by Gregory Hamel
More-efficient equipment may improve manufacturing gross profit.
Small business owners who aim to create, produce and sell new products
often start out by fabricating products themselves in their own homes or
some other small workspace. Small production operations may be adequate in the early stages of launching a business, but as companies grow and demand for their products increase, moving production to a larger facility such as a manufacturing plant can potentially reduce costs and boost sales.
Economies of Scale
One of the primary benefits of expanding production operations to a large
plant is that a large-scale operation can result in economies of scale.
Economies of scale describes a situation where the average cost of
producing a good falls as the quantity produced increases. For example, a
single worker might not be very efficient at making all of the different
parts of a product alone. On the other hand, a team of 10 workers on an
assembly line who each specialize in making a small part of a product could
churn out more units than 10 workers who individually.
Scaling up to a production plant can allow a company to employ larger, more efficient types of equipment. When you launch your business, it may not be financially feasible to invest in a large machine to produce items in large quantities. As demand for products grow, expanding to a larger production facility allows you to rent or purchase new technology that can increase production capacity, resulting in more total sales.
Production Costs and Prices
Because scaling up manufacturing to larger facilities can result in
economies of scale that lead to a lower average cost per unit, it
potentially can enable a company to lower its prices. For instance, if
scaling up reduces the cost of producing a good by $10, your company could
cut prices by $5 and earn a greater profit per unit despite setting a lower
price. Reducing prices can increase the total number of units sold.
Once a production plant is established, managers can attempt to control
costs further by implementing lean manufacturing. This production
philosophy focuses on continuous improvement of processes to limit
slowdowns of production and reduce waste. Lean manufacturing seeks to limit production to just enough output to satisfy demand, rather than
mass-producing and stockpiling large quantities of product. Lean
manufacturing can reduce the costs associated with storage and shipping
goods before sale.
The Economist: Economies of Scale and Scope
Vorne Industries: Reduce Manufacturing Costs
U.S. Environmental Protection Agency: Lean Thinking and Methods
U.S. Environmental Protection Agency: Lean Manufacturing and Environment
About the Author
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College.
Hamel maintains a blog focused on massive open online courses and computer programming.