When a new technology is introduced to an industrial scale for the first time, the project is exposed to a wide range of risks. Along with the external unknowns, there are internal unknowns. If the market fit a for product utilizing this new technology is found, can the product be produced on consistent quality, high enough quantities, and in a cost-efficient manner? To answer this question, a commercial-scale factory must be built.
When preparing for scaling in an unknown environment, the company must understand the purpose of the commercial-scale factory. It is not to generate profit, nor is it to have positive gross-margin. The goal is to prove that the technology also works in scale and if production could be profitable. In other words, the commercial-scale factory is designed for learning, not operational efficiency.
When running the production, learning of the internal processes are collected, but at the same time, the output product is sold in the market. The products are sold to find answers to the leap of faith assumptions related to the market. Here we have the confusing factor: Even though products are sold in the public market, the factory is not a full-scale factory designed for optional production efficiency. This means that selling with negative gross-margin is acceptable.
A commercial-scale factory is an additional step between the laboratory-scale and the full-scale level, but strong arguments support having it. First of all, building a full-scale factory is very expensive. When the knowledge level of the technology at hand is limited the risk of making commitments to the wrong kind of layout, and the wrong type of equipment is high. Also, it is unknown what kind of product variant produced with the new technology will find traction in the market, if any. What is positive about taking first a smaller step is that a commercial-scale factory will be operational faster than a full-scale one would be. In conclusion, having a commercial-scale facility will allow the company to move in the learning curve as quickly as possible, but commit to significant investments as late as possible.
Facilitating the counter-intuitive mindset that “our factory that looks like a full-scale factory is not one” to all stakeholders is of utmost importance for a successful scale-up project. For example, if new investors or management members of the company do not understand the purpose of the factory, learnings will not be collected efficiently. Also, achieving high operational efficiency in a factory designed for other purposes will be very difficult.
If you are interested in reading more about the topic, find my blog about Lean Production Scale-Up here.