The action of making or manufacturing from the components or raw materials or the process of being so manufactured.
The processes and methods used to transform tangible inputs (raw materials, semi-finished goods) and intangible inputs (ideas. Information, knowledge) into goods and services.
The production of goods for use in the home country. It provides output that is enough to satisfy domestic needs and wants. There is no excess available for export. However, production is enough to supply local demand.
SMALL SCALE PRODUCTION
Small scale production refers to the production of a commodity with a small plant size firm. It requires less amount of capital and is labor intensive in nature. The investment in machinery is lower when compared to large scale units. Small scale units are appropriate if:
the business produces non-standardized products
the market size is limited or
products have to be customized.
Small scale production enjoys certain unique advantages and disadvantages. It is a major contributor of industrial output, exports, employment and national income in many developing countries.
Advantages of Small Scale Production:
1. Close Supervision:
The small producer can himself supervise the minutest details of the business. Nobody is allowed to spoil machinery or waste materials. The master’s eye is everywhere. There can be no fraud or idleness. He will exercise utmost economy to achieve the aim of maximum profits.
2. Nature of Demand:
The small producer has an advantage over the large producer, when the demand is either small or is constantly changing. He has thus a sphere of his own where he has an advantage over the large scale producer.
3. More Employment:
In the face of large scale unemployment existing in the country, the development of cottage and small scale industries is of great help to create more employment opportunities. Small scale production is more labour-intensive i.e., there is more use of labour than machinery. Thus, many unemployed persons are employed in the newly developed small scale industries.
4. Need of small Capital:
The small scale production can be started with small capital. Where there is shortage of capital, the small scale industries are of great advantage for the development of industries.
5. Direct Relation between the Workers and the Employers:
In small scale production less workers are employed. Therefore, a close relationship exists between the employer and the workers. Because of this close relationship, the employer can look after the well-being of his employees and employees, too, consider their work as their own and the work goes on smoothly without any disputes between the two parties.
6. Direct Relation between the Customers and the Producers:
The small scale producers generally cater to the local demand. Hence, they remain in touch with their customers. A small producer personally knows his customers. Therefore, he can produce goods according to the taste and fashion of each individual customer.
7. Easy Management:
The management of small business is easy and economical. Simple accounts and a few persons can manage the job well.
8. Freedom of Work:
There is complete freedom of work in a small business organisation. Workers are more or less self-sufficient. They are not dependent on the capitalists and carry on their jobs freely.
9. External Economies:
The small scale production secures all kinds of external economies, which are available to large units also. These economies are: better transport, electricity, and communication facilities; banking and insurance services; technical workers, etc.
10. No Evils of Large Scale Production:
The small scale production cannot fall victim to the evils of the large scale production i.e., evils of the factory system, overcrowding, etc.
11. Other Advantages:
In the small scale production, there are some important advantages over the large scale
(i) Whenever demand changes, the supply can be adjusted accordingly.
(ii) There are less possibilities of strike and lockouts and no moral degradation of the workers is feared.
(iii) There are no dangers of monopolistic institutions.
Disadvantages of small scale production
Small scale production suffers from the following disadvantages:
1. Outdated technology: Small scale producers run their business with limited capital. They do not have sufficient funds to invest in latest technology. Technology used in many small scale enterprises is outdated.
2. Low levels of mechanization: In small scale units, the use of modern machinery is very less. They continue to depend on their labor force. They do not have sufficient funds to invest in modern machinery.
3. Low innovation capacity: A small scale producer has limited funds. He cannot afford to invest money on research and development. Therefore the innovation capacity of small units is very less. They are not able to come out with new products or modify their products according to current requirements.
4. Less scope for division of labor: Division of labor can be practiced when there are high levels of mechanization and more workers. In small scale units the level of mechanization is less and therefore division of labor cannot be implemented. Small scale units are denied the advantages of division of labor such as high productivity, better quality and reduced time for production.
5. High overhead charges: The number of units produced is less. Fixed costs are spread over a limited number of units. Therefore the overhead cost per unit is high.
6. Difficult to survive during depression: A large scale enterprise would be able to survive in adverse economic conditions. A small scale entrepreneur would find it very difficult to survive during periods of recession and depression. Many small scale units face closure during adverse economic situations.
7. Difficulty of finance: A small scale entrepreneur faces great difficulty in sourcing the required finance. Banks are reluctant to fund small enterprises because of the high rates of default and failure. Investors may not be interested to invest in small firms.
8. Difficulty of attracting talent: Small scale enterprises find it difficult to attract talent. They do not have the financial capacity to pay high levels of salary and provide other benefits. Therefore they are not able to attract talented employees.
9. Inability to compete: Small scale units are not able to compete with large scale units in terms of costs or quality. Large scale units use the latest technology, employ skilled workers and enjoy the advantages of specialization. These advantages are not available to small scale units.
10. Wastage of by-products: Since scale of production is small, the quantity of by-products generated is less. Therefore they are not able to use their by-products in a productive manner.
11. High cost of purchase: Small scale units buy raw materials and other components in small quantities. Therefore they are not able to enjoy quantity discounts. The credit period allowed to them is also less. Therefore their cost of purchases is higher.