The following appeared in a report sent to stockholders by Olympic Foods, processors of frozen foods.
Over time the cost of processing go down because as organizations learn how to do things better, they become more efficient. In color film making for example, the cost of a 3-5inch print fell from 50 cents for 5 day service in 1970 to 20 cents for one day service in 1984. The same principle applies to the processing of food. And since Olympic Food will soon celebrate its 25th birthday, we expect that our long experience will enable us to minimize costs and thus maximize profits.
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It is a proven fact that companies often realize economies of scale once they learn how to optimize their processes and reduce the costs associated with running them. Once companies are able to realize the full potential of available resources, they may be able to cut costs and pass the benefits to their customer. However, while on the one hand i believe that economies of scale do exist, I find the argument presented above completely flawed. The argument tries to draw an analogy to the color file processing industry and states that "age" makes things better. The argument it is at best incomplete and flawed in my opinion.
The first and the most basic flaw in my opinion, is that the company does not explain the steps it has taken in order to minimize its costs. We do not know if the processes are run any better now than they were when the company first started. It may just be that the company has done nothing to improve its processes and at the same time, its machinery would be depreciating and getting older and there may be a surge in maintenance costs for the machinery. A classic example of this is the American automotive industry that has come under tremendous pressure due to failure on its part to improvise its products and cutting costs, almost leading it into bankruptcy.
The company does not provide us any information on the pricing pressures it faces due to competition in the market. The analogy that it tries to draw to the color film processing industry seems to be flawed too. It may well be that the manufacturers of color films may have taken measures such as six sigma etc to improvise their manufacturing process, also raw material costs would have reduced and logistical challenges would have been dealt with as companies work toward improvising their supply chains. Reduction in the inventory holding costs, by use of Just-in-time purchase and other methods would have helped reduce cost of manufacturing. For example, Toyota carried out various improvisations on its plant floor, eliminated the inventory costs by using just in time purchase for inventory to reduce costs.
The company should also realize that there are several external factors, not just the efficiency of its processes, that may increase its cost of production. For example, due to the general slow down in the economy companies are finding it difficult to finance their working capital needs, as bank loans have become more expensive and sparsely available. For example several shipping companies like OSG maritime are finding it difficult to sustain their day-to-day operations due to lack of availability of credit.
Finally, the company should also consider that the costs may actually go up over a period of time, a classic example of this is the airline industry that has seen costs rise steeply over the last few years. As cured oil prices have gone up, airlines have come under tremendous pressure. Several airlines have taken drastic steps to cut costs inorder to stay in business.
Hence the company needs to take into consideration the above factors before presenting their argument. The argument need to be substantiated with facts and numbers inorder to prove it logical and acceptable.
Over time the cost of processing go down because as organizations learn how to do things better, they become more efficient. In color film making for example, the cost of a 3-5inch print fell from 50 cents for 5 day service in 1970 to 20 cents for one day service in 1984. The same principle applies to the processing of food. And since Olympic Food will soon celebrate its 25th birthday, we expect that our long experience will enable us to minimize costs and thus maximize profits.
====================================
It is a proven fact that companies often realize economies of scale once they learn how to optimize their processes and reduce the costs associated with running them. Once companies are able to realize the full potential of available resources, they may be able to cut costs and pass the benefits to their customer. However, while on the one hand i believe that economies of scale do exist, I find the argument presented above completely flawed. The argument tries to draw an analogy to the color file processing industry and states that "age" makes things better. The argument it is at best incomplete and flawed in my opinion.
The first and the most basic flaw in my opinion, is that the company does not explain the steps it has taken in order to minimize its costs. We do not know if the processes are run any better now than they were when the company first started. It may just be that the company has done nothing to improve its processes and at the same time, its machinery would be depreciating and getting older and there may be a surge in maintenance costs for the machinery. A classic example of this is the American automotive industry that has come under tremendous pressure due to failure on its part to improvise its products and cutting costs, almost leading it into bankruptcy.
The company does not provide us any information on the pricing pressures it faces due to competition in the market. The analogy that it tries to draw to the color film processing industry seems to be flawed too. It may well be that the manufacturers of color films may have taken measures such as six sigma etc to improvise their manufacturing process, also raw material costs would have reduced and logistical challenges would have been dealt with as companies work toward improvising their supply chains. Reduction in the inventory holding costs, by use of Just-in-time purchase and other methods would have helped reduce cost of manufacturing. For example, Toyota carried out various improvisations on its plant floor, eliminated the inventory costs by using just in time purchase for inventory to reduce costs.
The company should also realize that there are several external factors, not just the efficiency of its processes, that may increase its cost of production. For example, due to the general slow down in the economy companies are finding it difficult to finance their working capital needs, as bank loans have become more expensive and sparsely available. For example several shipping companies like OSG maritime are finding it difficult to sustain their day-to-day operations due to lack of availability of credit.
Finally, the company should also consider that the costs may actually go up over a period of time, a classic example of this is the airline industry that has seen costs rise steeply over the last few years. As cured oil prices have gone up, airlines have come under tremendous pressure. Several airlines have taken drastic steps to cut costs inorder to stay in business.
Hence the company needs to take into consideration the above factors before presenting their argument. The argument need to be substantiated with facts and numbers inorder to prove it logical and acceptable.
