Big Money in Small Batches

When does a new technology make real money? A key question, no doubt. A ground-breaking research in this field was the book "The Innovator's Dilemma" (Clayton M. Christensen, 1997). Two essential parts of disruptive technologies, that may change a market, have to do with dramatically different cost structure, and with converting non-users to users.

Highcon's technology influences the cost structure of small batches in conversion production lines. The smaller the job, the larger is the influence. However, the existing conversion market does not support truly small batches (dubbed micro-batches), for example 200 sheets, 50 sheets etc.

Point is made here that there is a need for small batches, which the market is unable to satisfy. This is of course highly theoretical, as the market is off-limits to current technologies. But will it be possible to open this market for non-users with Highcon? Most probably yes, with small batches of unique boxes to serve store brands, small manufacturers (for example the 800,000 store-fronts in ETSY), or even families looking for unique packaging for Christmas gifts. With digital printing, and with e-commerce infrastructure to reduce transaction costs, a whole new market, with much less sensitivity to unit price, may open up.

This goes well with the emergence (one may say re-emergence) of small-scale manufacturing, as described in the Economist article mentioned before. Each of these micro-manufacturers may look for folding carton boxes for products.

On value chains, commoditization wars, and synergy

In the Robert Gair post (#3), the influences on supply chain fights for domination were mentioned. I would like to expand a bit more on this tricky subject, and review the opportunity made possible by Highcon's novel technology.

In actual value chains there is a tendency for key links (infrastructure makers, manufacturers, sellers, retailers, consumes etc.) to try and gain a dominant position, with the following characteristics:

·         Maximal pricing power possible

·         Ability to convert all other players to commodity makers. Commoditization means the prime or only selection criterion is price.

Before Gair's invention, the power was in the hands of the retailer. The retailer was the only entity to select and portion the goods, to communicate with the consumer, to pack and price the final sale. Manufacturers tried to establish footholds in the consumer's heart via advertisement, branding etc. (as they do today). Gairs' folding carton box gave them a perfect vehicle to portion, communicate, brand, protect and promote their products directly to the consumer. In the following years, manufacturers used this opportunity to take increasing command on the value chain, as manifested by the proliferation of the self-service stores. The retailers gained an advantage only when a new tech revolution – the bar-code – became common - however this is beyond the scope of this blog.

Commoditization is considered by many CEO's to be an ultimate threat. In printing, it is common to compete on price in order to gain business. Vendors continuously add capabilities and features to their products, but these innovations tend to quickly diminish to commodity via fierce competition. For printing vendors there is value in large batches, where efficiency is maximized; Press manufacturers respond to this by accelerating the press speeds, achieving on-going cost-per-page reduction. However this trend has limited horizon, with some hard cost floor drivers.

From the point of view of consumer product makers and retailers, the large-batch efficiencies are nice for the bottom line, but many times limit the entire value-chain ability to respond to smaller niches.

However the ability to respond to smaller target audiences groups' needs, to closely "hug" the demand curve with targeted offerings, is always there, is always luring with significantly higher pricing power. So retailers respond by reviving the in-store service, with bakeries, cooked food, deli and other services – highly profitable, but with the same issues known a generations ago – cost, quality, freshness, waste etc.

Digital printing and package-making holds the promise for manufacturers and retailers to offer targeted variety – at mass-manufacturing costs. This potential of digital printing has been captured only in the periphery of the consumer market (e.g., photo-albums), but not in main markets; digital packaging technology, as offered by Highcon, is brand-new.

For such possibilities to materialize, value-aware people in consumer market value chains – marketers, product managers, strategic planners – must demand directly from print and package makers what they need – ability to print and pack small quantities, at a moment's notice, directly from the digital file, in timely response to the whims of the market segments. This will enhance the profit, satisfaction, and stability of the entire value chain. This is the real synergy promise of digital.

An excellent review of the opportunity can be found at an article by Barb Pellow in Whattheything.
On cost value chains limitations please see the chapter "The Tyranny of Low Price" in the marketing guru Seth Godin's blog.

Digital as variety engine

In the previous post we looked into the inherent contradiction between efficiency, maximized with mass-produced uniform products, and profitability, maximized with product lines that fit a variety of customers' needs like a glove - with a lot of versioning in smaller batches.

A closer look at the reason for increased cost of variety reveals two important cost drivers:

1.      Cost of information management - the need to keep numerous product details accurately available at the exact moment of need.

2.      Cost of training - even relatively complex tasks are learned following learning curves until becoming automatic; the most complex tasks are divided, achieving efficiency by the principle of division of labor.

Digital systems traditionally handle the first cost driver – information management – with extreme benefits on supply and value chains. Both manufacturers and retail companies enjoy the benefits of digital bar codes, automatic inventory and supply, automated pricing, accounting and CRM.
When digital information management is coupled with digitally-based automation, versioning becomes affordable, generating new unprecedented value for the industry. And with versioning, there is no industry more advanced then printing.

Economy of scale is hardest to achieve in printing, as even the largest batches live typically for a day or a week, and  are then replaced by new versions – tomorrow's newspaper, another book, another journal. Economy of scale is also challenging in retail, due to the inherent need for portioning.  As a result, printing and retail are the only major industries that are totally fragmented – no single vendor holds more than a small portion of the global market (compared to cars, computers, software, Pharma, food…).

The first digital revolution in printing dealt with the manual process of color printing preparation, replaced in the 1980's by digital pre-press, and then migrated to simple environment of the Apple Macintosh. The time to prepare color plates was reduced by a factor larger than a hundred, leading to an explosion of color publication. For example, the variety of leisure activities exploded with color journals servicing smaller and smaller niches of specific mountain biking or snowboarding or competitive chess or amateur magic. The economy of the whole leisure market grew accordingly, as expected when vendors can satisfy the huge demand for variety.

The second revolution was Digital Printing, in my opinion the first truly digital manufacturing technology to reach the main market (now an emerging wave, see for example last week's Economist). The full potential of digital printing versioning ability is still emerging.

The most updated phase of digitizing a manual process, accelerating it by a factor of 100, and enabling super profitable versioning is the Highcon Euclid^TM.

Until Highcon, die making for the Gair process has not changed much since its inception in the late 19^th century. Although modern technologies greatly enhance productivity (for example laser cutting), parts of the process still require skilled manual labor.  

Highcon creates a creasing die using a unique polymer and cuts with a laser, condensing the time from file to pack to about 15 minutes. The process is fully automated, requiring no skilled labor.

The potential for market changing, based on this technology, is huge:

-          Avoiding the hassle disturbing production floors when short run, quick-turn-around jobs are becoming more and more frequent, following market demand for variety 

-          Package making for smaller segments, for example regional supermarkets, holidays and events, promotions – all easy to produce and highly profitable

-          Price, size, design and placement real-life, in-store testing, by easily producing tens of package types with a few hundreds of each, and scientifically pinpointing the best combination to maximize profit

-          Combining digital printing and package making to respond to events in the Facebook tempo, exploiting opportunities while managing market challenges in real-time.

The reader is welcome to suggest more ideas!

The importance of Variety

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Abraham Maslow

Why is variety so important?

As we have seen with the Henry ford story (1^st post), once a new technology becomes affordable, consumer preferences change towards almost insatiable appetite for variety. The reasons for that are beyond this blog (or my knowledge), however I will point out two important points:

1. The innate need of people to place themselves in the social ladder, as I think was properly described by Thorstein Veblen in his classic “The Theory of the Leisure Class” (1899). People require conspicuous consumption to achieve that.
   In simpler words, if the entire neighborhood has black “Model T” cars, there will be unique value for my new red car. As marketing people know, there is a need to satisfy smaller and smaller niches in order to capture and sustain market-share and profit.

2. In basic economics we learn that there is a demand curve, where people will buy less when price rises. First an ideal price is set, where profit is maximized; but retailers cannot disregard customers who cannot afford the ideal price, so they use tools like seasonal sales, product versioning etc., to address different market segments. The better the fit to the real market out there, the better the economic results. This very well may be the source for today's diminishing folding cartons batche sizes, reported throughout the industry.
   This may contradict the efficiency inherent to large, uniform production batches, as done by Henry Ford.

The inherent contradiction from section 2 above, between market efficiency, which dictates variety of product, and manufacturing efficiency, dictating uniformity, has its most effective solution in the conversion to Digital.

Folding carton first revolution - Robert Gair

[A far better description than mine, by an ETSY author, can be found here]


A concise (abridged) description from Wikipedia:


In the 1840s, cartons were made by hand and held together with tacks and string, and used only for expensive items (such as jewelry). Mass production of the cartons was invented, partly by accident, at the Robert Gair Company in Brooklyn, New York. Machinery at the end of the press had been set up carelessly by a pressman, and machinery cut through the material. This ruined the press but gave them an idea: printing and cutting could be done with one machine. Previously, cutting of printed cardboard had been done manually. From the mistake in 1879, Gair developed a process for mass production of boxes. In 1897, the National Biscuit Company (Nabisco) became the first large company to adopt the new cartons, for Uneeda Biscuits. Other manufacturers soon followed. With inexpensive packaging now even common items could be placed in a showy carton and each carton became its own advertisement. The product was also protected, and the contents had a longer shelf life.


Let's look at the manual production of cardboard boxes: Carton is cut to measure, creased, folded, tied and glued - all by hand. Care is taken for accurate, stable product. A reasonable estimate will be, say, several minutes per box, say 2 minutes.


Now let's imagine a full-scale Gair process, with boxes running through the machine at thousands per hour, or say a hundred per minute or more. Here we see again the 100x factor of acceleration in the previous, manual process' bottleneck. Also, the level of skill is reduced, from artisan level to machine operation and control.


As expected from true revolutions, there is a wide economic and social impact:

• Imagine the retail process before Gair. The crucial retail act of portioning is done manually, by a store employee, from a sack or a large box. the process is slow, expensive - and in complete control of the store, while the goods' producers have limited influence. The store owner can promote whatever he prefers, price goods as he sees fit, and needs to take care of freshness, proper weight and volume, etc. The Gair process puts the power in the hands of the goods maker: Portioning is done in the factory, communication with the consumer is achieved by printing on the box, and pricing and brand management are now determined outside of the store. This shift in power towards the vendors was in place for many decades, until the invention and application of bar-codes during the 1970's gave some power back to the store owners.
• For the consumers, freshness, proper weights, brands and choice were suddenly easily gained. Instead of limited choice, goods could be made to large variety catering various needs. The ability to shop boxes off-the-shelf enabled the modern supermarket, and made it easy to stock goods at home, freed homemakers time and effort.

The balance of power towards goods makers let them optimize for efficiency, via limiting variety and focusing on price. However, when stores could clearly follow sales performance with bar codes, the pressure on better sales performance was on, forcing goods makers to increase variety and satisfy specific needs. This reduction in batch size is accelerating relentlessly, making box batches smaller, reducing efficiencies, increasing costs and challenging production floor managers.

Affordability, then variation - how tech markets evolve

On May 25th, 1927, after selling more than 15 million Model T cars, Henry Ford was forced to halt manufacturing and send all employees home due to falling sales. Consumers had changed their taste, from clamoring for Model T cars (60% market share in 1921) to completely abandoning it in 1927. Why was Ford so successful at first? What was the reason for this complete change in consumer behavior? What was so popular in 1921, but so missing in 1927?

Step 1: Make the Technology Affordable

Cars were first made by skilled craftsmen following a meticulous manual process. Involvement of skilled labor is typical in the early days of most technologies, taking parts from existing industries and manually adapting them to achieve needed performance. Making things by hand is inherently expensive, as it is costly to train and pay skilled labor. High cost becomes a roadblock to mass consumer market adoption, as affordability is a necessary condition.

The first step towards affordability comes from standardtization of the product. When all resources are geared to supply a single, unified product, different activities go through the tried-and-true division of labor process, into steps that can be either automated or simplified beyond the need for specialized skills. Henry Ford’s assembly line for the Model T is an excellent example. The whole line was geared for the production of a single model, with large economy-of-scale benefits that allowed almost a 3 to 1 reduction in price while profitability numbers skyrocketed. There is however a price to pay. The extreme specialization makes the process inflexible: Even small changes are extremely expensive.

Another example for "give the customers any color they want, as long as it's black", was Abraham Darby's cooking pot, exactly 200 years before Henry Ford. It is a rather common occurence.

The examples in this post is far better decipted here.
 

Step2: The Emerging Need for Variation, Style and Selection

Consumers always look for ways to differentiate themselves, to express themselves through what they buy[1]. When new technology is rare, the fact of having it is unique enough (like having the first car in the neighborhood); when it becomes commonplace, having the technology is not unique enough, and people look for other differentiations in the technology itself (if half the neighborhood has cars, I want mine to stand out). Henry Ford concentrated on value, mandating uniformity for efficiency (black color dries fastest – so “you can get any color as long as it’s black”). Any change in his super-efficient assembly line would have been cost-prohibitive. GM on the other hand did not change cars’ internals, but provided annual marginal variations in exterior design, and invested in new paint technology that allowed for many color variations.

Once a technology’s affordability is achieved through uniform offering, the consumers – almost overnight – change their habits and demand differentiation to set them apart with selection and style. Ford was baffled by this dichotomy, while GM’s Alfred Sloan fully capitalized on it.

[1] As noted by Thorstein Veblen in his classic “The Theory of the Leisure Class” (1899), there is a “ceremonial / instrumental dichotomy”, where people do not follow the ‘instrumental’ best price strategy, but enter the ‘ceremonial’ status-seeking game, and will pay more in order for example to display status difference

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Affordability, or the 100-times-faster rule

Imagine the Medieval scribe, writing letter after letter in the scriptorium. The core technology – quill, water-based ink, and parchment – is simple, but the process is really slow. It takes about two months to copy a book; and copying is done by skillful, lifetime-dedicated masters, under strict supervision.

Enter Gutenberg. A trio of press operators (pressmen) could print a book in two hours, using the following process: the first operator spreads the type with ink, using two ink-soaked pads; the second lays paper on the type tray, and the third pushes the tray into the press. Then operates [1. maneuvers?] the tray with the second pressman. Then the third operator pulls the tray out, while the second one peels the paper off. No part of the process requires lifelong dedication... This process printed approximately three pages per minute, about 600 times faster than a scribe. But, just as significant as the increase in speed is the decrease in required skill.

Some detailed historical analysis reveals a general observation, where true technical revolutions typically include:

• A 100 times (at least) acceleration in current technologies' bottlenecks
• Dramatic reduction in the operational skills involved

The next true revolution in printing technology happened in the 19th century, while in the 350 first years after Gutenberg the main improvements were gradual, many times sacrificing quality for speed.

With Gutenberg's printing method, the most respected printing craftsmen were those who arranged the type. Here, speed and skill combined to give the best-looking printed result. Type composing was the real bottleneck. By the late 1700's, it still took approximately one day to compose a page. Additionally, linear printing speed was limited by the flat-bed, sheet-fed process, to a few hundred sheets per hour. A major technology shift was required.

The first of the two changes was the introduction of the composing machine. Instead of casting and setting each letter by hand, sophisticated machines, operated by relatively low-skilled operators, could arrange thousands of characters per hour. This is a perfect example of increasing accessibility, where skill is replaced by automation.

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An early type-composing machine, able to set up to 6000 characters per hour

The second change was the rotary press. The top speed with the stationary type bed was limited to 4,000 impression per hour – not a revolutionary change; but with the rotary press, 20,000 impressions per hour were achieved as early as 1851. Naturally, the energy source was steam, not manual.

The combination of the two changes detailed above brought the printing of text to today's rates, more than 100x-combined-acceleration on the previous bottlenecks. Just as Gutenberg's invention was the source of important economic and social change, so was this change, enabling modern newspapers, essential for popular Democratic modern states.

In the next post, we will describe the 100x-acceleration in folding cartons, at the end of the 19th century.