Economies of scale concept is an old concept but the majority of the companies knew about it through education and sometimes through trial an error, this concept as a summary means that as the quantity produced of each product increase , the unit cost per product will decrease thus the contribution margin will increase and the sales revenue also will increase.

Due to the tough competition nowadays locally and globally, the need to apply this concept becomes necessary for companies especially if they are competing in a very competitive environment where price wars takes place and price competition is played in small margins where every penny may affect the decision of the customers to choose a certain product.

Economies of scale can be achieved through five basics which are, product development, purchasing, production, demand management and order fulfillment.

Product development:

It helps us to decrease the unit cost through designing products once and only once for the global markets. The importance of this concept is due to that the product design decreases the maintenance needed hence decrease the warranties cost, it also decreases the returned sales in spite of getting rid of the repairing cost associated with the defective items which will cost us approximately as like as the production cost so the more we decrease the number of clients’ complaints and product repairs and returns, the more we can achieve efficiency in operations and can achieve economies of scale that can decrease the after sales expenses and work load for this department.

Purchasing:

The company can achieve the economies of scale when they purchase the raw materials needed for the production, this cost depends on the quantity purchased and offers given by the suppliers, from this point of view the company must sign contracts with the suitable suppliers in order to keep the raw materials prices constant as much as they can so that the company will not be forced to charge additional prices for their customers as the raw materials prices violates especially for necessities like fuel, copper, silver, gold, life stock…

Production:

It is well-known that the company can reach the economies of scale when the production increases, because set up cost will be minimized and the total overheads cost will be eliminated and allocated to larger amount of finished goods so the average production per unit will decrease and the management will have an additional margin for discounts if needed to penetrate a new market or protection for an existing market share. Demand management: managers use marketing and sales forecasts the core of demand management to set sales quotas, plan production schedules and inventory requirements, negotiate suppliers’ contracts and establish corporate revenue plans.

Order fulfillment:

This concept can lead also to the economies of scales because if the company fulfills all of its customer’s orders they will be more efficient order agreement decrease in total finished goods inventory and quicker, more direct delivery and all our customers will be well satisfied. Discrepancies in order fulfillment like non delivery on time may lead to penalties for the company if it is a binding contract while if the production finished earlier than expected may lead to additional storage charges due to the fact that the company will be obliged to keep the finished goods longer time in the warehouse which may require additional expenses. From this we can conclude that in order to reach economies of scale there is a chain that must be accurately applied at the same time because only in this way we can compete with our competitors especially if there is a fierce competition and price war.

This concept can be applied anywhere and in every company regardless of its working capital and size. This concept can be applied easily in Lebanon but it will not be very effective because quantities play a major role . In some industries in Lebanon, competition forces some companies to use this concept so they are trying to use this concept  from it especially in Fast Moving Consumer Goods and dairy products…