Economies o f Scale and Implications for Policy
A Study of Electrical Ceiling Fan Industry
This article studies the cost structure and the other comparative merits and demerits of manu-
facture of ceiling fans by large scale and small scale units. An attempt is also made to-draw up a scheme
for manufacture of fans in the small scale such that it is competitive with fan manufacture in large scale
units.
ELECTRIC domestic fans were first
manufactured in this country towards
the beginning of the second decade at
this century. I t was a swadeshi venture
among whose sponsors were such illus-
trious people as Suren Tagore, Kumar
Arun Sinha of Paikpara, Maharaja Bro-
jendra Kisore of Gouripore, Nalini
Ranjan Sarkar and others. In the back-
ground of the technological poverty of
the country in those days, it was con-
sidered to be a remarkable feat. Of
course there was no criginality, every-
thing being modelled on imported
fans. However, commercially it was a
flop and went the way of all such
ventures of those days, which at One
time became the subject matter of
many amusing stories. However, the
credit for pioneering must go to those
people.
The industry has now travelled a
long way from those pioneering days.
With the passing of time and parti-
cularly since independence technology
and the compulsions of market trends
influenced the few manufacturers who
had been in; the field. Much attention
began to be given to streamline the
design to reduce the material cost and
in general to tackle the problem of
rising cost, in a bid to keep the price
within the paying capacity of the ave-
e buyer. Fan makers have been
quick to adapt themselves to the tech-
nological advance made in the postwar
years. As a result, the Indian ceiling
fan has earned its place in the world
market. The progress that has been
made by the fan industry during the
last quarter of a century or so, it
measured in terms of . numbers of fans
produced, presents a very encouraging
picture. From a mere 1.93 lakh fans
in 1950,' total production came to
22.68 lakhs in 1974. The figure avail-
able for the first six months of 1975
would show that the upward trend
continued.
A remarkable change , in the metho-
dology occurred during the late fifties
or early sixties when a very large
domestic fan manufacturing unit
started a novel scheme of farming out
suitable orders to its own employees
who had the requisite skill. They were
Subir Kumar Das
encouraged in various ways to accept
orders for certain parts or components
which they produced in their homes
in. off-duty hours, often with the help
of other family members. Sometimes
machinery was provided on loan. This
gave rise to a number of independent
cottage units acting as ancillary units
supplying various components to the
large scale fan manufacturer. Techno-
logically, the domestic fan is a simple
product to manufacture. Machinery
used for production of fans is of the
general purpose type and is now avail-
able indigenously. With the develop-
ment of a strong base of allied cottage
industries, almost all the components
particularly of a ceiling fan are avail-
able and it has become possible to
manufacture a domestic fan in a back-
yard in Calcutta simply by assembling
the components procured from these
cottage units. As a result, in and around
Calcutta there has been a mushroom
growth of cottage based domestic fan
manufacturing units which have only
small assembly shops where traditional
fans are manufactured. Being handi-
capped because of low financial base,
the seasonal marketing pattern and
Stiff and somewhat unequal commercial
competition from the large-scale units,
many of these small fan manufacturing
enterprises close down within a short
period. Nevertheless, new enterprises
do continue to come up. Unfortunately,
no figured are available as to the
number of fans produced by such units
independently and the total quantum
of parts and components supplied by
these to the larger manufacturing
units, It is, however, known (vide An-
nual Reports of Fan Makers' Associa-
tion, FMA) that out of 25 lakhs of fans
produced in 1972, 3.21 lakhs were
produced by manufacturers who are
not members of the FMA. The number
of fans produced by such manufacturers
in 1973 and 1974 comes to 3.75 lakhs
and 3.15 lakhs, respectively. While at
one time such small units were con-
centrated in and abound Calcutta, a
number of these are reported to have
sprouted in other states such as UP,
Delhi, Punjab, Maharashtra and Tamil
Nadu particularly. The Government of
India or even the state governments
may not have reliable figures or infor-
mation about such manufacturers. While
the fan industry had its early roots in
West Bengal, large manufacturing
concerns have developed in Delhi and
Maharashtra. Statistics indicating the
number of fans produced in the diffe-
rent states, the number of personnel
employed and the amount of capital
invested in the fan industry in different
states along with comparative state-
ments on the performance of small,
medium and large firms are not readily
available.
Nevertheless, considering the grow-
ing enthusiasm in the small scale sec-
tor for manufacturing of domestic fans,
we ventured to undertake a study of
cost structure and other comparative
merits and demerits of fan manutac-
turing in large scale vis-a-vis small
scale units. Both the large and small
scale units taken up for study are
situated in the same locality. We would
name the large scale unit as "A" and
small scale unit as "B''. The major
products of " A " are large varieties of
domestic fans while those of "B" are
ceiling fans. The comparative cost
structure of both the units relate to
that of ceiling fan of 48" in sweep
which is most popular in the country
today. The models of fans considered
in the case of both units are almost
identical in performance, designed for
hade market. The cost data (Table
1) have been computed on the basis
of monthly production of 50,000 fans
by unit ''A" and 300 fans by unit
"B". "A" has a strength of employees
of around 1,500 and "B" of 9. In com-
piling cost, selling expenses and out-
ward freight have been excluded.
Further study of the comparative
usage of the raw material and rates of
purchase indicate that ''A" unit enjoys
advantage amounting to minimum of
Rs 34 by way of saving oyer unit "B".
Major areas of such advantage are:
Rate (of purchase) Rs 10.00
Copper usage (quantity used) Rs 15.00
Electrical core Rs 7.50
Rotor die casting Rs 1.50
Total Rs 34.00
"A" employs coil setting machines.
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Review of Management May 1978

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ECONOMIC AND POLITICAL WEEKLY Review of Management May 1978

for winding its stators thereby achiev- T A B L E 1 : C O M P A R A T I V E C O S T STRUCTURE

ing sizeable saving in cost of copper
and electrical core. "B" winds its
stators by conventional methods, ie,
by setting machine-made coils by hand.
''B" cannot afford to utilise coil setting
machines since "B"s production quan-
tum cannot economically justify instal-
lation of such a machine.
"A" casts rotors by the use of
pressure die-casting machine which is
very costly and highly productive. "B"
has to get its rotor die cast through
outside cottage units employing gravity
die-casting method, involving very low
capital cost
The advantage of rate enjoyed by
"A" is due to its bulk purchase.
In spite of cost disadvantages in
regard to the material consumption and
despite the built-in profit elements and
head included in the bought outs
unit "B", "B" 's ex-works cost
higher than that of "A" by Rs 3.30
only. In case, there be units set up
to undertake jobs of coil setting by
machines for supplying .to various small
scale fan manufacturing units having
more or less standardised requirement
and should it be possible to eliminate
the rate variance in the purchase of
raw materials, the cost of production
of unit "B" should be less than that
at "A" by, say, minimum of Rs 22.00.
Number of fans produced per man/ more employment indirectly. As com- should be more reliable in the small-
month are same in both the cases, pared to ,"A" "B" has to incur scale sector. A small-scale unit, because
although unit "A" undertakes more additional cost of Rs 29.60 per fan of smaller number of products it has
number of operations and its purchase under the head of 'bought-outs and to handle, can give individual attention
of bought outs are less. High degree outside labour'. A very rough estimate to each item, whereas a large-scale
of mechanisation and capital-intensive would put the labour content included unit has more or less to depend on
mass production techniques are res- in 'additional cost' at well over one statistical quality control.
ponsible for favourable production rate and half mam days per fan produced It is a pity that despite government's
at unit "A". Nevertheless, incidence by ''B''. In other words, for e v e r y lakh declared policy of encouraging growth
of overhead per man/month at unit "A" of fan produced/month in ''B" type in the small-scale sector, the small
very high in comparison to that in small-scale sector in preference to sized fan makers of the type ''B" find
unit "B". This is because unit "A" large-scale sector, there is an additional it difficult to sustain themselves, in
having highly productive capital inten- employment of over six thousand mar spite of the in-built potentialities dis-
sive equipment employs comparatively months, that too without any sacrifice cussed above.
smaller number of personnel at a high in the cost of production. Labour The principal constraint faced by a
cost whereas the small unit "B" em- content of a small-scale unit's fan is small-scale fan unit in running its
ploying labour intensive techniques has between two and three times higher business is on the commercial front.
a low overhead. than that of a fan manufactured by Fan is a consumer product. Effective
"B" enjoys further saving in its large-scale unit. From Table 2, based on marketing of fans would call for sub-
overhead, since it does not have to a rough estimate i t can be seen that, stantial sales promotion efforts. With
conform to the Factories Act and even with comparable level of wages the limitation of size, a SS unit can
other legislations pertaining to social and benefits with respect to "A", "B" hardly put up any sales promotion
security, as would be applicable to is a cheaper producer. effort which could have any tangible
the large size enterprises. However, a Small-scale fan units (set up for effect on its marketing prospects. Big
liberal estimate would put incidence manufacturing fans say upto 500 pcs houses control most of the major
of all these allowances at 30 per cent per month) are greatly handicapped by marketing channels, thereby making it
on wages, i e, the additional cost of lack of development facilities. Such difficult for the SS unit to make a
production would be around Rs 4 per small units can hardly afford technical satisfactory marketing inroad. The
fan. personnel and sophisticated gadgets domestic fan is a seasonal product. Its
Another interesting feature that could inclusive of- intricate measuring instru- season, particularly in northern India,
be revealed from the above analysis is ment necessary for proper development lasts for five months only in a year. It
that "B" turning out the same number work, to keep pace with time, but once becomes extremely difficult for a SS
of fan/man month as "A", supports design is finalised, quality control unit with limited finance to last during
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Review of Management May 1978
the long off-season period of seven
months. Government departments and
undertakings account for substantial
proportion of fans sold in the country.
Government departments do make
bulk purchase of fans under rate
contract (RC). Seasonality has not much
effect on the turnover of fans sold
under RC. But again i t is difficult
for the SS units to get the benefit by
RC business due to a number of
reasons.
The extraordinarily rigid standard of
RC fans as laid d o w n by government
calls for elaborate testing arrangements,
w h i c h the SS units can ill-afford. The
testing facilities are there in govern-
ment test houses but they are costly.
Further, l o r a test w h i c h should not
take more than a day to conclude, it
would require months t o obtain the
results from a test bouse. Even o t h e r
wise, the governments policy to en-
courage SS industries could not find
any meaningful expression in ensuring
preference from the DGS and D to-
wards listing the SS units under R C
and from the respective government
purchase officials to such SS units.
Once again as regards the RC speci-
fications, even the large houses find it
difficult to maintain the standard some-
times. and w i t h such extra regidity the
possibility of encouragement to irre-
gular practices at government testing/
inspection may not be entirely ruled
out. There have been a number of
representations to the government to
revise its. specifications i n keeping w i t h
trade practices b o t h in internal and
international markets. Should the gov-
ernment accede to the request.
should be possible to save copper, the
major portion of w h i c h is imported
today, electrical core and E C grade
aluminium substantially i n RC fans,
w i t h o u t any adverse effect whatsoever
on the air delivery.
T o return to trade selling, these SS
units w i t h o u t the effective patronage
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ECONOMIC AND POLITICAL WEEKLY
of established large marketing houses
and the government rely heavily on the
small dealers/distributors of fans and
often into a huge blockade of fund
w i t h these dealers. I n its anxiety to
sell its product, a SS unit does some-
time make wrong marketing decisions,
resulting in b a d / d o u b t f u l debts. Such
blockade creates working capital crisis,
which most of the SS units working
w i t h a low financial base cannot sustain
and the units "ultimately closed down.
I n the light of the earlier discussion,
it w o u l d not be w r o n g to conclude that
both f r o m the consideration of employ-
ment potential and cast benefit cottage
based manufacture of fan in small
scale sector has a distinct edge over
that in large scale, provided the mark-
eting constraint i n small scale be off-
set. A stage has come when the domes-
tic Ian is no more a product deserving
encouragement for being produced in
the large scale Sector. Production in
large scale sector acts against employ-
ment growth and is at a disadvantage
economically.
In the circumstances, the planners
have to take a long-term view of the
nature and future of the fan industry.
I n this context, we would like t o draw
up an imaginary future model of a fan
manufacturing enterprise i n the small
scale sector. Let us imagine that a
number of small-scale entrepreneurs,
essentially technicians, sit together and
decide to manufacture fans under a
common design and brand name, say
" C " . T h e proportionate shares of off-
take of fans by each of the SS partici-
pants are predetermined. Now they
it
move to a financier having marketing
ambitions and ability to organise a
marketing setup which w o u l d market the
entire l o t of ' ' C " fans. T h e marketing
organisation w i l l also maintain a Small
fleet of technicians who w o u l d promote
development and keep an eye on the
quality of products manufactured by all
the small scale clients. The incidence
of overheads on account o f the techni-
cal division would be taken care of
while determining the purchase price
a farms. T h e SS units would essenti-
ally be assemblying components t o be
procured f r o m cottages. Considering
the bulk demand of the congregation
of the SS u n i t s manufacturing " C "
fans, it w o u l d he economically justified
to have various cottages employing
modern equipment and techniques like;
coil setting machines, centrifugal die-
casting, etc. The government, i n order
to encourage expansion of cottages and
small scale fan enterprises, w o u l d be
letting out costly p l a n t and equipment
considered essential to achieve saving
in material i n the manufacture of fans,
on lease basis or against suitable hire
and purchase schemes, to the entre-
preneurs of cottage and small scale
sectors. T h e government w o u l d also
ensure preferential treatment in en
ing such small scale set-ups under RC
and price fixations. I n the government
purchases, a minimum quota w i l l be
fixed for purchase f r o m these small
scale set-ups. Since public sector
organisations are r u n along commercial
lines, any price preference to small
units should come as government
subsidies to the public sector units
concerned. The government in a bid
to try to compensate against the com-
mercial advantage of large houses w o u l d
fix excise chargeable on a fan produced
by a large scale unit say from Rs 40
to Rs 45 and lower the same in the
case of small scale u n i t s say from Rs
40 to 30. These differentials may be
evaluated on the basis of the turnovers
of large scale and small scale units i n
a manner so that the earning to the
exchequer is not affected. Similar con-,
cession may be extended, to the
units i n respect of sales tax. F r o m the
above described model, manifold ad-
vantages can be foreseen. Firstly, a
self-reliant, employment-oriented, close-
ly-knit small scale industrial base w o u l d
have been established, which would
also ensure more equitable d i s t r i b u t i o n
of income. This scheme has the poten-
tial to offer employment in certain rural
sectors as well. Secondly, cost of pro-
duction can be brought d o w n signi-
ficantly, i n comparison t o that in large
units, thereby scaling d o w n the market
price of fans. The small scale entre-
preneurs can concentrate more on p r o -
duction, and the commercial aspects
can be left to the central marketing
organisation which, because of b u l k
turnover f r o m SS units, can afford t o
undertake sales p r o m o t i o n a l activities
in an effective way. T h e technological
handicaps of small scale units are taken
ECONOMICANDPOLITICALWEEKLY Review of Management May 1978

care of by the centralised division
w i t h i n the marketing organisation. The
incidence of servicing charge is absor-
bed by all the small scale clients, there-
by none of the clients w i l l be burdened
unduly.
T h e small scale units having been
given the concession i n regard to ex-
cise, sales tax and RC, the large scale
sector gets handicapped in the com-
petition w i t h the small scale and would
automatically diversify its activity for
survival, thereby a longer share of busi-
ness w i l l start flowing i n the direction
of small scale sector. But the setting
u p of such a model w o u l d demand a
good deal o f organisational works termed as small scale. Manufacturing
wherein the government has t o give, under the above scheme would neces-
the lead. A centralised marketing set- sitate plant and machinery of a value
u p is the key organisation, on whose much below Rs 10 lakhs. I n the cir-
performance would depend the success cumstances, a rich entrepreneur can
of the scheme. To set up such a mark- step in and reap the benefit, create
eting organisation, government has to another monopoly pocket and deprive
i n i t i a t e action and may consider joint the l o w income technicians/unemployed
venture w i t h private capital a n d / o r on entrepreneurs. It might be useful to
co-operative basis. introduce a stipulation to l i m i t the
A W o r d of caution is called for in average monthly turnover of each in-
identifying small scale enterprises which dividual u n i t by say five hundred fans
could be allowed to avail of the or so. Certain restriction may also be
scheme. As per today's definition, an imposed to choose the entrepreneurs
industrial undertaking owning plant and who could be permitted entry into the
machinery at or below Rs 10 lakhs arescheme.

Elitism i n Management Development

Programmes
]ai B P Sinha

This article briefly analyses the way in which Management Development Programmes actually
work in the many institutions which are engaged in management education. Its findings are that despite
the professed aim of these Programmes to democratise the whole work process, their actual impact has
been to make the hierarchical divisions more rigid. The phenomenon of elitism so characteristic of
management culture, while masquerading under the garb of democratisation, is indeed doing very well.

I N the last t w o decades, a large Rs 1.5 crores per year for the training the hardware on the ground that the
number of institutions devoted to of about 8,500 executives. I n addition, human factor is central to any man-
management development programmes the sponsoring organisations spend agement system.
have come up in the country. The about Rs 80 lakhs o n travelling allow-
Despite the diversities in the areas
National C o u n c i l of A p p l i e d Economic ances and other expenses. By 1985. we
of and approaches to these courses,
Research has identified 23 such insti- may need t o train about 12,000 execu-
there seems to exist a broad commit-
tutions. 1 Some of them conduct tives annually w h i c h might involve a
ment to democratisation of w o r k place.
degree and diploma courses while sum of about Rs 2.5 crores.
Consistent w i t h the w o r l d - w i d e trend,
others arrange short terra refresher t h e courses offered are wide and the manifest contents of the courses
.courses, and some have both. Besides, varied. They range from finance, tend to liberalise the management
there are larger companies and gov- marketing, production, foreign trade, system, recognise the w o r t h of even
ernment agencies w h i c h have their inventory control, raw material man- an ordinary employee, share informa-
own training facilities where new agement, man power planning, labour tion, delegate authority, decentralise
entrants are provided w i t h job t r a i n i n g relations, delegation of authority, decision making, and above all let all
along w i t h information about the leadership effectiveness, motivation, members of the organisation grow and
policies, procedures, and w o r k culture. power, communication, team building, actualise their potentials along w i t h
There are then institutions and univer- conflict management, etc. Broadly, the g r o w t h of the organisation.' 3
sity departments which, though not they are k n o w n as 'hardware' and In this context one is struck by
exclusively devoted t o management 'software' courses — although the certain unwelcome developments in
education, frequently arrange w o r k - t w o have significant overlaps. The Indian management education w h i c h
shops, seminars and short t e r m courses. hardware provides the latest technical are likely t o negate its professed
I n general the practice is to give job i n f o r m a t i o n w h i c h a manager needs to purpose : democratisation of the w o r k
training w i t h i n the organisation, and function efficiently. The software place. Let us start first w i t h cost in-
then to send the managers to outside courses, on the other hand, tell one how volved in attending the courses. The
institutions for short term specialised to deal w i t h his boss, peers, subordi- accompanying Table presents the ex-
courses w h i c h w o u l d be uneconomical nates; about his own needs, values, penditure pattern of management
t o arrange w i t h i n the organisation. motivation, likes and dislikes; and the development courses. 100 courses
The whole arrangement has resulted resultant phenomena such as job in- advertised by four institutions, t w o
in the proliferation of institutions and volvement, satisfaction, team spirit, fairly big and t w o medium sized, were
programmes. According to one esti- morale, and w o r k culture of the orga- examined for average d u r a t i o n of
mate.2 management development ac- nisation. The software trainers o f t e n courses and fees per person per day
counts for a direct revenue of about claim to have a say in the handling of for hardware and software courses.

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