At your desire, I have taken a closer look at the problem which our company faces nowadays. I agree with you that efficiency is the primary goal of any business and the economies of scale are one of the ways we can increase it.
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Before giving you my recommendation on the achievement of the economies of scale, I want to concentrate your attention on the efficiency measures. It is not a secret that the efficiency of the company can be measured by different ratios. The return on assets is one of these ratios. The ratio is calculated as the amount of revenue per each dollar of the assets. I suggest focusing exactly on this measure when determining the efficiency of the company and its strategy.
Now I want to turn to the economies of scale as the way of increasing efficiency. The materials on economics define the economies of scale as “the cost advantage that arises with increased output of a product” (“Economies of Scale” n.pag.). However, the increase in output is generally connected with the increase in costs of production. There is one more term we should care about. It is the diseconomies of scale which represent a situation when the company cannot sustain its average costs at a particular level, and they rise at a rate greater than the output rises (“Diseconomies of Scale” n.pag.).
That is why it should be stressed that the economies of scale are the benefits, which a company gains when it increases productivity while maintaining the fixed costs at a certain level. The total cost of the company consists of variable and fixed components. Variable costs are the ones that cannot be reduced with the increase in production. So, our goal is to find the maximum level of production, which can be achieved with the same level of the fixed costs. The rent for the manufacturing spaces is one of the major components of the fixed costs according to our budget.
If you take a look at the location of our manufacturing factories, you can see that they are situated in substantially different locations. It would be much more efficient if we consolidate our production facilities in the locations with the lowest fixed costs. The disadvantage of this strategy is the relatively high investments that are necessary for reorganization.
The next alternative is to redesign the production spaces to maximize the number of machines in each factory. In this case, we will achieve the increase in output per square meter without a simultaneous increase in the fixed costs, including rent, the lighting of the premises, and other utilities. In my view, this alternative seems to be more attractive as it requires fewer investments and less time to be accomplished.
Finally, I want to present you with some relevant information about the economies of scale which I found in The Economist. I hope it will be interesting for you. “It’s unusual to find a large corporation that’s efficient. I know about economies of scale and all the other advantages that are supposed to come with size. But when you get an inside look, it’s easy to see how inefficient big business is. Most corporate bureaucracies have more people than they have work” (“Economies of Scale and Scope” n.pag.).
In conclusion, I should say that economies of scale can be a real tool for increasing efficiency. However, we need to calculate the necessary amounts of investments required and to compare the cost and benefits of each strategy. I look forward to helping you.
“Diseconomies of Scale”. n.d. Investopedia.com. Web.
“Economies of Scale”. n.d. Economist.com. Web.
“Economies of Scale and Scope”. 2008. Economist. Web.