Describe the concept of “Economies of Scale” in relation to the transportation industry. What advantages have economies of scale brought to transportation? Can you think of any disadvantages?
This week’s Topics: The Concept of Economies of Scale in Transportation
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Matthew Paidar
To start off this final discussion, I want to look at a definition from investopedia on the economies of scale: Economies of scale are cost advantages reaped by companies when production becomes efficient (Kenton, 2024). The big thing to take away from this is with bigger companies will have greater savings, whereas the smaller business have smaller savings, and this is all in regards to a few factors. These include, production costs, unit of issue costs, and customers in general, and finally, I would even say that location plays a part in this too.
Within the economies of scale, there are two variations:
Internal economies of scale: Originate within the company, due to changes in how that company functions or produces goods (Kenton, 2024).
External economies of scale: Based on factors that affect the entire industry, rather than a single company (Kenton, 2024).
These two help create advantages and disadvantages to the transportation industry. Some advantages would be lower costs as mentioned before, improved customer service and better reliability, and global reach. On the disadvantage side, Environmental hazards due to more transportation happening, bigger corporations dominating over the smaller businesses, and with a bigger exposure now to the supply chain and movement in transportation, a lot can go wrong if not planned correctly.
Reference
Kenton, W. (2024, June 20). Economies of scale: what are they and how are they used? Investopedia. https://www.investopedia.com/terms/e/economiesofscale.asp
Matthew DiNunzio
Greetings, Class and Dr. R.,
According to a Corporate Finance Institute article, “Economies of scale refer to the cost advantage experienced by a firm when it increases its level of output.” (Loo, 2023) In this case, the transportation and logistics industry can acquire cost advantages as companies increase their scale of operation. Expanded operational footprints and increased traffic volumes of raw materials and finished goods enable a structured, systematic spread of fixed costs over more units, considerably reducing average costs. meaning “the greater the quantity of output produced, the lower the per-unit fixed cost.” (Loo, 2023) Cost and expense reductions mitigate transportation and logistical costs, thereby permitting a company to invest in futures and infrastructure while remaining relevant as a market influencer.
The advantages gained from economies of scale in the transportation and logistics industry of increased operational efficiency and reduced average costs allow a company to offer pricing models that intrigue consumers. How does this relate to the transportation industry? A more robust company that capitalizes on economies of scale leverages size to negotiate preferential rates and relationships with suppliers, which leads to improved interoperability and creates a preference base for transportation providers due to their high volume of business. Scaling also underscores the ability of companies to make technological and continuous process improvement investments to exploit operational superiority.
However, it’s crucial to be aware of the potential risks. Over-expansion, for instance, can lead to underused capacity and increased average costs. The enormity of larger operations may also pose challenges in terms of flexibility and responsiveness to market changes. Also, the initial investment required to capitalize on economies of scale can be significant, potentially creating a contentious hurdle for some companies to overcome. It’s essential to remain deliberately careful and consider these factors when considering the benefits of economies of scale.
Have a great week!
Matthew
Loo, A. (2023, November 29). Economies of scale. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/economics/economies-of-scale/
