EOS - Economy of Scale

EOS - Economy of Scale What is it?

EOS - Economy of Scale / Economy of Scale is the decrease in cost per unit as the quantity increases. This concept, which is closely related to growth and large-scale production, states that the unit cost of each unit decreases when more products or services are produced. The effect of Economy of Scale is seen more clearly, especially in items where fixed costs are higher than variable costs. This concept is a fundamental principle that enables businesses to become more competitive and profitable as they grow.

Economy of Scale History

Economy of Scale was first published by Adam Smith in 1776 in his famous article Wealth of Nations< /a>" It is detailed in his work. With the emergence of large factories in the Industrial Revolution (1760-1840), the importance of Economy of Scale increased.

Benefits to Purchasing Processes

Better negotiation with suppliers
Reinforces the win-win approach in sales

Economy of Scale / How to Calculate Economy of Scale?

The first step in determining the amount of Economies of Scale is that the business

Total cost => Costs including all stages of the production process.
Production quantity => The amount of products or services produced in a certain period.

is to determine.

To calculate the unit cost, the total cost is divided by the production quantity;

Unit Cost = Total Cost / Production Amount

The last step is to compare the old unit cost and the new unit cost. If the new unit cost is lower than the old unit cost, this indicates that the Economies of Scale advantage has been achieved.

Uses of Economy of Scale

Manufacturing Industry: Larger production quantities allow for lower costs per unit, thus offering more competitive prices. Economy of scale offers serious advantages in many sectors such as automotive, electronics and food products.
Logistics and Transportation: In the logistics and transportation sectors, the use of larger transportation vehicles and warehouses for large-volume transportation operations reduces transportation unit costs.
Energy Production: Large power plants produce energy at lower unit costs, which is reflected in cheaper energy costs to the consumer.
Agriculture: Large agricultural machinery and mass production reduce costs.
Service Sector: Large banks can serve more customers and thus reduce transaction costs.
E-commerce: Uses economies of scale to offer products to a large customer base. It offers larger stock, faster delivery and lower costs.
Healthcare:Hospitals and healthcare organizations can serve more patients and reduce the cost of healthcare by using economies of scale.
Education: They can have economies of scale advantages by increasing the number of students through methods such as large classes or online education.

Benefits

Cost Reduction: Larger production quantities lead to lower cost per unit. This allows products or services to be produced more economically. Lower costs allow the business to offer more competitive prices and achieve higher profit margins.
Competitive Advantage: Businesses that can offer products or services at lower unit costs are in a stronger position against their competitors.
Profit Increase: Lower costs can increase a business's profits.
Opportunity for Expansion: Economies of scale can increase the growth potential of the business. Having more resources and capacity to produce more products or services offers the opportunity to gain more share in the market.
Innovation and R&D: Large-scale production allows businesses to direct more resources to R&D (Research and Development) activities. This contributes to the development and introduction of new products or services to the market.
Better Customer Service: Large businesses have the capacity to provide better service to customers. More staff can offer faster delivery and better customer support services.
Risk Diversification: Large businesses can diversify risks by offering more markets and product types. This allows the business to be better protected against fluctuations in certain markets.
Supply Chain Improvements: Purchasing large quantities of materials allows you to take advantage of volume discounts and better supplier relationships.
Sustainability: Large-scale production can enable more effective use of resources. More efficient production processes can increase environmental sustainability.

Risks

Financial Risk: Large-scale production requires large investments. This could put the business at financial risk. If growth expectations are not realized or financial resources are insufficient, the business may face financial problems.
Operational Complexity: Large-scale production can cause operations to become more complex. More difficulties may arise in areas such as management of production processes, logistics, quality control and workforce management.
Loss of Flexibility: Large-scale production can reduce the flexibility of the business. It may be more difficult to adapt to rapid changes and the ability to react quickly to the market may be limited.
Quality Issues:Producing large volumes can make quality control more difficult. If quality control processes are not managed properly, serious decreases in product or service quality may occur.
Competitive Pressure:Large businesses can make competition difficult for smaller businesses and may be under more pressure to offer competitive prices. This could reduce profit margins across the entire market.
Second Resource Risk: Large-scale production requires large quantities of raw materials and supplies. This can increase the business' dependence on its primary supplier and make it more vulnerable to supply chain disruptions.
Legal and Regulatory Challenges: Larger businesses may be subject to greater legal and regulatory scrutiny. Complying with local, national or international regulations may impose additional burdens.