Supply and demand are the two fundamental concepts of microeconomics. They are the most important levers in a market economy, as pricing is based on supply and demand. The interaction of supply and demand defines what and for whom to produce and at what price to sell. The importance of these concepts can be studied using an example of Al Ain Dairy, Dubai. Being established in 1981, Al Ain Dairy came a long way from local milk supplier to the renowned leader of the United Arab Emirates’ (UAE) dairy market that offers a wide range of dairy products and other goods. Currently, the company owns about 2,500 camels and 5,000-heads of cattle. In order to maintain its leading position on the market, the enterprise must always pay attention to the demand for its products as well as its capability to satisfy it. Moreover, it is required to take into account all the possible factors of demand and supply (both price and non-price) that may affect the firm in a short or long-term perspective. Therefore, the following case study is dedicated to the analysis of the supply and demand factors that affect Al Ain Dairy, and study the possibility of application of the concepts of economies of scale and scope to the case.
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The Analysis of Demand Factors
The demand is the number of goods and services, which the buyer is willing to purchase at a specified price and within a specified period. The demand is not constant, as it is always in motion. In the case of Al Ain Dairy, there are many factors that directly affect the number of products demanded by consumers.
- The income level of consumers. The higher is the level of income of consumers, the greater is the demand for goods and vice versa. For example, the recent financial crisis negatively affected the income of particular layers of the population (i.e. construction workers), leading to a decrease in demand for a variety of goods, including dairy products, by 15-20%. Political stability also has an influence on the welfare of the population, and, as a result, on the demand. Therefore, economic and political stability is among the most important supply factors that affect Al Ain Dairy.
- The tastes and preferences of consumers. The changes in the consumers’ tastes can occur due to the new fashion trends, such as a healthy lifestyle, or they can be of a seasonal nature. Thus, in order to keep up with the newfound needs of its customers, Al Ain Dairy has to expand its product range, offering new varieties of its usual products (i.e. cinnamon milk for Ramadan) and promoting new goods, such as camel milk, which is known for its health benefits.
- The time spent on the consumption of goods. For example, the demand for salt is always on about the same level because the product is consumed in small quantities, and thus, one pack can last for a long time. Al-Ain Dairy offers its customers one-shot milk packs that can be consumed very quickly and, therefore, are popular among school children and bachelors. Moreover, they are also popular as an impulsive buy. As a result, the demand for such convenient products tends to be higher during the school year, so the company has to review its manufacturing plans for that season.
- The time of the year. This is one of the most significant demand factors for Al Ain Dairy. First of all, climatic conditions in the UAE are rather harsh, with the temperature rising up to 50 degrees from April till October. Consequently, the demand for one-shot milk, and, especially, juice products increases significantly (up to 30-40%), so the company cannot keep up with it and is forced to outsource its supplies. In turn, such a strategy leads to an increase in transportation costs and, as a result, to growth in the prices for particular products. Another important aspect is religion – the demand for milk products grows significantly during Ramadan when it is forbidden to eat from sunrise to sunset. Therefore, the seasonality factor provides an additional load on the production capacity of the company, forcing it to seek new sources of the product.
- The size of the population. There is a significant amount of tourists and workers from other countries in the UAE, which results in an increase in the demand for various goods, including dairy products. However, during the hot season, most of the foreigners leave the country, decreasing the demand.
Therefore, it is possible to say that among all the mentioned demand factors, time of the year and the size of the population have the strongest influence on Al Ain Dairy. However, the decrease of the population coincides with the beginning of the hot season. Accordingly, the demand is leveled, allowing the company to keep up with the needs of the consumers.
The Analysis of Supply Factors
Supply is the number of goods and services, which the manufacturer can offer at a specified price and within a specified period. Taking into account the complex environment Al Ain Dairy operates in, it is possible to say that there are many supply factors that affect the company. The price is a major determinant affecting the supply. However, the prices for dairy products in the UAE are under governmental control and cannot be changed significantly, which limits its influence on the supply. Therefore, it is necessary to analyze several other factors, which are called non-price factors of the supply. These factors affect the quantity of the supplied goods and are not related to their price.
- The cost of resources. The price of resources significantly affects the volume of supply. In the case of Al Ain Dairy, one of the main resources are animal feed and fruits. Both of the mentioned resources are mostly imported from abroad, so an increase in their price will cause a significant rise in the production cost. However, since the prices for dairy products are regulated in the UAE, the company will be forced to limit its supply. Thus, in this case, the cost of resources is related to the amount of supply of goods.
- The level of technology. Technology development leads to increased productivity – more products can be manufactured from the same amount of resources. Taking into consideration that Al Ain Dairy highly depends on the import of resources, it has to improve its existing technology, in order to maintain the maximum productivity and the minimum spending of resources. On the other hand, this factor’s influence is limited because each cow/ camel can produce only a certain amount of milk per day.
- The shelf life of the product. According to the Abu Dhabi Food Control Authority, the expiration date for milk should not exceed five days, for yogurt – eight days, and for juices – 20 days. As a result, Al Ain Dairy has to provide the number of dairy products that correspond to the current demand for them in order to avoid financial losses both from spoiled, unsold goods, as well as their disposal.
Thus, it is possible to conclude that supply factors have the most significant effect on Al Ain Dairy, as they impose certain limits on the volume of production. As a result, the company is forced to find new ways to increase its productivity and maintain its production costs as low as possible, in order to cover the gap between supply and demand.
The prognosis for the Future
The need for the UAE market in dairy products (including both cow and camel milk) grows with each year due to the increase of the population and the improvement of its welfare and is mostly covered by local producers. The growing demand for dairy products can be considered a favorable factor for Al Ain Dairy, since it may result in an increase in sales. However, the company will also face a variety of challenges on the market. First of all, it is strict control over the prices of dairy products by the government. The second challenge is the rise of prices for animal feed. Al-Ain Dairy imports a significant amount of the cow feed, which, combined with the inability to raise the price to match the production costs, is a serious problem for the company. Finally, it is the harsh climatic conditions that hinder the agricultural sector, so Al Ain Dairy has to rely on the import of resources, and are not suitable for cows. All of the mentioned challenges may have an adverse effect on the supply of the company, increasing the current gap between supply and demand even more.
Summarizing the results of the analysis, it is possible to forecast that in order to meet the growing needs of the consumers and answer the mentioned challenges, Al Ain Dairy will have to develop the most efficient technology that will provide the maximum productivity and the minimum spending of resources as well as the most suitable conditions for the livestock. Such measures will raise the productivity of the company, which, combined with the decreasing production cost, will allow it to maintain its leading position on the dairy market of the UAE. Moreover, due to the growing popularity of a healthy lifestyle, as well as an aggressive marketing campaign, the company may expect an increase in the demand for camel milk, known for its health properties. Finally, the demand can be increased even more through targeting particular categories of customers, such as young mothers and children. However, the company will have to be mindful of its manufacturing capabilities in order to avoid unsatisfied demand.
Concepts of Economies of Scale and Scope
The concept of economies of scale is focused on the cost advantages that companies can obtain due to their scale of operation, considering that cost per manufactured unit decreases with the increase of the production scale; as a result, fixed costs are spread over all the manufactured products. Moreover, operational efficiency also grows, thus lowering variable costs. This concept can be applied to many business situations and levels of the company. For example, a large manufacturer, such as Al Ain Dairy will have a lower cost per unit than a smaller company on equal conditions. Moreover, as the price for resources rises, Al Ain Dairy strives to lower its production costs per unit of cow milk even more by implementing new technologies. Such an initiative is rather costly, but it proves to be successful in the long run, giving the company a cost advantage by lowering variable costs.
The concept of economies of scope is rather similar to economies of scale. However, economies of scope are about lowering the average cost in the production of two or more products. As a result, the diversification of products becomes efficient provided it was based on the common know-how. Therefore, it is more efficient to ship a variety of products to any location rather than a single type. For example, during a hot season, Al Ain Dairy has to outsource its production in order to meet the needs of the consumers. As a result, dairy products that were manufactured in the outer facilities are to be delivered to Dubai by using refrigerator trucks. Taking into account that most of the dairy products require the same conditions to be kept fresh, and, moreover, have almost equal length of shelf life, they are transported all at once. As a result, the efficiency of the shipment is increased, and the transportation costs can be lowered.
Thus, it is possible to conclude that concepts of economies of scale and scope are applicable to certain business processes of Al Ain Dairy, such as manufacturing and transportation.
Supply and demand factors (particularly, non-price ones) have a significant effect on Al Ain Dairy. Among them, the most critical is the welfare of the country’s population and its size, the time of the year, the level of technology, and prices for the necessary resources. Since the UAE dairy product market is subject to strict governmental control, the influence of the price factors is rather limited, so the company is forced to increase the efficiency of its business processes to reduce the possible adverse effects of non-price factors of supply and demand. In this regard, the concepts of economies of scale and scope can be applied to particular business processes of Al Ain Dairy, such as manufacturing and transportation.
Considering that the UAE dairy market tends to experience stable growth in the following years, Al Ain Diary should take measures to maintain its leading position and reduce the current gap between supply and demand. However, the company will face a number of challenges in the future, such as rising prices for the resources, which will result in an increase in production costs. In order to avoid that, it is imperative to implement new technologies that will provide the maximum productivity and the optimal spending of resources, as well as the most suitable conditions for the livestock.