Efficiency in the Indian iron and steel industry – an application of data envelopment analysis

Abstract

Purpose – The purpose of this paper applies to Indian steel manufacturing industries to evaluate the technical and scale efficiency (SE). Design/methodology/approach – Data envelopment analysis (DEA) has been employed to calculate the relative efficiency of the steel manufacturing units. The selection criteria for the inclusion of a steel manufacturing unit in the analysis has been annual income of more than 50 crores and units manufacturing pig iron, steel and sponge iron. Within the DEA framework, the output-oriented model with constant returns to scale and variable returns to scale were studied. Four input variables, namely, gross fixed assets, total energy cost, total number of employees and currents assets were considered. Among the output variables, the four variables considered are income, sales, PBIT and PAT. Findings – The result of the efficiency scores have been categorized into three parts. The pure technical efficiency represents local efficiency and the reason of inefficiency is due to inefficient operations. Technical efficiency indicates that the respective decision-making units are globally efficient in case the efficiency is 100 per cent. The SE explains that the inefficiency is caused by disadvantageous conditions. As the result shows, that public sector undertaking (PSUs) are operating under disadvantageous conditions as compared to private manufacturing units. One of the possible reasons of location disadvantage condition is manufacturing units for PSUs are scattered throughout India. Some of the units are located in such places where, the raw material, supply chain could be difficult. It has been found that 45 per cent of the private manufacturing units are technically as well as scale inefficient units. Practical implications – The result of the study would benefit the steel industry to develop a performance benchmarking as steel companies must be profitable in the long term to ensure sustainable achievements. Originality/value – This is an original study to apply DEA to get insights on productivity efficiency of the steel manufacturing units in India. Though the manufacturing units were selected on the basis of annual income, the analysis of productivity does not reflect any impact of income on the efficiency of the manufacturing firms.