Productivity Concerns at RKC: Production Function and Returns to Scale

Ravi Kumar (Ravi) is the Founder and CEO of RK Constructions (RKC), established in 2005, in Hyderabad. Born into the family of a farmer in Khammam district, Telangana, Ravi had always wanted to become an engineer but had to opt for a diploma because of his pecuniary conditions. To fulfill his aspirations he completed the three-year Diploma in Civil Engineering in 2000 from Government Polytechnic, Kothagudem. Upon his completion of the diploma, he came to Hyderabad and worked as a Draughtsman and Site Supervisor for a small construction firm, where he drew house plans, floor plans, Reinforced Cement Concrete (RCC) structural designs for residential houses and also supervised the work ar construction sites. After gaining 2 years of experience and identifying the business potential in taking up small housing projects, he quit his job. He took up small housing construction projects from individual clients along with the responsibilities of designing and site supervision. During this time, he developed good business connections with many people within the construction industry and grasped the business intricacies.

With his experience in small/independent residential construction projects, satisfied clientele, and two other interested partners (K. Surendranath and V. Srinivas) he set up RKC in 2005. While Surendranath came with 9 years of marketing experience in the construction industry, Srinivas came with 5 years of project management experience. During the early years, RKC undertook only sub-contracting work from bigger construction companies (for residential and commercial buildings). Later, the company moved on to handling direct contracts and projects. RKC has around 10 big residential and commercial building projects in addition to several smaller projects. RKC that had started with only three employees in 2005, currently has 127 associates (Exhibit I) including Civil/Mechanical/Electrical Engineers, Structural Designers, and Draughtsmen (using AutoCAD and STAAD), Architects, Site Supervisors, Site Engineers, Executive Engineers, Project Managers, Quality Inspectors, Contract Managers, Surveyors, Quantity Surveyors, Safety Managers, etc. However, RKC hires other on-site workers like carpenters, general workers, masons, concrete and ironworkers, electricians, AC workers, plumbers, welders, painters, etc., on a contract basis from the labor contractors. Around 500 skilled, semi-skilled and unskilled workforces employed were local workers to work at its different construction sites. However, for some time, the company (and the industry) had been facing a huge shortage of skilled workforce in the State.

 Organization Structure

Founder and CEO

In such circumstances, RKC bagged the contract of constructing a major commercial complex. The construction of the commercial complex included – designing the architecture and CC/RCC/steel structures (foundation, roof, beams and columns of RCC, steel beams and

columns) of the building and construction of structure along with the exterior/ interior walls, security systems, communication systems, lighting and cooling systems, elevators/escalators/ staircases, acoustic ceilings, plumbing, masonry, carpentry, painting, electrical services, mezzanine flooring of office spaces, doors, partitions as well as property improvements as required by the buyers. RKC needed to provide the designs, services, and materials required, hire subcontractors, and day-to-day management of the project. However, with the shortage of workers and as suggested by his friends in the industry, Ravi had hired migrant skilled workers on this project, as they were known for quality work. While the productivity of the new workforce brought in was good at the beginning of the project, their productivity had been decreasing by the time 50% of the project was completed (Exhibit II). Consequently, the company was facing project delays and cost overruns.

Labour Productivity

Ravi discussed with the Chief Engineer, Project Manager, and the Executive Engineers this and discussed the stages of construction which were labor-intensive or capital-intensive (Exhibit III). While some of the Executive Engineers suggested that more labor should be employed for the project, the Chief Engineer suggested that the workers be replaced with machinery and ready-made components (like readymade walls and roofs) for quicker completion of the project. However, the Project Manager opined that bringing in more workers would not help because, after a certain point, it would turn into diseconomies of scale and the company would face more losses instead of gaining from such a move. Ravi was in a quandary as to how to resolve this dilemma. As he did not have much time on his hands, any slight disruption could jeopardize the project's completion.

Stages of Work

Stages of Building Construction

Labor

Capital

Choosing and buying the site Designing and building Buying, planning materials and labor Levelling the land Drawing the layout of the building Excavation and laying the foundation Erecting the frame of the building

Initial wiring

Putting the roof Constructing the walls and interiors Plastering of the ceiling and walls Plumbing and wiring Finishing the inside walls and paintings Installing fixtures Flooring Painting Decorating and landscaping.

Assignment Questions

1. What do you understand by Returns to Scale/Law of Variable Proportions and what is its importance to Production and Cost Analysis? Illustrate the operation of Returns of Scale with the help of RKCs' worker productivity.

2. What is a Production Function and what is the difference between Long-run and Short-run Production Functions? What are Isoquants and their properties? Using RKC's case facts, exemplify the concept of Isoquants.

3.. What are the differences between Economies of Scale and Economies of Scope? What is the importance of these concepts in business decision-making?

Mandatory Reading

Paul A. Samuelson, et al., “Production and Business Organization”, Economics, 19th Edition (Special Indian Edition), McGraw Hill Education (India) Private Limited, 2014 – To understand the concepts of Production Function, Isoquants, the Law of Diminishing Returns, Economies and Diseconomies of Scale