What are economies of scale?
Economies of scale are savings that arise in the cost of producing each individual product as the production volumes increase. The larger the scale of operations, the cheaper it is to produce each individual item.
Is volume sufficient to achieve economies of scale?
While economies of scale derive from savings associated with larger production volumes, they are not however guaranteed. It is not quite as easy as the cost curve in economies would imply. While some savings are relatively direct – such as spreading fixed costs over a larger number o products, other savings require more active effort by management to achieve the savings typically associated with larger production volumes.
Areas that you need to focus on to achieve economies of scale
Negotiating better prices for raw materials
One possible source of advantage from larger volumes is associated with being in a better bargaining position with suppliers. Having larger purchasing volumes typically allows you to negotiate more effectively than small production volumes. However, these savings are not automatic – you typically will have to negotiate with your suppliers – arguing for a better price based on your increased purchasing volumes.
Reductions in change-over times for larger batches
Another possible source of advantage comes from savings that you may be able to achieve in change-over times from producing the product in larger batches. Rather than having to change over the production line every 1,000 products, you may for example be able to run batches that are 10,000 units in length, in effect resulting in your change over times (per item produced) being a tenth of what they were. If volumes are sufficiently high, you may be able to set up dedicated production lines, completely eliminating change-over costs entirely. Again, achieving this benefit relies on actively taking steps to reconfigure your operations.
Developing more efficient operations
Another component of achieving economies of scale is developing routines that are quicker at a large scale. Potentially you can create products in batches, or automated procedures that allow you to bring down the cost associated with each product. Some of these may be relatively obvious improvements that you can make to your operations, but again, it requires some conscious effort to allow you to see, and take advantage of the opportunities presented.
Final thoughts: Be aware of maintaining efficient communications and avoiding diseconomies of scale
While typically costs decline as volumes increase, there is a danger that diseconomies of scale start to negate these benefits. As production volumes increase, coordination can become more difficult, potentially resulting in more mistakes. Thus, as well as taking proactive steps to achieve economies of scale, it is also important to consider how to reduce diseconomies of scale that may offset volume benefits.