The Limitations on Economies of Scale
Hi there,
This will be a short one as I have early college applications due early next week. Nevertheless, I hope you enjoy it.
Something I learned this week:
Economies of scale is a powerful tool. Effectively it means the larger the scale of your operations, the lower the unit costs.
Compare a 3’x 3’x3’ container with a 6’x 6’x 6’ container.
The material used on each side would increase by four times; that is, each side increases from 9 square feet to 36 square feet.
However, the capacity of the smaller container is 27 cubic feet while the larger one is 216 square feet, an increase of eight times.
Provided the material cost and value of the additional space is the same, the company makes more money per unit of material.
The downside of economies of scale is that the system might break while you try to scale it.
If the vehicle or container becomes too big to haul shipments along a given path (ex. doesn’t meet the same height for passing under bridges, or a boat that is too wide for a canal), this can become problematic. An airplane could be so big that it takes too long to load and unload passengers. A pipeline could collapse under its own weight when loaded. These are all examples of diseconomies of scale.
For this reason, the benefits of centralization can decrease or collapse as scale increases. It is important to find the right balance between size and margins. Economies of scale have a fiscal threshold.
On Life Philosophy
A few questions that have been on my mind:
How big would you dream if you knew you could not fail?
If I were to imagine there are people my own age who achieved as much as the President of the United States, Founders of Fortune 500 companies, or some other notable accomplishment, what would I change over the next year to match their trajectory?
There’s a special oompf of motivation and inspiration when comparing myself to high performers my own age.
It’s very easy for the environment we are in to begin to infiltrate our own self-image. What are the values, independent of an environment, that I want to evaluate my sense of pride on?
What I’m Up to This Week
Finishing early college applications
My time at Thirdweb ended. Looking forward to the next chapter of my work life - going deep into Global Trade Finance. If you know someone in the industry - I’d love to connect with them - shoot me an email.
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See you next week 👋,
-Satvik