Measuring the Technical Efficiency Level of Sauce Processing Industry in Malaysia

1. Measuring the Technical Efficiency Level of Sauce Processing Industry in Malaysia Abu Kasim Ali Economics and Technology Management Research Centre Malaysian Agricultural Research and Development Institute (MARDI) P. O. Box 12301, 50774, KUALA LUMPUR, MALAYSIA

2. INTRODUCTION • market size of the processed food and drinks from RM5,600 mil. (1981) to  RM12,400 mil. (2000)  AAGR 4.2 % • contribution to the overall manufacturing output  from 16 % to  9 %.

3. INTRODUCTION (contd.) • As pointed out by Farrell (1957), the average labour productivity is inadequate as a measure of efficiency, since it ignores all other inputs. The role of efficiency may be viewed as an integral component of any policy to stimulate production and to promote resource conservation. Hence it is important to know how an industry can increase its output by simply increasing its efficiency without absorbing further resources.

4. INTRODUCTION (contd.) • Market performance • domestic market size,  RM820 mil. (2000) • export market, remarkably improved;  from RM16 mil. (1985) to RM126 mil. (2000) • imports, only RM70 mil. in 2000 • +ve balance of trade, valued RM 56 mil.

5. Objective : • The primary objective of this study was to measure the technical efficiency of the sauce processors in Peninsular Malaysia. • Other objectives include, understanding the status and performance of the industry players especially that of Bumiputera entrepreneurs.

6. TECHNICAL, ALLOCATIVE AND ECONOMIC EFFICIENCY

7. Specification and Estimation The value of output is determined by the level of four input costs; direct labour, machine, building and administrative expenses. Using the cross sectional data collected from each firm, the `average’ Cobb-Douglas is: lnY = 2.44369 +.58552 lnLW + .15212lnMCH + .17974lnBLD + .16096ADM (2.304) (3.762) (1.122) (1.595) (2.371) R2 = 0.77 Umax = 1.5514 4 Σβi = 1.07834 i =1 t ratios in parentheses Where: Y = Ex- factory value of all finished products LW = Total production wages or direct labour MCH = Machine cost (depreciation, rental, maintenance and utilities) BLD = Rentals of building and land, depreciation, and maintenances ADM = Administrative expenses (wages, telephone, stationeries etc).

8. Technical Efficiency (TE) of a Sample of 51 Sauce Factories

9. Major problems • Lack of understanding on the importance of meeting the standard as a measure to ensure consistent product quality. • The food Act (1983) governing the regulation is not strictly enforced, and if the offenders are prosecuted, the fine imposed is usually too little to deter the processors from committing future offences. • In meeting the standard, some extra cost on quality control equipment, material and wages are required. Subsequently, this will add to production cost and the product may have to be sold at a price higher than the competitors who do not meet the standard.

10. CONCLUSION • The low TE indices as well as large efficiency variation also point to a development stage that yet to reach maturity. Hence, there are ample rooms for efficiency improvement. • Efficiency improvement is possible through improved mechanization and automation to ease labour problems, which require more capital injection in the form of loan or grant from relevant agencies. • Market access can also help the industry minimize underutilization or resources that will lead to better efficiency level. • Using a common brand may lead to better market penetration especially to super and hypermarket. • To maintain or improve market position, continuous product development is vital, but it is only possible through contract research with Research Institutions as R&D is generally beyond the SMI’s capability.

11. THANK YOU