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the overall level oF operatIons CapaCIty 129

example economies of scale in heart surgery and shipping 2

Don’t think that the idea of economies of scale only applies to manufacturing operations. It’s
a universal concept. Here are just two examples.
In the 1,000-bed Narayana Hrudayalaya hospital, in Bangalore, India, Dr Devi Shetty (who
has been called the ‘Henry Ford’ of heart surgery) has created what, according to Forbes maga-
zine, is the world’s largest heart factory. It is a radical new approach, he says, and proves that
economies of scale can transform the cost of cardiology. Dr Shetty calls his approach the
‘Wal-Martisation’ of surgery – referring to the high-volume approach of the world’s largest
supermarket chain – Wal-Mart. The hospital has 42 surgeons who perform 6,000 heart opera-
tions each year, including 3,000 on children. This makes the hospital the busiest facility of
its type in the world. And it’s needed; it is estimated that India requires 2.5 million heart
operations every year, yet only 90,000 are performed. ‘It’s a numbers game’, said Dr Shetty, who
has performed 15,000 heart operations. ‘Surgeons are technicians. The more practice they get, the
more specialised they become and the better the results.’ The result is that costs are slashed and
the hospital can be profitable, even though many patients are poor. The hospital’s charges
for open-heart surgery are, on average, a tenth of the cost of the cheapest procedures in the
United States. But, even then, treatment is too expensive for many, so wealthier patients are
charged more to subsidise the poorest.
The Maersk Triple-E class ships are owned by Maersk Lines, the world’s biggest container-
shipping company. They are among the biggest ships ever built: almost 400 metres long (the
length of four football pitches), 59 metres wide and 73 metres high. The 20 new vessels will be
deployed on the vital Asia to Europe trade route. According to Maersk, the Triple-E is about more
than size, though. In fact, the name refers to the three main purposes behind the creation –
economy of scale, energy efficiency and environmentally improved. The ships will emit 20 per
cent less CO per container moved compared to the Emma Maersk, currently the world’s largest
2
container vessel, and 50 per cent less than the industry average on the Asia–Europe trade lane.
They will be equipped with a waste heat recovery system, saving up to 10 per cent of main engine
power. This equals the average annual electricity consumption of 5,000 European households.
Triple-E vessels travel 184 kilometres, using 1 kWh of energy per ton of cargo, whereas a jumbo
jet travels half a kilometre using the same amount of energy per ton of cargo. They are also
powerful, with the largest internal-combustion engines ever built – as powerful as 1,000 family
cars, which enables them to move all their cargo from China to Europe in just over three weeks.
Yet, the ships are so automated that they require only 13 people to crew them. It is these econo-
mies of scale that allow a T-shirt made in China to be sent to the Netherlands for just 2.5 cents.

There may also be less obvious costs of operating above nominal capacity levels. Long
periods of overtime may reduce productivity levels, reduced or delayed maintenance
time may increase the chances of breakdown, and operating facilities and equipment
at a higher rate, or for longer periods, may also expose problems which hitherto lay
dormant. These ‘diseconomies’ of over-using capacity can have the effect of increasing
unit costs above a certain level of output.
However, all the fixed costs are not usually incurred at one time at the start of opera-
tions. Rather, they occur at many points as volume increases. Furthermore, operations
managers often have some discretion as to where these fixed-cost breaks will occur.
So, for example, the manager of a delivery operation may know that at the level of
demand forecast for next month a new delivery vehicle should be purchased. This extra

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