More grist to the mill

Productivity improvement applications of OR/MS techniques require care in identifying marginal costs. Many costs which are traditionally thought of as variable, are in real environments, relatively fixed. It is suggested here that the difference in total unit cost under differing operating conditions be used as marginal cost. Fixed cost resources with slack may have a marginal cost less than or equal to zero thus creating opportunities for system re-design to improve productivity at negative marginal cost. By way of illustration this article describes a piece of consulting work undertaken by the authors including an application where the marginal costs were in fact negative. The illustration was also concerned with inventory decisions, with the result that the lowest cost inventory levels in the application were determined by throughput requirements.