Analyzing the technical and scale efficiency performance: a case study of cement firms in India

Purpose: The purpose of this paper is to perform non‐parametric production efficiency analysis of cement companies in India. Relative technical and scale efficiencies are estimated for the year 2005‐2006. Design/methodology/approach: Data envelopment analysis (DEA) has been used to calculate the technical and scale efficiency measures of the companies. Within DEA framework, the input oriented variable returns to scale (VRS) model is employed for the study. A representative sample of 20 companies which account for 85.5 per cent of the total market share is studied. The selection criterion for the inclusion of a firm in the analysis has been market share of one per cent or more. Findings: Findings suggest that 50 per cent of the firms are found to be technically efficient and they are also operating at optimum plant size. Whereas 25 per cent firms are exhibiting decreasing returns to scale inferring over utilization of their plant capacities and the rest 25 per cent are showing increasing returns to scale signifying underutilization of plants. Input targets and reductions are suggested for the inefficient firms. Overall, the industry seems to do well on both the efficiency parameters since the average scores for technical and scale efficiency for the industry came out to be 0.96 and 0.97, respectively. Originality/value: This current paper is the first study to apply DEA tool to get insights on productivity efficiency of the cement firms in India.