In today’s world of shrinking government budgets, one of the most cost-saving strategies is to leverage economies of scale. Why is this important? The more you can do to reduce your operation costs, the better off you will be. But how do you identify these economies of scale?
To begin with, let’s consider a scenario in which there are three types of organizations. One consists of a large corporation with hundreds of employees. The second is a smaller business with a few employees. The third type is composed of smaller companies with no employees whatsoever.
Let’s assume that the third type of company operates in a relatively small market segment and the profit margins are thin. Now, let’s examine why it makes sense to leverage economies of scale in this situation. If the market penetration is very low – say less than 10% – then it would take much more effort to reduce costs and improve productivity than it would if you had a larger company with lower labor and operational costs. There are several ways to increase efficiency in a tight market segment through internal and external economies of scale.
One approach is to hire more workers, which leads to increased production but it also increases operational costs. In response, many larger organizations seek to outsource functions such as accounting, IT, billing and payroll. But sometimes it makes sense to contract with suppliers who specialize in those activities and who can perform them at a lower cost. Banks for example, have increasingly used outsourcing as an approach to leveraging economies of scale in their retail banking sector. Of course, banks also realize the risks involved in outsourcing these types of functions to a third party – whether it is from a human resource standpoint or a cost-related standpoint.
Another way to improve the efficiency of operations while reducing costs is to reduce inventory turnover. By leveraging economies of scale through economies of logistics, companies can realize significant cost savings by reducing the average number of locations that they need to maintain inventory at any given time. This approach allows companies to leverage their existing network infrastructure to help them streamline the flow of orders between locations. Banks for example, have been able to realize significant cost savings by leveraging their own networks and their own logistics systems. They have also been successful in leveraging economies of scale through acquisitions of property-based businesses and other activities.
One of the most common examples of how companies have leveraged economies of scale to decrease costs is through the production process. Many companies have been able to significantly reduce the number of waste streams that they have by streamlining their production processes. This process can also help to increase efficiency by improving the quality of the raw materials that are used in production processes. Streamlining operations also enables companies to accelerate the rate at which products are manufactured. It can also lead to cost savings because the longer it takes for a product to be produced, the greater the cost savings will be.
Another example of how organizations have leveraged economies of scale through production efficiency is through increased productivity. Productivity improvements typically come from increased efficiency in the operation of the business. By producing fewer inefficient products, organizations have the ability to reduce the amount of time that it takes to produce a product and can achieve new levels of productivity. Productivity improvements typically take place when operational efficiencies are achieved, but it is possible to realize productivity improvements even when operational efficiencies are not as effective because of the increased efficiency that occurs due to increased scale. Some of the ways that production efficiency can be improved through increased scale include:
The benefits that can be realized through the use of economies of scale through manufacturing and sales efficiency are likely to continue to increase in the banking industry as larger banks seek to improve their bottom line. The improvement in efficiency that comes from the use of economies of scale in the banking industry can lead to cost savings and increased productivity. By leveraging efficiencies across the various operations of the banking industry, banks can reduce their risk, improve customer service, and increase customer satisfaction and loyalty.