Practicing Economies of Scale in Small Businesses

a) Purchasing

Bulk purchasing from suppliers (refer back to page 1) allows the business to benefit from a reduced average cost per unit. Bulk purchasing is often out of reach for small businesses because they are budgeted to buy in only what they intend to sell (or manufacture).

If, say, two or three businesses buying in the same product or material get together, they can purchase in bulk from the supplier and split the cost.

Example: A business usually buys 50 products at £200 (i.e. £4.00 per product). The supplier has agreed to sell 300 products at £900. If three businesses got together and put in £300 each, they would all receive 100 products.

The cost per unit would then be: £300 / 100 units =

£3.00

b) Sales Staff

If you rely on staff to go out and sell your product or service, you may have the problem of paying the wages to employ someone to do so. If you sell, say, televisions and another local small business sells, say, video recorders, you could both employ the same sales staff to sell your products and split the cost of employment between you.

The objective of the sales staff would be, apart from maximizing sales, to make a balance in sales as much as possible even if it takes him/her one week to sell 20 televisions and two weeks to sell the same number of video recorders.

The sales staff would act as a representative of both businesses with no favouritism towards either (or however many number of businesses they are employed by).

c) Asset Sharing

Most assets, such as machinery/equipment, have a fixed cost that does not change with respect to usage or production levels: this cost may be the hire price if it is leased. If the machinery/equipment is shared between businesses, then the fixed cost can be split between them therefore reducing the average fixed cost per unit. It should be stressed that variable costs will not be affected in any way, as they will still change with a change in output.

Assets such as delivery vans can also be shared between businesses and so the expense of running and maintaining them can be split, further reducing costs that can be reflected in pricing and profit levels.

d) Cross Training

There may be areas in your business where you feel training is necessary to gain the required skills to run the business: a common area is credit control as there is a lot to learn in this specific subject. The cost of training can be quite high and so you can organize a way of reducing this cost with the co-operation of other businesses. Your first task is to identify what area it is that you require training: in this case, we will assume credit control.

By joining a local Small Business Club (often attended by hundreds of small business owners/staff), you can use the communication network to find other business owners/staff that are interested about being trained in the area of credit control. Say you find six people that want to be trained: you then attend the training sessions at a local training company that offer you a block discount of 25%. If the original price for training was £400 per person, you have now managed to reduce this to £300 per person. You (alone) may further be offered the training at £200: who is to say it would be wrong to get a 50% discount because you organized the block booking.

You can seek business owners/staff for block training in a number of areas including sales and marketing, product development, small business accounts, health and safety, basic food and hygiene, and so on.

Summary

Economies of scale is associated more with the larger businesses that dominate the markets today, but that is not to say that small businesses cannot enjoy similar benefits. There are many ways that a business can gain economies of scale, but for small businesses, the key lies with the co-operation of other businesses that are keen to adopt the practice.

Co-operation for mutual benefit is the phrase that can best define a small business approach to economies of scale and it requires putting your trust into other businesses to achieve this. Practicing economies of scale in small businesses can encourage growth and allow them to be more competitive and profitable as a result of reduced costs and increased efficiency.