Small & Medium Business Improvement in the ASEAN Region: Production Management 9789814345804

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SMALL AND MEDIUM BUSINESS IMPROVEMEN1 N THE ASEAN REGION Production Management Edited by

KENNETH JAMES Institute of Southeast Asian Studies

and

NARONGCHAIAKRASANEE Industrial Management Co. Ltd., Bangkok

Field Report Series No . 21 ASEAN ECONOMIC RESEARCH UNIT INSTITUTE OF SOUTHEAST ASIAN STUDIES

1988

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1988 Institute of Southeast Asian Studies

The responsibility for facts and opinions expressed in this publication rests exclusively with the authors, and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. Cataloguing in Publication Data Small and medium business improvement in the ASEAN region: production management I editors, Kenneth James and Narongchai Akrasanee. (Field report series I Institute of Southeast Asian Studies; no. 21) 1. Small business -- ASEAN -Management. I. James, Kenneth George. II. Narongchai Akrasanee. Ill. Institute of Southeast Asian Studies. ASEAN Economic Research Unit. IV. Series. DS501 1594 no. 21 1988 ISBN 9971-988-97-6 ISSN 0217-7099 Printed in Singapore by Fong and Sons Printers Pte Ltd

CONTENTS

List of Tables List of Figures Contributors ix Preface

iv vii

viii

I

Production Management in Small and Medium Businesses 1 in the A SEAN Region: An Overview James Kenneth

II

Efficienc and Production Management in Small and 19 Medium Businesses: The Indonesian Case M. Dawam Rahardjo

UI Production Management in Small and Medium Businesses 55 in Mala sia Sieh Lee Mei Ling IV Problems of Production Management for Small and Medium 93 Enterprises in the. Philippines al. et Jr. Melito S. Salazar, V

Production Management Practices of Small and Medium 126 Businesses in Singapore Ch'ng Hak Kee, Chang Zeph-Yun, and Yeong Wee Yong

VI Technical Efficiency and Production Management: The Thai 164 Experience Narongchai Akrasanee, Pharadorn Sestakupt, and Sunee Kultravut

UST OF TABLES

Number of Workers per Firm, by Industry and Size Category, 1974/75,1 979 , 1982

22

Number of Industrial Establishments and Workers, 1974,1979,1982 , 1986

23

Aggregate Input, Output and Value Added, by Size Category, 1974/75, 1979,1982

25

Value Added per Worker, by Industry and Size Category , 1982

26

2.5

Value of Fixed Assets, by Industry

28

2.6

Average , Highest and Lowest Value Added per Worker , by Industry

29

" Craftsmen Entrepreneurs" and "Pure Entrepreneurs " in Various Enterprises

32

3.1

Type of Products Manufactured by Sample of SMBs

57

3.2

Distribution of SMBs and Manufacturers of All Sizes by Employment and by lr.dustry

58

3.3

Capacity Utilization

63

3.4

Gross Margin Percentage of SMBs and Manufactmers of All Sizes

64

SMBs and Average Size Firms with Gross Margin of 45% or More

65

2.1 2.2 2.3 2.4

2.7

3.5

List of Tables v 3.6

Capital Intensity, Labour and Capital Productivities of SMBs and Manufacturers of All Sizes

67

3.7

Process, Engineering and Control in SMBs and Manufactuers of All Sizes

72

3.8

Most Serious Production Problems -- SMBs and All Industries

77

3.9

Recent Action for Improvement -- SMBs and All Sized Firms in All Industries

81

3.A1 Distribution of SMBs and Manufacturers of All Sizes by Ownership and by Industry

89

4.1

Mean Efficiency Ratings of Selected Industries

106

4.2

Firms' Technical Efficiency Classified According to Age

107

4.3

Production Efficiency of Firms by Educational Attainment of Owners/Managers

108

4 .4

Production Efficiency of Firms Classified by Legal Form of Business

109

4 .5

Mean Production Efficiency According to Asset Size

llO

4.6

Production Management Practices

113

4 .7

Mean Technical Efficiency by Industry

114

4.8

Raw Materials Import for 1983-1984

121

5.1

Distribution of Sample Firms by Industry

128

5.2

Profitability of the Firms Surveyed

130

5.3

The Four-Phase Life-Cycle

132

5.4

Major Manufacturing Activities

133

5.5

Types of Tools and Machines Used

133

VI

List of Tables

5.6

Utilization of Plant Capacity

135

5. 7

Estimated Capital Investment for Automation

136

5.8

Organization of Production

138

5.9

Awareness of Business Environment and Market

140

5.10 Commonly Found Problems in the Plant 5.11

Companies That Change Production Schedules Frequently

143 145

5.12 Presence of Production Control System

145

5.13 Indirect Work-Force as a Proportion of Total Work-Force

148

5.14 Distribution of Direct Work-Force

149

5.15 Wage and Incentive Payments

150

5.16 Educational Qualification of Mid-Level Managerial Staff

151

5.17 Percentage of Companies Maintaining a Particular Type of Data

153

6.1

Indices of Technical Efficiency for the Four SMBs in Thailand, 1982

168

Locational Distribution of Surveyed Firms by Industry and Province

1 73

6.3

Number of Ceramics Plants Classified by Product

176

6.4

List of Equipment Used in Ceramics Plants

178

6.5

Manufacturing Steps for Cast Iron Castings

184

6.6

Summary Assessment of Production/Operations Management: Five Selected Industries

197

6.2

6.A2 Estimated Production Functions for the Four SMBs in Thailand, 1982

205

LIST OF FIGURES

6.1

Framework for Production/Operations Management

170

6.2

Production Process for Ceramics Prod uction

179

6.3

General Manufacturi ng Steps for Cast Iron Castings

183

6 .A1 The Frontier Iso quant

200

CONTRIBUTORS

Chang Zeph-Yun , Ph .D., is Senior Lecturer at the School of Manage ment , Nati onal University of Singapore. Kenneth James, Ph .D. , is a Fellow with the Institute of Southeast Asian Studies . Narongchai Akrasanee , Ph .D., is Managing Director of the Industrial Management Co. Ltd. , Thailand, and Senior Vice -President of the Industrial Finance Corp orat ion of T hailand. M. Dawam Rahardjo is Director (S pecial Programmes and Consultancy ), Lembaga Penelitian , Pendidikan Penerangan Ekonomi dan Sosial (LP3ES) . Melito S. Salazar, Jr ., is Director of the Institute of Small-Scale Industries, University of the Philippines. Pharadorn Sestakupt is Research Management Co. Ltd. , Thailand.

Asso ciate

at the Industrial

Sieh Lee Mei Ling , Ph.D., is Associate Pro fe ssor, Faculty of Economics and Administration , University of Malaya. Sunee Kultravut is Research Associate at the Industrial Managemen t Co. Ltd., Thailand. Yeong Wee Yong, Ph.D., is Senior Lecturer at the Sch ool of Management , Nat ional University of Singapore.

PREFACE

Development policies in the countries of the ASEAN region have in recent years reflected an increasing awareness of the significance of the small and medium-sized business enterprise in economic This has manifested in official action, initially development. hesitant but now increasingly vigorous, to develop and support small and medium businesses (SMBs), financially and otherwise. The ASEAN Small and Medium Business Improvement Project seeks to contribute to this awareness of the significance of SMBs in a direct and practical manner: through the examination of SMBs at ground level, and the dissemination of findings for policy action. The project is the collaborative effort of research teams in each of the ASEAN countries (except Brunei; the project was formulated before that country joined ASEAN), co-ordinated centrally at the Institute of Southeast Asian Studies (ISEAS). The general objectives of the project are: ( 1) (2)

( 3)

to collect, develop and organize information relating to the role and potential of small and medium-scale enterprises in GNP formation, employment creation and industrial growth; through overall analysis of problems involved, as determined through primary (field surveys and case studies) and secondary research, to identify and recommend economic policies and measures (institutional, educational, commercial) geared to the improvement of the small and medium business sector in ASEAN countries; and to disseminate the findings and recommendations of the project in a readable and easily comprehensible form .

The first phase of the project focused on financial (including fiscal) factors affecting the improvement of ASEAN SMBs, while the second phase studied issues and problems relating to the marketing of SMB products. The third and final phase examined the remaining major aspect of SMB operation, namely, production, and focused on

x

Preface

problems relating to production management. As with the first and second phases, the research teams in each country obtained primary data from surveys they carried out. Furthermore, secondary data was also used by some teams for estimates of technical efficiency within and between industries. Early drafts of the country studies were revised in the light of valuable feedback from several experts in SMB marketing, from both the public and private sectors. This interaction between academicians and practitioners helped ensure that recommendations were as realistic as they were innovative . The present volume is the distillation of the substantial output from the third phase. (Readers interested in the original papers should contact the respective writers.) The country studies are preceded by an Overview chapter which places the problems of production management in the context of technical efficiency, describes the analytical approaches followed by the research teams, looks at similarities and differences in findings, and summarizes the conclusions and recommendations. We hope that this publication, and its companion volumes on Financial Factors and Marketing, will contribute to an increased understanding o f SMBs and their potentially powerful role in the economic development of the region. The editors are grateful to the ISEAS Publications Unit, in particular Mrs Susan Nerney for copy-editing, and Mrs Triena Ong, who kept the gates open when the horses were still nowhere in sight; and to Miss Norhay ati Dollah and Mrs J osephine Lim who typed the several drafts . ISEAS Director Prof. K .S. Sandhu was, as always, a constant source of support. All three phases of the ASEAN Small and Medium Business Improvement Project were supported by the United States Agency for International Development (USAID). ISEAS would like to thank USAID for this most welcome and timely assistance. However, the conclusions of the present study remain the responsibility of the authors and their views do not necessarily reflect those of USAJD or I SEAS. July 1988

Kenneth James Narongchai Akrasanee

I

PRODUCTION MANAGEMENT IN SMALL AND MEDIUM BUSINESSES IN THE ASEAN REGION: AN OVERVIEW

Kenneth James

Introduction Among the major constraints facing small and medium-sized businesses (SMBs} , problems related to finance and marketing are mentioned most often. Recognizing this the ASEAN Small and Medium Business Improvement (SMBI) Project , co-ordinated by the Institute of Southeast Asian Studies, focused on financial factor s in the first phase of the SMBI project, and on marketing matters in the second . As Narongchai Akrasanee ' s schematic analysis shows (J ames and Akrasanee , 1986) , there remained one other major area of SMB activity still to be examined: production. Accordingly , product i on -- specifically, the management of production -- was the subject of the third and final phase of the project. The present paper draws on the research of that phase . The major empirical contribution of the research comes from sample surveys conducted by research teams in Indonesia, Malaysia , the Philippines, Singapore and Thailand. Over a period from mid-1986 to early 1987, each of the r esearch team s surve yed SMBs in at least five industries in their respective countries . By agreement, three of the industries were common to all : metalworking , food proce ssi ng and garment s manufacturing. (The appendix gives a list of industries surveyed in the respective countries.) The sample s urveys focused on aspects of production management , se eking to identify the way they

2

Kenneth James

affected efficiency of production. The surveys actually formed the second part of the study; the first, where data permitted, attempted various estimates of technical efficiency, both of specific industries as well as relative to other industrie s .

Outline of Paper The research problem i s considered more fully in the next section, which explains the relationship of production management to technical efficiency . A methodology section follows, which discusses analytical approaches to the estimation of technical efficiency for the fir st part of the study, and then looks at certain featu r es of the sample surveys that made up the second part . Conc l us i ons arising from the findings of these two part s are then presented , and some recommendations offered.

Nature of the Problem A theoretical concept that will be useful in coming to grips with the notions of efficiency and production management is that of the production function. A production function defines the relationship between the inputs of a firm (e . g., capital, labour, management) and its output(s). Intuitively, the efficiency of a given firm has to do with achieving maximum output from the available resources; the greater the output relative to a given combination of inputs, the greater its efficiency (Yotopoulos and Nugent, 1976: 71). For a given level of technology the set of maximum outputs from the various input possibilities (or alternatively, from different firms using different levels and combinations of the given inputs) is the production possibility frontier . By definition, therefore, any firm

Overview 3

operating below its production possibility frontier is less than fully efficient. Thus one way of estimating the (technical) efficiency of firms - in a given industry would be determine how close the level of production i s to the frontier . Rather sophisticated econometric technique s have been developed to apply the concept in an empirically meaningful way . Their use , however , demands adherence to a relatively stringent set of empirical conditions . It is also useful, and empirically less demanding , to estimate relative efficiencies, as for instance between industr i es , or large and small businesses , or urban- and rural - based enterp ris es. Thi s is the approach taken by most of the count ry res ea rc h t ea ms. Such esti mates , wh ethe r given in ab solute or relative terms , satisfy th e first pa r t of the investigation: they gi ve an indicat i on of the efficiency or inefficiency of a relativel y homogeneous group of business enterprises. The se cond part would then be to identify those factors, po si t i ve and negat i ve , that make a particular firm, or set of f i rms , eff i cient or inefficient. The main research tool here is the more fa mi liar sample survey , focusing on aspects of product i on management in SMBs .

Analytical Approaches Mea sures of Mean Technical Effi ciency The estimation pro ce ss that was mad e available to the re search team s i s ba sed on a mode l of a stoch as tic frontier production function ( i.e., in cor porating random distur bances) developed by Aign er , Lovell and Schmidt (1977), and refined by Lee and Tyler (1978) , and Lee and Pitt (1978) . In econometric estimat io n, a fu nctional form is first

4

Kenneth James

defined. In a production function, for instance, output (the dependent variable) is defined as a function of specified inputs such as labour, capital and land (the independent variables). Sample data on these variables are then fitted onto the function using econometric estimation techniques, and the "best fit" is determined . The extent to which the sample data does not correspond to the estimated best fit is explained by an omnibus "error" or "disturbance" term which in theory includes all factors not explicitly incorporated into the model as independent variables. In a production function this would certainly include technical inefficiency, as reflected in poor management skills, labour dissatisfaction, stock bottlenecks, etc.; but it would also include other random and non-random factors such as weather, unexpected variations in machine or worker performance, even political climate. The contribution of Aigner, Lovell and Schmidt (1977) was that they were able to separate the effects of technical efficiency factors from the other random effects, by splitting the error term in their model into two components, one of which could be clearly linked to technical efficiency. Lee and Tyler (1978) went further by deriving from this model a measure of mean technical efficiency for a given sample of firms. This measure was an estimate of the average level of technical efficiency for these firms relative to the maximum output level as represented by the production frontier. Several empirical conditions have to be satisfied for the estimates to be valid. Of the five research teams, only the Thai team obtained secondary data in sufficient quantity and quality to give their estimates empirical significance. Details of the estimation methods, and a comprehensive discussion of their validity and limitations, is given in the Thai paper (Chapter VI) and its appendices.

Overview

5

Relative Estimates of Efficiency Other teams chose to develop alternative approaches more appropriate to their economic environment, and which satisfied-their respective data and operational constraints. The Malaysian team, for example, compared findings from their sample set of SMBs with an "industry average" based on another sample which included large as well as small and medium businesses . They estimated performance and efficiency , based on certain indicators : level of capacity utilization, gross margin and manufacturing cost structure as indicators for performance; and labour and capital productivity as indicators for efficiency. The Philippines took a similar approach: they compared SMBs in selected industries in the Greater Manila area with a corresponding sample of SMB s in the same industries based in the provinces . Estimates of technical efficiency were based on an equation relating output, expressed in terms of material yield and capacity utilization, and inputs in the form of raw material , capital, direct labour and manufacturing overhead . Also , on the assumption that profitability is a measure of performance, they made estimates of performance based on return on investment (ROI). One problem , that of non-homogeneity, is worth mentioning . A production function, for instance, assumes that a 11 firm s sub s umed under it are homogeneous, that is, of the same size and using the same technology. We make a similar grand as sumption whenever we talk about "X industry" or "Y industry". This of cour!>e is not necessarily so. The point is brought home forcefully in the Indonesian study, which combined simple quantitati ve analy s i s with qualitative observation based on case studie s . The study found that in most of the six indu s trie s observed, there existed two distinct technologies : an old er , mo r e traditional technology well suited to the cottage and very srna ll enterprise ; and a

6

Kenneth James

more modern, mass-production type technology which required a medium-sized or large work -force. Furthermore, it appeared that applying sop hi sticated production management techniques to the small enterprise would bring only marginal gains, if any ; wherea s the medium-sized enterprise using the newer technology wa s generall y inefficient , so that proper production management wa s l ikely to produce si gnificant results.

Factors Affecting the Effi ciency of SM Bs: The Sample Surveys Having determined e stimate s of effic i e ncy for the various industries, we would then want to identify the fa ct ors conducive to , and factor s hinderin g , the eff i c i ent management of production in SMBs. This was ach i eved through the collection of primary data f rom sample sur veys of SMBs i n the selected industries. The subj ect matter of t he survey questionnaire would be in the nat ur e of an op erations review of the firms in the respe cti ve sample s . Inevitably, portions of the sur vey wer e technic al in nature. Two such areas of investigat io n , on system development and production , in c luded que s tions on the following aspects: System Development: - Capacity Planning - Plant Layout and List of Machinery - Process Engineering - Work Measurement - Organization Production : - Foreca sting - Production Planning and Scheduling System - Supervision

Overview 7

-

Production Control System Inventory Control System Quality Control System Maintenance Programme Waste Treatment System

Since the research teams were primarily conversant in economics and business management, an important challenge of the surveys was to place these technical aspects of production management in the overall human and economic context. In order to do this, the teams took care to consult engineering experts at the various levels of the primary research . Another important aspect of production management is information management . Questions asked on this aspect related to data gathering, information flows, data processing and bookkeeping .

Efficiency and Productivity Where quantitative estimates were made, the unanimous finding was that, in general, the efficiency level of SMBs is low ; very low, in many cases. In other words, SMBs should be producing far more than they are doing with the equipment and other resources that they have. The Indonesian team's analysis of macro-economic data indicated that large firms were growing larger in both size of work-force and gross revenue over time . In general, the greater efficiency of large firms appeared to be almost a truism. The Malaysian study found, interestingly, that in capacity utilization SMBs matched and even bettered the industry average which included large firms. Nevertheless, when comparing performance as measured by gross margins, for

8

Kenneth James

example, large firms were clearly stronger. This finding underlines the importance of treating production as more than just a technical problem. Better utilization of capacity alone does not make for better performance; the difference, as the surveys clearly showed, is in the better application of the other non-technical production management techniques. However, productivity of labour for SMBs in some industries matched or was greater than that of their larger counterparts. Such industries included textiles, garments and leather products. The productivity estimates were by no means sophisticated or very precise, but it is possible to suggest that these industries, and probably others, could under certain circumstances be more suited to small- to medium-sized enterprises than large ones. Textiles/garments are a case in point. Both the Thai and Malaysian research teams singled out this industry as one worth developing for SMBs because its technology is labour-intensive, a boon in a situation of unemployment, and it is potentially labourproductive. This holds true for all the ASEAN countries studied except labour-poor Singapore. The point, it appears, has already been well taken by In the Thai study, garments Thai entrepreneurs. manufacturing scored very low on the efficiency scale . On the other hand, that industry among all others has shown the flexibility to adapt to new sharply-increased export demand. Initially low efficiency, in this case, has meant a greater capacity for improvement when the opportunity presented itself.

Aspects of Production Management What were the aspects of production management that could give rise to the technical inefficiency in SMBs? The

Overview 9

findings of the sample surveys can be summarized thus: SMBs were found to be lacking in the areas of system development and information management, while production processes were managed in a rudimentary and short-term fashion. System Development For all countries except Singapore, system development (capacity planning and utilization, plant layout, process engineering , work measurement and organization) was considered poor to practically non-existent. Plant layout had the lowest rating for all industries in the Thai study . The Indonesian st udy found that capacity planning and utilization was "practically non-workable" because of two reasons: there was fluctuating demand for the product (particularly in the food industry) due to seasonal and other factors ; and full machine capacity was invariably never reached. Similarly , a little over half of Philippine firms surveyed planned their plant layout, while the Malaysian study found no emphasis placed on plant layout, or on capacity planning. To an extent the finding was affected by the economic downturn then prevailing in almost all the ASEAN countries. Thus the respondents in the Malaysian study reported capacity utilization of 60% to 80% for all industries except textiles and garments, where continuing export demand for those products pu shed utilization above 80% . System development wa s more consciously applied in Singapore's industrie s . Mo st r es pondents , for instance, claimed to have considered plant layout , particularly when setting up the plant , although few had re - appraised the situation after several years of operation . Nevertheless, there was general agreement over its importance, and a generally expressed intention to reorganize layout when they

10

Kenneth James

upgraded their equipment. The Singaporean team noted that re-appraisal would be necessary for the majority of SMBs interviewed whose products were already in the growthmaturity phase of the product cycle . Production Processe s To the extent that production proce ss es have to do with the day-to-day operation and management of equipment and labour, respectively, most SMBs could be s aid to have a working grasp of this part of production management . Processes such as superv1s1on of the variou s pha se s of production , and maintenance of equipment , were in gene r al handled with competence, to varying degree s. A fair proportion of SMBs also practised a measure of quality contr ol , although the differences in the application of thi s pro ces s were more marked, whether between countries , bet ween indu stries within a country, or even between f i rms with i n an i ndustry. But production pro ce s se s are be s t understood and handled when the entrepreneur i s able to place them within the larger context of change s in the econ omi c environment, and so be able to make the neces s ar y adjustments when required. Thus, production processes also include forecasting, production planning and s cheduling, and production and inventory control. all of which require an ability to look beyond the immediate horizon . Most of the surveys found thi s lacking . The Thai s tudy was t ypical in reporting an almost total absence of systematic planning. Owners and managers instead depended on "e xperience and intuition ", terms which cropped up more than once in the various country reports. The efficient management of production processes was found to increase with the size of the enterprise, the stage of development of the fi r m, and the production techniques utilized. "Efficient management" , however, generally did

Overview

11

not reach the level of systematic planning. The Malaysian report echoed a familiar refrain when it said that firms "behaved as reactors rather than pro-actors". Most Malaysian -SMBs surveyed had a production horizon of only one week . The consequence of such behaviour , however, was vulnerability and a lack of flexibility . A vivid example is provided by the Thai study ' s comparison of three industries' response to new challenges. Noodle -making firms in the Thai sample were unable to diversify in the face of increasing competition. Similarly, cerami cs firms in the study were unable to meet a new demand for high -end ceramic products , because they could not come up with new designs, and had no production improvement programme. In contrast, garments manufacturers we re able to re-org anize promptly in order to capture a share of the growing overseas market. Production processes were relatively better managed in the Philippines and Singapore. Philippine SMBs scored relatively high on planned purchase of raw materials, inspection and inventory of raw materials, inspection of work -i n- progress, and inspecti on of the finished product. The management of production processes was thus not as much a problem wit h Philippine SMBs as it was with some of its ASEAN counterparts. The two major production management problems facing Philippine SMBs , in fact, were external in nature : lack of raw materials , and shortage of skilled and other labour. Singapore SMBs said they had given critical thought to forecasting, production planning and scheduling. For instance , fully 70% s aid they took international and domestic economic developments into consideration. The percentage wa s even higher in industries with traditionally volatile demand such as electrical and electronic goods (86%) and rubber and plastic products (83%). Quality control

12

Kenneth James

was given very high emphasis, relative to the other ASEAN countries studied, as was maintenance of equipment. The higher level of production management among Singapore SMBs in general is not very surprising. The small city-state has one of the most open economies in the world . Singapore firms, therefore, have to compete not only domestically but internationally , and on two fronts: when purchasing production equipment and inputs, and when marketing their output . Efficiency in production management then becomes a necessary tool for survival. Even so, the Singapore study revealed contrasting problems of unused capacity and need for overtime , showing that production planning remains far from perfect. Information Management System Of the five countries s tudied , Indone si a and Thailand emphasized the limitation s of SMBs in this part of production management. For both Indonesian and Thai SMBs. the management of information wa s the weakest component of production management, and wa s found to have been virtually ignored by even the largest SMBs . The same was undoubtedly true, although to a less dramatic extent, of SMBs in the other countries. Particularly striking was the observation of the Singapore team that even though "only" 56% of the respondents had computers in the workplace, fewer than half had any kind of data collection system. The lack of an information management system manifests at two levels. At the higher level, a firm is expected to monitor progress by gathering and processing data and make changes to the requisite production processes based on this feedback . This aspect of information management was found to be virtually non-existent among SMBs of all sizes. At a more basic level, firms should maintain records of their financial assets and transactions. The Indonesian

Overview

13

survey found that, for the majority of SMBs, even the simplest of bookkeeping practices was absent. If records of financial transactions were kept at all, they were on odd pieces of paper that were discarded after a while. Among some Thai SMBs, particularly in the ceramics and agricultural machinery industries, there was no standard bookkeeping system, much less data-gathering forms.

Management and Entrepreneurship What is the most critical factor affecting the performance of the firm? Significantly , the Thai study, easily the most quantitative of the five, identified a human factor: the quality of management and entrepreneurship. A common thread running through the country studies was the role of the owner-operator as manager and entrepreneur. Although a study on entrepreneurship, the present study was able to highlight a couple of significant aspects in the context of production management. The level of formal education of owner-operators was found to have a bearing on some aspects of production management, but not on others. The level of information management, for example, seems to be a function of the size of the enterprise, and of the level of education of the entrepreneur. A small firm tends to be a family enterprise, where the financial transactions of the business are not distinguished from domestic tran sactions. As the enterprise grows larger , and more workers who are not family members are employed, there is an increasing need to keep the business finances separate from the family expenditure . As the number of employees increase s, there is the further need to develop some form of work measurement, if only for the purposes of wage payment. Even among relatively large SMBs, however, the owner's

14

Kenneth James

lack of formal education could be the reason for a lack or absence of production and financial records. In the Indonesian sample, educational attainment for most of the respondents was primary or lower secondary school. On the other hand, a high proportion of owners or managers of Singapore SMBs, and fully two-thirds of the Philippine sample, had vocational school or tertiary education. Nevertheless, formal education was less of a factor in production management as a whole. The Philippine survey, for example, showed that owners and managers with elementary to technical/vocational education were in fact more production-oriented, and outperformed their colleagues with college and other tertiary education. More relevant in this respect was the level of technical education, for supervisors as well as owners and managers. A factor examined by the Indonesian team was that of the entrepreneur as craftsman. To what extent did the entrepreneur's technical expertise, or lack thereof, relate to his entrepreneurship? The study's examination of 46 SMBs in nine types of business showed that the "craftsmanentrepreneur" was more likely to be found in skill-intensive industries, for example rattan and leather products. It was not necessarily a factor in industries like wooden furniture, garments and printing where the craftsman is less prominent.

General Conclusions We are able to draw a few general conclusions from the study: 1.

SMBs in general are not efficient producers. Technical efficiency grows with the size of the SMB, but SMBs as a group are clearly less efficient than large

Overview

2.

3.

15

enterprises. Technical inefficiency in SMBs arises from inadequate production management practices. SMBs are found to be most capable in those production processes related to day-to-day operation. However , production processes in the context of external changes, such as fore casting, production planning and scheduling, and production and inventory control, are poorly handled or not considered at all. Two other major areas of production management have been found to be virtually ignored by SMBs . These are system development and information management .

Solutions to production management problems, particularly if they are technical in nature, are best applied industry by industry. In some instances (as in the Indonesian example of two technologies in the same industry), two or more different solutions may be needed within the same industry. However , the second and third general conclusions mentioned above point to a larger predicament, namely that problems of inefficient production management which are not overtly technical may not be perceived as problems at all. The initial challenge, therefore, is one of education, and of instilling awareness. It may be as straightforward as convincing a small producer of the need to keep proper financial accounts , and teaching a simple bookkeeping system. At the more sophisticated level, it may entail demonstrating to a medium-sized producer that he will actually increase his profits if he uses part of his resources to track information flows regarding his operation . The study has underlined the pivotal role of the SMB owner - operator as manager and entrepreneur. With that

16

Kenneth James

conclusion, the ASEAN SMBI Proje ct comes full circle. Having studied the three main aspects of SMB operation -finance , market ing , and now production - - we are in a po s ition to reaffirm the integrated nature of the SMB problem . The schematic division of SMB fun ctio ns is useful , even ne cessary, becau se it serves to focus the attention on particular aspects of a comple x subject. In analyzing t he finding s, however , the researcher i s co nstantly reminded of the substantial overlap of the different aspects of the SMB situation. Any recommendations the researcher offers are made in the light of that realization .

Some Recommendations l. Becau se of the technical content of many production management problem s , so lution s are often i ndustryspecific. Specific re comm endation s are set out i n detail in the re s pect i ve co untr y paper s . As an example, the Philipp ine s tudy has identified a shortage of raw mater ials as the majo r problem facing Philippine SMBs. It s recommendation s include areevaluation of product de s ign to le ss en the dependence on scarce raw material s, and to use substitutes . As a general recommendation, SMB org anization s sh ou ld cooperate closely with industry-specific organizations both within the government and private sect or to identify and solve such problems . The larger challenge lies in in sti lling an awareness 2. among SMBs of the importance of efficient production management practice s . A logical first step would be more comprehensive industry s urveys to establish baseline data . Independent researc h groups could work with relevant public and private sector departments in planning and carrying out such surveys. This would

Overview

3.

4.

5.

17

provide a basis for developing training programmes for SMB operators in the areas of production and general management, and more specialized courses for managers and supervisors. One of the most effective ways to develop efficiency is to establish links between SMBs and large firms which practice effective production management. This could take the form of joint ventures or subcontract ing arrangement s. At this stage of SMB development, the government sector appears to be most suited to the "matchmaking" role; indeed most ASEAN trade and/or industry ministries have already established subcon tracting exchanges. Subcontracting in particular has been ment i oned repeatedly by senior officials who participated in feedback to the SMBI project's findings and by SMB repre sentatives themselves. It is a promising area for further investigation. We have consistently argued for a single umbrella body within each country which encompasses all the major SMB -oriented organizations, public and private. Such a body would provide a focus for training and for information dissemination. It is gratifying to note a perceptible trend in this direction for most of the ASEAN countries, with more SMB groups pooling their resources for the overall welfare of SMBs . Finally , we would like to reiterate a call for the establishment of a regional centre or institute, jointly organized , funded and managed by the ASEAN member countrie s, to service the larger needs of ASEAN SMBs. The centre would "provide an integrated focus on the common problem s of ASEAN SMBs , and (be) a concrete manife stat i on of ASEAN co-operation in this increasingly significant area of regional economic development" (Akra sanee, Ibid.).

18

Kenneth James

APPENDIX Types of Industr i es Stud i ed Indonesia

Metal products, food proces si ng, garments, furniture, printing, building materials

Malaysia

Metal prod ucts, f ood processing, garments/text i les, chemical products, wood products

Philippines

Metal products, food proces sing , garments/text i les, wood products , leather products

Singapore

Metal products, food processing, garments/textiles, electronic and electrical products, printing and paper pr oducts, rubber and plastics

Thailand

Metal products, food processing, agricultural machinery

garments/text il es,ceramics,

REFERENCES Aigner, D. J., C. A. K. Lovell, and P. Schmidt . " Formu lat i on and Est imat i on of Stochastic Frontier Producti on Function Mode ls". Journa l of Econometr i cs 6 (1977) . Akrasanee, Narongchai. "Financial Factors Related to Smal l and Med i um Bus i ness Improvement: An Overview". In Small and Medium Business I!!Jlrovement in the ASEAN Region: Financial Factors, ed i ted by Kenne t h James and Narongcha i Akrasanee. Singapore: Institute of Southeast Asian Studies (!SEAS), 1986. James, Kenneth and Narongchai Akrasanee, eds. Small and Medium Ousiness Improvement in the ASEAN Region : Financial Factors. Singapore: !SEAS, 1986. Lee, L. F. and M. M. Pitt. "Pooling Cr oss -s ecti on and Time-Ser i es Data i n the Estimation of Stochastic Frontier Product i on Function Models." Discussion Paper No.78-98, Centre of Economic Research, Department of Economics, University of Minnesota , Minneapolis, ·1978 . Lee, L. F. and II . G. Tyler. "The Stocha s tic Frontier Production Function and Average Efficiency." Journal of Ec onometr i cs 7 (1978). Yotopoulos, Pan A. and Jeffrey B. Nug ent. Economi cs of Development. Inves tigations . New York : Harper & Row, 1976 .

Empirical

II

EFFI CIENCY AND PRODUCTION MANAGEMENT IN SMALL AND MED IUM BUSINESSES: THE INDONESIAN CASE

M. Oawam Rahardjo

Introduction Compared to concepts like finance and marketing, the idea of production management is likely to be less familiar to, and thus less understood by, most small enterprises. This is certainly true of the Indonesian case , where we found that even in small and medium enterprises (SHEs) employing a relatively large number of workers, production management practices varied widely . In many instances, production management was largely an ad-hoc and haphazard affair. Nevertheless , pre cis ely becau se production management is so poorly understood and practised, small businesses can gain much from understanding it better. We hope the present study will contribute a little towards this understanding. In order to obtain more meaningful data on production management, the survey portion of this study focussed on indu s trial enterpri ses which were medium-sized (20 to 99 workers, following the official definition), or at the upper end of the small enterprise sca le (5 to 19 workers). Even then, the ca s ual nature of many producti on management practices gave rise to difficulties with regard to the consi stency and reliability of data co llected in our survey . For instance, it be came clear that th e data co llected would not support sophisticated estimates of te chnical efficiency of production. However, broad comparisons could be obtained from aggregated data, to give an indication of the relative

20

M. Dawam Rahardjo

efficiency of the different size-categories of industrial enterprises , and between different industries in the same size-category. In addition , the st ud y trie s to give a flavour of production management e xperien ce within the selected industries. For each indu stry, the ~ata from the initial survey are supplemented by carefully selected case studies from a follow-up survey carried out se veral months later. The present study is thu s a combination of simple quantitive analysis and qualitative ob se rvation. The final section offer s a set of recommendations ari s ing from the findings of these prima ry inve st igations.

Methodology The first part of the paper uses avai l ab le macro data to show the relation of SMEs to large enterprises. Rough estimates of efficiency and produ ctivi ty are derived from input, output and value added data. In the second part , pri mar y data from a survey of production management is presented. Fi ve industries were selected, namely, food processing , printing , metal-working , garments manufacturing and production of building materials . Questionnaires were distributed to 250 firms in the towns and cities of Jakarta, Bandung , Cirebon and Purwakarta . Only 66 responded, 10 of them giving incomplete responses . A follow-up study was done some months later, focussing on qualitative aspects of particular firms in each of the selected industries, plus the furniture-making (wood and rattan) industry. For each case study, the production management practices observed included system development (e.g . , capacity planning and organization) , production processes, production planning and scheduling, production control, maintenance and information management.

Indonesia

21

SHEs in the Macro Context Data Sources Our data 4bout the growth of the manufacturing industry in Indonesia are obtained from the 1974/ 1975 Industrial Census, the 1979 and 1982 Industrial Surveys and the 1986 Economic Census, of which only a small part has been published. From these census and survey results, we can see the difference in status and progress of industrial development by size However, official figures which classification. disaggregate by size of firm unfortunately combine large and medium - sized fi r ms (defined as employing more than 99 workers , and between 20 and 99 workers, respectively) in one category , with sma 11 firms in another category, and home or cottage industrie s in a third . Small enterprises are defined as employing between 5 and 19 workers , while cottage industries employ fewer than 5 workers. Labour Absorption The average large comp any employed 93 workers in 1974/1975, 109 workers in 1979 and 133 workers in 1982 (Table 2.1). The highest ab so rption of labour was in basic metal manufactur i ng . For 1982 the difference in employment size between large fi rms and the small and cottage industries is significant ; the av er age number of workers in the latter two categories is 7 and 2, respectively . Clearly, the average employment size in small and cottage indu s tries has not changed in eight years . On the other hand, for almost all kinds of large and med i um -si zed indu stries, employment size has increased over time, with a 43% increase ov er the period being considered . This indicates that large and mediumsized companies are playing an increasingly important role in labour absorption in the country's industrialization efforts.

22

M. Dawam Rahardjo

NUiber

TABLE2.1 of Workers per Finn, by Irdlstry and Size Category, 1W4175, 1979, 1982

Large & Medium

Small

Industry

1. Food, beverages, tobacco 2. Textile, garments, leather 3. ~ood & furniture, fixtures 4. Paper, printing, publishing 5. Chemicals 6. Non·meta ll i c minerals 7. Basic metal 8. Machine and equipment 9. Others

Average

Sources:

Cottage

74/75

79

82

74/75

79

82

74/75

79

82

133

122

143

6.2

7.0

6.6

3.2

2.2

2.3

84

106

128

9.6

9.4

9.5

3.1

1. 7

1.8

55

88

127

7.6

7.3

7. 5

3.1

1. 7

1.7

76 93

83 126

99 144

9.3 9.0

9.4 9.7

9.4 7.4

3. 6 3.9

51 114

64

75 438

7.0

6.7

6.9

3.3

2.1

375

2.4

112 129

133 69

166 80

7.5 7.7

7.3 7.0

7.4 7.4

3.6 3. 2

2.5 2.0

2.3 2.2

93

109

133

7.1

7.3

7.2

3.2

2.0

2.0

2.7 2.3

Central Bureau of Statistics, Industrial Census 1974/75, Industrial Surveys 1979 and 1982, and Economic Census 1986

Further information on changes in the labour patterns can be seen in Table 2.2. This table shows the increase in the average number of firms, and the corresponding change in the number of workers, for each size category. There was an increase in the number of firms in 1982, to 2.4 million units, which then declined to only 1.5 million units in 1986 . Very possibly, this decline is attributab le to the economic recession, whose impact began to be felt only in 1983. The effect on labour is clearly

Table Z.Z NuMber of Industrial EstablishMents and 1974, 1979, 1982, 1986

~rkers,

Nl.mber of Establi s hment s

Nl.mber of \lor kers

Size 1974

Large and Med i 75%

Total n

50 . 0 31.3 6.2 12 . 5

58 . 8 29.4

100.0 16

100 . 0 17

5 .9 5 .9

45 . 4 27.3 9 .1 18 . 2

64 .3 14.3 14. 3 7.1

33.3 66.7

54.1 27.9 6.6 9.8 1.6

100.0 11

100.0 14

100 . 0 3

100 . 0 61 All Industries

% of Firms of Al l Si zes

< 30% 30 - 44 45 - 59 60 - 75 > 75%

Total n

36.6 28.8 16 . 0 16 . 0 4.0

75 . 0 8.3

100 . 0 25

50.0 21.4 14.3 7.1 7.1

80 . 0

16 .7

46 .2 15.4 15 .4 15 . 4 7.7

100.0 12

100. 0 13

100 .0 14

100.0

20 . 0

5

57 . 5 15.0 11 . 7 7.5 8 .3

100 . 0 127

The generally low gross margins attainable by SMBs suggest that small industries had the tendency of being left with rather meagre profits when one considers their relatively substantial ma rk eting expenditures due to costly and inefficient selling and distribution methods (Sieh 1986). Small manufacturers would have difficulty keeping afloat if not for their ability to contain overhead costs. When compared with firms of all sizes f r om the same industries, Table 3 . 5 confirms that for each of the five industries under study, proportionately more of the average

Malaysia

65

sized firms enjoyed gross margins of 45% or over. Despite the higher overhead costs of average sized firms and their higher marketing costs attributed to more sophisticated approaches of promotion and selling, larger manufacturers appeared to be able to compete more effectively. This could be due to scale economie s , greater bargaining strength, lower cost of wastage and set-up due to magnitude of production run and more effective techniques of management in area s of ma r keting and production. TAB LE 3.5 SNB

end Average Si ze Fi n.s wi th Gross Margin of 45X or More

X of Respondents with Gross l ndu try

Hargi n of 45% or Hore

SHBs

Average Size Firms

Chemi cel M tal

16 . 7 11.7

Food

Z7. 3

llood

21. 4

36 . 0 16.7 38.4 Z6.6

Te• t le

zo.o

Manufactur i ng Cost Structure As expe c ted , mater i al cos t s formed the bulk of total manufactu r ing cost s averaging 60% for the sample of SMBs surveyed . SMBs i n food industries reported the highest percentage of 57% on average whilst metal SMBs indicated only an ave age of 56% for mate r ial s. Dire ct labour cos t con s tituted the second majore component of total manufacturing costs of SMBs, averaging near l y 18% for the sample . In enterprises manufacturing food products direct labou r ac counted for only 12.5% of total manufacturing co sts whilst wood products SMBs spent as much as one - fifth of the i r cost s on direct labour.

66

Sieh Lee Mei Ling

Overheads made up the third important category of manufacturing costs of SMBs averaging nearly 13% in the sample. Metallic products industries appeared to require proportionately more overhead expenditure amongst the five industries whilst textile manufacturers seemed to need less . When compared with firms of all sizes , SMBs were certainly more labour inten s ive whilst spending less for manufacturing overheads . It is evident that direct labour which represented 18% of total SMB production cost accounted or only 13% of that for manufacturers of all sizes . On the other hand larger firms spent 19% of their manufacturing cost on overheads whereas SMBs required only 13% . This is to be expected as larger firms employed more capital intensive technologies which required technical special i sts besides larger provisions for plant and capital equipment depreciation. Relative Factor Proportions and Productivity This section analyses relative capital or labour intensity of SMBs, their labour productivity and their capital productivity for the purpose of estimating their technical manufacturing efficiency. Again comparisons are made with those achieved by firms of all sizes in similar industries (Table 3.6). Such analysis is also useful for justifying policy measures such as support programmes and finance for SMB development. Amongst SMBs, metallic products manufacturers had the highest capital intensity, followed by those in food industries. In fact, SMBs of both these industries were more capital intensive than average sized competitors in the industry . For purposes of employment creation, it appears that small textile-garments enterprises required the smallest amount of capital investment per job whilst small metallic product businesses woulq be the most expensive.

67

Malaysia TABLE 3 . 6 Capital Intensi ty , l abour and Cap i t a l Product i vi ties of SMBs and Manu fac turers of All Si zes

SMB s (MS '000) Total Ch~ical

Metal

food

llood

Textile

67 . 4

83 . 7

80 . 6

34.4

13.0

57 . 0

Output 3/Labou r

115 . 3

85 . 6

124 . 1

42.6

39.6

79.3

Output/Capital

1.7

1.0

1. 5

1. 2

3. 1

1.4

1 Cap i tal tLebour 2

n a-:r.·..a.za~sac:: z :~c:-:.s: :::

c :: : : :

17 18 == : ::::: =:: ====== = = :

11 ::: :

19

4

69

======== ====

==::: :: = ::: = ::: ::::: ====::: ============ =

f irms of al l s izes (M$ ' 000 )

4 Cap i t al t Lebour Output /L abour Output / Capi ta l

73 . 7

56 . 3

79 . 1

31 . 8

57 . 8

181 . 0

87 . 0

83 . 0

232.9

61.8

79 . 3

2. 1

1. 2

1. 5

2.9

1.9

1.7

27

n

IIOtH

86 .8

12

13

14

5

71

1. Net I i A~ ess.e t s. f or SM8 s 2 . N

r (n)

= 0,


0

u

elsewhere

The average efficiency level of the industry is

=j

E(u)

ۥ

exp(·Z) G(z;n) dz

0

Thus, z is in fact the efficiency parameter with mean n and variance n, n




if

Let us consider

the application of ordinary least squares to the estimation of Cobb-Douglas proclAetiana func:t ion.

Let

I;

I(

yt • A 1t i•1

11

1t

= 1, • • • • ·, T

ut

where u " exp C·zt> and it is assumed that the Zt •s are a random sample with a Let Yt = log Yt x1t = log xit

~distribution.

and~

= log

A

IC

yt

t

aoc •

i=1

1 1x 1t- zt

where E (Zt) .. n, Var (Zt) =nand Cov = 0, s t1 t. • n·1t.

Let ! 0

=ex:

· nand vt

Then

I(

Yt

= .a 0 +t 1 x. i•1 1 1t

+

vt

where E (vt>

cv2t> =nand E (vt v1 ) =

(E (v/x) •

v

= o, E o, where

~qUare esti•tor of

= cv 1, .••... vt>

o,

S # t.

If we further assume that

and x = (xit> and denote the ordinary least

1 0 ,-----·, Jk by I i (i = 1, ..•••• ,1C) and the ordinary least

..-re esti•tor of n by ii

Narongchai Akrasanee et al.

204

I(

__1_

T-K-1

I

T

-

t=1 ~i xit

I

t=1

then it follows that

E : a: E

E Oil

Hence

(~O

+

n)

60 + n is

~i

( ii> n

(i

1,--- ,1()

an unb iased estimator of

a:

which in turn implies that exp

is an upward biased but consistent estimator of A.

upward biased but consistent estimator of

Further

f:: 2-n

is an

£ = 2-n_

The Model and Specification To estimate the transformed Cobb-Douglas production function of the four selected small- and medium - scale industries, two factors of production are employed in parameters estimation; capital and labour.

The production funct i on in therefore

written as:

1,----,n

where Yj

log-value of output which is measured in value term.

Lj

log-value of labour computed from the annual labour expenses of each firm.

Kj

log - value of capital value which in this case is the value of fixed assets taken out the depreciation.

The above model is employed in both estimation methods; the linear programming (LP) and the ordinary least squares .

205

Thai land

APPENDIX 6 . A2

The Estimated Production Functions Table 6.A2 presents the estimated product i on functions for the four selected SHBs. Equations designated with (a) report the results of fitting the Cobb-Douglas form using the linear programming technique. functions for each industry.

These are the frontier production

The OLS estimations of the same form of production

function are reported as equation (b) of each industry. The examination of the estimated parameters by both techniques suggests that there is a difference between the best practice firms and average firms of the sample industries .

The output elasticities of labour generated from the LP method

show higher values than those from the OLS estimation of every industry .

The metal

product industry, however, presents quite similar values of output elasticity of labour from both estimation techniques . LP

The output elasticities of labour of the

and OLS methods in the case of the garments industry are shown to have the

largest difference, which is as high as 50%.

TABLE 6.A2 Est i mted Production Functions for the Four SMBs in Thailand. 1982

Food processing

Ga1111ents

Intercept

Labour

Capital

LP OLS

5 . 8550 2. 5116 (2.6253)

0.7098 0.8305 (10.8159)

o. 5650

b)

0.1321 (2.2021)

a)

LP

6.0980 1. 9293 (0.7090)

0.6169 0 . 7866 (4 .4391)

0.1261 0.1694 ( 1.0796)

53 .68

LP OLS

3.0430 4 . 3197 (3 . 5531)

0.8402 0 .6420 (5.0610)

0.0328 0.0681 (0.9055)

68 . 85

LP b) OLS

1. 7990 0 . 7197 (0.4858)

0 .6905 0.8525