What are economies of scale?
Economies of scale are basically anything that makes a company more efficient. Whether that be costly efficient to save the company money, time efficient to save time or productively efficient to produce more of the products so that the company can sell more. All of these come together to make the company more efficient and eventually save them a lot of money.
”In microeconomics, economies of scale are the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase. More simply put, when more goods can be produced on a larger scale with lower costs, economies of scale is said to be achieved. The economic concept dates back to Adam Smith and the idea of obtaining larger production returns through the use of division of labor. Diseconomies of scale is the opposite.”
Source achieved from: http://en.wikipedia.org/wiki/Economies_of_scale When more units of a good or a service can be produced on a larger scale, yet with (on average) less input costs, economies of scale (ES) are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs. According to theory, economic growth may be achieved when economies of scale are realized.
Source achieved from: http://www.investopedia.com/articles/03/012703.asp#axzz2EGWNIOG2 Tesco economies of scale
Why is it important for Tesco?
Economies of scale are very important to Tesco because with the updates that they can make to their company, they will be able to save millions of pounds. If the business is running inefficiently then they will not receive as much profit.
Buying in bulk domestically
To save them money, Tesco buy fresh products like fruit and bread from the UK. Tesco can get these products cheaper if they buy the product in bulk because if they offer the other company a price for them buying 1000 of the product. This price will be cheaper than normal but the other company will not reject Tesco’s money for two reasons; firstly because having your product in Tesco will increase market share because more people will see the product on the shelves. Secondly, If it is cheaper the company will lose money but not profit. If the profit margin is smaller they will make less but still make money. Times that by 1000 for the items Tesco buy and the company makes a lot of money. The fact that Tesco can buy in bulk makes them more efficient because they do not have to spend as much money on the products they wish to sell which makes their profit higher.
Buying in bulk from the far East
Tesco often buy nonperishable items like furniture and televisions from other countries. This makes the store more costly efficient. Because they are manufacturing things in different countries like China they are saving money buying the equipment because the things there aren’t as rare. Things like Iron and Copper are running out in the UK and the more they run out, the more expensive it becomes as more people want it. Countries in the far East have a lot of these supplies so they would be willing to sell them for a cheaper price to Tesco. This makes Tesco money as well as the company that mines the metals.
Tesco also buys from abroad because the labor laws are a lot less strict. In the UK, the minimum wage is £6.19 an hour. This means that anybody that works in the UK has to make at least that much money in one hour. On the other hand in China there is no set minimum wage law so companies manufacturing the product can hire their workers for an incredibly cheap price. This saves Tesco money because they will not have to pay employees to make their products.