Economy of Scale and Economy of Scope

In the context of Industrial Manufacturing Automation, Economy of Scale is defined as follows.

Economy of Scale

Definition: Reduction in cost per unit resulting from increased production, realized through operational efficiencies. Economies of scale can be accomplished because as production increases, the cost of producing each additional unit falls.

Obviously, Automation facilitates economy of scale, since, as explained above, it enables efficient large-scale production. In the modern industrial scenario however, another kind of economy, called the economy of scope assumes significance.

Economy of Scope

Definition: The situation that arises when the cost of being able manufacture multiple products simultaneously proves more efficient than that of being able manufacture single product at a time.

Economy of scope arises in several sectors of manufacturing, but perhaps the most predominantly in electronic product manufacturing where complete product life cycle, from conception to market, are executed in a matter of months, if not weeks. Therefore, to shrink the time to market drastically use of automated tools is mandated in all phases of the product life cycle. Additionally, since a wide variety of products need to be manufactured within the life period of a factory, rapid programmability and reconfigurability of machines and processes becomes a key requirement for commercial success. Such an automated production system also enables the industry to exploit a much larger market and also protects itself against fluctuations in demand for a given class of products. Indeed it is being driven by the economy of scope, and enabled by Industrial Automation Technology that Flexible Manufacturing (i.e. producing various products with the same machine) has been conceived to increase the scope of manufacturing.

Next let us see the various major kinds of production systems, or factories, exist. This would be followed by a discussion on the various types of automation systems that are appropriate for each of these categories.

Point to Ponder: 8

A. Can you give an example of an industry where economy of scope is more significant than the economy of scale?

B. Can you give an example of an industry where economy of scale is more significant than the economy of scope?

C. Can you give an example of an industry where both economy of scope, and economy of scale are significant?

Types of production systems

Major industrial processes can be categorized as follows based on their scale and scope of production.

·         Continuous flow process: Manufactured product is in continuous quantities i.e., the product is not a discrete object. Moreover, for such processes, the volume of production is generally very high, while the product variation is relatively low. Typical examples of such processes include Oil Refineries, Iron and Steel Plants, Cement and Chemical Plants.

·         Mass Manufacturing of Discrete Products: Products are discrete objects and manufactured in large volumes. Product variation is very limited. Typical examples are Appliances, Automobiles etc.

·         Batch Production: In a batch production process the product is either discrete or continuous. However, the variation in product types is larger than in continuous-flow processes. The same set of equipment is used to manufacture all the product types. However, for each batch of a given product type a distinct set of operating parameters must be established. This set is often referred to as the “recipe” for the batch. Typical examples here would be Pharmaceuticals, Casting Foundries, Plastic moulding, Printing etc.

·         Job shop Production: Typically designed for manufacturing small quantities of discrete products, which are custom built, generally according to drawings supplied by customers. Any variation in the product can be made. Examples include Machine Shops, Prototyping facilities etc.

The above types of production systems are shown in Figure 1.6 categorized according to volumes of production and variability in product types. In general, if the quantity of product is more there is little variation in the product and more varieties of product is manufactured if the quantity of product is lesser.

                                            Types of Production Systems