e-learningsite.com

free essays
Free essays

ECONOMIES OF SCALE

ECONOMIES OF SCALE 5

ECONOMIESOF SCALE

April10, 2014

Economiesof scale refer to cost advantages that businesses derive from theirsize, scale of operation or output with a decrease in cost per unitof output. In other words economy of scale is doing things moreefficiently at low cost, increasing returns with an increasingoperational speed. In the chain of distribution, the producerminimizes cost of production and distribution by enlisting otherplayers in the distribution channel. This helps to spread costsrelated to distribution and inventory storage (Ballou,1992).

Choosingthe right channel of distribution is vital for most large scalebusiness operators who want to get their products close to customersregularly. Economies of scale in transport may influence a producerinvolve aregional merchant wholesaler in order to have goods available tocustomers at the right time and in the right quantities. Logisticsinvolved in the transportation, storing and handling goods to matchcustomers’ needs may influence producer to use a regionalwholesalers to cut on costs associated with transportation, storageand other physical distribution costs (Thomas,et al. 1996).

Inmost cases, costs incurred through logistics are high and may have abig impact on the whole macro marketing system especially to thecustomer who bears the whole costs as a cumulative price attached toa particular product. For instance, if a producer does transportationwork and distribution, all the cost would add up to fixed productioncost making the products too expensive this may lead to low marketsales as customers may shift their preference to other similar andcheap products in the market (Ballou,1992).

Regardlessof the process involved in the distribution, customer`s needs are tohave products readily available. As such physical distribution ofgoods matters less to customers unless delays delivery of goods. Inaddition clients prefer goods at low prices by enlisting theregional wholesaler in the distribution channel, the producer is ableto make trades off between costs, customer service level and sales.For instance, when the producer enlists the services of wholesaler,possible trade off may be to make goods available to clients at fastrate even if they are expensive, if the goods are not available ontimely basis customers may buy other similar products therebycreating sale loss to the producer(Blumenfeld, et al. 1985).

Awell coordinated physical distribution of goods enhances goodcustomer service levels. When regional wholesaler is involved in thischannel of distribution, lower costs and better customer services areensured. By shifting the distribution tasks to other wholesaler theproducer is able to substantially save on cost involved throughphysical distribution process. As such the producer is able to spreadthe fixed cost of distribution to the wholesaler thus achievingeconomies of scale. In addition, the wholesalers ensure good marketcoverage at reasonable cost than the producer would do. Goods andservices are readily available for the clients and reach more remoteareas contrary to what producers would achieve(Thomas, et al. 1996).

Furthermore,the producer is able to avoid transportation risks associated withtheft and delays. In some instances, wholesalers are able to collectmarket information relating market needs and coverage. If theproducers do the logistics, they may deliver goods to wrong markets.The wholesaler through coordinating transport activities is able toget more on economies of scale in the distribution of goods theyoperate small distribution deports which would be too costly for theproducer to set up or the producer may set distribution centers inthe wrong markets. In addition, wholesalers are able to make smallbut frequent transports trips which ensure that goods are near thecustomers. A producer who does not rely on wholesaler, may takelonger time to transport all produced goods from warehouses tocustomers thereby creating backlog in their storage houses. This mayin turn affect products quality, time wastage and resources whichcould be used for continuous production (Ballou,1992).

Reference

Blumenfeld,D. E., Burns, L. D., Diltz, J. D., and Daganzo, C. F. (1985).‘Analyzingtrade-offs

betweentransportation, inventory and production costs on freight networks’.TransportationResearch 19B(5),361–380.

Ballou,R. H. (1992). “Businesslogistics management”3rd. edition. Prentice-Hall.Englewood

Cliffs.

Thomas,D. J. and Griffin, P. M. (1996). “Coordinatedsupply chain management”.European

Journalof Operational Research 94,1–15.