Economies of scale has been a marked feature of cost reduction in supply chains. A BCG study indicates that a doubling of production results in a 30% reduction in Cost of Goods Sold (COGS) which shows up in a similar increase in gross profits. Economies of scale would mean following strategies of consolidating production in a single or few locations, using techniques of mass production, automation, bulk sourcing etc. However increasing production implies a corresponding increase in sales to justify the increase in investment to set up production and logistics facilities. A good barometer of the extent to which economies of scale can be pursued would be the Return On Investment (ROI) for setting up facilities and supply chains. A positive ROI greater than cost of capital will be a sign of success in going ahead with the strategy.
In the case of luxury goods, an additional complexity in terms of volume or markets is introduced. For example, what is the sales or market penetration that the brand is comfortable with? A flooding of the market with increased sales would simply run counter to the brand's perceived value. Hence this imposes a natural limit to the economies of scale a particular luxury brand can support. Typically doubling of production for instance for a 30% reduction in costs is not tenable for most luxury brands (other than fragrances).
Similarly another natural limit is the concept of location or origin. Economies of scale cannot be provided by moving production away from the brand's orgin (Champagne from Champagne in France) at the risk of loosing its luxury status. Also there will be a limitation to increasing the headcounts in these brand origin locations (number of artisans available in Italy for instance).
A good takeaway would be that for SCMluxe, economies of scale must be pursued upto a point where:
In the case of luxury goods, an additional complexity in terms of volume or markets is introduced. For example, what is the sales or market penetration that the brand is comfortable with? A flooding of the market with increased sales would simply run counter to the brand's perceived value. Hence this imposes a natural limit to the economies of scale a particular luxury brand can support. Typically doubling of production for instance for a 30% reduction in costs is not tenable for most luxury brands (other than fragrances).
Similarly another natural limit is the concept of location or origin. Economies of scale cannot be provided by moving production away from the brand's orgin (Champagne from Champagne in France) at the risk of loosing its luxury status. Also there will be a limitation to increasing the headcounts in these brand origin locations (number of artisans available in Italy for instance).
A good takeaway would be that for SCMluxe, economies of scale must be pursued upto a point where:
- Sales volumes are in line with the brand and marketing plan for the product
- The location of the brand can support the production both in terms of artisans and production facilities
- There is a high ROI on the proposed investments
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