Final answer:
Smaller businesses can achieve lower per unit costs from quantity discounts through a buying consortium, flexible purchasing agreements, and just-in-time inventory systems, despite having limited storage space.
Step-by-step explanation:
As the quantity of output increases, businesses often benefit from economies of scale, a situation where the cost per unit decreases, allowing businesses like Costco or Walmart to offer lower prices. However, smaller businesses face a challenge when it comes to taking advantage of these quantity discounts due to limited storage space. To circumvent this issue, small businesses can employ various strategies.
- They can collaborate with other small businesses to form a buying consortium, thereby enabling them to collectively purchase in larger quantities and receive bulk discounts while sharing storage space.
- They can negotiate with suppliers for flexible purchasing agreements that provide scaled discounts even for smaller quantities, to secure better unit costs without having to order large volumes at once.
- Some small businesses may opt for just-in-time inventory systems, reducing the need for large storage spaces by timing purchases closer to the actual sales periods.
A firm's production model and cost structure, like that of Amazon, facilitate its capacity to offer competitive prices. For small businesses, finding innovative ways to achieve advantageous cost structures is crucial for success in the competitive marketplace.