Some fabricators (including my company, OSH Cut) enable rapid service by charging more for it. The “pay for speed” strategy isn’t just a gimmick. It’s an important tool for controlling the cost of excess capacity. If you have weeks to turn orders around, you can level production backward so that you only need enough capacity to handle average demand. But if you want to turn orders around quickly, you need enough excess capacity to deal with peak demand at all times. That gets expensive. So instead of trying to fulfill everything fast, you maintain some excess capacity and limit access by charging more for speed.

The Power of Scale

That works fine, but here’s the exciting caveat: the bigger you get, the less excess capacity you need, and therefore the less you have to charge for speed. That’s true for large and small jobs alike. The enabling factor is a magical property of the statistics of random arrivals.

Random arrivals are often best modeled with what’s called a Poisson distribution. Think of car arrivals at a stoplight, for example. If at a given time of day cars arrive independently and at a steady average rate, the Poisson distribution helps us predict the likelihood that we’ll see zero, one, two, or more cars over a certain time period.

For our purposes, a key property of the Poisson distribution is how its standard deviation—the “volatility” of arrivals, so to speak—changes as the average grows. The standard deviation of a Poisson distribution is always equal to the square root of the mean. In other words, the larger the average grows, the less volatility there is as a percentage of the average. This is magical for an on-demand manufacturer, because as demand increases (more orders per day on average), less excess capacity is required to fulfill peak demand quickly.

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Read the full online article at The Fabricator

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