Monday, July 18, 2011

The Challenge of Perceived Cost

The Fallacy of “Economies of Scale”:  Yes, you can drive down the cost of an individual object by making a lot of them, but what if you do not really want a lot?  You have locked in the design, added the cost of setup for mass production, getting the raw materials in bulk, storing and transporting the finished goods. 

Furthermore, you have created the need to convince customers that this specific product is what they need.  The entire concept of marketing, market research and the fundamental basis of a Free Market Economy is based on producing more of an item than you needed. 

Creating a particular object requires Design, Setup, Operation and Cleanup phases.

If the Operation phase is tiny compared to the total, one would be tempted to repeat it just to create “free” objects.  It requires discipline to “Just Say No” to unnecessary production.

If we have the mind set that says we are only going to make one object at a time we are much more likely to engage in trial and error experimentation and make a better product in the end.

When I step into the machine shop today, I rarely have the pleasure of just sitting down and making something.  I spend all my time designing.  Figuring out how I can tell the machinist how to set up the machines for production.  What stock to use.  How the CNC program is going to behave for multiple parts.  What hand finishing will be needed.  I cannot just mill, whittle and gnaw until my object works.  I have to remember every detail of what I do so that I can do it again.  And that information has to be in a form that I can communicate to someone else.

The true cost of an object  is a function of time and energy.

Long production cycles may also lead to overproduction due to the necessity of starting production in anticipation of demand.  If the demand does not materialize you have to deal with the over-supply.  And you might have created shortages of other goods preempted by the production of the material you did create.
Cellular metabolism is regularly confronted with exactly this type of challenge.  The solution that seems to have evolved in nature is that many proteins are regularly created and then digested within the cell without ever being used.  The balance between production and recycling determines the amount of the material that is available within the cell.  In other words, recycling should be the norm, every bit as important as production.  If you need material on an emergency basis, you already have the production in place to handle the demand.  You simply cut back on the recycling for a while.

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No one can figure out how much a car costs, least of all the consumer.  The modern automotive industry obfuscates costs to such an extent that no individual, inside or outside the industry can tell where the real value lies.

The salesman may attempt to maximize his commission, but this may be at odds with what is best for the dealership.  The dealership manager may attempt to maximize revenue, but this may conflict with the dealership owner’s interests which are based on periodic bonuses received for unit sales.  The manufacturer may incentivize sales for a particular model using revenue from a different model.  Research and development, advertising and overhead costs may be spread across multiple models and years. 

In reality, the cost of credit is often the overriding concern when purchasing a vehicle.  In the current system there is no way for the consumer to know how much he should pay.  Supposed credit scores are based on proprietary formula which may or may not be applicable to the particular transaction.  Since there is no reference loan price for a consumer to compare, there is essentially no ability for free-market shopping to operate.  There is every incentive for commissioned agents to misrepresent the available options to maximize payments from the customer.  Financial institutions should recognize that in a non-transparent system such as this, the abuse comes from their own employees and agents, not the consumer.

The cost of a car to a small colony on Mars would be a completely different matter.  It would take a certain amount of time and material to produce the vehicle, and the priority of that production would have to be weighed against the other needs of the colony.

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