Small scale production | Meaning | disadvantages

What is 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.

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 Outdated technology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 Technology used in many small scale enterprises is outdated.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.

12. Difficulty in marketing

The ultimate objective of production is to place the product in the hands of the consumer. Small scale units are not able to effectively market their products. They do not have sufficient funds to spend on sales promotion and advertising. Therefore it is difficult to build a strong brand image and attract customers.

13. Limited growth

Small scale enterprises are not able to grow beyond a certain level. Limited resources and skills and lack of a strong brand hinder further expansion or diversification.