- Explain how supply chains may benefit from economies of scale?
In the market for goods and services, a supply chain refers to the processes that link together all the parties and prior processes involved, directly or indirectly, in ensuring the delivery of these goods and services to the ultimate consumer (Chopra and Meindl, 2004). Supply chains involve producers and manufacturers, suppliers, transporters, retailers, warehouses and customers. The functions and processes include product development, operations, distribution, marketing and customer service (Chopra and Meindl, 2004) .
Economies of scale refer to the ability of a production process to lower average costs in the face of increasing production levels, until resources are fully utilized (The Economist, 2008). Beyond that optimal production level, a producer is said to be facing ‘diseconomies of scale” in the face of increasing average production costs.
Supply chains become more efficient, meaning there is a tendency to achieve lower costs across the distribution process, when every supply link achieves economies of scale in its own right and is able to pass on this efficiency down the supply chain. However, to my mind, given the increasing consumer-orientation of production processes, market demand plays a huge role in influencing scale economies which are the outcome of specialization (Rao, 2012). Market-driven demand will dictate that level of production that will enable supply chains to experience economies of scale that will allow greater efficiency within their respective places in the supply chain. More than that, it will allow greater efficiency for that intermediate or end-user that a supply chain participant serves since there is enough market demand to allow suppliers to price intermediate goods favorably because suppliers experience economies of scale with higher production output that is market-driven.
- Provide one company example that utilizes economies of scale to increase its supply chain profit.
A good example would be Apple and its i-Phone 5 which has peaked the market’s interest so well that there is supposed to be a long queue of buyers waiting for the newest i-Phone to roll out (The Economist, 2012). Because of attendant fixed costs, and increasing specialization as more and more i-Phone 5 are produced in Apple factories (Grover, Lau and Sharma, 2008), Apple is able to price its i-Phone 5 more competitively (vis-à-vis Samsung brand in this case). At huge numbers, the average costs go lower since Apple’s fixed costs are now evenly distributed over a large number of production output. There is increased profit throughout the supply chain because sustained increasing demand from consumers ensures that there is more than enough revenue generated to cover the added total, although falling average, costs for every i-Phone 5 coming out of the production line.
There is good reason to believe that Apple’s fixed costs for new product development and design and related activities must be quite substantial. This would explain why Apple realizes, even improves, the supply chain profit position with further expansion in factory production. The economies of scale achieved in the production process are translated into economies (and therefore added profit) throughout the supply chain. Ruling out sweatshop operations, improved efficiency across the supply chain may primarily be a matter of cost management, in this case improving the allocation of the fixed cost component over a greater number of saleable production output that the market demands. In addition, repeatability of production line tasks allows greater specialization which also contributes to achieving scale economies brought about by falling average variable costs. The net result is overall improvement in cost management, leading to greater efficiency (maximizing production levels at least cost).
Chopra, Sunil and Meindl, Peter. (2004). Supply Chain Management. 2 ed. Upper Saddle River:
Pearson Prentice Hall.
Grover, Gautam, Lau, Eileen and Sharma, Vivek. (2008). Building Better Links in High-Tech Supply Chains. McKinsey Quarterly. Retrieved from https://www.mckinseyquarterly.com/Building_better_links_in_high-tech_supply_chains_2251.
Rao, Venkatesh. (15 October 2012). Economies of Scale, Economies of Scope. Ribbonfarm. Retrieved from http://www.ribbonfarm.com/2012/10/15/economies-of-scale-economies-of-scope/.
The Economist. (20 October 2008). Ideas: The Economies of Scale and Scope. Retrieved from http://www.economist.com/node/12446567.
The Economist. (23 January 2012). Supply Chains: Apple and the American Economy. Retrieved from http://www.economist.com/blogs/freeexchange/2012/01/supply-chains.