View/Open - Naval Postgraduate School

Volume economies of scale refer to the definition provided above; namely, increases in
production volume allow for lower unit costs. Organizations achieve learning economies of
scale where improvements or advancements in labor and organizational efficiencies or
improvements in planning or techniques lead to lower total costs and per-unit costs. People
often refer to these gains as learning-curve efficiencies.
Centralization of labor in large-scale operations gives workers the opportunity to
become proficient at the specific tasks assigned to them, and specialization further reduces
labor inefficiencies. However, geographically distributed services, such as many of those
required at DoD installations, may not allow for economies of scale because of the
dispersion of labor. In fact, dispersion of services may actually increase average cost and
result in dis-economies of scale. While this characteristic is not unique to the DoD, what is
distinctive is the DoD’s inability to replicate the private sector’s response of possibly
consolidating operations. For example, even where operational efficiencies are possible,
base closings or mergers are controlled by Congress—not the DoD. Figure 3 displays the
level of centralized purchasing for services by category (Center for Strategic Supply
Research, 2002). Note the trend for the decentralization of distributed services. Whereas
complex services (or those requiring retained relationships with the procuring organization)
are often targets for centralization, non-complex distributed services such as food service,
landscaping, janitorial, gate guards, waste removal or construction are not good candidates
for centralization. These types of services are location-specific in that contractors must
physically perform the services on the requiring installation. Also, distributed services are
typically labor-intensive operations where labor costs comprise the majority of total contract
costs. Typically, labor intensive operations are not amenable to economies-of-scale
influences. This constraint may further offset potential learning economies of scale by
inhibiting corporate learning. Lastly, services such as these are nearly impossible to
centrally purchase effectively and efficiently because supply markets are highly localized.
Consequently, they are simply not good candidates for centralized purchasing. Still, bulk
purchasing of services could allow for some volume economies of scale by distributing fixed
costs across a broader base.
=
==================^Åèìáëáíáçå=oÉëÉ~êÅÜW=`ob^qfkd=pvkbodv=clo=fkclojba=`e^kdb====- 35 -
=
=