Page
  1. 1
    1
  2. 2
    2
  3. 3
    3

Economies of Scale: Wal-Mart. Economies of scale means declining average cost when volume increases.

Extracts from this document...

Introduction

Economies of Scale: Wal-Mart Economies of scale means declining average cost when volume increases. When the marginal cost is less than average cost, there are economies of scale. For example, an IT company spends a huge fixed cost to develop software and marginal cost of producing a CD compare with the fixed cost can be considered as small and unimportant, so before capacity constraints kick in, the average cost will decline as fixed cost are spread over lager volumes. Economies of scope refers to cost savings when different goods or services are produced "under one roof". For example, there are two products: A and B. If the cost of producing A and B together is smaller than producing them separately we can say there are economies of scope. Here, we use Wal-Mart as an example to explain the sources of economies of scale and diseconomies of scale. The most common source of economies of scale is the spreading of fixed costs over an ever-greater volume of output. Fixed costs arise when there are indivisibilities in the production process. ...read more.

Middle

Efficient distribution channels will help to lower price. Economies of scale may also arise when firms carry inventories. Firms carry inventory to minimize the chances of running out of stock. Of course, there are costs to carrying inventory and the inventory costs will drive up the average costs of good sold. Wal-Mart's inventory control system is legendary. It does not want to hold inventory, it does not want backorders. It always orders fewer cases but more frequently. Like many huge companies, Wal-Mart will not wait. It requires shorter lead times and implements "zero tolerance" policies. And this measure can help Wal-Mart save a lot of money on inventory. The fourth resource of economies of scale and scope is purchasing. Most people have purchased items in bulk. They may find sometime price falls as the amount they purchase increases. Big companies that make large purchases from their suppliers may also obtain discounts, enabling them to enjoy a cost advantage over smaller rivals. Likewise, companies with low costs can price their products at the same level as competitors, but make a higher profit while doing so. ...read more.

Conclusion

When Wal-Mart starts its business in a new area, they need to do some research to find out the culture of the society and habits of local people. For example, the hypermarket in China is better to offer the infrastructure carrying traffic to their locations. And in Japan the placement of hypermarkets in malls which include entertainment venues will be more attractive to customers. What's more, they also need to find out the surrounding of its placement. For example, if access by pubic transportation is limited, then the availability of parking is necessary. This kind research will help Wal-Mart take advantage of economies of scale. Firms understand that there are limitations to economies of scale, so that beyond a certain size, bigger is no longer better and may even be worse. Diseconomies of scale may arise for number of reasons. Sometimes it's because the labor costs is too high, the spreading of specialized resources is too thin and bureaucracy. The diseconomies of scale for Wal-Mart maybe is that its pressure on competitors, its impact on communities, its treatment of employees and its dealing with suppliers, to varying degrees, generated badwill for the company. There are even books, films, and occasional conferences devoted to degrading Wal-Mart. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Case Studies and Analysis section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Case Studies and Analysis essays

  1. Marketing Mix of Carphone Warehouse

    The Carphone Warehouse may use this in some cases where they are selling less up-to-date products to encourage people to pay full cost for newer up-to-date products. * Loss leaders: This means putting a price very low so more customers are encouraged into the business.

  2. PEST is a planning tool which is used by a business to evaluate and ...

    then people will not be aware that the products exists and Ginsters will therefore have wasted money on producing a product that a small percentage of people in the UK buy because they are unaware that this products exist as one of Ginsters products.

  1. Disneyland and M&S. I am going to investigate customer service in two separate ...

    it is also important that they provide the business individuals with facilities to use and places to go to enjoy their selves during their stay at the resort, however, if this range of facilities was not available it would be a less appetising place to hold business conferences and in

  2. Investigating Business Resources

    HAVS results from damage to small nerves and blood vessels in the fingers caused by the overuse of hand-held vibrating tools, and can cause chronic pain and numbness. In 2007, Tarmac invested £500,000 in 15 modified mini-excavators developed by JCB.

  1. starbucks customer service

    There are two types of customers' internal and external customers. All businesses have them. They are both very important in the running and expansion of customer service. Internal customers are people who work within the business and have an input on the day to day running of the business.

  2. NETFLIX CUSTOMERS SATISFACTION

    The rese?rcher will focus on Monterey ?re? to g?ther the rese?rch d?t? (qu?lit?tive ?nd qu?ntit?tive). This study will en?ble le?ders of the org?niz?tion to be ?w?re of customers' satisfactions c?uses, underst?nd the role of the e-business org?niz?tion, ?nd the effectiveness of the org?niz?tion's str?tegy comp?ring with other simil?r services.

  1. The Diversity of Distribution Channels in the Retailing Industry

    possible then they will be able to bring new goods * Improve availability of stock , which means that there is more of the product at the warehouse so if any of the Tesco Retail shops run out of a product they are able to get it from the warehouse ASP.

  2. How Evans Enterprise party and wedding planners could use IT to help manage their ...

    Elizabeth also supplies her own costumes for 'Perfect Parties' and this requires no planning for costumes to be rented etc. It will be more cost effective and can be simply washed and used for the next event.

  • Over 180,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work

Marked by a teacher

This essay has been marked by one of our great teachers. You can read the full teachers notes when you download the essay.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review on the essay page.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review under the essay preview on this page.