Spurious Correlation between Economies and Scale

Abstract

Abstract: It is common knowledge that expansion in the scale of production leads to economies of scale. A correlation between economies and scale does exist. However, the reality on the shop floor, in Japanese, gemba, in actual manufacturing is that productivity increases and that there is expansion of production volumes through for the entire production process. Previous studies demonstrated how flow creation has led to increased productivity and expansion of production volumes even in relation to the production system for the Model T Ford, which is considered as a typical example of a large range cost reduction (i.e., an increase in productivity that was achieved through mass production). For example, expansion of production volumes occurs simultaneously as productivity increases due to a succession of standardizations such as the standardization of components, production processes, and operations. That is, there is highly likely a spurious correlation between productivity and production volumes. Increased production does not guarantee increased productivity. In fact, that was the case with the Model T Ford.Keywords: standardization, creating a production flow, economies of scale, mass production, spurious correlation, Model T FordIntroductionEconomies of scale are not necessarily achieved because an organization becomes larger either within the internal or external boundaries of the firm. Economies of scale are not achieved even with expansion of the factory size through mass production or an increase in the size of the business through various corporate acquisitions and mergers, including those with other industry types (i.e., even if internal production is chosen rather than outsourcing) by increasing the standalone production volumes of relevant individuals, divisions, and businesses. Economies of scale are only achieved if there is coordination of the activities of the relevant individuals, divisions and businesses, and appropriate management of the overall flow of activities (Fujimoto, 2004; Miyazoe, 2006).Organizations can be viewed as systems operating through the interaction of various elements (Takahashi, 1995/2003/2006, 2014). A system is generally defined as a complex of interacting elements (von Bertalanffy, 1968). An organization is a concept that indicates linkages and relationships, and its main feature is the individual relations among elements. A feature of an overall organization is that it cannot be comprehended by summing the features of each individual element. Even in the case of organizations that have brought together similar elements, any difference in the method of interaction among elements leads to a difference in overall performance. The manner in which the elements of composition interact is the essence of the organization.Even in relation to manufacturing, it is more important to have overall optimization as a system than the optimization of individual elements of composition of the production system to achieve the objective, whether that is the expansion of production volumes or increased productivity. A basic issue when pursuing such overall optimization is the creation of relationships between elements, that is, the creation of flows for each process and division, as well as for the supply chain that includes external component manufacturers and distributors.The appropriate coordination of such flows allowed for major U.S. companies such as Standard Oil Company, US Steel, and Ford Motor Company, which emerged during the latter half of the 19th century to the first half of the 20th century, to benefit from economies of scale through mass production.For example, what was merely a loose federation of the U.S. Standard Oil Alliance rationalized into a large-scale business in 1882 by unifying business operations with the formation of Standard Oil Trust. This trust made it possible to reorganize the production process through consolidation of the affiliated refineries simultaneously constructing new refineries. …