Unit IV

Rationalization
Introduction
Rationalization in industry was first discovered in Germany. After the first world war the
economy of Germany was completely ruined. Industries which wear at the top before the war
where declining. Labour force was badly reduced the industries where experiencing the acute
shortage of funds and there was depression in the market. For the burden of reparation payment
and the depreciation in the value of currency made the economic condition of Germany bad to
worst. Industries had to recognize and revamp. With a view to rehabilitating and reorganizing the
revenged economy National Commission was set up in 1921. On this basis several experiments
were done. Several new tools and techniques were introduced. As a result, the economy of
Germany revived miraculously. With a short span of time between 1924 and 1929 the country
regained its old position. All these experiments and efforts were collectively termed as
‘rationalization, In German language rationalization is termed as rationalisierung. It means new
industrial philosophy. Walter Meakin has named its new industrial revolution.

Concept and Definition

In common parlance rationalization refers to rational and logical thinking for getting better
result. In the industrial sense it is an act of reforming and industry by reorganizing it so as to
eliminate waste and inefficiency relating to time, labour, material, methods, tools, etc. In a wider
sense it implies a fundamental change in the structure and control of industrial activity in a well-
coordinated and integrated manner for removing various types of waste and inefficiency and
bringing down cost and meeting market demands.

- According to national board of economy and efficiency Germany e rationalization

consists in understanding and applying every means of improving the general economic
situation through technical and systematic organization.

- According to world economic conference Geneva 1927 rationalization refers to the

method and techniques of organization designed to secure the minimum of waste of
either effort or material. It includes the scientific organization of labour standardization
 of both material and products simplification of processes and improvement in the system
of transport and marketing.

- Professor E.A.G Robinson rationalization refers to the reorganization of relationship of

the individual form to the industry as a whole.

- Professor Sergeant Florence rationalization is the moment to eliminate waste and

inefficiency scientifically and logically by some short of joint action between all the
firms within one industry.

Features of rationalization

1. Movement for reforms – Dash one of the main characteristics of rationalization is that it
is a movement for reforms Revolution for change plan for reorganization and
reconstruction and finally I scheme for Revival and growth full stop it was adopted in
Germany for the Revival and growth of shattered industrial structure of the country.
2. Elimination of waste and inefficiency – This is another important characteristic of
rationalization. Rationalization is adopted in order to remove inbuilt inefficiency and
whispered wastage of men money and material.
3. Application of rational and scientific method and techniques – with the help of
rationalization old methods, traditional approach and unscientific and unsystematic
thinking or supplanted by new methods, modern approach and scientific and logical
thinking.
4. Comprehensive process –Rationalizations a comprehensive process. It is not restricted
to production only. It covers the entire range of technologies, financial management,
labour relations and personal management, marketing methods, and practices,
transportation and warehousing, etc. So as to the entire fabrics of economy can be
brought back on right track and desired growth may be achieved.
5. Macro approach – Rationalization lives in macro approach, not in micro approach. It is
industry oriented, not firm oriented. The rational and logical thinking are applied in
industry at large. With the help of collective Endeavour every unit within an industry is
rationalized so that maximum benefits may be reaped.
6. Promotion of Industrial Research – This is also an important characteristic of
rationalization. In order to get maximum benefit research and development is promoted.
Research and development are also resorted for the purpose of replacing old methods and
techniques and introducing new ones, in proving traditional system and approaches,
promoting mechanization and automation.
7. Social motive – Rationalization has social motive by eliminating waste and inefficiency
and by adopting rational and logical Tools and techniques productivity is improved,
 efficiency is increased and cost of production is reduced. This helps in loading price
which in turn benefit the customers.

OBJECTIVES OF RATIONALIZATION

1. Eliminating waste and inefficiency – The primary objective of rationalization is to

eliminate all types of wastage and inefficiency prevailing in an industry. Therefore,
rationalization cure the is caused by faulty production system ineffective organizational
structure improper coordination among various factors of production and unbraced
competition.
2. Ensuring maximum utilization of resource – The next important objective of
rationalization is to ensure optimum use of available resource. It is a well-known fact that
resource is eliminated and hence scarce. Irrational use depletes the resources very soon
and increases the cost of production. Without ensuring optimum utilization of resources
maximum production at minimum costs is not possible.
3. Maximizing production – Rationalization aims at maximization of production by
applying rational and logical approach. This helps in lowering costs and offering products
to consumers at low prices. Production is increased due to use of better machines and
equipment’s and increase in overall efficiency of industry.
4. Maximizing efficiency at minimum effort – Efficiency effects the overall performance
and profitability of industry. Hence rationalization seeks to improve efficiency of workers
by improving working conditions.
5. Simplifying marketing and distribution system – One of the fundamental objects of
rationalization is to improve the efficiency and effectiveness of distribution system. To
achieve this objective unnecessary transport practices are eliminated unless multiplication
of middleman is removed and access a financial burden is relation to transport system is
terminated.
6. Improving the quality of product –Rationalization aims at not one increasing the
quantum of production but also in enhancing quality of product. Quality of product is
increased by using that equality raw material, standardization and specification.
7. Establishing industrial stability –One of the basic objective of rationalization is to
establish industrial stability in the nation. This is done by adopting the means of
restructuring and reorganizing the entire industrial structure of the nation. This helps in
overcoming the danger and trade cycle.
8. Improving Industrial Relation –In order to increase the efficiency of workers
rationalization aims at improving the condition of Industrial Relations in the industry.
The Bombay textile labour inquiry committee 1941 also stressed on the improvement in
the efficiency of workers and in working conditions. In fact, only a motivated and
satisfied worker can give better result.
 9. Regulating the variety of products – Unnecessary varieties of products causes wastage
in industry and prove a burden on scarce resources. This also leads to confusion in the
minds of customers. Hence, rationalization aims at reducing the unnecessary varieties of
products through which research into the processes and methods of manufacture and
standardization and grading.
10. Increasing the standard of living of society –Increasing the standard of living of the
mass is also a basic objective of rationalization. By eliminating waste and inefficiency at
all levels improving working conditions, and by introducing modern tools and
techniques, efficiency of increased; production is maximized; quality of product is
improved; resources are optimally used; and cost are reduced.

Causes of rationalization

1. Effects of War –One of the causes responsible for the emergence of rationalization is the
adverse effects of World War I. Due to this war, economy of Germany was completely
shattered. In order to revive the economy, the rationalization movement was started in
Germany and the success was marvelous. This attracted the attention of other countries
like USA the UK Japan etc. toward rationalization.
2. Worldwide depression –Rationalization measures had been adopted for averting the
adverse impact of worldwide depression of 1929. This famous depression caused
unemployment, low level of demand, low production, higher cost and several other
malaises in industrial sector. To mitigate or remove these ills rationalization was adopted.
3. Scramble for scarce resources – Several resources are limited and scarce in nature. The
shortage of resources gives rise hectic competition. Competition is struggles with others
to acquire as much resource as possible by hook or by crook. But only a few succeed in
this struggle, other lag behind. In such situation, planned use of resource is the only
solution. Rationalization promotes planned use of resources available in Limited quantity
all the firms in an industry through the process of rationalization main distribute the
resource on a mutually agreed basis.
4. Ideal plant capacity –The productivity of a firm depends to a great extent on the
utilization of plant capacity. Generally, during the period of prosperity or boom a
mushroom growth of firms takes place. But during depression due to the reduction in
demand production level is reduced. This causes under-utilization of capacity which in
turn, influences the performance and productivity of the plant. Rationalization is a good
solution in this regard. It may be noted that during the depression of the thirties measures
of rationalization Where adopted mainly because of removing the ideal plant capacity in
the industry.
5. Unnecessary product varieties – This is one of the important reasons of wastage in an
industry. Cut throat competition lead to proliferation of product varieties. This further
increases the cost of advertising and other mean of promotion. Again, overall cost of
 production is increased and price go up. Rationalization helps in this regard. By adopting
standardization, the varieties can be effectively reduced which leads to Economics of
scale.
6. Obsolete machinery and equipment– Obsolete machinery and equipment if used for
production increase operating maintenance and repair cost. Does production wait such
missionary and achievements in uneconomical? Rationalization provide solution it is
stresses on the use of modern and up-to-date machinery and equipment. Automation is
one of the principle of rationalization. It is does obvious that for the purpose of increasing
efficiency is steps need to be taken to replace the one out and absolute machinery by
latest machinery and equipment. This lead to rationalization.

Principles of Rationalization

Rationalization is a multidimensional moment. It is comprehensive in nature. It scope is white. It

encompasses all those activities which are undertaken to increase production and productivity
reduce various cost eliminate waste and efficiency and ensure higher industrial stability and
better standard of living of society. In order to achieve the goals of rationalization several
principles are followed this principles touches each and every aspect of an industry the principles
of rationalization are also termed as elements of rationalization scope of rationalization aspects
of rationalization a techniques of rationalization. The principles of rationalization for the sake of
simplicity and convenience min studied under the following heads.

1. Technological principles
Rationalization aims at securing maximum technological efficiency and industry. Hence,
the technological principle of rationalization of concerned with industrial engineering
which is its foundation. The following principles are related to technological aspects of
rationalization:
i. Standardization –The principle of rationalization is related to products and their
varieties. This calls for removal of unnecessary product varieties and regulation of
production to a selected variety. Thus, standardization is concerned with fixing
standards of size, processes, quality and varieties of products to be produced in an
industry. This principle helps in eliminating wastage of efforts material and
capacity so as to cost of production and distribution could be reduced to optimal
level.
ii. Mechanization –It emphasizes on the adoption of more and more machines in
place of human labor. This helps in reducing cost of production, bringing about is
standardization, increasing efficiency of labour, improving the quality of products
and finally in enhancing return on investment.
 iii. Intensification –Intensification refers to the optimal use of available or existing
machinery, equipment and organizational capabilities including labour. This also
includes the use of old machines after proper repairing and improvement. In fact,
the purpose of intensification is to operate machines at a higher speed and
increase labour productivity without making any major change in plant and
machinery.
iv. Specialization– It is an important principle of rationalization, it is concerned with
division of labour, allotment of products, segmentation of Markets and grouping
of activities among the forms with an industry. It facilitates effective and proper
use of available resources, reduction of cost and improvement of Industrial
efficiency.
v. Simplification – The principles of simplification is the product of standardization
in any specialization. It implies reduction in the complexities involved in
production programme. This brings about improvement in organization and
techniques which in turn, lead to higher productivity through high production and
lower costs. It also ensures increased sales of each varieties of products.
vi. Modernization– Modernization refers to the processes of change or replacement
of old and absolute plant and machinery and equipments by modern plant.
Machinery and equipment’s. Hence, it is an important principle or element of
rationalization.
vii. Scientific management –It is also termed as fictionalization. It means the
application of scientific methods and techniques in the matters of supervision and
Management in internal organization of a firm within an industry. Its purpose is to
ensure maximum utilization of men, money, machines and materials.
viii. Industrial Research - Industrial Research is a vital element of rationalization. In
order to apply the above techniques continued research and development is
equally essential. Industrial Research helps in determining the most economical
processes of production and distribution. It facilitates the improvement in product
quality and helps in searching new usage of products.
ix. Automation –Automation is a fundamental principle of rationalization. It is the
improved form of mechanization. The philosophy of automation implies the
establishment of proper and effective integration and coordination among the
methods of Material Management, production management and organization
structure so as to work within an enterprise could be performed within minimum
efforts.
2. Organizational principle
Rationalization stresses not only on revolutionary technological change, but also on
organizational re-structuring and re-vamping within an industry. Such measures are taken
with a view to eliminating waste arising out of cut-throat competition among the
 enterprises. organizational changes are brought about with the help of the following
principles:
i. Industrial combination –With a view to making the industry vibrant and effective the
tool of combination is adopted under rationalization. Combination employees the
integration for merger of various types of small and inefficient business units with large
and efficient units this helps in reaping the benefits of large-scale production and
distribution it also ensures plant utilization of resources and capacity.
ii. Matching of supply and demand– Rationalization regulate the behavior of market by
suitably adjusting overall production to overall demand. Thus, production is controlled
keeping in view the total aggregate demand. The enterprises within an industry, for the
purpose of exercising control over production come into a common agreement.
iii. Control over the entrance of new units –This is also an important aspect or principle of
rationalization. In order to bring about adjustment of aggregate production to aggregate
demand restrictions imposed on the entrance of new enterprises. This may also be
affected with the help of statutory measures.
iv. Nationalization– It implies the taking over of ownership and management of an industry
by the government. This is done with a view to making the enterprises within an industry
more efficient, more effective and more productive. It may be noted that the measures of
nationalization can be considered an aspect of rationalization when it is based on
economic reality not on political ideology.

3. Financial principles
Proper Financial Management is essential for the success of rationalisation movement.
The other areas technological and organisational could be improved on the basis of
financial rationalization. Hence financial aspects include the following:
i. Financial planning –Itis an essential element of rationalization. It aims is to ensure that
that adequate funds are raised at the minimum cost.It also ensures that the funds so raised
are widely used in the firm in particular and in the industry in general. With the help of
optimal financial planning the dangers of over capitalization and under capitalization
could be avoided. It may be noted that inadequacy of funds hampers operation where as
too much funds are an unnecessary burden on earnings.
ii. Capital structure– According to Gerstenberg capital structure implies that kinds of
securities and their proportionate amount that make up the capitalization. For the success
of rationalization movement, the capital structure both of the firms or companies and
industry should be based on the fundamental principles of safety and economy. Hence a
proper ratio between two or more types of securities is to be fixed for optimal capital
structure.
iii. Financial control -For the purpose of effective use of available funds rationalization
seeks to exercise proper financial control. This can be effected with the help of budgetary
Control, management Accounting, cost accounting and financial audit.
 4. Social and human principles
Rationalization does not only cover technological forces organizational elements and
financial aspects, but it also covers social and human factors. This is the reason why it is
said that rationalization is not merely a mechanical process but it is also an art. According
to C.S Myers, rationalization demands the consideration of business not in its own purely
selfish, technical and commercial aspects but also in its wider economic social and
generally human aspects, without all this aspects it will be pseudo rationalization of
business affairs. The main aspect of social and rationalization in industry are as follows:
i. Industrial Relations– Building good Industrial Relations in an industry is an important
principle of rationalization. It facilitates optimum utilization of Manpower. Industrial
relation and manpower planning relate to recruitment of labour, provisions for adequate
training, better schemes of remuneration, motivation and incentives, recognition of
efficient workers, schemes of promotion, building high moral of workers, etc. providing
adequate security of employment, improved working conditions and provisions for labour
welfare are also covered by the scheme of rationalization.
ii. Social welfare –The scheme of social wellbeing is also a vital aspect of rationalization.
In order to raise the standard of living of society, rationalization ensures supply of better-
quality product at reduced price with ample opportunity of making choice.
iii. National interest –It is a truth that the scheme of rationalization was implemented in
Germany to revive the strength the economy of the country. Hence, rationalization serves
the interest of a nation by ensuring efficient and proper use of resource, providing
economic stability, securing industrial, development and boosting national prosperity. In
Modern times protecting, preserving and promoting environment have also become a
crucial element of rationalization.

Benefits of rationalization
Rationalization is considered a key to industrial development and economic stability. It attacks
on waste and inefficiency and promotes efficiency and productivity as also social welfare. As a
result, its benefits pass on from producers to consumers and finally to the nation.

1. Benefits to producers initially rationalization benefits the producers in a number of ways

these benefits are as under.
a) Higher production
b) Lowering of costs
c) Maximum use of power and materials
d) Higher profit
e) Elimination of wasteful competition
f) Adequacy of funds
g) Benefits of standardization
 h) Benefits of specialization
i) Protection from the evils of trade cycle
j) Promotion of Industrial Research
k) Promotion of better industrial Corporation

2. Benefits of workers –Workers are the vital part of any industrial system. Hence, the levels of
production, productivity, profitability and use of resources are greatly influenced by the work
culture of the workers. This is the reason why you rationalization page great attention on it.
Further, rationalization benefits the workers in many ways. These benefits are as follows:
a) Increase in efficiency
b) Increase in remuneration
c) Stability in employment
d) Better working conditions
e) Labour welfare
f) Proper selection and training
g) Mutual cooperation
3. Benefits to consumers- consumers are also benefited from rationalization. The major benefits
are as follows:
a) Availability of better products
b) Availability of cheaper products
c) Ease in product selection
d) Highest standard of living
e) Availability of products in right quality
f) Prompt delivery

4. Benefits of the Nation– As we know the scheme of rationalization was introduced in

Germany with the view of restructuring the shattered economy. This reveals that
ultimately rationalization benefits the nation in the number of ways. The major gains the
natioobtains are as follows.
a) Effective and economical use of resource
b) Increase in national income
c) Economic prosperity and stability
d) Rapid industrial development
e) Increase in export potential

Objectives of rationalization

1. Producers objective against rationalization –As we know, the producers are the direct
beneficiary of the scheme of rationalization. However, rationalization faces opposition from
the side of producers. The major objections against it are as follows:
 a) Requirement of heavy capital expenditure.
b) Scarcity of fund
c) Problem in exercising control
d) Fear of International competition
e) Fear of Nationalization
f) Difficulty in cooperation
g) Fear of obsolescence
h) Fear from
i) Fear of not obtaining sufficient Returns
2. Workers’ objections against Rationalization – The workers are by far, the most important
opponent of the scheme of rationalization. They attack rationalization vehemently and
openly. Their attack, at times, take the forms of strikes and demonstrations. The workers
criticize it mainly on the following grounds:
i. Danger of large scale unemployment
ii. Danger of increased workload
iii. Danger of exploitation
iv. Danger of reduced mobility
v. Danger of dominance of capital of capital over labour
vi. Danger of adverse working conditions
vii. Disparity in sharing the benefits

3. Society’s objections to Rationalization or general objections – Rationalization is criticized

and opposed not only by the producers and workers, but by the people in general also. The
society’s objections are based on the following grounds:
i. Danger of monopoly conditions
ii. Danger of big business
iii. Adverse impact on small business
iv. Danger of concentration of wealth
v. Fear of wastage of resources
vi. Adverse impact on skill and personality development
vii. Danger of environmental pollution

Difference between Rationalization and Nationalization

Rationalization Nationalization

1. Rationalization aims at cutting the ills 1. Nationalization aims at removing the

of all the enterprise-private and abuse of power by private enterprise through
 converting
public-within an industry. them into public enterprise.

2. Rationalization is a process of 2. Nationalization is the state policy through

increasing efficiency of the enterprise which private enterprise are taken over and
within an industry. managed by the state in public interest.

3. Rationalization does not aim at

transferring the control and 3. Nationalization aims at transferring control and
management of private enterprise to ownership to the government from the private
the hands of the government. hands.

4. Under rationalization, generally 4. Under Nationalization, measures for public

private entrepreneurs decide the enterprise are decided or planned by the state.
measures to be adopted for the units
within an industry.

5. Rationalization saves the units within 5. Nationalization saves the community from
an industry from wasteful competition exploitation by private entrepreneurs.
through rational or logical means.

Difference between Rationalization and Scientific management

Rationalization Scientific Management

1. Rationalization was discovered in 1. Scientific management was discovered in
Germany with a view to converting the United State with a view to
the shattered economy into a maximizing the efficiency of plant.
prosperous one
2. The scope of scientific management is
2. The scope of Rationalization is wide limited. It is, in fact, a constituent of
and comprehensive. It, inter alia, rationalization.
includes scientific management.
3. Scientific management is plant oriented
3. Rationalization is industry oriented because its principles are applied at
because its scheme is introduced at the individual plant level.
whole industry level.
4. Scientific management mainly covers
4. Rationalization covers all activities of production and organizational activities.
an industry, such as production,
finance, organization, marketing, 5. Scientific management encompasses only
personnel, social and human, etc. a limited measures, such as time study,
motion, study, fatigue, study, tool study,
5. Rationalization encompasses several personnel matters, etc.
measures to ensure industrial progress
and prosperity, such as, combination,
mechanization, automation,

reorganization, industrial research,

standardization, intensification, etc.