Unit I – Introduction to SME

Unit I
Introductions to SME

SMEs, or small and medium-sized enterprises, are defined differently

around the world. The country a company operates in provides the specifics on
the defined size of an SME. The sizing or categorization of a company as an
SME, depending on the country, can be based on a number of characteristics.
The traits include annual sales, number of employees, the number of assets
owned by the company, market capitalization, or any combination of these
features. The United States also defines SMEs differently from one industry to
another.
The objective of small scale industries is to adapt to the latest technology
and to produce better quality products at lower costs. Even in this type of
business, registration is voluntary and not compulsory. But, its registration with
the State Directorate or Commissioner of industries or DIC’s makes the unit
eligible for availing different types of Government assistance like financial
assistance from the Department of Industries, medium and long terms loans
from State Financial Corporations and other commercial banks, machinery on
hire-purchase basis from the National Small Industries Corporation, etc.

No. Type of Manufacturing Enterprises Service Industry

Enterprise (Investment in Plant and (Investment in equipment)
Machinery)
1. Micro Does not exceed Rs. 25 Does not exceed Rs. 10
Lakh Lakh

2. Small Exceeds Rs. 25 Lakh but does not Exceeds Rs. 25 Lakh but
exceed Rs. 5 Crore does not exceed Rs. 5 Crore
3. Medium Exceeds Rs. 5 Crore but Exceeds Rs. 2 Crore but
does not exceed Rs. 10 does not exceed Rs. 5 Crore
Crore

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Characteristics of Small and Medium Enterprise –

1) Dependence On Few Employees:- Many SME companies are quite small and
have only a very few employees. This limited staff is required to complete
all necessary tasks including innovation, production, marketing, sales and
accounting for the entire business; for example, the owner of the business
may also be the manager who oversees all the areas of the company. This
can be a disadvantage if employees do not have the required skill sets to
perform multiple tasks well; however, this type of business structure
promotes long-term stability rather than focusing on short-term results.
2) Relationships:- Most SMEs focus on a small number of products and
services; this limited focus lets such companies establish strong
relationships with their business partners, which in turn provides stability
for the SME. An SME typically makes necessary changes to its services or
products to suit clients' needs; the downside of this is that the SME
relies very heavily on existing partnerships and may suffer financially if a
relationship is terminated.
3) Simplicity:- The SME is a simple business structure, which allows the
company to be very flexible and make necessary changes quickly without
such requirements as addressing boardmembers or stockholders for
approval. This flexibility, however, does not necessarily mean the company
is observing local or national regulations that a board or legal team of a
larger organization would review prior to putting such changes into place.
4) Size:- The small size of the business can be an advantage when it comes
to specialization and filling niche markets with products. However, size can
be a disadvantage when it comes to obtaining financing for the business.
Many SMEs rely on personal assets of owners and management to finance
the company. Limited funds also effect marketing and the ability to reach
new markets with their products due to budget limitations..
5) Limited resources:- A small and medium enterprise generally has limited
resources. This is extremely true for new starts-up due to an absence or
lack of track record on the firm to entice potential investors and bankers.
Hence, it is highly dependent on the capability of the owner to generate
resources.

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6) Limited Investment:- The capital requirement of an SME is less as it

operates on a small scale.
7) Labor-Intensive:- SMEs usually don’t require heavy or sophisticated
machinery. Hence, it uses more labor-intensive techniques.
8) Less Number of Employees: SMEs requires a smaller number of people as
compared to large corporations, due to their small scale of operations.
9) Local Area of Operations:- SMEs operate locally and remain there for
longer periods of time (years or maybe decades) which helps it to build a
strong relationship with local customers.
10) Management:- In most cases, a single owner or a small group of
individuals handles the management of the business.

ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT

Entrepreneurs initiate and sustain the process of economic development in the
following ways:
1) Capital Formation: Entrepreneurs mobilize the idle savings of the public
through the issues of industrial securities. Investment of public savings in
industry results in productive utilization of national resources. Rate of
capital formation increases which is essential for rapid economic growth.
Thus, an entrepreneur is the creator of wealth.
2) Improvement in Per Capita Income: Entrepreneurs locate and exploit
opportunities. They convert the latent and idle resources like land, labour
and capital into national income and wealth in the form of goods and
services. They help to increase net national product and per capita income
in the country, which are important yardsticks for measuring economic
growth.
3) Generation of Employment: Entrepreneurs generate employment both
directly and indirectly. Directly, self-employment as an entrepreneur offers
the best way for independent and honorable life. Indirectly, by setting up
large and small scale business units they offer jobs to millions. Thus,
entrepreneurship helps to reduce the unemployment problem in the
country.

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4) Balanced Regional Development: Entrepreneurs in the public and private

sectors help to remove regional disparities in economic development. They
set up industries in backward areas to avail various concessions and
subsidies offered by the central and state governments. Public sector steel
plants and private sector industries by Modis, Tatas, Birlas and others
have put the hitherto unknown places on the international map.
5) Improvement in Living Standards: Entrepreneurs set up industries which
remove scarcity of essential commodities and introduce new products.
Production of goods on mass scale and manufacture of handicrafts, etc., in
the small scale sector help to improve the standards of life of a common
man. These offer goods at lower costs and increase variety in consumption.
6) Economic Independence: Entrepreneurship is essential for national self-
reliance. Industrialists help to manufacture indigenous substitutes of
hitherto imported products thereby reducing dependence on foreign
countries. Businessmen also export goods and services on a large scale and
thereby earn the scarce foreign exchange for the country. Such import
substitution and export promotion help to ensure the economic
independence of the country without which political independence has little
meaning.
7) Backward and Forward Linkages: An entrepreneur initiates change which has
a chain reaction. Setting up of an enterprise has several backward and
forward linkages. For example- the establishment of a steel plant
generates several ancillary units and expands the demand for iron ore, coal,
etc. These are backward linkages. By increasing the supply of steel, the
plant facilitates the growth of machine building, tube making, utensil
manufacturing and such other units. Entrepreneurs create an atmosphere
of enthusiasm and convey a sense of purpose. They give an organization its
momentum. Entrepreneurial behavior is critical to the long term vitality
of every economy. The practice of entrepreneurship is as important to
established firms as it is to new ones.

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PROBLEMS FACED BY SMALL SCALE INDUSTRIES

The following are the problems faced by Small Scale Industries:
1) Poor capacity utilization: In many of the Small Scale Industries, the
capacity utilization is not even 50% of the installed capacity. Nearly half
of the machinery remains idle. Capital is unnecessarily locked up and idle
machinery also occupies space and needs to be serviced resulting in
increased costs.
2) Incompetent management: Many Small Scale Industries are run in an
incompetent manner by poorly qualified entrepreneurs without much skill
or experience. Very little thought has gone into matters such as demand,
production level and techniques, financial availability, plant location, future
prospects etc. According to one official study, the major reason for SSI
sickness is deficiency in project Management i.e., inexperience of promoters
in the basic processes of production, cash flow etc
3) Inadequate Finance: Many Small Scale Industries face the problem of
scarcity of funds. They are not able to access the domestic capital market
to raise resources. They are also not able to tap foreign markets by
issuing ADR’s (American Depository Receipts) GDR’s (Global Depository
Receipts) etc because of their small capital base. Banks and financial
institutions require various procedures and formalities to be completed.
Even after a long delay, the funds allocated are inadequate.
4) Bank credit to the small scale sector as a percentage of total credit has
been declining. It fell from 16% in 1999 to 12.5% in 2002. Small Scale
Industries are not able to get funds immediately for their needs. They
have to depend on private money lenders who charge high interest.
Finance, as a whole, both long and short term, accounts for as large as
43% of the sector’s sickness.
5) Raw material shortages: Raw materials are not available at the required
quantity and quality. Since demand for raw materials is more than the
supply, the prices of raw materials are quite high which pushes up the
cost. Scarcity of raw materials results in idle capacity, low production,
inability to meet demand and loss of customers.

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6) Lack of marketing support: Small Scale Industries lack market knowledge

with regard to competitors, consumer preferences, market trends. Since
their production volume is small and cannot meet demand for large
quantities their market is very restricted. Now with the process of
liberalization and globalization they are facing competition from local
industries as well as foreign competitors who sell better quality products
at lower prices. For e.g. heavily subsidized but better quality imports
from China has made most of the Indian SSI units producing toys,
electronic goods, machine tools, chemicals, locks and paper etc., unviable.
7) Problem of working capital: Many Small Scale Industries face the problem
of inadequate working capital. Due to lack of market knowledge their
production exceeds demand, and capital gets locked in unsold stock. They
do not have enough funds to meet operational expenses and run the
business.
8) Problems in Export: They lack knowledge about the export procedures,
demand patterns, product preferences, international currency rates and
foreign buyer behavior. Small Scale Industries are not able to penetrate
foreign markets because of their poor quality and lack of cost
competitiveness. In countries like Taiwan, Japan etc. products produced by
Small Scale Industries are exported to many foreign countries.
But in India not much thought and focus has gone into improving
the export competitiveness of Small Scale Industries.
9) Lack of technology up-gradation: Many Small Scale Industries still use
primitive, outdated technology leading to poor quality and low
productivity. They do not have adequate funds, skills or resources to
engage in research and development to develop new technologies. Acquiring
technology from other firms is costly. Therefore Small Scale Industries are
left with no choice but to continue with their old techniques.
10) Multiplicity of labor laws: One of the merits of Small Scale Industries are
that they are labor intensive and can provide employment to a large
number of people. But the multiplicity of labor laws, need to maintain
several records (PF, ESI, Muster Rolls etc), fines and penalties for minor
violations etc. place Small Scale Industries at a great disadvantage.

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11) Delayed payments: Small Scale Industries buy raw materials on cash but
due to the intense competition have to sell their products on credit.
Buying on cash and selling on credit itself places a great strain on
finances. The greater problem is payments are delayed, sometimes even by
6 months to one year. It is not only the private sector but even
government departments are equally guilty. Delayed payments severely
impact the survival of many Small Scale Industries.
12) Poor industrial relations: Many Small Scale Industries are not able to
match the pay and benefits offered by large enterprises, because their
revenues and profitability are low and also uncertain. This leads to labor
problems. Employees fight for higher wages and benefits which the SSI is not
able to provide. This may lead to strikes, resulting in damage to property in
case of violence by employees, production losses etc.
13) Lack of awareness: The government has set up many organizations to
support and provide assistance to Small Scale Industries. But, many of the
entrepreneurs running Small Scale Industries are not aware of the various
support services.

Location Strategies with Examples

Introduction
Location is termed as a specific site where organizations set up their
business or manufacturing plant and location planning includes selecting an
optimum or ideal location after considering different possible alternatives.
Identifying manufacturing plant location (site selection) for producing
goods or services is considered one of the important decisions that any
organization takes from a strategy point of view. Both planning and managing
the plant or site location comes under such a decision. Also, choosing the right
location is a crucial element in the success of any organization as one of the
major goals of the organization is to delight its customers, and for this,
customers must be accessible within the organization’s reach. The selection of
the right location can be achieved by formulating a location strategy. Through
the location strategy, an organization can determine its market, product

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offering, demand forecast, appropriate manufacturing, and service setup place for
easy customer access.
So, a plan, which is formulated to obtain the appropriate location for an
organization as per the objectives and requirements of the organization is termed
as location strategy. This includes ensuring the compatibility of location search
with an organization’s objectives and needs. By doing so, the main aim of an
organization is to maximize the potential market share and reducing risks and
associated costs.
There are different reasons that push organizations to get involved in
making decisions for location planning. For example, supermarkets, banks, retail
and fast food chains, etc. consider location planning as an integral aspect of their
marketing strategy and plan their locations to gain the advantage of market
expansion in their relevant industry. Similarly, when the demand for an
organization’s offering increases and it is not possible to meet such increased
demand at the same location, then, the organization looks for location decisions.
Wrong or ill choice while making the decision of location, may result in less
qualified labor, an increase in transportation costs, an insufficient supply of raw
materials, loss of customers, etc.
At the time of making decision-related to plant location, an organization
must consider the below-mentioned forecasting needs for the long-term:
 The plan and policy of an organization to meet expansion needs
 Plans for product diversification
 Fluctuating market conditions
 Dynamic sources of raw materials
 Different other factors that may affect the decision of choosing the location

The Process of Location Planning

Planning is considered the initial and most important management function
in different business decisions and strategy-formulation. Planning decisions related
to deals associated with building, equipment & machinery, lands, etc. require a
huge investment and it is not easy to move them once occupied. So, a lot of
thought processes, data collection, and prediction of the future are required in
location planning.

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Therefore, organizations use proper location planning processes and techniques.

Following steps are involved in the process of location planning:

Planning the Plant Location

Location decisions include making decisions on different levels i.e. country,
region, and community. Organizations first make decisions regarding the
selection of the country, then region and community respectively. Different
choices are available for location planning. Different alternates are there for
corporations in addition to new locations such as an expansion of existing
locations, closing one location, and shifting to another one.
Different factors contribute to and influence decisions of selecting the best
appropriate plant location. These factors can be broadly categorized into two
types i.e. general factors and special factors.

General Factors
This consists of both controllable and uncontrollable factors that influence
location planning of all industry types.

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1. Controllable Factors
1.1) Land Availability
This is a crucial factor in making the decision of plant location. Most of the
time it happens that a specific area seems to be the appropriate place to build
a plant according to the forecasts, plans, and calculations of an
organization. However, an issue of land availability may arise. So, in that
scenario, organizations should look for the next suitable alternative in terms of
location.
1.2) Raw Material Supply
To receive raw material of the right quality and at right time by an organization
is a prerequisite for the uninterrupted production facility. This factor is highly
important in the case of perishable raw materials such as fruit, vegetables,
eatable items, etc. and also, the transportation cost of such raw materials is
quite high.
Below are the guidelines for location planning according to the influence of raw
materials:
 If there is a requirement of one type of raw material without losing weight,
then the plant should be located at the source of raw material or
somewhere near to its market, or any area in between.
 If the demand is for raw material with loss of weight, then the plant should
be located at the source of raw material.
 In the case of the universal availability of the raw material, it is advisable to
locate the plant near to the market.
 If there are different locations where raw materials are sourced, then it is
appropriate to locate the plant in between in order to keep transportation
costs as low as possible.
1.3) Availability of Labor
An organization should consider the factor of availability of labor in appropriate
numbers and with the required skill set at the time of deciding the location of
the plant at the community and regional level. It is required to study the
history of the prospective community and labor relations in the community.
Labor productivity, living cost, union’s bargaining power, industrial relations, etc.
should also be taken into account as important factors.

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1.4) Nearness to Market Areas

The plant can be located close to the market of customers or far as per the
nature of the product to be produced. A plant should be located near to the
market in the following circumstances:
 The life projection of the product is less
 Higher transportation cost
 Delicate products
 To promote after-sales services
1.5) Availability of Better Communication Facilities
Location planning is also influenced by the communication facilities that are
available in the region. The preference should be given to those sites that are
linked with telecommunication.
1.6) Availability of Infrastructure Facilities
Location planning is also influenced by the availability of basic infrastructure
facilities such as water, electricity, waste disposal, etc. For example, industries
that operate on a 24/7 basis like Steel, Aluminum need an uninterrupted power
supply. So, the location of plants of such industries should be near to the power
station or at places where there is no interruption in the power supply. If
power is unavailable, then it may create survival issues for these industries.
Similarly, continuous water supply is another important factor while considering
infrastructure facilities; especially, in process industries such as chemical, paper,
cement. In such industries, it is important to have a good quality water supply
on a large-scale.
One more factor under infrastructure facilities is waste disposal that is
extremely important in the case of process-oriented industries such as sugarcane,
chemicals, medicine manufacturing, and paper.
1.7) Availability of Transport
This is an essential factor for deciding plant location because appropriate and
fast transport facilities lead to the availability of raw materials in a timely
manner. It also ensures the timely delivery of finished products/ services to end-
users or customers. Different transportation modes include air, rail, road, water,
and pipeline. These modes should be considered while making decisions related to
the location. For instance, the location of goods meant for exports should be

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near to an airport or the port. So, we can say that the selection of the
transportation mode and the location is based on suitability, convenience, and
transportation costs.
1.8) External Economies of Scale
This includes location-based and urbanization economies of scale. Economics of
scale with reference to urbanization is related to an advantage that an
organization gets through setting up its unit in a big city. In this, organizations
prefer big cities as compared to small ones for gaining the benefit of transport
facilities, access to a large number of labor and extended business services,
increase their market share and sales, etc.
A location-based economy of scale is related to setting up a manufacturing unit
where other organizations of related industries have their units.
2. Uncontrollable Factors
2.1) Government Policies and Support
This is considered an important factor in location planning. Government policies
include different policies such as labor laws, safety, building codes, etc. made by
the state government and local bodies. To maintain a balance in the growth of
industries at the regional level, different incentive packages are offered by center
and state government to entrepreneurs that are based at different locations.
These incentive packages may include subsidy in electricity bill and investment,
loan facility from financial institutions, excise duty, and sales tax exemption,
etc.
2.2) Conditions related to Climate
The geographic aspect of the location along with conditions of climate such as
temperature, humidity is considered an important factor in location planning.
Human behavior and work efficiency are somewhat indirectly influenced by
climate. For example, industries such as the Textile mill demand a more humid
climate.
2.3) Community Infrastructure and Facility
Plant location is influenced by certain community infrastructure factors. It
creates a great impact if a manufacturing concern is located near to certain
facilities such as schools, hospitals, universities. These factors create an impact
on location decisions by motivating employees.

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2.4) Supporting Services

Different manufacturing concerns outsource few activities such as manufacturing
of a few parts and components of its product to outside vendors. So, location
planning is influenced by the factor of supply source. Other than this,
manufacturing concern is indirectly linked with different service industries such as
banking, consulting, and communications. So, these also play a crucial role in
location selection decisions.
Special Factors
These include specific factors for the manufacturing and service industries.
Special Factors for the Manufacturing Industry
These are divided into dominant and secondary factors.
Dominant Factors
Dominant factors are those that dominate the decisions related to location for
new manufacturing units. These are further categorized into the below 6
categories:
Favorable Labor Climate
This is considered a very important factor in making decisions related to the
location; especially, for organizations that are labor-oriented and operate in
industries such as electronics, furniture, textile, chemical. Labor climate consists
of productivity of workers, wage rate, work attitude, training needs, and
strength of labor union.
Nearness to Markets
Once an organization is able to find out the place that has a great demand for
its products and services, then the facility location is selected for demand-
supply. It is important to locate near the market area if products are in bulk or
heavy products and higher transportation cost. For example, if a company is
indulged in the production of heavy metals, then it is feasible to locate the
plant near the market of the product.
Quality of Life
This includes better education facilities such as good universities and schools,
cultural events, modern lifestyle, recreational facilities. This factor can influence
decisions related to location.

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Closeness to Different Resources and Suppliers

Different large manufacturing organizations outsource a few of their core
functions and also, depend on different suppliers. This demands effective
communication and coordination between the organization and different suppliers
which is difficult in case of more distance of the location.
Costs Associated with Utility, Land, Taxes
Different utility costs such as water, electricity, phone usage, taxes imposed by
local and state government, relocation costs, cost of land also affect location
decisions.
Secondary Factors
Other factors that create an impact on location planning are cost associated
with construction and shifting of manpower and material from one plant to
another, expansion plans, community attitude, accessibility to different
transportation mediums, etc.
Special Factors for Service Industry
Both, dominant and special factors that influence manufacturing firms, also
affect service organizations while making location decisions. This includes location
effects on the satisfaction of customers and sales.
Dominant Factors
Closeness to Customers
Location is considered a key component to determine the convenience of
customers in association with the service organization.
Cost of Transportation and Nearness to Markets
It is important that the market should be nearby to the location for
warehousing and distribution activities. In the case of the closeness of the
warehouse, service organizations can keep their inventory near to the customer.
This helps in sales promotion and cutting down the delivery time.
Competitors’ Location
The impact of competitors may create hindrances in making estimation of sales
capacity at different locations. So, a factor related to the location of
competitors plays a crucial role in deciding location as an organization needs to
keep in mind the competitor’s current location.

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Secondary Factors
Different secondary factors must also be considered in the location planning of
service firms like retail companies. Factors such as retail activity, visibility of the
site, the flow of traffic are crucial factors for retailers. Customers that are
businessmen visit retail stores by cars; this is an illustration of the flow of
traffic. The size of buildings that are nearby and signs are considered into
visibility factor.

Location strategy of SME

Both general and special factors mentioned above have their own significance
while deciding the location of the manufacturing plant. So, location can be
determined by giving rating and appropriate weightage to these factors. These
methods include:
 Method of Rating Plan
 Method of Factor Rating
 Method of Point Rating
 Break-even Analysis Method
 Centre of Gravity Method

1. Method of Rating Plan

In this method, the rating is given to different factors that influence the
plant location decisions. This rating is based on the management’s perception.
Once all factors have been given rating, then the location obtaining the highest
rating is considered for locating a manufacturing unit.

For example, a car manufacturing company wants to start its manufacturing unit
in India. For this, it selects four appropriate cities i.e. Noida, Gurgaon,
Chandigarh, and Jaipur. To choose the best location for its manufacturing plant,
the company adopts a rating plan method according to its business requirements.
For this, the company made a list of important factors of its business
requirement. The same is shown in the table given below:

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The manufacturing company further allotted proportional values for each factor
in the form of percentage as per the Rating plan method. The above table
shows the approach of a rating plan that the car manufacturing company has
used.
Once the rating is given to each factor and for each city (as shown in the above
table), then, the rating of Noida comes to the maximum one i.e. 95 out of
100. So, accordingly, the company has selected the Noida location for
establishing its manufacturing plant.

2. Method of Factor Rating

These methods are considered the most common methods for selecting the
location of a plant as it is easy to analyze different factors through this
method. The factor rating method includes rating each factor of location. It
also considers ratings given to competitive locations. After determining these
ratings, products of rating are calculated by multiplying factor rating with
location rating. Finally, that location will be selected which receives the maximum
product of rating.

This method includes the below steps in its selection process for a new
location:
 Identification of the location factors according to the importance.
 Rating each factor as per its appropriate importance, like prominent factors
will be given the higher ratings.
 Assigning each location as per each factor’s location-based merits.

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 Calculation of each location’s rating

 Determining the product of rating and its total to select the best suitable
location that gets the maximum total score.

The below example represents the method of factor rating. The table listed
below indicates three locations, factor rating, location rating, and final product
of rating.

The manager of a manufacturing company gives a rating to each suitable factor

as shown in the column of factor rating in the above table. The location rating
includes rating or ranking to each individual location which is again determined by
the company. The last column is the product of the rating values of all three
locations. The value of this column is obtained by multiplying factor rating with
location rating. After summing up the product of rating of each location, the
company is able to determine the location with the maximum product of rating.
In the above example, the maximum product of rating is 201 of location 1 as
compared to location 2 and location 3. So, the most suitable location is location
1.
Moreover, the total product of rating is almost the same in the case of location
2 and location 3 i.e. 195 and 196 respectively. These cases require a personal
reconsideration of different factors.
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3. Method of Weighted Factor Rating/ Point Rating

This method includes merging both qualitative and quantitative factors and
for this; weights are assigned to factors according to the importance. These
relative weights that a company allots to each location factor may be displayed
by the number of points. These points are those that are given to the perfect
location in each factor. Further, through the preference matrix, each site’s
weightage score is determined.
In other words, the evaluation of each potential location is done based on each
factor that an organization considers, and points are given to each factor.
The selection of the location is based on the site having a maximum weighted
score.
For example, a manufacturing company of auto spare parts is looking to expand
its business in new locations in the Punjab region i.e. Jalandhar, Mohali, and
Bathinda. The below table represents different possible factors, weights/ points
of each factor, and each location ratings through point or weighted rating
method.

The weighted score is calculated by using the below formula:

The weighted score of each location and each factor= Weights * Rating
So, the total weighted rating of Mohali will be:
20 *4+15*2+25*3+20*5+20*3= 345.
Similarly, the total weighted ratings of the other two locations are determined.
By comparing the final score of weighted ratings, the score of Jalandhar location
is the highest one i.e. 395. So, Jalandhar is considered the best site for the
manufacturing unit.
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4. Break-even Analysis
This is considered a technique to evaluate the choices of location from the
economic aspect. Break-even analysis explains that the break-even point is the
one where total revenue and total cost are the same. So, this method is related
to locating the point where both revenue and costs are equal. This point is
termed as a break-even point. In other words, the break-even point is a no-
profit and no-loss situation.

There are three main heads in cost in every manufacturing organization i.e.
 Cost in the form of investments that are made for equipment, machinery,
land, plant, etc. This cost is termed as a fixed cost. These investments are
associated with interest and depreciation.
 Recurring cost (part of the fixed cost)
 Costs that change according to the quantities of product i.e. variable cost.

Steps in break-even analysis

 To calculate each location’s fixed and variable costs.
 To determine the indifference point for each alternate location pair.
 Identifying the output ranges
 Selecting the location that has the lowest cost in terms of design capacity
related to the new facility.

For example, an electronic company has two options for potential sites to launch
its new manufacturing plant. Both fixed and variable costs on annual basis for
each potential site are as given below:

Let’s say if the annual demand for the company’s products is estimated to be
50,000 units, then break-even analysis is used to determine the best location
among the two locations mentioned in the above table.
Below are the steps to determine the best location:

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Calculation of fixed and variable costs

The total cost for each potential location will be calculated through the below
formula:
Total cost (TC) = Fixed cost (FC) + Variable cost (VC) * Q
Q is considered the volume of output or demand of the product
So, as per the above formula, the total cost of Delhi, Banglore is as under:
Total cost (Delhi) = 10,00,000 + 6Q
Total cost (Banglore) = 15,00,000 + 4Q

The next step is to determine the indifference points among location pairs i.e.
Let’s say, Q1 is the indifference demand, so:
Total cost (Banglore) = Total cost (Delhi) at Q1
15,00,000 + 4Q1= 10,00,000 + 6Q1
Q1= 5,00,000/2= 2,50,000 units

Further, the range of output is calculated to determine each location’s lowest

total costs:
Let’s say Q=0, then
Total cost (Delhi) = 10,00,000
Total cost (Banglore)= 15,00,000

5. Center of Gravity Method

A mathematical method which is utilized to find a distribution center’s
location aiming at minimizing distributions cost is termed as the “center of
gravity method”. This method considers market location, the shipping cost of
products, and the volume of products delivered to markets, etc. in order to find
out the most appropriate location for a distribution setup.
In other words, the center of gravity is termed as an average location where the
weighted distance between the warehouse and its distribution centers is
minimized. The weighted distance is determined by the supply or consumption of
the number of tones.

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Cost considerations are the prime factor on which the center of gravity
method is based. Managers can balance costs and objectives related to the service
by using this method. This methodology can be utilized in the following
circumstances:
 In case of high production rates
 The huge weights and volume of materials that are being shifted
 The main criteria for product distribution of material gathering from various
suppliers are the transportation cost
 The time that is consumed in receiving material from vendors or delivering
the goods to customers is crucial.
The below table shows the supply of tonnages from five different locations to a
specific plant:

Now, we have to first locate the above five locations in a graph and for
this, the value of X and Y coordinates needs to be determined. Further, the
center of gravity point (G) will be located. While calculating the X and Y
coordinates, the minimum cost should be obtained.
The formula for calculating X and Y is as under:

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So, according to the above formula, calculations of the above terms will be as
under:

PRELIMINARY REGISTRATION WITH THE STATE DIRECTOR OF

INDUSTRIES
Definitions of Micro, Small & Medium Enterprises are defined in accordance
with the provision of Micro, Small & Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME). Small
Scale and ancillary units (i.e. undertaking with investment in plant and
machinery of less than Rs. 10 million) should seek registration with the Director
of Industries of the concerned State Government.
The main purpose of registration of SSI or MSME is to maintain statistics
and to maintain a note of such units for providing support and incentives for

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these companies. States have generally adopted a uniform registration method

for registering these companies but since this is a State list subject and they
use the registration to implement their own scheme, so it is possible that in
some states have slight modification from the general procedure provided below
and some states may have a “SIDO registration scheme” and a “state
registration scheme”.
In the registration of SSI/MSME there are two types of certificates
provided by the authorities, initially provisional registration certificate is given to
the companies which is valid for five years. It is given for pre-operative period
and after that a permanent registration certificate is given in perpetuity.
The registration for a medium enterprise which is engaged in manufacturing is
necessary to be registered for other enterprises registration is optional.

Procedure for MSME Registration

Eligibility for MSME Registration
All Micro & Small Enterprises which are registered with the Director of
Industries (DI)/District Industries Centre (DIC) as manufacturing/service
enterprises or having Acknowledgement of Entrepreneurs Memorandum (EM
Part-II) are eligible for registration with NSIC under its Single Point
Registration Scheme (SPRS).
Micro & Small Enterprises who have already commenced their commercial
production but not completed one year of existence. The Provisional Registration
Certificate can be issued to such Micro & Small Enterprises under Single Point
Registration scheme with monitorylimit, minimum amount of money to be
invested, of Rs. 5 Lacs which shall be valid for the period of one year only from
the date of issue after levying the registration fee and obtaining the requisite
documents.

How to apply:
Micro and Small enterprises could be applied through online application that is
provided by the prescribed state website(State website’s of thou are applying
for registration) respective state in which or by submitting the application form

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in duplicate which is to be submitted the concerned Zonal/Branch Office of NSIC

located nearest to the unit.

Procedure:
Step 1: Provisional Small Scale Industry (SSI) Registration
To obtain SSI registration you must apply for provisional SSI registration
certificate. This certificate is given when the unit is in pre-operative stage and
helps SSI unit obtain term loans and working capital. This license is given for five
years.
One could apply for this certificate online through the state website or by
applying in the concerned zonal department.
Important Documents for Provisional SSI registration:
 Three passport size photographs of proprietors/partners/directors, as
the case may be.
 Photocopy of the partnership deed in case of a partnership unit. It is
not necessary that the partnership should be registered under the
Partnership Act.
 Copy of the Memorandum and Articles of Association in case of Private
Company along with a certificate of incorporation. Copy of the
resolution of the company authorising one of the Directors of the
company to sign the application form and also appear for the interview.
 Proof of legal possession i.e. rent receipt, NOC from the landlord with
proof of ownership, the power load authorised by the connection holder
to the applicant
 Provisional Registration would be allowed in approved Industrial areas
only after the Unit has obtained consent to establish from Delhi
Pollution Control Committee
 Some of the documents may differ because each state has different
requirements for documents. Above given documents are minimum
required documents that are to be submitted

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Benefits of Provisional SSI registration

 Material for construction of factory building : The material which is
needed for construction of the factory or building would be available to
the factory at subsidized rates from government
 Apply for Municipal Corporation License & power connection. With the
provisional registration the company would be able to get all the
clearances from the concerned authorities.
Step 2: Start the Business
The next step towards having a permanent license is to start the business with
SSI certificate. The owner should start the production in the factory so that
permanent license could be given.
Step 3: Apply for Permanent SSI registration
After you have started the business you should apply for permanent SSI
registration. This could be done by applying online through state website or
through the Zonal office or district office of the department.
Requirements for applying PRC(Permanent Registration Certificate)
 You may apply for the PRC without an industrial license in case your
unit is listed in Schedule-III of the Industrial Licensing Exemption
Notification. Other units must first acquire an industrial license.
 The unit should have obtained all clearances from the pollution control
board, drug control board etc.
 The unit should not violate any locational restriction
 The original value of plant including machinery should be within
prescribed limits for which you are applying.
 The unit should not be a subsidiary, owned or controlled by another
industrial undertaking.
Documents which are to be submitted for applying in
 Proof of ownership of premises i.e. allotment letter/possession
letter/lease Deed/property tax receipt. If the unit has a municipal
corporation license in its own name or in the name of its proprietor or
one of the Partner/Directors as the case may be, then no other proof
of legal possession is required.

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 In case premises are arranged on rental basis, unit should submit proof
of Legal possession i.e. a rent receipt and/or NOC from the landlord
supported by the proof of land lord’s ownership. For this purpose rent
receipt/rent agreement with GPA (General Power of Attorney) is also
accepted provided the GPA is appointed by the owner/lessee through a
Regd. deed.
 One photo copy of sale bill of each end product applied for.
 One photo copy of purchase bill of each raw material.
 Copy of partnership deed in case of partnership unit (this need not be
registered.)
 Copy of Memorandum of Articles of Association with certificate of
incorporation in case of private limited company (in case of any change
of Directors subsequently, copy of resolution and intimation in form
No.32)along with copy of resolution authorising one of the directors to
sign the application for grant of permanent SSI registration.
 Copy of the industrial license from Govt. of India in case the end
products require such license under Industrial Development and
Regulation Act.1951.
 An affidavit on Rs.10/- Non judicial Stamp Paper duly attested by
Notary Public affixed with proper notarial Stamp giving the status of
the unit, machinery installed, power requirement etc. as per the
prescribed format
 Purchase bill of machinery installed.
 Photo copy of valid consent letter from pollution control committee of
that state.
Benefits for having a permanent SSI registration
 Tax Benefits: Depending on your business, you may enjoyExcise
Exemption Scheme as well as exemption from certain Direct Taxes in
the initial years of your business.
 Availability of raw material depending on existing policy: Raw material
for production would be given by the government in the initial years at
subsidized rates.

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 Benefits from Banks: All banks and other financial institutions recognise
MSMEs and have created special schemes for them. This usually includes
priority sector lending, which means that the likelihood of your business
being sanctioned a loan is high, and lower bank interest rates. There
may also be preferential treatment in case of delay in repayment.
 Benefits from State Governments: Most states offer those who’ve
registered under the MSMED Act subsidies on power, taxes and entry
to state-run industrial estates. In particular, there is a sales tax
exemption in most states and purchase preference on goods p
Time taken for SSI or MSME registration ranges between 5 to 20 days
depending on the state in which the industry is located in.

Agencies Promote SME Development:-

Institutions set up by Central Government

1. Small industries development organization (SIDO)

SIDO was established in October 1973 now under Ministry of Trade, Industry
and Marketing. SIDO is an apex body at Central level for formulating policy for
the development of Small Scale Industries in the country, headed by the
Additional Secretary & Development Commissioner (Small Scale Industries) under
Ministry of Small Scale Industries Govt. of India. SIDO is playing a very
constructive role for strengthening this vital sector, which has proved to be one
of the strong pillars of the economy of the country. SIDO also provides
extended support through Comprehensive plan for promotion of rural
entrepreneurship.

2. Management development Institute (MDI)

MDI is located at Gurgaon(Haryana).It was established in 1973 and is sponsored
by Industrial Finance Corporation Of India, with objectives of improving
managerial effectiveness in the industry. It conducts management development
programs in various fields. In also includes the programmes for the officers of
IAS,IES,BHEL,ONGC and many other leading PSU’s.
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3. Entrepreneurship development institute of India (EDI)

Entrepreneurship Development Institute of India (EDI), an autonomous and not-
for-profit institute, set up in 1983, is sponsored by apex financial institutions –
the IDBI Bank Ltd., IFCI Ltd., ICICI Bank Ltd. and the State Bank of India
(SBI). EDI has helped set up twelve state-level exclusive entrepreneurship
development centres and institutes. One of the satisfying achievements,
however, was taking entrepreneurship to a large number of schools, colleges,
science and technology institutions and management schools in several states by
including entrepreneurship inputs in their curricula. In the international arena,
efforts to develop entrepreneurship by way of sharing resources and organizing
training programmes, have helped EDI earn accolades and support from the World
Bank, Commonwealth Secretariat, UNIDO, ILO, British Council, Ford Foundation,
European Union, ASEAN Secretariat and several other renowned agencies. EDI
has also set up Entrepreneurship Development Centre at Cambodia, Lao PDR,
Myanmar and Vietnam and is in the process of setting up such centers at
Uzbekistan and five African countries.

4. All India Small Scale Industries Board(AISSIB)

The Small Scale Industries Board (SSI Board) is the apex advisory body
constituted to render advise to the Government on all issues pertaining to the
small scale sector. It determines the policies and programmes for the
development of small industries with a Central Government Minister as its
president and the representatives of various organization i.e. Central
Government, State Government, National Small Industries Corporations, State
Financial Corporation, Reserve Bank of India, State Bank of India, Indian Small
Industries Board, Non-government members such as Public Service
Commission,Trade and Industries Members.

5. National Institution of Entrepreneurship and Small Business

Development(NIESBUD),New Delhi
It was established in 1983 by the Government of India. It is an apex body to
supervise the activities of various agencies in the entrepreneurial development

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programmes. It is a society under Government of India Society Act of 1860.The

major activities of institute are:
i) To make effective strategies and methods
ii) To standardize model syllabus for training
iii) To develop training aids, tools and manuals
iv) To conduct workshops, seminars and conferences.
v) To evaluate the benefits of EDPs and promote the process of Entrepreneurial
Development.
vi) To help support government and other agencies in executing entrepreneur
development programmes.
vii) To undertake research and development in the field of EDPs.

6. National Institute of Small Industries Extension Training

It was established in 1960 with its headquarters at Hyderabad. The main
objectives of national Institute of Small Industries Extension Training are:
i) Directing and Coordinating syllabi for training of small entrepreneurs.
ii) Advising managerial and technical aspects.
iii) Organizing seminars for small entrepreneurs and managers.
iv) Providing services regarding research and documentation.

7. Risk Capital and Technology Finance Corporation Ltd.(RCTFC)

RCTFC was established in 1988 with an authorized capital of 15 crores rupees.
The main objectives of RCTFC are provision of risk capital for the extension and
expansion of entrepreneurial development and venture capital for the projects
with high techniques for technology development and transfer.

8. Khadi and village industries Commission(KVIC)

Khadi and Village Industries Commission established by an Act of Parliament in
1956.It is a service organization engaged in promotion and development of Khadi
and Village Industries in rural areas. Its main objectives are:
i) Providing employment in rural areas.
ii) Improvement of skills
iii) Rural Industrialization

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iv) Transfer of Technology

v) Building strong rural community base and self-reliance among rural people.

9. Indian Institute of Entrepreneurship (IIE)

It was established by the Department of Small Scale Industries and Agro and
Rural Industries in 1953.It is autonomous organization with its headquarters at
Guwahati. Its main objective is to undertake research, training and consultancy
activities in the field of small industry and entrepreneurship.

10. National Alliance of Young Entrepreneurs(NAYE)

It has sponsored number of entrepreneurial development scheme in collaboration
with various public sector banks. The main objective of the scheme is to
encourage young entrepreneurs to explore investment and self –employment
opportunities .It arranges for their training and assists them in procuring
necessary finance. In 1975 NAYE also set up a Women’s Wing to make women
self-reliant and to raise their status.

11. Institute for Entrepreneurial Development (IED)

It was set up by the IDBI in association with other financial institutions, public
sector banks and the State Governments. The IEDs was set up to fulfil the
entrepreneurial development needs of the industrially backward States in the
country.

12. Technical Consultancy Organisation (TCOs)

A network of TCOs has been established by All India Financial Institutions and
State Government throughout the country. These organizations have been set
up to provide comprehensive package of services to entrepreneurs in general and
to small business entrepreneurs in particular. Their main functions include the
following:
i) Identifying potential industrial project.
ii) Preparing project reports, feasibility reports and pre-investment status.
iii. Identifying potential entrepreneurs.
Providing technical and administrative support.

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Conducting techno-economic studies of the projects.

Conducting market research and surveys.
Rendering advice to set up laboratories and design centre.

13. Public Sector Banks.

Public sector banks in association with NAYE have been conducting
entrepreneurial development programmes. The main thrust of these banks has
been to identify potential entrepreneurs in rural and backward areas. For
example Punjab National Bank started entrepreneurial assistance programme in
March 1977 in the States of West Bengal and Bihar. Similarly, Bank of India
started entrepreneurial assistance programme since August 1972 in the States of
Punjab, Rajasthan , Himachal Pradesh, J& k and the Union Territories of
Chandigarh and Delhi.
The important Forms of entrepreneurial assistance are:
i) Identifying potential entrepreneurs
ii) Identifying viable projects.
iii) Assisting in preparation of project profiles
iv) Helping in project evaluation.
v) Arranging practical training.
vi) Financing the projects.

B) Institutions set up at State Level

There are a number of institutions establishes at state level for organizing,
developing, developing, assisting and making successful entrepreneurial
development programmes. Prominent among these are:

1) Small Industries Service Institute (SISI):

Small Industries Service Institute is a national level organisation founded by
Central government. At the state level, SISI functions under the Director
assisted by Deputy Directors. Total 28 SISIs and 30 divisions in State capitals
and other towns in India. The small industries service institutes (SISI’s) are
established in every State to provide consultation and training to potential

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entrepreneurs. SISI conducts EDP aiming educated jobless youth, ex-service staffs
etc. for period of weeks.

2) District Industrial Centers (DIC):

Governments- both Central and State, attempted for entrepreneurship
development in past, but actual success have been far below the expectations.
Also centre of attention of industrial development was primarily on large cities
and state capitals consequently ignored the district areas. In addition, variety of
institutions involved in small industries development and complex systems and
procedures made job of encouraging industrial units an uphill task for small
entrepreneurs. Hence, it was felt essential to establish a development agency,
which could cater all services and facilities to village and small industries under
one roof. Accordingly, the DICs were established in May 1978 in order to satisfy
the needs of small units. Each district has a DIC at its headquarters. The main
function of DIC is to act as a chief co-ordinator or multifunctional agency in
respect of different government epartments and other agencies. The potential
entrepreneur would get all help from DIC for setting up and running a business
unit in rural areas. DIC was not established in metropolitan cities like Delhi,
Mumbai, Calcutta and Chennai.

3) Maharashtra Small Scale Industries Development Corporation (MSSIDC):

The Maharashtra Small Scale Industries Development Corporation Ltd., generally
known as MSSIDC, was founded on October 19, 1962 with a vision to give
strength to progress of Small Scale Industries in Maharashtra State. The
objective of MSSIDC is to help, guidance, and support, funding, encourage the
interests of Small Industries. The Corporation renders help to near about
30000 SSI units in the Maharashtra. MSSIDC is top most Corporation in India
concerning to small scale industries. MSSIDC offers comprehensive backing right
from how to establish a SSI unit to selling goods at marketplace.

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