The economies of scale concept refer to the benefits the company receives when it increases in size. For example, one of the most common examples of economies of scale is the bulk purchasing of products or supplies for a lower price. Economies of scale and their effects are closely connected to companies’ efficiency levels. With the more efficient operation of the business, companies can benefit from more advantages in economies of scale. On the other side, inefficient functioning is likely to have a negative effect on the company’s opportunity to benefit from economies of scale. In the case of AutoEdge, it is important to identify the potential ways in which the company can obtain economies of scale in production to ensure the successful relocation of manufacturing to the United States.
There are several ways in which AutoEdge can obtain economies of scale and increase efficiency. Firstly, as a big manufacturer, the AutoEdge company probably has many employees. Optimizing the number of employees on the scale of a big company can significantly increase the company’s efficiency. For example, the company’s primary function in manufacturing engines and transmission parts requires having many employees in the production and product testing departments. Thus, reducing the number of administrative personnel who do not participate in production will release a significant number of financial resources in the form of former employee salaries. Alternatively, the integration of higher levels of automated processes in production will result in a reduced number of employees required to manufacture and assemble products. Thus, by optimizing human resources, the company can obtain economies of scale and increase efficiency.
Next, the alternative way in which AutoEdge can obtain economies of scale with production is by improving the management of inputs and outputs. For example, a more accurate calculation of raw material resources required for producing one engine or transmission part can save extra material costs, resulting in significant economies in the scale of mass production. Management of inputs includes not only the costs of raw materials but the final cost of all processes included in the production. Thus, inputs also include the cost of renting a building for production, the production equipment depreciation, the cost of the company’s technological systems and utilized software, energy, etc. Exaggeration of expenses in any of the inputs multiplied by the scale of production will cause an increase in the final price of goods.
Thus, in order to obtain economies of scale with production, AutoEdge should prioritize using the input-output model. The input-output model presents a multi-level framework that is often used for managing sustainability and environmental activities (Merciai, 2019). The model allows close inspection of input components and estimates the effect of input changes on the final product costs. With the use of the input-output model, AutoEdge will be able to recognize whether the company has achieved economies of scale. According to Rodríguez-Villalobos et al. (2018), economies of scale exist if the increase in production causes a less than proportional increase in total production costs. Thus, if the increase in production will require less input to produce more outputs, the company will acknowledge that it obtained the economies of scale. On the other hand, if increased production requires additional input resources but ultimately results in fewer outputs in a smaller number of produced engines and parts, it signals that the company achieved diseconomies of scale.
References
Merciai, S. (2019). An input-output model in a balanced multi-layer framework. Resources, Conservation & Recycling, 150, 1-13. Web.
Rodríguez-Villalobos, M. C., García-Martínez, J. G., & Mata-Camarena, R. O. (2018). Economies of scale and minimization of the cost: evidence from a manufacturing company.Journal of Eastern Europe Research in Business and Economics, 1-16. Web.