Production Rates

A Lean tenet is to produce at the rate of customer demand. While this may be good in principle (it helps minimize overproduction and other wastes, while synchronizing processes), there is an implicit assumption: that the rate of customer demand represents a firm’s profit-maximizing output quantity.

A firm’s optimal output quantity is that which maximizes the firm’s profit. The current rate of customer demand may result in an output quantity that is either above or below the optimal output quantity, meaning that producing at that rate does not maximize profit.

Profit is maximized when a competitive firm produces at the output quantity where marginal revenue equals marginal cost. This is a microeconomic optimization problem, not a production rate or takt time problem. Taking a firm’s current rate of customer demand and blindly producing at that rate incurs the risk that profit is not being maximized.

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