobs are to the overall success of the business.

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