You don’t have to study economics to understand one of the most popular rules of the market economy: the more you buy of a particular product or service, the less it costs you. Buy three and get one free – everyone is familiar with these mechanisms.

The question is – is this really true or is it just an illusion? And why are we so convinced that it is true and an inescapable legality? I remember from my time at IKEA many years ago that they had a delivery cost model where the price went up the more you bought – simply because the freight would be heavier, take up more space and therefore cost more to deliver.  However, customers did not understand or accept this, and everyone felt that at a certain threshold there should be no shipping costs at all. This is understandable, as we have all been infiltrated by the shipping models of the likes of Amazon and Zalando. The question remains whether this really makes sense, even from an environmental point of view – I think that physical laws such as carbon emissions caused by transport are not overridden by economies of scale per se.

But I do not want to go too deep into this area as I think it is very complex and I would rather focus on another aspect of economies of scale. Larger global organisations have different ways of buying products and services from suppliers – they can do it centrally at a global level, they can do it at a regional level, or they can do it at a very local level.

If you asked 100 people what’s the most efficient option, I think the majority would say the globally centralised option. Our simple rule of buy more, get more discount comes into play again. Again, I want to question whether this is true. In particular, I think that when you are buying services rather than goods from a supplier, the relationship between buyer and seller becomes even more important.

  1. I think it also depends a lot on the structure of the global company that is buying the goods. Often you have a global layer in the company that makes the deal with global suppliers to get the most out of the spend. The challenge I see here is that this global layer is not dealing with the consequences of that deal later on, so the accountability is not fully there. Of course they feel responsible, but the pressure to get the best deal is probably higher when you are buying for yourself rather than on behalf of someone else. And in reality, other teams at a regional or local level will be working with the supplier, although they may not have chosen the supplier and established the relationship.
  2. Global vendors are often less efficient in their nature compared to smaller speedboat type vendors. More or less mirroring the paradigm above, the structure of a global vendor also influences the efficiency of a global purchase and whether or not it can outperform local purchases. Again, I think this has to do with the intentions of the people involved. A small supplier owned by a specific person has a natural interest in maintaining and nurturing the personal relationship with a customer over a long period of time. This is often different in global structures where there is a lot of turnover in the workforce and therefore less interest in maintaining a long-term relationship based on trust and give and take.
  3. When buying services, it is easier for a very local player to maintain service standards than for a fragmented global player. Often, global service offerings are created by putting together networks, which is not bad in itself, but you cannot guarantee a certain level of service quality and the corporate culture that all members of that network may have can be very different. This simply leads to an inconsistent experience.

The concept of economies of scale is often misunderstood and may not always hold true. Factors such as increased delivery costs and environmental impact challenge the idea that buying more leads to lower costs. The efficiency of global organizations in purchasing goods and services is influenced by the buyer-seller relationship and the accountability of the global layer. Smaller vendors may be more efficient due to their personal interest in maintaining long-term relationships. Local players have an advantage in maintaining service standards compared to fragmented global players. Overall, caution and consideration of various factors are necessary when considering economies of scale.