Small-Scale Manufacture of Footwear (ILO - WEP, 1982, 228 p.) CHAPTER IV. FRAMEWORK FOR PROJECT EVALUATION (introduction...) I. Factors influencing the choice of technology II. Evaluation methodology (introduction...) II.1 Estimation of cost items II.2 Estimation of total annual costs and of gross profits II.3 Sources of technical and economic data II.4 Hypothetical examples of the application of the evaluation methodology III. Evaluation of technologies adopted by established footwear factories in developing countries (introduction...) III.1 Alternative technologies for type 1 footwear: A Ghanaian case study III.2 Comparison of alternative types of footwear at fixed levels of scale: Ethiopian case study III.3 Effects of scale on manufacturing technology for type 1 footwear: Ghanaian and Ethiopian case studies IV. Concluding remarks on the choice of technology and specialisation IV.1 Need for preliminary marketing investigations IV.2 Specialisation and organisation of production

Small-Scale Manufacture of Footwear (ILO - WEP, 1982, 228 p.)

CHAPTER IV. FRAMEWORK FOR PROJECT EVALUATION

The previous two chapters described alternative techniques for producing various types of shoes and sandals at four different scales of production. They provided, in addition, detailed technical data on labour, equipment and materials inputs needed for each type of footwear and scale of production. The purpose of this chapter is to show how the above data may be used to estimate the feasibility of various footwear manufacturing projects and/or to identify technologies suitable for local conditions and circumstances.

I. Factors influencing the choice of technology

The choice of footwear manufacturing technologies is a function of a number of factors. The most important ones are briefly described in this section. Howe, ver, it is first important to better define the expression "footwear manufacturing technology" in the context of this technical memorandum.

It may be recalled that, depending on the type of footwear, the overall manufacturing process included a number of process stages, this number varying from one stage for moulded plastic sandals to seven stages for more intricate footwear. Furthermore, each stage is subdivided into a number of operations. For example, for type 1 footwear, the seven process stages include a total of 31 operations. Finally, each operation may be carried out with one out of a number of available techniques. A footwear manufacturing technology may therefore be defined as any particular combination of techniques needed to produce a given type of footwear.

Given the total number of operations underlying the overall manufacturing process (e.g. 31 operations as for type 1 footwear) and considering that two or more techniques may be adopted for each operation, the total number of technologies (or combination of techniques) available for each type of footwear will, by necessity, be very large (e.g. thousands or millions of technologies depending on the type of footwear). Obviously, it would not be feasible to evaluate all these technologies in order to identify the one which is most suitable to local conditions and circumstances. Nor would this be necessary for the following reasons.

Firstly, the stages of production and, to a large extent the operations, are not interdependent. In other words, one operation within a given stage should not, generally, affect the choice of technique for another operation within the same stage or subsequent stages. Thus, one may identify the appropriate technique for each operation and evaluate only those technologies which combine these techniques in the manufacture of a given type of footwear. The number of technologies to be evaluated will generally be a function of the number of types of footwear and/or the scales of production which are considered.

Secondly, within a given operation, one need not evaluate all available techniques. In many cases, some of the available techniques may never be appropriate at given scales of production. For example, a lining stamping machine may never be justified for scales of production of 8 or 40 pairs per 8-hours day. Thus, the choice of technique for a given operation should not, in many cases, require extensive evaluations.

As stated earlier, the choice of footwear manufacturing technology is a function of a number of factors. The most important ones include the following:

- the type of footwear,
- the adopted quality standard,
- the scale of production,
- the prices of the factors of production (e.g. wages, interest on capital, materials) and,
- the retail price of the output.

The type of evaluation needed to identify the most appropriate production technology will depend on whether the choice of footwear type and quality and/ or that of scale of production are fixed or not. Depending on the latter, the evaluation may take one of the following forms:

(i) Partial evaluation in cases where the footwear type and quality and the scale of production are pre-determined. In some cases, the market conditions and the financial means at the disposal of the shoe manufacturer are such that both the footwear type and quality and the scale of production are pre-determined. Under these circumstances, a number of cost items do not vary with the choice of technologies. These are: materials costs per unit of output, working capital, management costs and building costs.¹ Furthermore, revenues from the sale of the output are the same for all alternative technologies since these yield the same type of footwear and quality standard. Consequently, these costs and revenues need not be taken into consideration when the purpose of the evaluation is limited to the identification of the most appropriate footwear manufacturing technology.

(ii) Full evaluation of alternative footwear manufacturing techniques. Whenever the type and quality of footwear and/or the scale of production are not pre-determined by market or financial constraints, a full evaluation of alternative technologies should be undertaken with a view to identifying the one which is most suitable to local conditions and circumstances. Such an evaluation takes into account all costs and revenues since these² will generally vary with the adopted technology.

¹ Small differences in building costs may be experienced between two alternative technologies. However, these differences should, in general, be negligible.

² Materials costs per unit of output should vary with the adopted scale of production even if the type and quality of footwear are pre-determined since the wholesale price of materials is generally function of the quantity sold, and therefore of the scale of production.

The following section will describe an evaluation framework for the evaluation of alternative footwear manufacturing technologies.

II. Evaluation methodology

A number of evaluation methodologies may be used in the process of comparing alternative technologies. The one presented here should be easily applied by potential shoe manufacturers or project evaluators, and should yield reliable estimates of the profitability of alternative technologies.

The same methodology may be applied whether one is intending to carry out a partial or full evaluation of alternative projects. The only difference between these two evaluations concerns the types of costs and revenues which should be taken into consideration.

The purpose of the evaluation exercise is to identify the technology which minimises costs per unit of output (partial evaluation) or which maximises profits (full evaluation) depending on whether the scale of production and the type/quality of footwear are predetermined or not. It will now be shown how costs and revenues may be estimated to achieve the above goals.

II.1 Estimation of cost items

The estimation procedure used in this memorandum yields cost estimates for a typical year in a project life. It differs to some extent from a similar estimation procedure which yields the present value of costs incurred over the project life. However, it should be reliable enough for our purpose (i.e. to identify the most appropriate footwear manufacture technology). Total production costs include the following cost items:

- Equipment costs (depreciation + interest)
- Interest on working capital
- Labour costs (production workers)
- Management costs
- Materials costs
- Building costs (rental value)
- Energy costs, and
- Maintenance costs (of building, equipment).

It will now be shown how the above cost items may be estimated.

(a) Equipment costs

The cost of equipment may be subdivided into two items: the interest paid on invested capital and equipment depreciation cost. These two cost items are function of the equipment purchase price (K), the useful life of the equipment (n years), the prevailing interest rate (r), and the salvage value of the equipment at the end of the project (S).¹

¹ In equation form, the annual cost of equipment (D) is equal to:

If the salvage value of equipment is assumed to be equal to zero, the annual equipment cost may be easily obtained with the help of Appen. V by dividing the purchase price of equipment by the present worth of the annuity factor (F) for the given interest rate and the useful life of equipment. Let us, for example, assume that the purchase price of a piece of equipment is 1,000 dollars, that its useful life is 15 years and that the interest rate is 10%. Then the annual equipment cost is:

where the number 7 606 corresponds to the present worth of the annuity factor for a 10% interest rate and a useful life of 15 years (see in App. V the number corresponding to the intersection of the 10% column with the 15 years row).

In many cases, the salvage value may be substantial and may lower significantly the annual equipment cost. In this case, one should use the following formulation:

Let us assume that K and F have the same value as in the above example and that the salvage value (S) is equal to 10% of K or $100. Then we obtain the following annual cost of equipment:

The value of (l+r)ⁿ may be easily calculated for given values of r and n or may be obtained from available financial tables.

(b) Interest on working capital

Depending on the scale of production and the local conditions which determine the supply of various materials inputs (e.g. whether materials are imported or produced locally), a footwear manufacturer may need to keep a certain inventory of materials inputs (e.g. a one month or three months supplies) in order to avoid discontinuing production while waiting for new shipments of materials. The cost of these inventories is either paid out of the manufacturer's own funds or through a bank loan. In either case, th cost of maintaining capital idle is equal to the interest accrued over the average inventory period.

The same reasoning applies to the value of sold output whenever payments are not made on the day of the sale. In many countries, payments are made one to three months after the sale date, and the manufacturer should thus take into account the interest (on the value of the sale) paid or foregone during the one to three months period.

(c) Building costs

Annual building costs may be estimated in the same way as in the case of equipment costs, taking into consideration the cost of the infrastructure and that of the land. Alternatively, a simpler approach may be used by assuming annual building costs equal to the annual rent which would be paid for a similar building located in the project area.

(d) Management costs

Management costs should include the salaries of the plant manager (in some cases, the owner of the factory) accountant, marketing agents, maintenance staff, etc. (i.e. the staff which is not directly involved in the production process).

(e) Estimation of variable costs

Variable costs include the wages paid to production workers, the cost of materials, energy costs and the maintenance cost of building and equipment. The last two cost items usually represent a very small fraction of total costs and may, in most cases, be neglected unless the plant is highly mechanised.

II.2 Estimation of total annual costs and of gross profits

Once the various annual cost items have been estimated, one may calculate the total annual cost associated with alternative footwear manufacturing technologies by simply adding the various cost items Annual revenues from the sale of the output may then be estimated for the given scale of production and type of footwear, taking into consideration the estimated unit retail price. Finally, gross profits associated with each alternative technology may be calculated by substracting the yearly total costs from the estimated yearly revenues.

The evaluation should be repeated for all relevant scales of production and types and quality of footwear, given market conditions and the financial means at the disposal of the footwear manufacturer. The adopted scale of production, manufacturing technology and type and quality of footwear should be those which maximise gross profits.

Alternatively, whenever a single type and quality of footwear and a single scale of production are being considered, one may limit the evaluation to the estimation of those annual costs which are a function of the adopted technology. The adopted technology should, in this case, be the one which minimizes production costs since annual revenues are the same for all technologies.

The following section will indicate how to obtain the necessary technical and economic data in order to apply the above evaluation procedure.

II.3 Sources of technical and economic data

(a) Sources of technical data

Technical data needed to evaluate alternative footwear manufacture technologies include the following: type and number of pieces of equipment, number of skilled-semi-skilled and unskilled labour, energy inputs, factory floor plan, materials input per unit of output, and maintenance needs and frequency. This data is needed for various types and qualities of footwear' and scales of production whenever the latter are not predetermined, and for alternative production techniques available for each operation.

Chapters II and III provide the above technical data for six types of footwear and four scales of production. However, as already stated in Chapter I, this data does not cover all possible combinations of techniques or technologies. Instead, the authors have selected those technologies which, on the basis of data collected from a number of developing and developed countries, seem particularly suitable for conditions prevailing in developing countries. In other words, the technologies suggested in chapters II and III for each particular type of footwear/scale of production may be considered least-cost technologies.

This being said, there may be some special circumstances whereby these technologies may not prove to be the most cost-effective. Thus, the reader may wish to investigate other combinations of techniques on the basis of information contained in Chapters II and III or other available technical publications.

The types of footwear and the scales of production described in the previous two chapters do not either cover all possible alternatives. Obviously, no publication could cover the thousands of combinations of footwear type/scale of production. However, those covered in these two chapters should provide a sufficient basis for estimating the equipment and labour requirements for other types of footwear and/or scales of production. The same remark applies to the estimation of the required floor area for scales of production/technologies not specifically covered in Chapters II and III.

Table I.4 in Chapter I, describes the materials needed for each type of footwear. As already stated, in this chapter, the amount of materials per unit of output is the same for all technologies and scales of production. The table does not provide estimates of the actual amounts of materials needed for each type of footwear as these amounts are function of the exact shoe or sandal design, and footwear size. The reader should therefore estimate the average amount of materials per unit of output once a decision has been made on footwear design and sizes to be produced.

No information is provided on maintenance needs arid frequency for various pieces of equipment as such information is equipment-specific and may be easily obtained from equipment manufacturers. The same remark applies to energy inputs: information on the latter should also be obtained from equipment manufacturers or brochures which describe the equipment.

(b) Sources of economic data

Economic data needed to evaluate alternative footwear manufacture technologies include the following: prices of imported and local equipment, cost of buildings, unit price of various materials, wages for various types of labour, unit price of energy (mostly electricity) rental value of land, unit cost of packaging materials, prevailing interest rate (for the estimation of equipment depreciation cost and interest on working capital), estimated retail price of output, and income or corporate tax rates for a full evaluation of alternative projects.

Chapters II and III provide estimates of FOB (Free On Board) international prices for the pieces of equipment which may need to be imported. These are 1980 average international prices which could be different from the actual price which would eventually be paid once the equipment has been ordered. The reader wishing to obtain an estimate of the cost of imported equipment should use the following steps:

(i) Whenever possible, to obtain from local importers of equipment or from equipment manufacturers the actual FOB price of the equipment. If only an approximate estimate is needed, the FOB prices provided in Chapters II and III may be adjusted for inflation at, for example, a 10% rate starting from the 1980 prices,

(ii) To add to the FOB prices the shipping and insurance costs (to obtain the GIF price) and custom duties, if any. This information is country-specific and may be obtained from local importers or custom officials,

(iii) It is advisable to add to the cost of equipment that of spare parts which may be needed over a 3 to 5 years period in order to avoid the disruption of production for lack of spare parts.

Estimates of the prices of equipment which may be produced locally are also provided in the preceeding two chapters. However, these estimates are highly tentative, and the reader is urged to obtain more precise estimates from local workshops or engineering firms.

An estimate of the cost of buildings may be obtained from local contractors on the basis of the estimated floor plan.

Cost estimates for materials, wages, energy, etc., are country-specific and may be easily obtained from wholesalers of various materials, footwear manufacturers, etc.

An estimate of the retail price of the output should be based on the actual retail price of similar footwear either produced locally or imported.

II.4 Hypothetical examples of the application of the evaluation methodology

This section provides hypothetical examples of the application of the evaluation methodology described in section 1.2.2. The following section will provide real life examples from Ghana and Ethiopia.

The identification of the least-cost technique at the operation level may be illustrated by the following example in which two techniques are distinguished (see Table IV.1). The capital-intensive technique uses as equipment machine A having a total useful life of 20 years, and is used in combination with 9 full-time workers. The labour-intensive technique uses a less expensive and simpler machine B, having a useful life of 10 years (it must therefore be replaced for a second 10 years period, for a total project life of 20 years), and is used in combination with 15 full-time workers. The type and quality of footwear, and the scale of production (40 units per day, or 12,000 units per year based on 300 working days) are the same for both techniques. Therefore, all materials inputs and overheads may be assumed to be the same for both projects and may therefore be omitted from the analysis.

Similarly, the expected revenues from the sale of the output need not be estimated since the type and quality of footwear are the same for both techniques.

The pieces of equipment and annual wages are provided in units of account as follows:

- Machine A: 1,000 units
- Machine B: 300 units
- Annual wage: 10 units (the same for both techniques)

Table IV.1 Selection of a least-cost technique for an operation handling 40 pairs per day

Cost item		Technique
		Capital-intensive A	Labour-intensive B
1. Equipment purchase price		1,000 (20 years life)	300 (10 years life)
2. Labour		9 workers at 10 units per year	15 workers at 10 units per year
3. Annual cost method		117.45	48.82
	- Annual equipment costs
	- Annual labour costs	90	150
	- Total annual costs	207.45	198.82
	- Unit production cost	0.0172	0.0165
4. Present value method		1000	415.65
	- Present value of equipment
	- Present value of labour	766	1,277
	- Present value of total costs	1,766	1,692.65

The adopted interest rate is 10%, and the salvage value of equipment is assumed to be equal to zero.

Two variants of the evaluation methodology described in section 1.2 will be used in this example: one yielding an estimate of annual costs for a typical year in the project life, and one yielding the present value of costs accruing over the project life (20 years). It will be shown that both variants yield the same conclusion with respect to the cost-effectiveness of the two production techniques.

(a) Estimation of annual cost

- Annual cost of equipment; Using the relationship shown in section I.2 () where D is the annual cost of equipment, we obtain:

where 8.514 = present worth of the annuity factor corresponding to a 10% interest rate and 20 years period.

Similarly, the annual cost for machine B is equal to:

where 6.145 = the present with of the annuity factor for 10% and 10 years period.

- Annual labour costs These are equal to:

9 x 10 = 90 units for technology A, and
15 x 10 = 150 units for technology B

- Annual total costs These are equal to:

117.45 + 90 = 207.45 units for technology A
48.82 +150 = 198.82 units for technology B

- Cost per unit of output: Considering that both technologies yield 12,000 units of footwear per year, the cost per unit of output is equal to 0.0172 monetary units for technology A and to 0.0165 monetary units for technology B. In this case, technology B is the least-cost technology.

(b) Estimation of the present value of costs

In this second variant of the methodology described in section 1.2, all costs incurred during the project life are discounted to the present at the appropriate discount rate (in this case 10%)

- Present value of equipment costs

For Technology A, the present value of equipment cost is equal to the purchase price of equipment, that is 1,000 units.

For Technology B, the present value of equipment is equal to:

The second disbursement (300) which takes place 10 years after the start of the project is discounted to the present at a 10% discount rate. Financial tables are available to facilitate this kind of calculations.

- Present value of labour costs

In order to estimate the present value of labour one must discount the stream of labour costs over the project life. This may be easily accomplished with the help of Appendix V by multiplying the annual labour cost by the relevant present worth of the annuity factor F. In this case, F is equal to 8.514, corresponding to a 10% discount rate and a 20 years period.

The present value of labour costs for Technology A is equal to:

90 X 8.514 = 766 units, and for Technology B:
150 X 8.514 = 1,277 units.

- Present value of total costs

The present value of total costs is equal to the sum of the present value of equipment costs and labour costs.

The present value of total costs for Technology A is equal to:

1,000 + 766 = 1,766 units

while that of Technology B is equal to:

415.65 + 1,277 = 1,692 units.

Thus, the present value method yields the same conclusion as that yielded by the annual cost method (i.e. technology B is the least-cost technology).

The above example constitutes a partial evaluation of alternative technologies whereby costs and benefits common to the two technologies are not taken into consideration. In cases where either the scale of production and/or the footwear type and quality are not predetermined, the same approach may be used for the full evaluation of projects. The annual cost method may be easier to apply in this case since most of the cost items (e.g. materials, labour, maintenance and energy costs/and the rental value of premises) do not constitute investment costs and may be used as such without further calculations. The latter are needed for the estimation of annual equipment cost and interest cost on working capital only. Should the annual cost method be applied, the most appropriate technology/ project would be the one which maximises the difference between the annual revenues from sale of the output and total annual costs.

III. Evaluation of technologies adopted by established footwear factories in developing countries

This section evaluates a number of footwear projects in Ghana and Ethiopia. The evaluations relate to various combinations of scales of production, technologies, and footwear types. The conclusions yielded by these evaluations are country-specific and time-specific (Ghana and Ethiopia, 1972), and may not be generalised to all developing countries at the present time.

III.1 Alternative technologies for type 1 footwear: A Ghanaian case study

Chapter II contains an extensive description of manufacturing methods and equipment for type 1 footwear men's leather-upper, cement-lasted shoes with cemented-on unit soles. Being the standard method of construction of most types of footwear dealt with, the description is most detailed and includes most of the operations that can be meaningfully distinguished at the sub-process level. Particular attention will therefore be paid to technological alternatives to manufacture this type of shoe before discussing those of other types of footwear.

Following the methodological framework explained in the previous section, a least-cost technology as well as the most labour- and machine-intensive alternatives to manufacture 1,200 pairs per day of men's cemented-on, leather-upper shoes in a proposed Ghanaian shoe factory were evaluated. A complete description of the calculations is included in McBain (1977).

As shown in Table IV.2, annual production costs, fixed capital requirements and working capital are differentiated into (1) a local cost and foreign currency component, and (2) costs which are common to all technologies and those which vary with the technology adopted. The extent to which various cost items refer to locally produced or imported materials and equipment depends on the country concerned, in particular with regard to the availability and processing of hides and skins and the presence of a specialist machinery manufacturing sector, and project-specific circumstances. To obtain the local price of imported commodities, (country-specific) import duties must be added to the import price. Information on the extent to which costs vary with the technology adopted is derived from the technical data at the operations or production stage level. The actual valuation of cost items will depend on the prevailing system of local factor and commodity prices. Details of the supporting tables for production and investment are included in McBain (1977 , Appendix 1. Data and calculations for Bench Mark Factory Appraisals) The general methodology to estimate the various cost figures is treated in standard texts on feasibility studies such as the UNIDO Manual (1978).

A summary of the major characteristics of the most machine-intensive, most labour-intensive and least-cost technology to manufacture 1,200 pairs per day of type 1 footwear is presented in Table IV.5. The data confirm that differences in technology to manufacture type 1 footwear mainly refer to fixed capital requirements and the number and composition of direct production workers. Fixed capital per direct production worker in the most machine intensive case is almost three times as high as in the most labour-intensive case. Variations in fixed capital requirements itself are of a comparable magnitude. Although variations in labour requirements are less pronounced, the data suggest that the overall possibilities for technological choice are nevertheless substantial. The nature of capital-labour substitution appears to be such that capital substitutes to a larger extent for skilled than for semi-skilled and unskilled labour. The labour-intensive case not only entails a larger number of skilled workers, but its proportion in the total number of direct production workers increases as well.

Table IV.2 Annual total production costs at full capacity, year 10, Ghana, machine-intensive factory (¢ thousand)

Cost item		Origin			Total	Technology
		Imported	Duties	Local		Fixed	Variable
1. Direct materials		789	351	46	1,186	1,186
2. Electricity				1	1	1
3. Spares, tools, equipment		10	1		11		11
4. Direct production workers				54	54		54
	4.1 Skilled			27	27		27
	4.2 Semi-skilled			17	17		17
	4.3 Unskilled			10	10		10
Factory costs		799	352	101	1,252	1,187	65
5. Office overhead costs		2	2	25	29	29
6. Office and supervisory staff				70	70	70
Operating costs
7. Financial costs (interests)		801	354	196	1,351	1,286	65
8. Depreciation				22	22	3	19
Production costs		801	354	218	1,373	1,289	84
9. Interest on total initial capital at 10% (excluding item 7)				145	145	94	51
Total production costs		801	354	363	1,518	1,383	135

Note: Depreciation and interest on total capital are based on Tables IV.3 and IV.4. Cost estimates assume a 50% capacity utilisation at year 2, 85% at year 3 and 100% from year 4 to year 26 (end of project).

Table IV.3 Fixed investment cost schedule, Ghana, machine-intensive factory (¢ thousand)

Period	Construction				Start-up and full capacity				Closure
Year	1				2, 18, 14, 20			7, 13, 19	27
Origin	Imported	Duties	Local	Total	Imported	Duties	Total	Local	Local
1 . Land			1	1					(1)
2. Site works			3	3					(1)
3. Fixed buildings			26	26					(15)
4. Variable buildings			37	37					(27)
5. Furniture	2	2		4					O
6 . Workshop equipment			2	2					O
7 . Compressor	1	1		2					O
8. Variable production machine, tools	313	138	4	455					(3)
9. Vehicles					7	5	12	(2)	(1)
10. Formation and pre-start-up training			10	10					0
Fixed investment	316	141	83	540	7	5	12	(2)	(48)
Fixed with technology	3	3	42	48	7	5	12	(2)	(18)
Variable with technology (4+8)	313	138	41	492					(30)

Table IV.4 Working capital schedule, Ghana, machine-intensive factory (¢ thousand)

Period		Start-up		Full capacity		Closure
Year		2	3	4	5-26	27
Production programme		50%	85%	100%	100%	0%
1. Raw materials (5 month's usage of direct materials)		247	420	494	494
2. Work-in-progress (0.6 month's work of direct materials)		30	50	59	59
3. Finished goods and credits (3 month's of operating costs)		189	293	338	338
4. Cash reserves (1 month's wages)		10	10	10	10
	Working capital	476	773	901	901	0
	Imported items			568
	Duties			252
	Local items			81
	Fixed with technology			880
	Variable with technology			21
	Increase in working capital	476	297	128	0	(901)

To appraise the attractiveness of the different technologies distinguished in Table IV.5, either of the three cost-effectiveness methods explained in section II can be applied because revenues are equal for all technologies (300,000 pairs of shoes per annum sold at a wholesale price of ¢ 6 per pair) . Because of the latter, measures of financial profitability such as the net present value of the project's cash flow (NPV) can be calculated as well. Of the cost-effectiveness method, both the annual costs and unit costs were calculated, differentiating cost . figures into variable and non-variable (fixed) costs with regard to the adopted technology. Thus, the estimated annual depreciation charge (approximated by taking 4% of the fixed capital investment) and annual interest charge (10% of the total capital investment) were added to the annual operating costs to obtain the total production costs. As shown in Table IV.5, as well as in more detail in Table IV.2, the costs common to all technologies amount to a substantial 1.383 ¢ thousand. When this amount is substracted from the total production costs, the annual costs specific to each alternative technology are obtained. By dividing the annual cost figures by the annual output, one may calculate the unit footwear cost for each technology. A comparison of the results for the three technologies suggests that the least-cost technology is fairly labour-intensive.

Table IV.5 Economic characteristics of producing 1,200 pairs per day of men's cemented-shoes with different technologies in Ghana (0 thousand in 1972 prices and relative to sale, unless indicated otherwise)

Cost or benefit item		Most machine-intensive Value Ratio		Most- labour-intensive Value Ratio		Least-cost Value Ratio
1. Direct materials, electricity and overhead costs (fixed)		1,216	0.675	1,216	0.675	1,216	0.675
2. Spares, tools and equipment (var .)		11	0.006	5	0.003	5	0.003
3. Total wages		124	0.069	154	0.086	143	0.080
	· Office, supervisory staff (fix. )	70	0.039	70	0.039	70	0.039
	· Skilled production workers (variable) .	27	0.015	50	0.028	45	0.025
	· Other production workers (var.	27	0.015	34	0.019	29	0.016
Operating costs (1+2+3)		1,351	0.751	1,375	0.764	1,364	0.758
4. Depreciation (variable*)		22	0.012	9	0.005	11	0.006
5. Corporate tax		213	0.118	208	0.115	212	0.118
	Production costs (1+2+3+4)	1,373	0.763	1,384	0.769	1,375	0.764
	Net profit after tax (6-1-2-3-4-5)	214	0.119	208	0.116	213	0.118
	Value added (6-1-2)	573	0.319	579	0.322	579	0.322
6. Ex-factory sales		1, 800	1.000	1,800	1.000	1, 800	1.000
7. Fixed capital (variable) *		552	0.307	233	0.130	269	0.150
8. Working capital (fixed*)		901	0.501	910	0.505	906	0.503
Total capital (7+8)		1,453	0.800	1,143	0.635	1,175	0.653
9. Staff (no.)		36		36		36
10. Skilled production workers (no.)		49		90		91
11. Other production workers (no.)		70		92		68
	Total employed (9+10+11)	155		218		195
	Fixed capital/produc. worker (¢)	4,643		1,281		1,694
12. Interest on total capital at 10% per annum		145	0.081	114	0.063	118	0.065
	Total prod, costs (1+2+3+4+12),	1,518	0.843	1,498	0.832	1,493	0.829
	of which: fixed with technology	1,383	0.768	1,383	0.768	1,383	0.768
	variable with techn.	135	0.075	115	0.064	110	0.061
	Net profit at 10% (6-1-2-3-4-12)	282	0.157	302	0.168	307	0.071
	Net profit after tax/total capital (%)		14.7		18.2		18.1
	Unit cost per pair (¢) of which;	5.06		4.99		4.98
	- fixed with technology	4.61		4.61		4.61
	- variable with technology	0.45		0.38		0.37

* To a large extent.

Source: Calculated from McBain (1977). See also Tables IV.2, IV.3 and IV.4.

At this stage, one may ask how the least-cost solution shown in Table IV.5 (which reflects Ghanaian economic conditions in 1972) is related to the technical data for type 1 footwear provided in Chapter II. As mentioned before, the combination of techniques reported in Chapter II is indicative of a least-cost technology typical for developing country conditions. The actual specification of production methods and equipment in a particular situation will therefore invariably differ, though not substantially in most cases, from the stylised tabulations in Chapter II. Despite these differences, the latter can fairly easily be related to the methods and equipment specification underlying the technology in the least-cost solution of Table IV.5 through the following steps:

(1) Select scale 4 in Chapter II (1,000 pairs per day) as the scale of output closest to that in Table IV.5.

(2) Identify the corresponding technology (methods and specifications of equipment for type 1 footwear at scale of production 4)

(3) Tabulate the number of direct employees and the fixed capital equipment for the identified technology (see technical tables in Chapter II to obtain estimates of direct production workers by skill and the cost of equipment). Indirect employees required and production floor area can be considered common to all technologies for a given scale.

(4) Estimate the annual unit cost of direct labour and equipment as shown in the example of Table IV.1 The resulting unit cost figure, which includes most of the cost elements relevant for the identified technology, is now comparable with the unit cost per pair of the least-cost technology in Table IV.5 (0.37 (¢ in 1972 prices).

Although the partial cost-effectiveness method is an effective instrument to select least-cost technologies, it should be kept in mind that application of a full cost-effectiveness method does exactly the same, but gives, in addition, information on the total cost structure.¹ This information is essential if, in addition to the selection of technology, the financial feasibility of a proposed project must also be appraised. In Table IV.5, the overall profitability of the proposed shoe factory is shown by the annual net profit and by the ratio of after-tax profit to capital. Instead of calculating the NPV over the life-time of the project, the annual equivalent of the NPV called "net profit" in Table IV.5 was calculated by subtracting the annual capital charge (depreciation and interest) plus the annual current operating costs (i.e. the annual total production costs) from the annual sales. All technologies show a positive annual net profit, implying that they all earn a rent income (i.e. they add a surplus to society over and above the attributed 10% return to capital reflecting the rate of discount). Hence, at the prevailing system of prices, the proposed project is financially profitable irrespective of the technology adopted. Obviously, the least-cost technology maximises the annual project surplus.

¹ When the time involved in differentiating cost items into fixed and variable costs for each technology is substantial, application of the partial cost-effectiveness method might be more time-consuming than that of the complete method.

It should be emphasised that technological alternatives can be mutually exclusive. Consequently, the net present value (NPV) of a project is the correct selection criterion. Criteria other than those derived from cost-effectiveness or discounted cash flow analysis such as the use of operating costs, production costs excluding the proper capital charge, value added, and different concepts of profits or profit-ratios are, by nature, incomplete measures of the attractiveness of technological alternatives or entire projects, and therefore unsuitable as selection criteria. This can be illustrated for the case of operating costs, production costs and net profit after tax, according to which the most machine-intensive technology would seem to be the most attractive alternative. Similarly, when value added and net profit after tax to capital are used as selection criteria, the most labour-intensive alternative is wrongly identified as the most appropriate technology. Thus, it is preferable to use, in all cases, the NPV criterion.

Because operating costs, and hence working capital, are largely invariant for different techniques, production costs, value added and profits vary only slightly across technologies. As working capital requirements account for the larger part of total capital, variations in profitability are confined within a rather narrow range. For a government strongly concerned with the creation of more employment, this might be reassuring because it indicates that a more labour-intensive technology than the least-cost one can be adopted at little extra cost. By the same reasoning, however, entrepreneurs forego little profit when they adopt a more capital-intensive technology.

III.2 Comparison of alternative types of footwear at fixed levels of scale: Ethiopian case study

When the shoe manufacturer faces no particular demand constraint in terms of type and quality of footwear, the selection of the most attractive type(s) of shoes to be marketed becomes as important as the selection of the most attractive combination of techniques. The comparison and appraisal of alternative combinations of techniques to manufacture a different type of footwear, can, in principle, be undertaken in the same way as indicated for the case of the type 1 men's cemented-on, leather-upper shoes. Once a least-cost technology for each type of footwear has been identified and selected, the attractiveness of manufacturing different products with a least-cost technology can be compared by calculating the overall profitability of alternative projects.

For five of the six types of footwear distinguished in this study, the major characteristics of the least-cost combinations of techniques to manufacture 1,200 pairs of shoes or sandals per day are summarised in Table IV.6. The data was obtained from a number of footwear projects located in Ethiopia and is based on 1972 prices. The type 3 shoe with stitched-on leather soles is not included because its characteristics do not differ substantially from the type 1 shoe with synthetic soles.

Details of the calculations for the different types of footwear can be found in McBain (1977). The results presented in Table IV.6 can only be partly related to the tabulations included in Chapters II and III, because the latter largely refer to that part of the cost that varies with the technology.¹ As the choice between different types of footwear is necessarily based on a comparison of product profitability, variable and fixed costs are estimated separately in this case study.

¹ See technical tables in Chapter II for type 1 footwear and technical tables in Chapter III for footwear types 2, 4, 5 and 6.

Table IV.6
Economic characteristics of producing 1,200 pairs of different footwear per day with a least-cost technology in Ethiopia (in thousand 1972 Ethiopian dollars)

Cost or benefit item	Stitched leather, cemented-on shoes (Type 1)		Stitched leather moulded-on shoe (Type 2)		Welded PVC moulded-on shoes (Type 4)		Stitched PVC cemented-on sandal (Type 5)		One-shot, moulded PVC sandals (Type 6)
	Value	Ratio	Value	Ratio	Value	Ratio	Value	Ratio	Value	Ratio
1. Intermediate inputs	2,145	0.715	1,913	0.671	937	0.679	649	0.541	344	0.662
2. Wage and salaries	270	0.090	277	0.097	125	0.091	233	0.194	52	0.100
3. Depreciation	26	0.009	34	0.012	17	0.012	17	0.014	27	0.052
Production costs (1+2+3)	2,441	0.814	2,224	0.780	1,079	0.782	899	0.749	423	0.814
Net operating profit (4-1-2-3)	559	0.186	626	0.220	301	0.218	301	0.251	97	0.186
Value added (4-1)	855	0.285	937	0.329	443	0.321	551	0.459	176	0.338
4. Ex-factory sales	3,000	1.000	2,850	1.000	1,380	1.000	1,200	1.000	520	1.000
5. Average price per unit ($)	10		9.5		4.6		4		1.3
6. Fixed capital	660	0.220	842	0.295	423	0.307	417	0.348	295	0.567
7. Working capital	1,591	0.530	1,424	0.500	677	0.490	512	0.427	169	0.325
Total capital (6+7)	2,251	0.750	2,266	0.795	1,100	0.797	929	0.775	464	0.892
Net profit at 10% (4-1-2-3-10% of cap.)	334	0.111	400	0.140	191	0.138	208	0.173	51	0.098
Net oper. profit cap.		24.8		27.6		27.4		32.4		20.9
8. Staff and skilled production workers (no.)	86		93		29		71		22
9. Other production workers (no.)	81		77		12		52		6
Total No. employed (8+9)	167		170		41		123		28
Fixed capital/employee ($)	3,952		4,953		0,324		3,393		10,536

Source: Calculated from McBain (1977).

One of the most striking features observed from the figures in Table IV.6 is that the variation in labour requirements across different types of footwear is substantial ranging from 28 and 41 employees for synthetic footwear types 6 and 4 to 167 and 170 employees for leather footwear types 1 and 2. However, as labour and fixed capital requirements are, to some degree, proportional to output, variations in capital-intensity are considerably less marked as shown by the estimated fixed capital per employee. The highest capital-labour ratio estimated for type 6 footwear is approximately three times higher than that for type 5 footwear (the lowest capital-labour ratio). The range of fixed capital-labour ratios across products manufactured with a least-cost technology is to a large extent similar to that across technologies for the type 1 footwear (see Table IV.5). Interestingly, the skill composition of labour across products shows a tendency for capital-intensive products to be associated with a high relative share of skilled labour in total labour requirements .

The figures in Table IV.6 show that if effective demand for footwear would be such as to justify only one type of shoe or sandal to be marketed at a time (mutually exclusive products), the higher-priced varieties would be preferred because they generate the highest surplus to the economy (type 2 shoes and type 5 sandals show the highest net profit, the annual equivalent of the NPV). Compared with the synthetic and inexpensive type 4 shoes and the very cheap one-shot plastic sandals (type 6), the higher priced varieties also appear to be considerably more appropriate in terms of resource allocation. The economic and social implications of these findings will be further considered in the next chapter.

III.3 Effects of scale on manufacturing technology for type 1 footwear: Ghanaian and Ethiopian case studies

Empirical findings on the effects of scale in footwear production show that advantages of large-scale production are significant up to a level of 1,000 pairs per shift and per day. Generally, the effects of the scale of production are primarily of importance for the mechanised operations. An examination of the production rates of process equipment at various scales of production for 237 different types of machinery produced by the British United Shoe Machinery Company Limited shows that, in machine-intensive footwear plants, the minimum spare machine capacity is experienced at output levels of about 1,000 pairs per shift. Plants producing substantially more than 1,000 pairs per shift normally group their machines in such a way as to form separate production units specialising in different types of footwear. For manual operations, scale is less important because production operatives with related skills may be employed on capacity sharing, dividing their time between different tasks.

To illustrate the effects of scale, the Ghanaian case study for type 1 men's cemented shoes is extended to three scales of production: 200, 1,200 and 7,200 pairs per shift and per day. Full information on these scales of production was available in the country. For each scale, a most machine-intensive, a most labour-intensive and a least-cost technology are distinguished by applying the methodological framework described in subsection IV.2. The least-cost technology for output levels of 1,200 pairs per day can be related to the technical data and tabulations in Chapter II as indicated in the general treatment of type 1 footwear in section III.1. As the output level of 200 pairs per day coincides with scale 3 in chapter II, the technical data from this latter chapter can be considered indicative of the combination of techniques underlying the least-cost technology. As in the case of product comparisons, the overall profitability criteria (NPV or its annual equivalent, net profit) must be employed when appraising the effects of different scales of production.

A number of economic characteristics of the alternative combinations of techniques at different scales of production are presented in Tables IV.7 and IV.8.

The results confirm that returns, as indicated by the profitability criteria, increase rapidly between output levels of 200 and 1,200 pairs per day. This is mainly due to a marked reduction in fixed capital and labour requirements, in particular staff and skilled labour. Between output levels of 1,200 and 7,200 pairs per day only marginal changes occur, although returns still improve slightly. It should be stressed that the possibility of increased unit transportation cost of materials, equipment and footwear as a result of higher output levels has not been accounted for in Tables IV.7 and IV.8. Differences in returns may therefore somewhat overstate the effect of differences in scale.

Table IV.7 Economic characteristics of producing men's cemented shoes with different technologies at three scales of production in Ghana ( thousand, unless otherwise stated)

Pairs per shift	200			1,200			7,200
Technology	MM	ML	LC	MM	ML	LC	MM	ML	LC
1. Total number employed	35	45	45	155	218	195	845	1,233	1,073
Office and supervisory staff	13	13	13	36	36	36	143	143	143
Skilled production workers	19	26	26	49	90	91	291	540	486
Other production workers	3	6	6	70	92	68	411	550	444
2. Fixed capital	249	72	72	552	233	269	3,125	1,275	1,489
3. Working capital	157	158	158	901	910	906	5,362	5,404	5,365
Total capital	406	230	230	1,453	1,143	1,175	8,487	6.679	6,854
4. Ex-factory sales	300	300	300	1,800	1,800	1,800	10,800	10,800	10,800
5. Value added	92	94	94	573	579	579	3,461	3,489	3,498
6. Total wages	39	44	44	124	154	143	626	773	660
7. Depreciation	10	3	3	22	9	11	125	51	60
Net operating profit (5-6-7)	43	47	47	427	416	425	2,710	2,665	2,778
8. Direc taxes	21	23	23	213	208	212	1,355	1,332	1,389
Net profit after tax	22	24	24	214	208	213	1,355	1,333	1,389
9. Net cash flow (5-6-8)	32	27	27	236	217	224	1,480	1,384	1,449
10. Net present value at 10%	(89)	24	24	834	944	976	6,073	6,666	7,168
11. Internal rate of return (%)	7.0	11.3	11.3	17.5	20.6	20.7	19.	4 23,	23.7
12. Net profit at 10% (5-6-7-10% of capital)	3 .	24	24	282	302	307	1,861	1,993	2,093

MM = Most machine-intensive - ML = Most labour-intensive - LC = Least-cost technology

Table IV.8 Economic characteristics of producing men's cemented shoes with different technologies at three scales of production in Ghana (ratios)

Pairs per shift	200			1,200			7,200
Technology	MM	ML	LC	MM	ML	LC	MM	ML	LC
1. Index total employed	100	100	100	100	100	100	100	100	100.
Office and supervisory staff	37	29	29	23	17	18	17	11	13
Skilled production workers	54	58	58	32	41	47	34	44	45
Other production workers	9	13	13	45	42	35	49	45	42
2. Fixed capital/sales	0.829	0.240	0.240	0.307	0.130	0.150	0.289	0.118	0.138
3. Working capital/sales	0.524	0.526	0.526	0.501	0.505	0.503	0.497	0.500	0.497
Total capital/sales	1.353	0.766	0.766	0.808	0.635	0.653	0.786	0.618	0.635
4. Fixed capital/production worker (¢ thousand)	11.309	2.247	2.247	4.643	1.281	1.694	4.452	1.170	1.600
5. Pairs/shift/production worker	5.71	4.44	4.44	7.74	5.50	6.15	8.52	5.84	6.71
6. Value added/sales	0.308	0.315	0.315	0.319	0.322	0.322	0.321	0.323	0.324
7. Wages/sales	0.131	0.148	0.148	0.069	0.086	0.080	0.058	0.072	0.061
8. Net operating profit/sales	0.144	0.157	0.157	0.237	0.231	0.236	0.251	0.247	0.257
9. Net operating profit/capital	10.7	20.5	20.5	29.4	36.4	36.1	31.9	39.9	40.5
10. After tax profit/capital	5.3	10.3	10.3	14.7	18.2	18.1	16.0	20.0	20.3
11. Net cash flow/capital	7.8	11.5	11.5	16.2	19.0	19.0	17.4	20.7	21.1

MM = Most machine-intensive - ML = Most labour-intensive - LC = Least-cost technology

Although the results presented in the above tables do not seem to favour small-scale production of footwear in the modern sector, one should be careful not to generalise these findings, because the data do not include establishments in the informal or traditional sector using artisanal production techniques and employing only a few workers. An attempt to broaden the effect of scale to include artisanal production techniques was undertaken in Ethiopia.¹ Table IV.9 provides a summary of the findings from the Ethiopian case study.

¹ For more information on this case study, see Me Bain and Pickett (1975).

Output levels in the modern sector are 200, 1,200 and 7,200 pairs of type 1 shoes per day whereas in the very small enterprises in the informal sector 3 workers are assumed to produce 6 pairs of shoes per day. For each scale of production, the least-cost combination of techniques was identified at 1972 Ethiopian factor prices. The least-cost technology for producing 6 pairs of shoes per day is based on the combination of techniques specified for scale 1 in Chapter II.

The artisanal production units (alternative D) show by far the lowest capital-intensity as measured by the annual fixed capital charge per employee. Alternatives A and B employ a relatively capital-intensive technology and alternative C a relatively labour-intensive combination of techniques. Thus, the decrease in the capital-intensity figure between alternatives B and C.

The evaluation of the four alternative scales of production show that the combined net present value of the very small enterprises, each producing 6 pairs of shoes per day, is such that it would make them clearly preferable to the 200 pairs per day production units in the modern sector, though not to the extent that they would be able to compete successfully with the larger enterprises producing 1,200 pairs per day or more. However, since the artisanal production units sell directly to the public at retail prices (thus, no tax payments are due) and since wages are often lower than in the modern sector, returns can be satisfactory.

Table IV.9 Comparison of four scales of production of type 1 footwear for a total volume of 7,200 pairs per day - Ethiopian case study (1972 prices)

Characteristic		Scale of production
		A	B	C	D
1.	Output in pairs per shift per day for a single enterprise	7,200	1,200	200	6
2.	Total number employed per enterprise	904	167	42	3
	Total number employed to produce 7,200 pairs of shoes	901	1,002	1,512	3,600
3.	Total fixed capital excluding replacement1 (Ethiopian $ thousand)	3,439	3,961	5,054	5,940
4.	Annual fixed capital charge at 10% (Eth. $ thousand)	378	436	556	967
	Annual fixed capital charge per employee (Eth. $)	418	435	368	269
5.	Net present value at 10%2 (Eth. $ thousand)	14,055	10,646	(2,340)	3,450

¹ Project life of A, B and C is 25 years and of D is 10 years. The corresponding capital charge at 10% therefore amounts to 11% and 16% respectively.

² For D at retail prices without profit tax.

IV. Concluding remarks on the choice of technology and specialisation

IV.1 Need for preliminary marketing investigations

As suggested all along in this memorandum, potential footwear manufacturers will generally need to make two types of choices: choice of production technology and choice of the type and quality of footwear, the choice of technology being made concurently with that of scale of production. These choices determine whether a footwear project will be profitable or not. The wrong choice of technology may lower profits or lead to the closing-down of a plant for lack of price competitiveness. This is even more so the case if one were to make the wrong choice of footwear type and quality. Thus, the importance of undertaking a serious investigation in marketing with a view to identifying which footwear types and quality to produce and the scale of production.

Footwear manufacturers contemplating large-scale production of footwear (e.g. thousands of pairs per day) should use the services of a specialised firm for the conducting of a full-fledged marketing investigation: investments in large-scale footwear plants are such that one may not base investment decisions on limited marketing research undertaken by non-specialists. The same remark applies to the choice of technology: the latter should be made by a reputed engineering firm. However, since the majority of such firms tend to base their plant designs on conditions prevailing in industrialised countries, investors in developing countries should request that appropriate alternative techniques be considered. The technical and economic information contained in this memorandum should be useful in assessing plant designs prepared by foreign engineering firms.

This memorandum is, however, mostly intended for small-scale producers and artisans producing as few as 8 pairs per day to as many as 1,000 to 2,000 pairs per day. Such producers may not afford to hire the services of marketing or engineering firms with a view to identifying the appropriate type and quality of footwear, the scale of production and the manufacturing technology. The choice of the scale of production and that of technology having been already dealt with in earlier sections of this memorandum, this section provides a few suggestions regarding the choice of footwear type and quality through a limited market investigation. The latter may be undertaken according to the following steps.

Firstly, the potential footwear manufacturer may obtain information on the volume and growth of imports of various types of footwear from the country's trade statistics. If the latter indicate a steady growth of imports, the potential investor should obtain samples of such imports and determine whether he is capable of producing close substitutes at competitive prices (i.e. prices equal or lower than the retail prices of imported footwear). In the affirmative, he should visit a few retail stores and obtain the views of the owners on the marketing of locally produced footwear (e.g. what should be the retail and wholesale prices? Will the clientele accept to buy the local substitute footwear or does loyalty to the foreign brand constitute an important constraint?). Information from trade statistics and retail stores should generally be sufficient to decide whether the production of import substitutes should be undertaken.

Secondly, the potential producer may investigate the production of footwear similar to that produced by locally established large-scale manufacturers (e.g. a subsidiary of a multinational firm). The investigation, in this case, should focus on production costs: it is essential that these be much lower than those obtained by the large-scale plants since retail prices should be lower than those of footwear produced by these plants. This is an essential condition since a relatively large difference in retail prices will be needed if customers were to shift from a well-known brand name to a less-known brand. Such a condition will require the adoption of a technology which is more cost-effective than that used by the large-scale plants.

Thirdly, the potential footwear manufacturer may consider the production of a type and quality of footwear particularly appropriate for selected income groups (e.g. in terms of retail price, design, etc.) and which is not available on the market. For example, such a footwear could be intended for the rural population (e.g. footwear appropriate for field work) or high income groups (e.g. fancy footwear worn on special occasions). The production of such footwear is more risky than that of already marketed footwear since information on their marketability does not exist. On the other hand, high returns may be expected whenever an appropriate choice of footwear type and quality is made.

IV.2 Specialisation and organisation of production

Apart from the special market conditions under which small-scale enterprises operate and the possibility of employing non-mechanised, labour-intensive technologies, small firms can successfully increase their profitability in footwear production by specialising in a limited number of operations, or by using common facilities centres. A few examples of such schemes are briefly described below.

(a) Use of specialist suppliers

An enterprise that specialises in certain stages of manufacture converts raw materials into semi-finished components and supplies them to other enterprises. The semi-finished product might be soles and heels ready for assembly to the lasted upper, or closed uppers ready for lasting. This type of market structure is widespread in countries with industrially developed market economies and usually involves medium-scale component manufacturers supplying medium-scale enterprises that assemble and market the completed footwear. In developing countries, village shoemakers may purchase closed uppers from large factories and use these in the production of finished footwear. The purchase price of these uppers is generally lower than the cost of producing them by the village shoemakers.

(b) Sub-contracting of intermediate production stages

In this scheme, a footwear manufacturing enterprise issues raw materials or footwear components to subcontracting enterprises which carry out some production stages before returning the work to the footwear manufacturer. In this case, the latter is often a medium-scale enterprise while the sub-contracted enterprises are often very small firms. Generally, the stitching and lasting operations are sub-contracted in such a scheme.

(c) Manufacturing cooperatives

Several forms of footwear production cooperatives exist. For example, independent enterprises, which purchase their own materials and sell their completed footwear may share common manufacturing facilities in a central workshop where specific operations are carried out. This is akin to sub-contracting, except that the shared equipment may be operated by the individual members of the cooperative. Such a system might, for example, be organised by a few very small-scale producers sharing a sole stitching machine. Another arrangement would be for a group of very small producers with an output of 8 pairs per day to have the stitching work carried out in a central unit with a daily output capacity of two hundred pairs, and have the closed uppers returned to them for lasting, finishing and marketing.

The use of specialist component suppliers, subcontracting and manufacturing cooperatives are some of the ways used in order to benefit from technical and administrative economies of scale. These economies are usually obtained at manufacturing stages where the returns to scale are substantial, while the other manufacturing stages continue to be carried out at smaller scales.