Taking advantage of economies of scale is one of the most common strategies to achieve a lower production cost. It is an economic concept that affects all areas of the company, from marketing to financing. In the same way, its advantages go beyond an improvement in the income statement.
In this article we show you What are they exactly the economies of scale, What are its benefits and the keys to apply this mass manufacturing model in small and medium enterprises.
What is an economy of scale?
The economy of scale refers to the ability of a company to lower unit costs by increasing production. In other words, when there is more production, the yield increases and, as a consequence, the profit.
Everything is due to a better use of resources. Fixed costs (leasing, insurance, taxes, administration, etc.) are distributed among a greater number of units produced. So that, the more that is produced, the cost of each product is lower.
One of the examples of economies of scale The most representative are the large distribution chains. In this case, they do not have a proper production process, but their production is considered to come from the purchase of stock. By buying large volumes wholesale, they have bargaining power to get a lower unit price.
What effects does the economy of scale have?
In principle, a company that achieves a decrease in its production costs has the capacity to lower the price of its products, which results in a better offer. This way, the company becomes more competitive, you can access a greater number of customers and continue to increase your production.
The end effect is improved market positioning and greater business profit. But beyond the economic benefits, a company capable of taking advantage of economies of scale obtains the following advantages:
- Increased efficiency: Not only is the number of units produced increased, the company also has the opportunity to invest in improving internal processes and continue reducing costs.
- Resource optimization: machinery and equipment are not idle. With which they are amortized in a better way.
- structure improvement: a more efficient company manages to create a more appropriate working environment, defines its organization chart more optimally.
- quality increase: the company can use the extra benefits to obtain better raw materials or add improvements to the product, in order to increase its quality and stand out from the competition.
- Improvement of the brand image: reaching a larger market increases the prestige of the company.
How to take advantage of the economy of scale in your company?
exist two types of economies of scale:
- Internal economy of scale: is the one that occurs as a result of improvements and changes incorporated by the management of the company.
- External economy of scale: the company takes advantage of external factors, such as the size of the industry or the geographical location.
In the event that the company has the opportunity to grow as a result of an external factor, it simply must invest in its production process in order to satisfy the demand of a larger market.
On the other hand, you can also take a series of measures that boost your growth, such as an international expansion
Either way, the ultimate goal is to increase production, since each extra unit generates a profit. Therefore, it is necessary to acquire the relevant resources.
diseconomies of scale
Otherwise, you can get the opposite effect, called “diseconomy of scale”.
Diseconomies of scale occur when the company, by increasing its production, also increases its production costs. It occurs when the potential has been exhausted and more than one's own capacities are produced.
Although the economy of scale is closely related to the use of fixed assets (machinery, equipment and even inventory), it should not be forgotten that a larger company also requires more efficient management, an effective structure and resources. more specialized humans. In short, it involves making investments.
The correct application consists in finding a balance between the increase in productive capacity and the economic effort made.
At Alter Finance you can find business financing solutions agile and adaptable to the nature of the underlying business to find that balance and take advantage of economies of scale in an optimal way.