The case for the efficiency of localized production, even for large-scale industrial production

Kevin Carson has a very interesting, and substantive book review of:

William Waddell and Norman Bodek in Rebirth of American Industry: A Study of Lean Management (Vancouver, WA: PCS Press, 2005).

These authors blame Corporate America’s mismanagement on “the imposition of the DuPont definition of profit, the Sloan management method, and the Brown accounting method onto American industry.” These 3 factors are very well explained by Kevin.

For example, see how bookkeeping can distort truth about human value:

Direct labor is not a variable cost as a result of some mystic truth or a law of either nature or physics,” Waddell and Bodek write: It is a variable cost because management decided it would be so. Calling inventory an asset, while people are not an asset is also a distortion of the truth. [p. 207]

The book and Kevin’s reviews outline how the promising Japanese “Lean manufacturing” got “Sloaned” in the US, with disastrous results. Kevin cites Deming comparison of the Japanese ‘caring’ management style with the inhumanity of the US counter-examples.

The second part of Kevin’s review is of particular interest to p2p economics, or what he calls decentralized production:

I expressed some curiosity as to whether the Toyota Production System could be scaled down for decentralized manufacturing in a local economy. I’ve since concluded, in fact, that the TPS system is ideally suited to such an economy. The Toyota system, applied to a local network of small cooperative manufacturers like that in Emilia-Romagna, will have found its true purpose.

The present association of “just-in-time” supply chains, whether in industry or in Wal-Mart’s wholesale distribution model, with “warehouses on wheels” (or in container ships), is just one example of the way lean production is distorted by the larger state capitalist system within which it operates. It would be far more in the spirit of the lean system if it were organized around local supply chains. The “warehouses on wheels” supply model is really just a way of smuggling Sloanism, in disguised form, into the Toyota Production System. The whole point of the TPS’s just-in-time supply chain operations is to reduce inventory costs to zero. But as practiced by a giant corporation like Toyota, it simply outsources the inventory costs to the long-haul trucks and container ships. They’re not only still paying for de facto warehouses to hold inventory, they’re paying the fuel costs to move it around.”

Kevin cites a supporting argument by Eric Husman:

“Bill Waddell and other lean consultants have been trying to convince manufacturers that if they would only fire the MBAs and actually learn to manufacture, they could do so much more cheaply locally than they can by offshoring their production. Labor costs simply aren’t the deciding factor, no matter what the local Sloan school is teaching: American labor may be more expensive then [sic] foreign labor, but it is also more productive. Further, all of the (chimerical) gains to be made from going to cheaper labor are likely to be lost in shipping costs. Think of that flotilla of shipping containers on cargo ships between here and Asia as a huge warehouse on the ocean, warehouses that not only charge rent, but also for fuel.”

And he concludes:

So trying to integrate lean production into a conventional globalized economy of large corporations is putting new wine in old bottles (although Ohno did it as well as it was humanly possible to do it). The TPS is really meant for a decentralized world where the trucks and container ships are eliminated, the supply chains are local and composed of small firms (on the Emilia-Romagna model), and the local economy is organized for producing on a demand-pull basis.”

Support of this interpretation comes from H. Thomas Johnson, a coauthor with Robert Kaplan of Relevance Lost: The Rise and Fall of Management Accounting (Harvard Business School Press, 1987 and 1991):

“Overlooked in this picture are the unfortunate environmental consequences of building such global production systems. The cheap fossil fuel energy sources that have always supported such production operations cannot be taken for granted any longer. One proposal that has great merit is that of rebuilding our economy around smaller scale, locally-focused organizations that provide just as high a standard living [sic] as people now enjoy, but with far less energy and resource consumption. Helping to create the sustainable local living economy may be the most exciting frontier yet for architects of lean operations. Time will tell. [p. xxi]

Some might argue that a world economy of diverse local bioregions would cause consumers’ standards of living to fall because it would reduce the economies and efficiencies of large-scale production and distribution systems that we ostensibly have in the world today. Herein lies the importance of understanding the fallacies of scale-economy thinking. In reality, production systems designed along the lines of Toyota’s turn scale-economy thinking on its head: they make it possible to build manufacturing capacity on a much smaller scale than ever before thought possible, yet produce at unit costs equal to or lower than those of large-scale facilities now thought so necessary for cost-effective operations.” (“Confronting the Tyranny of Management by Numbers” [Reflections: The SoL Journal, vol. 5, no. 4 (2004)])

The example is cited of Toyota, which discovered that a fivefold difference in capacity between a 90k producing plant in Melbourne, and a 500k in Kentucky, yielded no unit-cost differences.


“If a fivefold difference in capacity yields no unit-cost differences between these two plants, then what is to be said on behalf of scale economies? In fact, Toyota people have said they probably will not build another plant as large as Georgetown in the future. The company currently is building new plants, smaller in scale and located as close as possible to customer markets. Carried to its logical extent, Toyota’s example helps show how bioregional economies of 10 to 30 million people could support high-variety and low-cost manufacturing facilities for a wide range of products. Indeed, the relatively isolated Australian economy, with about 20 million people and a vast land area, supports several auto manufacturing operations in addition to Toyota’s, as well as facilities producing a wide array of other products just for Australian consumers.

There are now ample technologies available to support efficient small-scale operation of almost every commercial activity.”

More Information:

We are monitoring localization trends here on the wiki, as well as with this tag in delicious.

For extensive treatment of the topic, see the appropriate chapter of Kevin’s upcoming book.

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