The most common reflex when a factory's output drops is to hire more people. Sometimes that's right. But a production-theory law more than a century old explains exactly when that reflex stops working — and when it starts backfiring. This post explains the law through a simulation built to be dragged and tested, not just read.
What drives output
Classical production theory splits a production line's inputs into two categories:
- Fixed factors — the number of machines, the floor space, the installed line. In the short run, this number doesn't change.
- Variable factors — most commonly, the number of workers on the line. Management can raise or lower this number almost immediately.
Output is the result of the relationship between these two factors — and that relationship is not linear. Doubling the workers does not double the output, because the number of machines stays the same.
What is the Law of Diminishing Returns
The law governing this relationship is the Law of Diminishing Returns (German: Ertragsgesetz). It describes what happens when ONE factor (workers) increases while the other (machines) stays fixed. Three concepts to keep separate:
- Total product — total units produced per day.
- Marginal product — the output added by the single newest worker.
- Average product — total output divided evenly across all workers.
The marginal-product curve always moves through the same 4 phases, regardless of industry:
- Phase I — Accelerating: each new worker adds more than the one before.
- Phase II — Peak efficiency: marginal product has started declining but is still above average.
- Phase III — Diminishing: each new worker still helps, but less than the last.
- Phase IV — Backfires: total output starts falling even as headcount grows.
Exactly where each phase starts depends on the specific line — there's no universal formula that fits every factory. The fastest way to see the real shape of the curve is to test it directly.
📚 Want the theory behind this law — the definition of a production function, substitutional vs. limitational, and why the curve always has exactly 4 phases? Read What is a production function — has its own 3D simulation.
Try it yourself: simulate your own line
The simulation below models one concrete scenario: 3 fixed CNC machines, adding workers one at a time. Drag the slider — or drag directly on the chart — to watch total product, marginal product and average product change in real time, and see exactly which phase this line sits in at any headcount.
The real-world lesson: don't rush to hire
The real lesson sits at the boundary between Phase II and III — and between III and IV.
- If output is falling and the line is still in Phase I or II, hiring is almost always the right call.
- If the line is already in Phase III, hiring still helps but with shrinking returns — this is the point to weigh investing in another machine instead of another hire.
- If the line has drifted into Phase IV, hiring only adds cost while output stays flat or drops — the bottleneck isn't the people.
The problem: most manufacturers don't actually know which phase they're in, because no one is measuring it. This is exactly where a proper system of record (an ERP/MES logging output per shift, per machine, per worker) becomes worth more than management instinct — it turns "should we hire" from a guess into a calculation.
Where to start
You don't need a full capacity-planning system to start. Start with the simplest possible log: output per shift, per machine. With just that number, the line's real marginal-product curve reveals itself within a few weeks — and "should we hire" gets a far clearer answer than gut feeling.
Nguyễn Hải Minh
I build custom software and data solutions for manufacturing ERP systems, including INFOR, for clients in Germany. As a Staatlich geprüfter IT-Techniker (Fachrichtung Informatik) and Informationselektroniker, I combine deep technical skill with business-systems thinking to help manufacturers automate operations and optimize cross-border import and export.
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