III.3 Effects of scale on manufacturing technology for type 1 footwear: Ghanaian and Ethiopian case studies

Empirical findings on the effects of scale in footwear production show that advantages of large-scale production are significant up to a level of 1,000 pairs per shift and per day. Generally, the effects of the scale of production are primarily of importance for the mechanised operations. An examination of the production rates of process equipment at various scales of production for 237 different types of machinery produced by the British United Shoe Machinery Company Limited shows that, in machine-intensive footwear plants, the minimum spare machine capacity is experienced at output levels of about 1,000 pairs per shift. Plants producing substantially more than 1,000 pairs per shift normally group their machines in such a way as to form separate production units specialising in different types of footwear. For manual operations, scale is less important because production operatives with related skills may be employed on capacity sharing, dividing their time between different tasks.

To illustrate the effects of scale, the Ghanaian case study for type 1 men's cemented shoes is extended to three scales of production: 200, 1,200 and 7,200 pairs per shift and per day. Full information on these scales of production was available in the country. For each scale, a most machine-intensive, a most labour-intensive and a least-cost technology are distinguished by applying the methodological framework described in subsection IV.2. The least-cost technology for output levels of 1,200 pairs per day can be related to the technical data and tabulations in Chapter II as indicated in the general treatment of type 1 footwear in section III.1. As the output level of 200 pairs per day coincides with scale 3 in chapter II, the technical data from this latter chapter can be considered indicative of the combination of techniques underlying the least-cost technology. As in the case of product comparisons, the overall profitability criteria (NPV or its annual equivalent, net profit) must be employed when appraising the effects of different scales of production.

A number of economic characteristics of the alternative combinations of techniques at different scales of production are presented in Tables IV.7 and IV.8.

The results confirm that returns, as indicated by the profitability criteria, increase rapidly between output levels of 200 and 1,200 pairs per day. This is mainly due to a marked reduction in fixed capital and labour requirements, in particular staff and skilled labour. Between output levels of 1,200 and 7,200 pairs per day only marginal changes occur, although returns still improve slightly. It should be stressed that the possibility of increased unit transportation cost of materials, equipment and footwear as a result of higher output levels has not been accounted for in Tables IV.7 and IV.8. Differences in returns may therefore somewhat overstate the effect of differences in scale.

Table IV.7 Economic characteristics of producing men's cemented shoes with different technologies at three scales of production in Ghana ( thousand, unless otherwise stated)

Pairs per shift	200			1,200			7,200
Technology	MM	ML	LC	MM	ML	LC	MM	ML	LC
1. Total number employed	35	45	45	155	218	195	845	1,233	1,073
Office and supervisory staff	13	13	13	36	36	36	143	143	143
Skilled production workers	19	26	26	49	90	91	291	540	486
Other production workers	3	6	6	70	92	68	411	550	444
2. Fixed capital	249	72	72	552	233	269	3,125	1,275	1,489
3. Working capital	157	158	158	901	910	906	5,362	5,404	5,365
Total capital	406	230	230	1,453	1,143	1,175	8,487	6.679	6,854
4. Ex-factory sales	300	300	300	1,800	1,800	1,800	10,800	10,800	10,800
5. Value added	92	94	94	573	579	579	3,461	3,489	3,498
6. Total wages	39	44	44	124	154	143	626	773	660
7. Depreciation	10	3	3	22	9	11	125	51	60
Net operating profit (5-6-7)	43	47	47	427	416	425	2,710	2,665	2,778
8. Direc taxes	21	23	23	213	208	212	1,355	1,332	1,389
Net profit after tax	22	24	24	214	208	213	1,355	1,333	1,389
9. Net cash flow (5-6-8)	32	27	27	236	217	224	1,480	1,384	1,449
10. Net present value at 10%	(89)	24	24	834	944	976	6,073	6,666	7,168
11. Internal rate of return (%)	7.0	11.3	11.3	17.5	20.6	20.7	19.	4 23,	23.7
12. Net profit at 10% (5-6-7-10% of capital)	3 .	24	24	282	302	307	1,861	1,993	2,093

MM = Most machine-intensive - ML = Most labour-intensive - LC = Least-cost technology

Table IV.8 Economic characteristics of producing men's cemented shoes with different technologies at three scales of production in Ghana (ratios)

Pairs per shift	200			1,200			7,200
Technology	MM	ML	LC	MM	ML	LC	MM	ML	LC
1. Index total employed	100	100	100	100	100	100	100	100	100.
Office and supervisory staff	37	29	29	23	17	18	17	11	13
Skilled production workers	54	58	58	32	41	47	34	44	45
Other production workers	9	13	13	45	42	35	49	45	42
2. Fixed capital/sales	0.829	0.240	0.240	0.307	0.130	0.150	0.289	0.118	0.138
3. Working capital/sales	0.524	0.526	0.526	0.501	0.505	0.503	0.497	0.500	0.497
Total capital/sales	1.353	0.766	0.766	0.808	0.635	0.653	0.786	0.618	0.635
4. Fixed capital/production worker (¢ thousand)	11.309	2.247	2.247	4.643	1.281	1.694	4.452	1.170	1.600
5. Pairs/shift/production worker	5.71	4.44	4.44	7.74	5.50	6.15	8.52	5.84	6.71
6. Value added/sales	0.308	0.315	0.315	0.319	0.322	0.322	0.321	0.323	0.324
7. Wages/sales	0.131	0.148	0.148	0.069	0.086	0.080	0.058	0.072	0.061
8. Net operating profit/sales	0.144	0.157	0.157	0.237	0.231	0.236	0.251	0.247	0.257
9. Net operating profit/capital	10.7	20.5	20.5	29.4	36.4	36.1	31.9	39.9	40.5
10. After tax profit/capital	5.3	10.3	10.3	14.7	18.2	18.1	16.0	20.0	20.3
11. Net cash flow/capital	7.8	11.5	11.5	16.2	19.0	19.0	17.4	20.7	21.1

MM = Most machine-intensive - ML = Most labour-intensive - LC = Least-cost technology

Although the results presented in the above tables do not seem to favour small-scale production of footwear in the modern sector, one should be careful not to generalise these findings, because the data do not include establishments in the informal or traditional sector using artisanal production techniques and employing only a few workers. An attempt to broaden the effect of scale to include artisanal production techniques was undertaken in Ethiopia.¹ Table IV.9 provides a summary of the findings from the Ethiopian case study.

¹ For more information on this case study, see Me Bain and Pickett (1975).

Output levels in the modern sector are 200, 1,200 and 7,200 pairs of type 1 shoes per day whereas in the very small enterprises in the informal sector 3 workers are assumed to produce 6 pairs of shoes per day. For each scale of production, the least-cost combination of techniques was identified at 1972 Ethiopian factor prices. The least-cost technology for producing 6 pairs of shoes per day is based on the combination of techniques specified for scale 1 in Chapter II.

The artisanal production units (alternative D) show by far the lowest capital-intensity as measured by the annual fixed capital charge per employee. Alternatives A and B employ a relatively capital-intensive technology and alternative C a relatively labour-intensive combination of techniques. Thus, the decrease in the capital-intensity figure between alternatives B and C.

The evaluation of the four alternative scales of production show that the combined net present value of the very small enterprises, each producing 6 pairs of shoes per day, is such that it would make them clearly preferable to the 200 pairs per day production units in the modern sector, though not to the extent that they would be able to compete successfully with the larger enterprises producing 1,200 pairs per day or more. However, since the artisanal production units sell directly to the public at retail prices (thus, no tax payments are due) and since wages are often lower than in the modern sector, returns can be satisfactory.

Table IV.9 Comparison of four scales of production of type 1 footwear for a total volume of 7,200 pairs per day - Ethiopian case study (1972 prices)

Characteristic		Scale of production
		A	B	C	D
1.	Output in pairs per shift per day for a single enterprise	7,200	1,200	200	6
2.	Total number employed per enterprise	904	167	42	3
	Total number employed to produce 7,200 pairs of shoes	901	1,002	1,512	3,600
3.	Total fixed capital excluding replacement1 (Ethiopian $ thousand)	3,439	3,961	5,054	5,940
4.	Annual fixed capital charge at 10% (Eth. $ thousand)	378	436	556	967
	Annual fixed capital charge per employee (Eth. $)	418	435	368	269
5.	Net present value at 10%2 (Eth. $ thousand)	14,055	10,646	(2,340)	3,450

¹ Project life of A, B and C is 25 years and of D is 10 years. The corresponding capital charge at 10% therefore amounts to 11% and 16% respectively.

² For D at retail prices without profit tax.