Page 120 - DECO405_MANAGERIAL_ECONOMICS

Unit 7: Laws of Production

repetitive task rather than many different tasks. As a result labour productivity increases. Notes
In addition, a larger scale of operation may permit the use of more productive specialised
machinery, which was not practically possible on a lower scale of operation.

Cause of Decreasing Returns to Scale
The most common causes are “diminishing returns to management”. The management is
responsible for the coordination of the activities of the various sections of the firm. Even
when authority is given to individual managers (production manager, sales manager,
etc.) the final decisions have to be taken by the board of directors. As the output grows, top
management becomes finally overburdened and hence less efficient in its role as
coordinator and ultimate decision-maker. Although advances in management science
have developed endless management techniques, it is still a commonly observed fact that
as firms grow beyond the appropriate optimal, management diseconomies come in. These
may result because as the scale of operations increases, communication difficulties make
it more and more difficult to run the business effectively.
Another cause for decreasing returns may be found in the exhaustible natural resources:
doubling the fishing fleet may not lead to a doubling of the catch of fish; or doubling the
plant in mining or an oil extraction field may not lead to a doubling of output.

Caselet Apache Aims to Double Adidas Shoe Production

pache Footwear India, the manufacturer for Adidas shoes in India, aims to double
production of shoes from its special economic zone (SEZ) here to 8 lakh pairs a
Amonth by 2014.

At present, about four lakh pair of shoes are produced every month from the SEZ, located
in Mambattu village of Nellore district.
"We have a target to double the production of shoes to 8 lakh pairs per month by 2014,"
Apache Footwear General Manager Phillip Chen said.
The company's SEZ, spread over 314 acres, recorded a turnover of 240 crore in 2010 and
provides employment to about 6,300 people.

The company also plans to set up a development centre and supply centre in the state.
These centres would help reduce the time taken for production of shoes.
"We are expecting that the turnover will increase to 300 crore this year," Chen said,
adding that a proposed supplier park will help the firm bring down the lead time for
production from two months at present to just five days.
Apache exports its shoes mainly to Europe, the US and Russia.

Chen said the firm is also trying to convince Adidas to buy raw material from India. "We
are importing the entire raw material mainly from China, Vietnam and Indonesia," he
added.
Germany-based Adidas is a leading sports apparel and equipment manufacturer.
Source: www.business-standard.com

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