1. Manufacturing variability Too wide, reject. Perfect, pass. Too thin, pass. But… Reliability problems, weak and failure Question: Does higher quality cost money? Scrap – or rework

2. Six  quality Part too small Part too large ~ four  quality ~ one  quality

3. Inside the Oreck (1)

4. Inside the Oreck (2)

5. Reducing costs through higher quality ► Quality TQM, Six sigmaTQM, Six sigma ► Less re-work ► Lower costs Careful MeasurementCareful Measurement IncentivesIncentives InvolvementInvolvement TeamsTeams Supplier relationships (get higher quality inputs)Supplier relationships (get higher quality inputs) Design for manufacturability (or service delivery)Design for manufacturability (or service delivery)

6. Lowering costs Lower costs PROFIT Efficiency Innovation Quality Customer responsiveness V P C Higher customer value and prices

7. The Experience Curve ► Studies during WWII uncovered a relationship between the number of ships produced and the cost of production

8. The Experience Curve ► The relationship between the number of ships produced and the cost of production became known as “the experience curve” ► This can be subdivided into two distinct effects with different causes - Scale Scale Learning Learning

9. Defraying fixed costs Greater specialization Unit cost Production volume c0c0 c1c1 v0v0 v1v1 Economies of Scale

10. Why does this matter? ► Scale anyone can achieve ► Competitors will seldom if ever be able to match your cumulative volume even if they can get the same market share ► Learning is one source of first mover advantage ► Knowledge is often ‘sticky’ and leaning is hard to replicate