Introductio

n
The Production Function and economic production

We have spoken of input like land and Labor and outputs like wheat
and toothpaste. But if you have a fixed amount of inputs how much output
can you get? In practice, the answer depends ‘on the state of technology and
engineering knowledge On any day given the available technical knowledge,
land, machinery, and so on only a certain quantity of tractors or toothpaste
can be obtained from a given amount, of labor. The relationship between the
amount of input required and the amount of output that can be obtained is
called the production function. The production function specifies the
maximum output that can be produced with a given quantity of input. It is
defined for a given state of engineering and technical knowledge. For
example we can imagine book of technical specifications that shows the
production function for ‘generating electricity. On one page there &e
specification for different-size gas turbines, showing their inputs (initial
capital cost, fuel consumption, and the amount of labor needed to run the
turbine) and their outputs (amount of electricity generated). The next page
includes descriptions of several sizes of coal-fired generating plants,
showing inputs and outputs. Yet other pages describe nuclear power plants,
solar power stations, and so forth. Together they constitute the production
function for electricity generation. Or consider the humble’ task of ditch
digging.’ Outside our windows in America, we see a large and expensive
tractor driven by one person with another to supervise. This team can easily
dig a trench 5 feet deep and 50 feet long,, in 2 hours. When .we visit
Vietnam, we see 50 laborers armed only with picks The same trench might
take an entire day. These two techniques one Capital-intensive and the other
labor-intensive are part of the production function for ditch digging. There
are literally millions different production function one for each and every
product or service. Most of them are not written down but are in people’s
minds. In areas of the economy where technology is changing rapidly, like
computer software and biotechnology, production functions may become
obsolete soon after they are used. And some Like the blueprints of a medical
laboratory or cliff house, are specially designed’ for a specific location and
purpose and would be useless anywhere else. Nevertheless, the concept of a
production function is a useful way of describing the productive capabilities
of a firm.

A production function can be represented in a table such as the one below. In

this table five units of labor and two of capital can produce 34 units of
output. It is, of course, always possible to waste resources and to produce
fewer than 34 units with five units of labor and two of capital, but the table
indicates that no more than 34 can be produced with the technology
available. The production function thus contains the limitations that
technology places on the firm.

A Production Function
Labor
5 30 34 37
4 26 30 33
3 21 25 28
2 16 20 23
1 10 13 15
1 2 3
Capital

The production function can also be illustrated in a graph such as that below.
This graph looks exactly like a graph of indifference curves because the
mathematical forms of the production function and the utility function are
identical. In one case, inputs of goods and services combine to produce
utility; in the other, inputs of resources combine to produce goods or
services. A curved line in the graph shows all the combinations of inputs that
can produce a particular quantity of output. These lines are called isoquants.
As one moves to the right, one reaches higher levels of production. If one
can visualize this as a three-dimensional graph, one can see that the
production surface rises increasingly high above the surface of the page; the
isoquants indicate a hill. The firm must operate on or below this surface.
There is one rule that seems to hold for all production functions, and because
it always seems to hold, it is called a law. The law of diminishing returns
says that adding more of one input while holding other inputs constant
results eventually in smaller and smaller increases in added output. To see
the law in the table above, one must follow a column or row. If capital is
held constant at two, the marginal output of labor (which economists usually
call marginal product of labor) is shown in the table below. The first unit of
labor increases production by 13, and as more labor is added, the increases
in production gradually fall.

The Marginal Product of Labor

Labor Marginal Output
First 13
Second 7
Third 5
Fourth 5
Fifth 4

The law of diminishing returns does not take effect immediately in all
production functions. It is possible for the first unit of labor to add only four
units of output, the second to add six, and the third to add seven. If a
production function had this pattern, it would have increasing returns
between the first and third worker. What the law of diminishing returns says
is that as one continues to add workers, eventually one will reach a point
where increasing returns stop and decreasing returns set in.
The law of diminishing returns is not caused because the first worker has
more ability than the second worker, and the second is more able than the
third. By assumption, all workers are the same. It is not ability that changes,
but rather the environment into which workers (or any other variable input)
are placed. As additional workers are added to a firm with a fixed amount of
equipment, the equipment must be stretched over more and more workers.
Eventually, the environment becomes less and less favorable to the
additional worker. People's productivity depends not only on their skills and
abilities, but also on the work environment they are in.

The law of diminishing returns was a central piece of economic theory in the
19th century and accounted for economists' gloomy expectations of the
future. They saw the amount of land as fixed, and the number of people who
could work the land as variable. If the number of people expanded,
eventually adding one more person would result in very little additional food
production. And if population had a tendency to expand rapidly, as
economists thought it did, one would predict that (in equilibrium) there
would always be some people almost starving. Although history has shown
the gloomy expectations wrong, the idea had an influence on the work of
Charles Darwin and traces of it still float around today among
environmentalists.

If one increases all inputs in equal proportions, one travels out from the
origin on a ray. There is no law to predict what will happen to output in this
case. If a 10% increase in all inputs yields more than a 10% increase in
output, the production function has increasing returns to scale. If it yields
less than a 10% increase in output, the production function has decreasing
returns to scale. And if it yields exactly a 10% increase in output, it has
constant returns to scale.

Returns to scale are important for determining how many firms will populate
an industry. When increasing returns to scale exist, one large firm will
produce more cheaply than two small firms. Small firms will thus have a
tendency to merge to increase profits, and those that do not merge will
eventually fail. On the other hand, if an industry has decreasing returns to
scale, a merger of two small firms to create a large firm will cut output, raise
average costs, and lower profits. In such industries, many small firms should
exist rather than a few large firms.
Most products require many more than two inputs, but showing a production
function with more than two inputs with graphs or tables is difficult.
Products require various types of labor and capital, energy of various sorts,
and raw materials. One of the key inputs, especially in larger firms, is
managerial ability. Inputs do not combine by themselves to produce output.
Someone must have knowledge of how to combine inputs and to coordinate
the production process.

If business decision-makers lack information or are incompetent, the firm

will not make the best use of available resources. Or if morale is bad in a
firm, people may work poorly and produce less than they could. In either
case, the firm will produce below the maximum that the production function
allows. Economist Harvey Liebenstein has called losses of these sorts "X-
inefficiency." Although economists assume that the firm will be on the
production function, a major challenge of management is to make decisions
so that the firm will be on or close to the production function.

In explaining the theory of the firm, economists conventionally assume that

the production function is fixed and that the firm operates on the surface of
the production function. The firm need not consider the production function
as fixed, but may view it as a variable that it can alter through research and
development. Creativity in the form of new technology or new management
techniques may loosen the boundary that the production function represents
and may make possible greater profit, at least temporarily.
Practical
Study

Company Introduction
The Kohinoor Maple Leaf Group was born from the trifurcation of the
Saigol group of companies and is a reputable and leading manufacturer of
textiles and cement. KMLG comprises of Kohinoor Textile Mills limited
(KTML) and Maple Leaf Cement factory limited (MLCF). Both companies
are incorporated in Pakistan and are listed on three stock exchanges of the
country.
Maple Leaf Cement is the third largest cement factory in Pakistan. It was set
up in 1956 as a joint collaboration between the West Pakistan Industrial
Development Corporation and the government of Canada. It is strategically
located at Daudkhel (District Mianwali) in Northern Pakistan, which is an
area rich in raw materials required for the production of cement. Kohinoor
acquired the ownership and management of Maple Leaf Cement under the
privatization policy of the government of Pakistan in 1992. Presently
Kohinoor Textile Mills is the holding company for Maple Leaf cement.
Vision
In order to remain competitive in the market the management at Maple Leaf
continuously re evaluates its business strategies. With the increase of furnace
oil prices the company adopted coal as a more cost efficient and
environmentally friendly fuel for kiln firing. Today the management
believes that the future lies in exploring the possibilities of alternative and
cheaper fuels such as waste firing. This would further reduce production
costs whilst promoting a culture of environmental awareness, health and
safety.

Capacity
At the time of privatization in 1992, the capacity of Maple Leaf to produce
Ordinary Portland Cement (OPC) was 1000 tones per day (tpd). A second
plant of 4000 tpd was commissioned in 1998 and a third plant of 6700 tpd
came into production in 2006. It increased the total capacity to 11,700 tpd.
The capacity of White Cement has also increased from 100 tpd to 500tpd
with the addition of a new plant. This plant also has provisions for doubling
the capacity to 1000tpd. Presently Maple Leaf cement has 9% of the market
share of OPC and is a leading brand in Pakistan with a diverse customer
base. It is also the largest producer of White Cement in the country with
80% of market share.

PRODUCT STANDARDIZATION

PLANT AND EQUIPMENT

There are three production lines for grey cement with annual clinker
capacity of 1.5 million tons. The white cement has three production lines
with annual capacity of 180,000 tons.
This capacity has increased over a number of years since maple leaf was
established in 1960. However we would like to discuss the recent up
gradations.

• In 2000, Maple Leaf Electric Company Ltd. (MLEC) a power generation

unit was merged into the company.
• In 2004, the coal conversion project at new dry process plant was
 completed.
• In 2005, dry process plant capacity was increased from 3,300 tpd to
4,000 tpd through de-bottlenecking and up-gradation of equipment and
necessary adjustments in operational parameters.
• In 2006, a project to convert the existing wet process line to a fuel
efficient dry process white cement line commenced its commercial
production.
• Currently, Company has undertaken an expansion project of 6,700 tpd
clinker capacity and is expected to commence its commercial production
as per schedule.

Technology

The plants of 4000 tpd, 6700 tpd and of White Cement are state of the art
and have been supplied by FLSmidth in Denmark. In order to ensure the
highest efficiency and process control the plants comprise of equipment with
the latest design and technology. To maintain the highest quality standards a
laboratory has also been set up at site for the testing of raw materials and
cement. All Maple Leaf plants comply with National Environment Control
standards.

RESEARCH AND DEVELOPMENT AND TECHNOLOGY

Research & development is an integral part of the Company’s policy of

development of new products and improving efficiency of the plant to
reduce cost. Through research and development Maple Leaf Cement
introduced the dry process technology which helped in reducing NO
emissions in the air from 4.5 kg/ ton to 1.5 kg/ton thus considerably
lowering the pollutants in the air and increasing the overall plant capacity.
Although research doesn’t form an integral part of the plant but we can
observe many strategic developmental programs that have been conducted
with many in the pipeline.
To retain the highest quality standards a laboratory has also been set up at
the site for the testing of raw materials and cement. This also helps Maple
Leaf to comply with national environment control standards.

TECHNOLOGY IMPROVEMENT
The Maple Leaf Cement Factory is completely automated and the plant
installation. The engineers constantly work to improve the efficiency and
effectiveness of the machinery. The highlighted techniques included

1. Troubleshooting
2. Continuous improvement under the Kiazen approach
3. ISO specified changes in work procedures and capacity utilization
4. Change in Hierarchy to support production

MATERIALS AND ENERGY

The following raw material is required in the production process

1. Lime stone: This raw material is company owned and is extracted from
the near by mountains of Iskanderabad. Limestone has the highest
composition in the cement product. 75% to 80% of the cement
constitutes of limestone.

2. Clay: Clay is another natural resource. This raw material is also

company owned. 15% to 20% of cement composition comprises of clay.

3. Iron Ore: Iron Ore is the only resource that is bought from contractors.
Iron Ore is added in small quantities and it helps to strengthen the
cement.

4. Gypsum: Gypsum acts as a retarding agent. It slows down the hardening

process which in turn gives the constructor enough time to use it.
5. Furnace oil: It is used mainly for power generation.

With the increase of furnace oil prices the company adopted coal as a more
cost efficient and environmentally friendly fuel for kiln firing. Today the
management is exploring possibilities of alternative and cheaper fuel such as
waste firing.
The process (discussed later) is such that it ensures that excess stock isn’t
left and on the other hand enough stock is present so that the production
process is not hindered.
WORK METHODS
PROCESS
Raw Materials
There are basically three main raw materials that are used for the production
of cement. In addition to that, a small proportion of other additives such as
silica are also added.
1. Limestone 80%
2. Clay 20%
3. Iron ore
Lime stone and clay are extracted from the same place. Iron ore is bought
from a contractor near Kalabagh.

Stage 2
The raw materials are feeded in separate “crushers” that break them into
smaller pieces. After that they are stored in separate piles.

STORAGE AREA

It is a stacker that provides immediate storage. In case there is a

problem with the crusher, the stock present can be utilized immediately to
provide enough amounts to be used for three days.

Stage 3
From the stacker the components are mixed and made into an ultra fine
powder in the grinder. A weighing scale is maintained to check that the
appropriate composition of the materials is maintained and the right quantity
is added. Again the mixture is stored in a Consistent flow Silo. It is to be
noted that until now only a physical change has taken place. The next step
would involve a chemical change.

Stage 4
The mixture is then added into a KILN. This is a rotating machine that heats
the mixture up to 1300*C where it is converted into a compound as a
chemical reaction takes place. This compound is the cement produced in
molten form. As it moves onwards an air cooler is present that cools the
cement and converts it into small stones known as CLINKER. This is the
intermediate product that is formed. After that the clinker is stacked in piles.
Step 5
The clinker is then added into a grinder. At this stage another element
known as Gypsum is added. The composition of the cement is 95% and that
of gypsum is 5 %. The gypsum acts as a retarding agent. Cement on its own
when kept in contact with water hardens very fast. It ensures rapid setting
but gives cement the time to harden In the grinder the cement is crushed into
a powder form. This stage is very critical in the cement production process
because of the fact that if something goes wrong with the composition, the
quality of the cement gets affected and the whole costs that are incurred to
produce the cement is wasted. Because of that the quality check at this stage
is the maximum and continuous.

EXTERNAL FACTORS

ECONOMIC FACTORS
Market for Cement in Pakistan exists in two main dimensions:
1. product type
2. And geographic area.

Product type:
Since cement is a specialized product, requiring sophisticated infrastructure
and production location. So, most of the cement industries in Pakistan are
located near/within mountainous regions that are rich in clay, iron and
mineral capacity. Structure of Cement industry in Pakistan is as such that
there is not much substitutability to buyers. Which shows that the Cross
elasticity of demand is negligible.

Geographical Area:
The other factor i.e. geographic location also doesn’t affects a lot
considering the flexibility of demand. Example can be taken from the fact
that if DG cement in DG KHAN raises its price and MAPLE LEAF
CEMENT in DaudKhel will raise its price to match DG cement’s. This is
due to cartel of all of the cement manufacturers in Pakistan. Thus the
customer has no choice at all to switch between two brands of cement.
As the cement market is moving from a virtual 'sellers' market' to an
oversupply situation, it is expected that when prices stagnate and
profitability becomes a function of volume and economies of scale, location
advantage and proximity to markets will become extremely important
factors.
At present the freight charges are a massive 20% of the retail prices. The
plants located very close to each other and tapping the same market will
have to expand their markets which will increase their freight expenses.

Pakistan Cement Industry

Cement is one of major industries of Pakistan. Pakistan is rich in cement raw
material. Currently many cement plants are operating in private sector.
Pakistan Cement Industry has huge potential for export of cement to
neighbouring countries like India, U.A.E, Afghanistan, Iraq & Russian
States. There has been a robust growth of cement demand seen both in
domestic and exports market during the financial year ended June 30, 2007.
The industry achieved an overall growth of 32% with domestic demand of
cement increased by 24.95% whereas the exports increased by 111.86%. The
overall growth achieved by many cement factories for the year under review
was 111.29% consisting of domestic and export markets at 71.02% and
335.12% respectively.
Pakistan Cement industry has been successful to capture export markets of
various GCC and African countries which are new markets for the Country
other than the conventional export markets of Afghanistan and Iraq.

Browse Major Pakistan Cement Plants in left menu

Pakistan ranked 5th cement exporter in World

Pakistan cement factories continue to make significant progress in cement

exports. Now Pakistan is ranked 5th in the world’s cement exports after a
huge increase of 47 percent in exports during last fiscal year.

According to the Global cement report, China maintained first position with
26 million tonnes in exports, while Japan got second position by exporting
12.6 million tonnes of cement. Third largest cement exporter in world is
Thailand with around 12 million tonnes, followed by Turkey which exported
11.6 million tonnes of cement. Pakistan now at 5th position has left
Germany behind by exporting 11 million tonnes of cement during last fiscal
year. Germany now stands at 6th position with 9 million tonnes exports.

Cement market experts told that Pakistan secured 5th position because of
high demand of cement in nearby countries and by capturing new markets
such as African countries, Qatar & Iraq. Pakistan could achieve the mark of
13 to 14 million tonnes exports by the end of the fiscal year keeping in view
Indian market which has once again started importing cement from Pakistan.
The export of cement from Pakistan to india showed a sharp decline after
Mumbai attacks.

Data Collection Method

Primary Data

BOOKS

Economics (Samuelson,Nordhaus)

18h Edition

Part#2

Chapter# 6

Page # 108

Web site
 www.wikipedia.org

http://www.cement.com.pk/latest-developments/112-pakistan-5th-
cement-exporter.html
www.accel-team.com/productivity/productivity_01_what.html
www.productivity.com

Secondary Data
Organization

Maple leaf cement factory pvt

Web site

http://www.kmlg.com/kmlg/cement

SWOT Analysis
Strength Weakness
Maple Leaf Cement is the third There main product is white cement
largest cement factory in Pakistan. so they are not very focus on OPC
that’s why they have 80% market
There Plants capacity is1.5 million share in white cement and 9% of
tons. OPC.

They have latest plants and

equipment in Pakistan.

They have a great understanding

with there labors.
Opportunities Threats
Pakistan is ranked 5th in the world’s The policy of the Government is to
cement exports and every passing keep a balance between rapid
day the demand of Pakistan cement economic development, on the one
is increasing so it is big export hand, and social justice and
opportunity. consumer’s protection, on
the other. There is a traditional
The technology is moving very fast conflict between these two aims. It
and its really help to decrees the cost is, therefore, necessary to regulate
level in production. Pakistan trade, commerce or industry in the
government given some edge to the interest of free competition therein.
cement sector to import the
production plants on some Restriction of export of cement is
reasonable duty conditions. deterring the full potential of this
sector.

The economical condition of country

is also effect on cement industry.
Conclusion
Conclusion
In my conclusion the importance of productivity is imminent and is
the need of the hour. Real gains in productivity are important then
simply measuring success in meeting objectives. Improvements in
productivity have a significant impact on lives whether the change
occurs at the national level, within the given industry or a company
or even at the individual level.
Changes in productivity within an industry or at the company level
are closely related to success and survival. The profit margins
realized by an industry or a specific company are related to its
ability to make productivity gains ahead of the competition.
Industries where competition helps to propel improvement often
experience greater growth. Companies that fail to keep in pace will
fail. In either case, all stakeholders are directly impacted.
Now keeping in view the analysis of Maple Leaf with respect to its
productivity of labor, capital and growth, we have concluded that
the current expansion of its capacity and induction of newer plant
with capacity of 6700tons might have caused short term costs. But
in due course of time it would provide higher returns in the form of
sales and revenue earned.

Secondly, the current management is actively resorting to

international set of quality standards so that to meet the upcoming
competition with regards toWTO. So the productivity and
efficiency with regards to effectiveness of the
plant is very important its not only help to create impact on
production but its also help to decrease the cost of production.

Recommendations
Maple leaf is the third big organization in Pakistan. . Presently Maple
Leaf cement has 9% of the market share of OPC and is a leading brand in
Pakistan with a diverse customer base. It is also the largest producer of
White Cement in the country with 80% of market share. There total focus is
on white cement my recommendation they should increase there production
in gray cement and second for the better production they should import new
technology like Simatic PCS 7 for better fast and economical production.

References
BOOKS

Economics (Samuelson,Nordhaus)
 18h Edition

Part#2

Chapter# 6

Page # 108

Web site

www.wikipedia.org

http://www.cement.com.pk/latest-developments/112-pakistan-5th-
cement-exporter.html
www.accel-team.com/productivity/productivity_01_what.html
www.productivity.com
http://www.kmlg.com/kmlg/cement