Sargant Florence and Economies of Scale

Sargant Florence and Economies of Scale

Sargant Florence has attributed the economies of scale the three principles, which are in operation in a large-sized business, namely, the principle of bulk transactions, the principle of massed reserves, and the principle of multiples.

• Principle of Bulk Transactions: This principle implies that the cost of dealing with a large batch is often no greater than the cost of dealing with a small batch, for example,’ the cost of placing an order, large or small; availability of discounts on bulk orders, or annual purchase contracts; economies in the use of large containers such as tanks or trucks of special design, for a container holding, say, twice as much as the other one, does not cost double the amount.

• Principle of Massed Reserves: A large firm has a number of departments or sections and its overall demand for services, say, transport services, is likely to be fairly large. But it is unlikely that all departments will make heavy demands of the particular service at the same time. Thus the firm can afford to have its own transport fleet and fully utilise it and thereby ultimately reduce its costs. The larger the firm, the greater are the advantages.

• Principle of Multiples: This principle was first raised by Babbage in 1832 and has also been referred to as ‘Balancing of Processes’. The principle can be better explained through an example. Suppose a manufacturing, operation involves three processes, first in which a machine (:an make 30 units a week; second in which an automatic machine can make 1,000 units per week; and a third in which a semi-automatic machine can make 400 units per week. Unless the output of the plant is some common multiple of 30, 1,000 and 400, one or more of the processes will have unutilised capacity. Their LCM is 6,000 and, therefore, to best utilise all the machines the plant size must be of at least 6,000 units or any of its multiples.