2min chapter

Catalyst with Shayle Kann cover image

Explaining the 'Watt-Bit Spread'

Catalyst with Shayle Kann

CHAPTER

Economic Perspectives in Manufacturing Theory

This chapter delves into the economic viewpoints of various stakeholders within manufacturing, comparing lean manufacturing models with the theory of constraints. It emphasizes the differing incentives for data center operators and utility companies that shape their investments and operational choices.

00:00
Speaker 1
You
Speaker 2
also, when you put together this watt-bit spread piece, described it in terms of manufacturing theory in a way that I thought was useful to think about how different actors in this equation are thinking of it in different economic terms. So can you walk through who is operating how? Yeah. So in terms
Speaker 1
of manufacturing, there's sort of two different models. One is sort of lean manufacturing, which says, hold as little inventory as possible. Everything's about just in time. And then if lead times extend to deliver, that's fine. The customers will just have to wait. But we're going to improve margins by not having a bunch of excess inventory. There's another model, which is the theory of constraints, which says, no, what you need to focus on is throughput. That's how you create enterprise value. where you need to find areas of the supply chain or the manufacturing process that tend to become constrained and make sure that you're always building extra capacity. So more labor, more overhead for those particular points of the system. So if I'm downstream in the system, so I'm data center operators, I'm cloud providers, I'm NVIDIA. I'm open AI. I'm very much thinking about the world in terms of theory of constraints. Because again, the cost of the base infrastructure for my end product is actually really low. When I say base infrastructure, I talk about land, power, a data center shell. Those things are relatively inexpensive in the grand scheme of operating my business. So I would be willing to pay a premium for those things to go faster. Now, if I hop over into the utility world, again, going back to what we were talking about just before, a utility sells an electron in 2027 for the same price it sells it in 2030. So what is the incentive the utility has to go faster? What's the incentive the utility has to stockpile 345 kV transformers? None. All they do is say, well, okay, lead times are longer. So it used to be that I could connect a customer in two years, and now it's seven years. And that's okay in sort of the utility world, right? Now, it's not ultimately in their best interest. They should want to go faster and get more customers. But their business model is not designed in such a way to operate in this theory of constraints sort of world.

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