Terra Technology's Transportation Forecasting Helps Kraft Foods Improve Transportation Efficiency

One of the most important things for a firm to do is find a way to reduce its costs in order to enter a process of economies of scale. The effects that this decision will have on any firm will almost always be favorable to it as by reducing its costs it will be able to use that amount of money for other purposes and clearly it will be a benefit because if it reaches abnormal profit, it will be able of covering all of its costs and even more. This situation that was mentioned above shows exactly what Kraft Food industries are trying to do in order to reduce their costs. What this firm is planning, is to ally with Terra Technology, a firm which provides transportation forecasting solutions, so then their efficiency will improve as the transportation efficiency does as well.

We understand by economies of scale a process in which a firm tries to reduce its long run average costs by altering the factors of production in order to increase the amount of product that they are capable of producing. In this case as Kraft Food Industries accepts the proposition that Terra Technology is giving them, they will reduce their costs by a huge amount, as they are not only offering transportation but also warehouse planners, including promotions according to different categories.

As shown in the graph, it can be observed that by accepting this proposal the firm will enjoy an enormous benefit as in the long run average cost curve it can be perceived that while the firm’s output (amount of product the firm produces during a determined period of time) is clearly increasing, its costs are decreasing. When the amount of output has increased from Q1 to Q2 it can be observed that inversely to that the costs are being reduced from C1 to C2 so it shown that they decreased in a great amount. Here it can be observed that the firm is experiencing increasing returns to scale “(…) a given percentage increase in all factors of production will lead to a greater percentage increase in output, thus reducing long-run average costs.”. (BLINK and DORTON: 2007, 81) This experience will not last forever as there will be a point, as shown in the graph, in which increasing output from Q2 to Q3 will cause that the firm’s cost increase from C2 to C3. When costs start rising as output increases it is said that the firm is experiencing decreasing returns to scale. However this is not yet occurring to Kraft industries.

As mentioned above, Kraft food industries are experiencing increasing returns to scale and this occurs as the firm was able to reach economies of scale. The fact that they were able to ally with Terra Technology in order to improve their transport efficiency and therefore reduce costs also makes that Terra Technology increases its profit so both industries are being benefited. Consumers may be also benefited as the firm’s distribution efficiency will increase, meaning that the past conditions of product distribution

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