The rationalisation is defined as a process or a reorganisation concept that is implemented to boost efficiency and productivity. In the corporate sector, the term is also used for closing down or selling off some units to adjust the operational structure so that it can be in sync with core competencies.
Meaning of rationalisation
The rationalisation is a process that every business entity considers important because it aids in minimizing costs and increasing revenues to improve the bottom line of the financial statement. It leads to expansion or reduction in the size of the firm or in making structural changes that result in improved productivity.
The rationalization is a concept of systematic reasoning that is designed to reduce waste in terms of effort, time and resources and simplify processes for the betterment of a company.
Need of rationalisation
The following factors will help to know the necessity of rationalisation –
- Conservation and proper utilisation of resources – An essential need of rationalisation is because the process helps in conserving resources. Numerous resources are present in a minimal capacity, and it becomes imperative that proper utilisation process takes place so that only the required number is used and the rest is conserved for future usage.
- Eliminating unnecessary product varieties – in these competitive times, every business is a rival of another company and are trying to launch products that are different from the previous ones. This has resulted in several unnecessary varieties of the same product. Rationalisation aids in eliminating useless product varieties via a joint effort of all the firms. This is possible by standardization of products in terms of design, quality etc
- Eliminating idle capacity – When the demand is high various new companies are formed to meet them, but after a boom period, the smaller units find it difficult to survive. There is a need for rationalisation because it aids in integrating weak units with the flourishing ones to eliminate idle capacity
- Replace old machinery- The need for rationalisation is felt in industries because it helps in replacing old equipment with new, modern and technologically advanced machinery to boost operations and efficiency.
Elements of rationalisation
The elements of rationalisation are as follows-
- Standardisation – One of the essential elements of rationalisation is standardisation that eliminates varieties of products that are unnecessary in the scheme of things, cross weights and expenses on the competitive advertisement.
- Specialisation – Another vital element of rationalisation is a specialisation that results in fair division of labour and efficient use of the available resources like human resources and machinery
- Combination – As the name suggests, rationalisation is a planned strategy that utilises all the available resources to eliminate waste. It integrates various types of weak and inept units for large scale production.
- Simplification – The rationalisation element simplification results in high production with reduced costs and it ultimately lead to increased sales.
- Mechanisation – The element mechanisation is targeted to replace human resources with machines. It is necessary to boost the efficiency and speed of production because of automated processes.
- Modernisation – rationalisation emphasises on modernisation because after a specific time it is imperative to replace old equipment with new ones if a company is interested in boosting its efficiency and productivity. It is modern and advanced innovations as well as techniques that can help a company to take a step forward and that too in the right direction
- Research – The process of rationalisation involves proper marketing research that aids in taking the steps needed to know and meet the demands of people.
Advantages of rationalisation
The advantages of rationalisation are as follows-
- Rationalisation helps in the standardisation of processes that simplify the manufacturing method and eliminates waste
- It helps in introducing new techniques as well as the latest equipment and machinery that boosts productivity
- Rationalisation aids in avoiding unhealthy competition
- Unsold stock is a massive problem for every sector and rationalisation aids in mitigating this problem by removing unhealthy competition
- Enhances the creditworthiness of weaker and inefficient units by integrating them with strong ones
- Improves market stability
- The process of rationalisation offers higher remuneration and good security to the workforce
- One of the advantages of rationalisation is that it provides the workforce with a chance to develop their efficiency levels
- It provides the workforce better working conditions
- As rationalisation lowers the production cost, the consumers can avail the benefits via reduced prices. One of the significant advantages of this process has been offering products to the consumers at considerably lower rates
- The improvement in technique leads to qualitative and standardised products to the consumer
- Rationalisation assist in increasing the standard of living in a society
- It reduces wasteful competition and helps in conserving resources
- Rationalisation decreases the coat of production, and this helps the companies to compete in foreign markets
Disadvantages of rationalisation
The disadvantages of rationalisation are as follows-
- The process of rationalisation involves a large number of capital expenses and that too without the guarantee of adequate returns
- It is sometimes unable to check trade cycles
- Raising funds for the process of rationalisation from external sources is difficult
- Rationalisation needs further research and development to continue with the process of improvements, and it is not possible to keep with it every time
- The rationalisation is about being fair and equitable, but it is unable to determine sharing ratio between employers and employees
- Rationalisation promotes mechanisation and modernization, and that leads to unemployment of workers because of automated processes
- It is a common belief that the human resources that are deployed after the process of rationalisation will have to work doubly hard to compete with each other as well as automated processes
- Even when working harder the workers feel that they are given nominal income compared to the workload they are handling
- The method of modernisation and mechanisation is becoming more important than improving the living conditions of the workforce
- Mechanisation has created monotony as the workforce has lost the initiative to make changes