How to determine the right scale for your FOAK manufacturing plant? Here is a step-by-step guide.
Scaling a First-of-a-Kind (FOAK) manufacturing plant is all about finding the sweet spot where your costs start to drop significantly with increased output. While your FOAK plant might not achieve the full scale needed for optimal efficiency, it must demonstrate the potential for cost reduction as production ramps up.
Here’s a step-by-step process to determine the right scale for your FOAK plant:
1. Understand the Purpose of Scaling
The primary goal of scaling is to reduce unit costs. Your FOAK plant needs to show this dynamic—proving that as you scale, your costs decrease.
2. Identify Your Business Type
Start by determining whether your business is OPEX-intensive or CAPEX-intensive:
- OPEX-Intensive: If your operations require a constant influx of materials, energy, or labor, you’re likely OPEX-intensive.
- CAPEX-Intensive: If your business requires significant investment in large structures or machinery, with relatively low ongoing operational costs, you’re CAPEX-intensive.
Understanding this distinction is crucial because it dictates where your cost savings will come from—whether through operational efficiencies or capital investment reductions and funding mix.
3. Engage with Suppliers
Your next step is to talk to your suppliers, as their pricing will significantly impact your costs:
- For OPEX-Intensive Businesses: Discuss with suppliers to understand at what order volumes they’re willing to offer substantial discounts (ideally 30% to 50%). These discounts are usually available for consistent, long-term orders (3-5 years) of materials, components, or energy.
- For CAPEX-Intensive Businesses: Engage with equipment suppliers to determine the conditions under which they’ll offer discounts on large orders of machinery or infrastructure.
For example, when planning a lithium-ion cell gigafactory, I found that ordering one electrode-to-cell line cost X, but ordering four lines yielded a 10-15% discount. In another case, sourcing wind turbine blades, we secured up to 80% discounts.
If your materials are traded commodities like oil or metals, you might not secure such discounts, making risk analysis even more critical. For CAPEX-intensive businesses your financing costs might be your biggest costs. You won’t be able to reduce those simply with scale at this stage. I’ll go more into financing cost in my later posts.
4. Calculate Your Output Volumes
Once you know the volumes required to secure supplier discounts, apply these to your production processes to calculate your corresponding output volumes. This will help you determine how much you need to produce to start seeing cost reductions.
5. Optimize Production Processes
The challenging part is now reducing other operational costs, like labor and energy. Analyze your production line operations, the layout of your manufacturing process, and the overall production flow. This is where creativity and optimization come into play.
Since you’re building a FOAK plant, you have the opportunity to design processes that optimize resource and energy use. It’s unlikely that your production process is entirely novel, so seek out experts who have experience optimizing similar processes. Hiring a team or consultant with a proven track record of reducing operating costs will greatly increase your chances of success.
This step is crucial for two reasons:
1. It helps you estimate your minimum possible costs.
2. It allows you to present well-founded cost projections to investors with confidence.
6. Map Your Cost Curve
With a clear understanding of your production costs and supplier discounts, plot these cost points against your output levels to create a cost curve. This curve will likely slope downward as your output increases.
Look for a point on the curve where costs start to drop significantly, but your capital investment (CAPEX) remains minimal. This is your FOAK sweet spot—the optimal scale that requires the least investment while still being large enough to demonstrate scalability and cost reduction.
By following these steps, you can determine the right scale for your FOAK manufacturing plant, ensuring it’s set up for both immediate and long-term success.