PRODUCTIVITY IMPROVEMENT IN THE MSE SECTOR

PAPER PRESENTED

BY

CHARLES M.M. ONDIEKI, Msc. (Meh. Engg.)

AT THE

PRODUCTIVITY CENTRE OF KENYA SEMINAR ON PRODUCTIVITY

FEBRUARY 2004, NAIROBI

Contents Page

Title 1Acronyms and Abbreviations 3Preface 4Executive Summary 6

1.0 Introduction 8• Definition of MSE Sector 8• Characteristics of the Informal Sector 9• The Importance of MSE Sector in the Kenya 13• Constraints to MSE growth 14

2.0 Productivity 15• Definition 15• Factors that affect Productivity 15• Economic Trends that influence Productivity 16• Productivity Improvement Tools and Techniques 17

3.0 Factors that affect Productivity Improvement 21• The Role of Education and Training 21• Entrepreneur’s and Enterprise’s Attributes 25• Poor Policy Formulation and Implementation 27• The Effects of Social Policy Strategy 27• HIV/AIDS Pandemic 29

4.0 Barriers to Productivity Improvement 335.0 Recommendations to Aid Productivity Improvement 34

• The Role of Education and Training 34• Institutions and Enterprise Productivity 40• Linking MSEs to High Volume Buyers Methods 42• Green Production (GP) 51• Production Management and Control Techniques 54• HIV/AIDS Strategy in the MSE sector 66• Legal and Regulatory environment 71• Reverse Social Policy Strategy 72• MSE Coordinating Council 75

6.0 National Productivity Centre (NPC) 76• Components of Assistance 76• Consultancy Procedures 77• Productivity Improvement Concerns 78• Productivity Improvement Action Plan (PIAP) 78• National Productivity Advocacy Plan 82• National Productivity Centre (NPC) Support Services 82• Productivity Indicators and Monitoring System 83• Further Sources of Support Available to MSEs 83

7.0 Conclusion 83

Acronyms and Abbreviations

DIT Directorate of Industrial Training

EMCA Environmental Management and Coordination Act

GP Green Productivity

GoK Government of Kenya

KEBS Kenya Bureau of Standards

KIRDI Kenya Industrial Research Development Institute

KNCPC Kenya National Cleaner Production Centre

MLHRD Ministry of Labour, Human Resource and Development

MLEs Medium and Large Enterprises

MLHRD Ministry of Labour and Human Resource Development

MSE Micro and Small Enterprise

MSEs Micro and Small Enterprises

MTI Ministry of Trade and Industry

NPC National Productivity Centre

NGO Non Governmental Organisation

NGOs Non Governmental Organizations

SCM Supply Chain Management

SEDEC Small Enterprise Development Council

SME Small and Medium Enterprise

SMEs Small and Medium Enterprises

UNDP United Nations Development Program

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PREFACE

Micro and Small Enterprises cut across all sectors of the country’s economy and provide one of the most prolific sources of employment, not to mention the breeding ground for medium and large industries, which are critical for industrialization. Today, these enterprises are found in every corner of this country and have great potential to create a variety of jobs, while generating widespread economic benefits.

The contribution of MSEs to the economic recovery cannot be overlooked since the MSE sector is one of the most important economic vehicles for growth, employment generation and social improvement. Almost all MSEs in developing countries face difficulties pertaining to market, technology, human resource development, infrastructure and financing problems. Low education levels, and short supply in entrepreneurial and managerial skills characterize the majority of them. These three factors are more often the main causes of business failure. However, the major problem is the lack of access to adequate and low-cost sources of financing coupled with low education levels. In general, MSEs also lack access to information on areas, which could assist them in their operations such as market opportunities, technologies, business linkages, and training opportunities.

The shift in outlook after 1970s benefited from heightened realization that a high and rising share of industrial employment was still in the small enterprise sector. Small enterprises also link closely with agriculture so that their promotion would be part of an agriculture-led development strategy (Snodgrass & Biggs, 1995).

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Executive Summary

This paper set out to explore the performance and productivity improvement of micro and small enterprises in Kenya. Research results show that the entrepreneur's age, gender, levels of education and membership in business support groups exert systematic influences on the productivity of enterprises. Similarly, attributes specific to different enterprises such as its age, location, ownership structure, formality status and business activity determine production outcomes, and hence productivity improvement.

These results have clear policy messages. Given the importance of education in enterprise performance, increasing the pool of diploma and degree level educated Kenyans from which small business entrepreneurs are drawn is key in promoting profitable entrepreneurship. However, this is a long term strategy. The education levels for the majority (over 60%) of the operators in the MSE sector is primary education and below. Therefore, for the short (as well as long) term market linkages is the solution to the productivity improvement in the MSE sector. Market Linkages is the most appropriate strategy that can be used to improve productivity of these operators with low level of education.

Female-owned enterprise shows poorer performance relative to those owned by male. Given the evidence that positive network externalities are in play in the small business community, promoting increased promotion of business related groups (e.g. Jua Kali Associations) is key to the future of the sector.

Considering the positive impact of entrepreneur's age and enterprise performance, demographic characteristics count for enterprise performance. This provides further justification for intensifying the fight against HIV/AIDS to increase life expectancy and tap the business-related benefits of longer life. A positive impact of the age of an enterprise on its productivity suggests that strategies for promoting enterprise longevity will be crucial for the development of the business sector.

Since majority of the enterprises are either sole proprietorships or family owned, strategies for making these businesses intergenerational would be boon. Given the negative impact of sole proprietorships as ownerships structures on performance, this mode of ownership is a dead end. It is necessary to design enterprise transformation mechanisms that release small businesses from the limitations posed by owner-managed sole proprietorship. Assuming a size factor in the business ownership structure, enterprise growth will be necessary in giving way to the more progressive ownership structures. Strategies for promoting enterprise growth are therefore important.

Spatial differences in enterprise performance can be addressed by improving public services in rural Kenya, particularly roads, telecommunication and electricity. Such improvement would encourage the development of profitable commerce in rural areas and create scale economies necessary for spatial spread of sustainable business-support services. These developments would in turn make rural commerce at least as productive as those in urban areas.

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Since formality is important for enterprise performance, strategies for mainstreaming informal enterprises would shield enterprises against penalties associated with informality and give them an opportunity to realize their full potential; the Government will also gain by collecting taxes that it will use to improve infrastructure facilities for the operators. Such strategies would include reduction of business registration barriers such as direct registration costs and delays.

The improvement of the rural facilities will encourage the establishment of more rural industries that will assist in raising the productivity of agriculture; this will promote agricultural business from being for subsistence to a commercial business with the emergency of value-added products. Civic education that demonstrates the viability of small business as a separate business activity would assist in the shift towards specialization and in turn encourage enterprise productivity. The basic concepts of continuous improvement highlighted in this paper are fundamental to the improvement of productivity. Companies of any size can apply these techniques to realise the benefits. The productivity improvement tools highlighted in this report are all low-cost; indeed some incur no direct cost at all. They are about working smarter rather than harder.

A gradual implementation of selected tools and techniques should lead to reduction in production waste and improve the morale of employees involved as they see the immediate visual impact of their productivity improvement ideas. The challenge (especially) for the MSEs is to overcome barriers to the adoption of productivity tools and to understand and implement some of the productivity improvement tools and techniques identified in this report. The application of such tools should mean that MSEs can become – and remain – preferred suppliers in the ever developing agile supply chains of which they are a key element.

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1.0 Introduction

Kenya has continued to perform poorly even in areas we have advantages i.e. agriculture, tourism, MSE sector etc.

Since the 1980s, the economy has performed well below its potential, with low economic and employment growth and a decline in productivity. Consequently, per capita income declined from US$271 in 1990 to US$239 in 2002. Thus the greatest challenge facing the Government today is how to restore economic growth, generate adequate employment and reduce the high levels of poverty.

This paper identifies Productivity Improvement as the key policy measure for Economic Recovery for Wealth and Employment creation. It is recommended that the productivity improvement first be applied to the productive sectors i.e. Agriculture including Livestock and Fishing, Tourism, Trade and Industry of the economy, which account for approximately 50% of GDP.

The Trade and Industry sector accounts for over 20% of GDP and employs about 300,000 in the formal sector and 3.7 million in the Small and Medium Enterprises (commonly referred to as ‘informal sector’). It is this sector that is likely to recover fastest, and therefore very strategic to the recovery plan. The Micro and Small Enterprises (MSEs) in particular, contribute significantly to the national GDP and employment, estimated at 18.4% and 75% respectively. Accordingly, priority will be given to MSEs and the manufacturing sector.

The development of MSEs is critical to the overall Economic Recovery Strategy (ERS). MSEs create jobs, employ workers laid off from declining of formal sector and generate government revenues. They also establish a solid foundation for market-based growth by creating a large class of entrepreneurs.

1.1 Definition of the MSE sector

Three criteria are mainly used in literature to define MSEs. The first one is based on number of employees; the second criterion is based on the degree of legal formality and is mainly used to distinguish between the formal and informal sectors; the third criterion defines MSEs by their limited amounts of capital and skills per worker; and the fourth defines the sector in terms of business turnover.

Since various technologies will yield different turnover for the same number of employees or size of enterprise, the fourth criterion gives a more realist definition of the modern MSE sector. In this respect the sector is divided into three categories:

• Survival enterprises are those with turnover of less than Ksh.200,000/= per annum,

• Micro-enterprises are those with turnover of between Ksh.200,000/= and Ksh.5,000,000/= per annum, and

• Small enterprises are those with turnover of between Ksh.5,000,000/= and Ksh.18,000,000/= per annum.

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The term MSE incorporates firms in both the formal and informal sector. However, the terms MSEs and informal sector are normally used interchangeably as most MSEs are informal enterprises. Informal sector firms are characterized by: ease of entry; small scale of activity; self employment with a high proportion of family labour; little capital and equipment; labour intensive technologies; low skills; low level of organization with little access to organized markets, informal credit, education and training or services and amenities; cheap provision of goods and services or provision of goods and services otherwise unavailable; low productivity and low incomes. The activities of MSEs also have very little compliance with administrative requirements. What distinguishes the informal sector from the formal sector is that the former are mainly incorporated business units of the household sector.

The informal sector is itself roughly divisible into two: the small informal productive sector and the mainly survivalist activities. The small informal productive sector are those elements of the informal sector as distinct from survivalist activities which are given such description as "sustainable"; emergent" or" entrepreneurial".

1.2 Characteristics of the Informal Sector

The informal sector consists of small-scale enterprises engaged in a wide range of economic activities on the margins of the 'formal' or mainstream economy and usually outside the conventional orbit of government regulation and assistance. Operations in this sector are usually unlicensed and unregulated by commercial authorities (hence the term 'informal'). Such enterprises have often been harassed and prosecuted by local and other authorities, who historically have tended to see them as a nuisance rather than as a legitimate means of livelihood.

Informal enterprises typically use simple forms of technical knowledge in labour intensive production and management processes, and generally supply unsophist-icated products and services through simple marketing channels to localised niche markets principally oriented towards low-income groups. Such enterprises often provide goods and services either not produced by formal businesses, or supplied by the latter in forms or quantities unsuitable for or unaffordable by local consumers.

Informal enterprises rely mostly on cash transactions, informal credit markets and/or supplier credit, and operate within an intensely competitive environment due to ease of entry and localised market area. Enterprises may operate singly, or organised in groups as co-operatives or associations. They face uncertainty and instability in their supplier, labour and product markets due to the low and variable consumer spending, less developed infrastructure and limited institutional capacity of most developing economies. Market opportunities shift rapidly, and competition for raw materials, skilled labour and customers can be intense.

Informal enterprises commonly deal with these challenges by forming organisational networks (in which firms relate to each other as organisations) and entrepreneurial networks (linking enterprise operators with other individuals and organisations) to secure physical and financial resources and markets.

One individual often operates informal enterprises alone, or together with a few paid or unpaid members of the operator's family. A majority of the informal enterprises in

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developing economies are micro-enterprises (i.e. employing five or less people including the operator), although the size breakdown of enterprises varies between countries and regions. Such firms are typically launched on the savings of the operator and/or his or her family, often supplemented with loans from rotating credit and savings associations within their community.

Limited capital bases, low productivity and output, low and irregular income and low levels of social service from local and other authorities depress the quality of the working environments of most informal enterprises. As a result, people working in such firms suffer comparatively high exposure to occupational health hazards and diseases. Very few operators and workers are reached by formal private sector or government social insurance schemes. Furthermore, given the historical tendency of authorities to view the informal sector as a transitory nuisance, it is rarely factored into national socio-economic strategies or development programmes other than as the recipient of specific micro-enterprise business or credit support projects.

Further than the above basic common characteristics, however, the informalsector encompasses very diverse and dissimilar activities, organisational forms, and institutional environments, and cannot usefully be treated as a homogeneous sector. People of widely differing ages, social backgrounds, genders, education levels, vocational training, and work experience operate informal enterprises.

Such enterprises engage in a very diverse range of activities, use different production strategies, sell to different markets, and operate in different physical, social and political environments. Broad categories of enterprise activity within the informal sector include the following:

• Retail enterprises (food): including street hawkers and "tuck shops" retailing a wide range of foodstuffs, and people selling fruit and vegetables, cold drinks and prepared snacks.

• Retail enterprises (non-food): including street hawkers, informal shops, and mobile vendors operating from vehicles, who retail a variety of non-food items such as cigarettes, cosmetics, electrical goods, and cleaning products.

• Service activities: including hairdressing, shoe repair and alterations to garments.

• Intermediary and wholesale trade: long-distance and cross-border trade in handicrafts, clothing, etc.

• Manufacturing (engineering production): including welding, the making of metal products, motor vehicle repair, production of wooden and clay handicrafts, and construction. n Manufacturing (soft goods production): including knitting, the sewing of garments, embroidery, making of toys, and the preparation and sale of food.

• Illegal or underground activities such as commercial sex work, production and distribution of narcotics, smuggling, theft and extortion.

Typically, single owner-operators particularly women with comparatively low levels of education, skills training and formal sector employment experience run most retail enterprises within a given community. The operators of engineering production-type manufacturing enterprises are mostly men, generally with comparatively high levels of education and skills training, often employing one or more paid or unpaid assistants or

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informal apprentices who themselves gain comparatively high levels of vocational skill. Operators of soft-goods production enterprises are mostly women.

Characteristics of informal sector enterprises that tend to vary strongly by the sub-sectors listed above include the following:

• Workforce size and potential for expansion: the majority of informal enterprises are micro-enterprises, often consisting only of the operator, or the operator plus one or two workers who may be members of the same family. The retail, services and intermediary/wholesale sub-sectors tend to be dominated by micro-enterprises with little potential for expansion, while manufacturing includes small enterprises as well, typically with greater growth potential.

• Gender of operator: women predominate in the retail food and soft goods manufacturing sub-sectors, while male operators are predominant in engineering production.

• Skill level of operator: the level of relevant technical and business skill of operators tends to be lowest in the retail, services and intermediary sectors where financial and technological barriers to entry are relatively low. Operators in manufacturing face higher technological barriers to entry, and will thus tend to enjoy higher skill levels.

• Extent of appropriate vocational training received by operator and workers: this will tend to be lowest in the retail sectors, services and intermediary trade. Operators in manufacturing will typically have received at least some vocational training, which to a large extent will determine their willingness and ability to participate in this sub-sector.

• Propensity to network or form linkages horizontally: in order to overcome their weak-nesses as individual firms, enterprises may form linkages or networks with each other in order jointly to manufacture products and market products or services. Horizontal networking for production purposes and marketing tends to be more important in manufacturing, intermediary trade and certain underground activities. Family networks and rotating savings and credit associations are important sources of capital in all informal sub-sectors.

• Propensity to network or form linkages vertically: enterprises may form linkages or networks with other firms or individuals at different stages of the production process, in order to access capital, jointly manufacture products and jointly market products or services, particularly in manufacturing and intermediary trade.

Often these functions will all be involved within the same contract or transaction with a particular supplier or customer. Characteristics of the informal sector that tend to vary strongly by location or region include:

• the relative dominance of urban and rural location within the sector; • the level and type of education received by operators and workers; • the extent of support for (and the effectiveness of) small business associations; • official policy and attitudes towards the sector; the level and type of support

available to informal enterprises; • and the effects of the macroeconomic environment on supply, labour and

product markets.

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People are motivated to start up and maintain informal enterprises for a variety of reasons. Kenya (as in all other developing countries) is prone to high levels of unemployment, which in the absence of adequate formal social protection schemes forces many people, particularly those with minimal education and skills training, to engage in those types of informal sector enterprise that are accessible to them. Women typically have less access to education and training than men, and are less able to compete in the formal labour market or to establish informal enterprises requiring higher skill levels. In addition, low household income, perhaps exacerbated by long separations from husbands engaged in migrant labour, prompts women to engage in family-livelihood or "survivalist" activity in informal sub-sectors with the lowest technological and financial barriers to entry, in order to support themselves and their dependants.

Other people, especially those with a more advanced level of education, formal sector work experience and/or some vocational training, have the skills necessary to compete in less accessible informal sub-sectors such as manufacturing. They establish their own enterprises not only because of difficulty in finding or keeping formal sector employment, but because they prefer the independence and growth potential offered by self-employment.

In many developing countries, structural adjustment programmes and economic crises have in recent years caused significant socio-economic dislocation, which has prompted an expansion of the informal sector. Trends towards the "actualization" of employment in the formal sector, or the "normalization" of production by subcontracting work to lower-cost informal enterprises, have helped increase the prevalence of informal sector activity. In addition, in pursuing socio-economic development, authorities may encourage formal sector outsourcing to or distribution via informal enterprises.

Kenya greatly depends on the informal sector enterprise since the maintenance of formal sector employment levels is progressively reducing. However, it is naturally difficult to measure the contribution of the informal sector to output and employment, and this varies widely between regions.

1.3 The Importance of MSE Sector in Kenya

The MSE is one of the dynamic and growing Sectors of the Kenyan economy. The activities of the MSE Sector cut across other sectors of the economy. Its wide geographical distribution attest to its potential for provision of goods and services, offering excellent opportunities for skills entrepreneurs and management development, alleviation of unemployment and poverty, strengthening forward and backward linkages with other economic sectors and supporting industrialization policies that promote rural-urban balance.

This sector presently is growing at the rate of 10%; recent statistics (2002 statistics survey) attest to the fact that the sector engages in excess of 6.9 million people, yields no less than 18.4% of National Gross Domestic Product (GDP) and contributes more than 75% of all non-farm jobs. This phenomenal growth in the MSE sector has increased policy focus on the development of this sector as an engine of economic growth, employment creation and poverty reduction. This is in line with the

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government's objective of making the private sector the key source of future growth. The sector is estimated to contribute 88% of the 2.6 million jobs the GoK intends to create over the Economic Recovery Strategy Plan (ERSP) period of 2003 – 2007. Other benefits that make promotion of MSEs crucial to the development of Kenya's economy are:

• MSEs contribute significantly to the economy's output of goods and services• MSEs save on scarce capital in creating jobs.• The MSE sector has been the primary source of developing a pool of skilled and

semi-skilled workers and entrepreneurial talent who are an important base for future industrial expansion.

• The MSE sector has been used to strengthen forward and backward linkages among socially, economically and geographically diverse sectors of the economy.

• The sector constitutes an important market and supply point for rural enterprise products, which are predominantly marketed to rural households.

• MSEs promote rural-urban balance by supporting industrialization policies in the rural areas.

• Because of their structure and ownership they are flexible and can adapt quickly to market changes.

1.4 Constraints to MSE Growth

As in most African countries, there is, however, no vertical growth in the MSE sector in Kenya, and therefore virtually no medium enterprises, hence the question of the “missing middle”. This missing middle is very crucial to economic development of any country. Lack of vertical growth has inhibited the translation of the sector into a vibrant sector to be an engine of growth and to provide sustainable economic development and generate significant employment and wealth. This scenario has been attributed to poor leadership and governance, low education levels, inadequate markets, inaccessibility to credit, lack of appropriate information, poor infrastructure, inhibitive legal and regulatory environment etc.

Despite the critical and significant role played by MSEs in national development the sector has over the years experienced many binding constraints to the realization of its full potential; there has been little policy implementation. Lack of coordination of the various implementing agencies, poor resource management, and lack of enthusiasm by policy makers to encourage the growth of the informal sector explains the poor implementation record in the sector. One of the drawbacks in policy implementation has been the failure of the government to consider policy on MSE as part and parcel of a broad economic policy framework, encompassing macroeconomic policies. Consequently, there has been very little vertical growth in the MSE sector.

The various impediments, policy or otherwise, that constrain the growth of MSEs and, therefore, result in low productivity and loss of competitiveness for MSEs include:

• The domestic policy environment encompassing the macroeconomic environment, incentive policies, and institutions. A combination of these impediments tends to create a difficult external environment for MSEs.

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• Internal constrains that tend to constrain supply of goods and services from the MSE sector. They include limited access to finance, low management skills, poor infrastructure, limited access to markets and market information, low technological skills and adoption, low education levels and also some gender aspects.

2.0 Productivity Improvement

2.1 Definition

Productivity is an index that measures output (goods and services) relative to inputs (labour, materials, energy, and other resources) used to produce them i.e. productivity relates to how effective an organization is in the use of its resources.

Productivity = output/input

Productivity measures are used to track the performance of an enterprise so that management can decide where improvements are needed. Productivity is closely related to the nation’s standard of living; high levels of productivity are largely responsible for the relatively high standards of living whilst low levels of productivity are responsible for low standards of living.

2.2 Factors that Affect Productivity

Productivity is affected by:Methods – the method used to produce the goods and services.Capital – in most cases a more expensive machine e.g. typewriter vs computer,

can improve productivity.Quality – poor quality affects productivity; where standards are not enforced the

quality of products are poor.

Technological change – many productivity gains have come from technological improvements. Technological change often improves the quality of capital, but it can enhance the productivity of any resource. The greater productivity is, the more goods and services will be produced from a given amount of resources. Technological change can increase the availability of resources, and can also reduce the number of workers needed to produce the same output (and hence increase productivity).

Research and Development – Economies prosper by producing more goods from the same resources. Examinations of productivity over time typically stress the role of technology change. Technological change and the ability to apply these changes to all aspects of products are the driving force behind modern economic growth in developed economies.

A major contributor to productivity has been improvement in the quality of human and physical capital. In terms of work force, this quality improvement results from more education and job training. In terms of physical capital, quality improvement results from better technology embodied in this capital. Improvements in technology arise from scientific discovery, which is the result

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of Research and Development. Technological innovation increases the productivity of the other resources, so that total output is increased.

Management – productivity improvements can be achieved through improving organization and preparation.

2.3 Economic Trends that affect Productivity

The following economic trends affect productivity in all enterprises irrespective of size:

Knowledge Knowledge has become one of the most important production factors. The centrality of knowledge brings to the fore the importance of human capital and intellectual investment. These lend greater weight to intangible production factors such as individual know-how, communication networks, access to information and technological knowledge.

Innovation Innovation has become the key factor in business, exceeding in importance other factors such as raw materials, the scale of production and low labor costs.

Downsizing The importance of knowledge and innovation, together with better access to info-communication technologies have resulted in a reduction in the size of businesses and an increase in their "productivity" in terms of the relationship between employees and turnover.

Networking In this situation, the importance of horizontal networks between enterprises grows, as is the case for relationships between businesses and other economic actors. The development of this vast range of potential cooperation among businesses has led to decentralized production. This has had an impact on technology transfer. The new technologies, which used to be transferred through hierarchical communications channels, now move through the integration of modular organizational components that are independent but perhaps linked through strategic alliances or temporary agreements.

Globalization The development of communication, global social and economic convergence, and the growth of transnational links foster the globalization not only of markets, but also of ideas, services, technologies and alliances.

Decapitalization We are entering an economic phase characterized by an increase in available capital and consequent lessening of the importance of "capital" compared with knowledge and human resources.

2.4.0 Productivity Improvement Tools and Techniques

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Fundamental Productivity Improvement Tools and Techniques for MSE Productivity improvement techniques can be applied effectively in enterprises of any size, from one-person companies to corporations with thousands of staff. The majority of the techniques were first seen in mass-production operations but the benefits they can yield in MSEs is not to be underestimated. Indeed, the absence in MSEs of many of the rigidities commonly found in large companies make it easier for them to reap the benefits of productivity improvement techniques.

In order to stay competitive, MSEs need to improve their production processes in an efficient manner. This paper explores a range of low-cost or no-cost productivity improvement techniques suitable for implementation by MSEs. Some of these techniques were pioneered in the Toyota production system. They include jidoka, heijunka, just-in-time, kanban, kaizen, and the five S’s.

2.4.1 JIDOKA

Jidoka is a Toyota concept aimed at describing the man-machine interface such that people remain free to exercise judgement while machines serve their purpose. Human jidoka allows operators to stop the process in the event of a problem. Workers have the ability to stop the line if: equipment malfunctions; defects are found; work delays occur; or materials or parts shortages occur.

The following three principles are central to the jidoka way of working.Do not make defects; Do not pass on defects; Do not accept defects.

The jidoka system shows faith in the worker as a thinker and allows all workers the right to stop the line on which they are working.

2.4.2 HEIJUNKA

Heijunka is the Toyota planning system, which focuses on achieving consistent levels of production. Heijunka is a key operating concept of just-in-time (JIT) manufacturing systems. In practice, it involves load levelling and line balancing, as well as achieving uniform scheduling of production so that as one operation ends the next operation is ready to begin.

2.4.3 JUST-IN-TIME

Just-in-time (JIT) is defined as “A philosophy of manufacturing based on planned elimination of all waste and continuous improvement of productivity”. In practice, JIT can be applied at two levels in an organisation:1. The manufacturing process, where the aim is to have synchronised operations

with minimum quantities of raw materials, work-in-progress (WIP) and consumables, throughout the process; and

2. Related activities, applied to all functional areas of the business and all levels of the organisation from the board of directors to the shop floor. The philosophical view is concerned with the reduction of waste (i.e. non-value-adding activities) throughout the organisation.

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In the factory, JIT continually focuses attention on waste and in particular on the time spent on all aspects of the manufacturing process. The goal is to minimise the standard lead-time by adopting a keep-it-moving approach to manufacturing. This will not be achieved by reacting to latest developments; it requires careful planning, testing and agreement as to how all those involved with both manufacturing and support functions will act. The basic aim of JIT in a factory is to: reduce lead times; minimise inventory; reduce the defect rate to zero; and accomplish all of the above at minimum cost.

There are three essential ingredients to effective manufacturing excellence through JIT:

• JIT manufacturing techniques, which aim to promote a rapid response to customer demand while minimising inventory – for example, pull systems, short change-over times, small transfer batch sizes and plant layouts that support short movements of materials;

• a total quality culture, an approach to running the organisation which pursues excellence in both the product and every area of the business, including customer service, purchasing, order taking, accounting, maintenance, design, etc.; and

• people involvement, that is the involvement of all employees in the development of the organisation through its culture and its manufacturing and other business processes.

To maintain continual improvement, appropriate performance measures and targets should be in place. These may include: factory lead time; factory change-over times; percentage of products right first time; work-in-progress (WIP) or stock turns; some measure of people involvement or contribution.

2.4.4 KANBAN

The word kanban literally means visible record. In the kanban system, which is employed as a JIT production control technique, flow is controlled by the use of cards. When implemented correctly, JIT and kanban can result in reduced inventory and higher efficiency in a manufacturing system.

2.4.5 KAIZEN

Kaizen is a Japanese word meaning gradual never-ending improvement in all aspects of life. It represents a Japanese approach to improvement and can be interpreted as continuous improvement in all areas. Total quality control is defined as ‘organised kaizen activities involving everyone in a company - managers and workers - in a totally integrated effort toward improving performance at every level’. This improved performance is directed towards satisfying such cross-functional goals as quality, cost, scheduling, manpower development and new product development. It is assumed that these activities ultimately lead to increased customer satisfaction.

kaizen-based improvements are approached with the following steps:1. Define the area for improvement.2. Analyse and select the appropriate problem.

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3. Identify its causes.4. Plan countermeasures.5. Implement countermeasures.6. Confirm the result.7. Standardise.

Techniques used in facilitating kaizen include the following: zero defects; just-in-time; kanban; total productive maintenance; 5S; suggestion schemes; robotics; productivity improvement; muda - eliminating waste; PDCA (Plan, Do, Check, Action cycle); quality circles

The following principles are recognized as essential for continuous improvement.• Traceability: In order to identify root causes and prevent them recurring there

must be a system in place to trace defects back to their source. In assembly manufacturing, this normally means tracing components by lot and vendor back to the problem assembly stage. In process manufacturing, this means tracing control conditions by critical process step for the lots affected by the defect.

• Design of experiments: The most effective way of improving process steps in order to increase yield, shorten cycle time or make the process more robust.

• Stop-in-time: When defects are detected on the production line, the defective material must be stopped immediately. If a second, similar defect is discovered the process step must be stopped immediately and corrective action taken. This prevents adding waste to the defective product and prevents production of further defects.

• Root cause detection: Statistical data collection is a method of identifying root causes. The five Ws (who, what, where, when, why) and two Hs (how, how much), also help track down the root cause of any problems in complex production environments.

2.4.6 THE 5 S’S

The five S’s stand for five Japanese words;seiri (proper arrangement); seiton (orderliness); seiso (cleanliness);seiketsu (standardising); shitsuke (discipline)

The concept is used to establish and maintain all aspects of quality in an organisation. The 5 S’s are explained in more detail below:

Seiri (proper arrangement, sorting out): Identify what is needed and what is not needed; Keep what is needed and eliminate what is not needed; Do not produce waste or consume more resources than necessary; Introduce measures to prevent the build-up of unnecessary items.

Seiton (orderliness, tidying up): Put things in order; Determine a location for all identified, needed items; Make it easy for anyone to find, use and return these items by providing information as to where things are now stored; Use standard equipment where possible; Find alternative storage for tools, parts, equipment and supplies that are needed but not used daily.

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Seiso (cleanliness): Shine equipment, tools and the whole workplace; Eliminate dirt, dust, oil, scrap and other foreign matter to make the workplaceClean; Adopt cleaning as a form of inspection - Cleaning exposes abnormal conditions and corrects pre-failure conditions; Integrate cleaning into everyday maintenance tasks by all staff.

Seiketsu (standardising, housekeeping): This is a state beyond the first three S’s, in which they are thoroughly maintained by sharing information so there is no searching for information such as delivery dates, production schedules and so on. Everything is standardised and standards are made visible so that all abnormalities can be easily and immediately recognised.

Shitsuke (discipline): Maintaining correct procedures becomes a habit; Proper training of all workers has occurred; All workers have ‘bought-in’ and a change in work habits has been achieved; The workplace is well ordered and run by agreed procedures; When applied to the organisation, it could also be applied to external relationships. The 5S principles underpin the low-cost productivity improvements discussed in this paper. All five of the five S’s can be accomplished with little or no capital investment whilst the financial returns from the resulting productivity improvements – in the form, for example, of improved storage facilities – can be quickly realised, and will offset any cost involved.

3.0 Factors that affect Productivity Improvement in the MSE Sector

3.1 The Role of Education and Training in Productivity Improvement in the MSE Sector in Kenya

The challenges and the opportunities for Kenyan MSEs to respond to external pressures and improve their productivity require a much greater focus on the learning of the individual MSEs, their enterprises, support institutions and the nation in order for economic development to have a good chance of success.

Globalization pressures increase the priority to develop and reshape the nature of strategies that can maximize MSEs competitiveness. In particular, it heightens the importance to enterprises of capturing the benefits of institutional and individual learning. Whilst education and training do not determine enterprise success, it is clear that they can play an important role in such success. However, there are significant obstacles that make it hard for enterprises to adopt learning-led competitiveness strategies or limit the benefits that arise from such strategies.

It is imperative that globalization’s implications for education and development should form the basis of a revisiting of the debate about appropriate curricula for the different levels of education in Kenya. Literacy and numeracy will necessarily form part of education's contribution to individual, enterprise and national development. However, education provision needs to build a stronger focus on the other essential elements of knowledge and skills for development and international competitiveness in the context of globalization. This requires those involved in educational planning to look beyond basic education to consider the appropriate modalities through which individuals can

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access an expanded notion of basic learning needs for competitiveness. This requires that education systems focus far more clearly on the ways in which education can empower individuals to become more competitive and to respond most effectively to their economic environment.

Globalization places a new emphasis on skills development; it highlights the role of training systems in equipping individuals, enterprises and economies to be more competitive. To lack skills and access to training is to be outside the community of those who may potentially benefit from globalization. Lack of skills means that individuals are increasingly likely to struggle to gain wage employment and lack key capabilities that could enable them to access sustainable niches in self-employment. Thus, training is important for competitiveness and social inclusion. However, it is absent from the current international model of poverty reduction and too little emphasized in growth strategies. This is a serious weakness in development policy and is in need of rectification. This could include the emergence of a generally agreed target for training, stressing its equity and growth aspects. Any such renewed stress on training requires a reconsideration of the location of authority for training matters in the central Government, local authorities and development partners.

Although basic education (i.e. primary and secondary education) is an important factor in enterprise success, it is not a sufficient condition for such success. There is not enough evidence to justify the assumption that a basic education alone will have a significant impact on individual productivity and enterprise performance. Higher levels of education (i.e. University degree or diploma) will often be necessary. A virtuous cycle needs to be encouraged that can allow more education to feed into better enterprise competitiveness, which in turn can encourage higher levels of education to take advantage of new technological niches.

It is dangerous to suggest that higher education levels in MSEs unequivocally lead to better enterprise productivity. Education and training probably are two of the more important inputs for productivity improvement. However, they are likely to work best in combination with other inputs (e.g. experience - Mead 1999) and with a favorable environment. Equally, it is important to consider the likely implications of the growing levels of education in MSEs for the livelihoods of those who have only a basic education or none at all (King and McGrath 1998).

Education is an important contributor to enterprise health and to individual chances of achieving sustainable livelihoods based on self-employment. Moreover, from the side of educational research, major claims have been made about the role of education in increasing individual productivity (and, hence, competitiveness) (Jamison and Lau 1982; Birks et al 1994).

However, evidence about education - performance relationships shows that education only has a major positive effect on individual and national productivity if it is supported by the overall trajectory of the economy (Mead 1999). Equally, there is a danger in arguing that a little education can have a major effect, as has been too common (Birks et al 1994). Mead argues that the international evidence from enterprise surveys suggests “while small amounts of education appear to have made little difference to enterprise profitability, going beyond a certain threshold (lower secondary in Zambia, upper primary in Kenya) is associated with

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substantial increases in enterprise profitability. In view of the standard problems of associating more education with more productivity (those who get more education are already more able and more highly motivated), these results may be important more for suggesting that a little education makes little difference, and a lot of education makes a lot of difference. (Mead 1999:67)”

Vision to industrialize by the year 2020 is inspired by examples from the NICs. Whilst it still is heavily influenced by structural adjustment approaches, the Kenyan industrial strategy was not built on globalization and competitiveness considerations. The vision is build from a principal reliance on production and processing of agricultural goods towards entrepreneurship, innovation and international trade. The policy also maintains a powerful anti-poverty focus and there is a strong emphasis on the role of the private sector in development.

However, education, training and MSE development was not taken to be crucial to the overall development policy; the Vision to industrialize by the year 2020 should have emphasized:

• Educational quality improvements; • problem solving and inquiry; • increased technical and vocational education and training; • better education and training; • private sector linkages;• promotion of informal sector activities; • increased access to credit, technology and other services; and• a focus on rural areas and the urban informal sector.

Although some of these have been implied they are not emphasized.

Research has placed increasing emphasis in recent years on the importance of learning for enterprise success (McGrath and King 1996; Manu 1999); the ability to acquire and use knowledge is central to competitive advantage.

Whilst simple causal relationships do not exist between education and a range of factors, including economic ones, it is apparent that education does have an important overall contribution to make. Learning and the development of an information-seeking orientation enhance personal competitiveness of workers and employers. Learning can extend capabilities and can help enterprises spot and exploit niches. Learning enterprise thinking also focuses on the crucial role of improved collaboration for competitiveness. This is lacking in the Vision to industrialize by the year 2020.

MSEs in many sectors in Kenya and other developing countries face very serious obstacles from poverty-induced constraints to demand and tendencies towards saturation of markets. To survive and succeed, the ability to exploit growing and higher value niches through learning is essential. Also, it is through collective learning that many of the benefits of collective efficiency accrue.

There is also evidence, from across a number of African countries that education and experience work in synergy. Mead (1999) argues that higher levels of education

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allow entrepreneurs to take better advantage of the learning from many years of experience, and vice versa. This is particularly important in responding to market changes and in finding new, more profitable niches. Thus, education and training can contribute to an ability to respond more effectively to technological and economic change. Education and training equip MSEs to master a series of important challenges to their future growth:

• product design and development;• product diversification;• quality improvement;• planning and waste management;• logistics; and• marketing.

Education levels in the MSE sectors of many African countries are apparently rising. This has led commentators (Birks et al 1994; Charmes 1999) to argue that inevitably there will be a positive effect on productivity.

Those entrepreneurs with some secondary education are most likely to succeed, whilst those with less than 5 years of schooling are most likely to fail (Oketch and Otieno 1999). Unfortunately, most of MSEs in Kenya are in this latter group. Rogerson (1999b) reports on South African evidence that higher education levels do seem to be a factor in enterprise success. Higher education levels (Afenyadu, 1998b) improve enterprise success by:

• allowing for higher levels of training;• facilitating the keeping of business records;• permitting production of better quality products;• improving customer service.

In most NIC and the industrialized countries the policy focus is on the detail of what education is on offer. This leads to the focus on what is called a "curriculum for competitiveness" one, which focuses more clearly on key knowledge, skills and attitudes for competitiveness and development. Such a notion parallels the views of emergent MSE experts in Kenya and other African countries regarding some of the principal requisites for success:

• creativity and innovative capacity;• theoretical knowledge, including literacy and numeracy;• business skills; and• capital.

A focus on a curriculum for competitiveness notes the major challenge for education of addressing the first two of these needs. In responding to the educational needs of entrepreneurs and enterprises, it is important to note that much of the evidence in the MSE sector suggests that quite considerable levels of education might be needed to make a positive impact on livelihoods and productivity improvement. This is

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evident in most NIC and the industrialized countries where more than 70% of the MSEs are University graduates.

The importance to enterprise development of learning-led competitiveness shows how enterprise development can be enhanced through a stronger focus on the contribution that learning makes to competitiveness. Internationally, there is a massive concern with developing the curriculum for competitiveness, especially in OECD countries and in the "tiger" economies of East Asia.

A lean curriculum is argued for in the case of Kenya and many of African countries by a number of agencies. This is partly on pragmatic grounds. Given the poor state of many African education systems and the likely limits to improved quality and resourcing, it is argued that it makes best sense to concentrate on providing the core subjects with adequate quality. These subjects tend to be an "international" language (typically and increasingly English), Mathematics, Science and a "national" language. Part of the argument for the bulk of time and resources being given to these subjects is that the first three elements are the only really important subjects needed in the era of globalization. This assumption is based on the contention that rapid technological change means that students do not need technical skills and knowledge across the traditional range of subjects but high levels of literacy, numeracy and scientific knowledge in order to be able to shift between tasks.

The average Kenyan child entering school in 1999 was likely to get between four and six years of education, according to current trends. Their counterparts in an OECD country could expect an average of 15 to 17 years (Oxfam 1999). Even if current quality was high, it is inconceivable that children in Kenya and other African countries on average would learn as much valuable knowledge, skills and attitudes as their OECD counterparts in a third of the time. If education is an important contributor to development, then this appears to disadvantage Kenya’s (and much of Africa's) development hugely.

3.2.0 Effects of entrepreneur’s personal and enterprise specific attributes on Productivity Improvement

Global factors tend to affect all firms indiscriminately. Included among such factors are the state of infrastructure, national policy, enforcement of contracts and other broader mechanisms for enforcement of social contracts. But there are other subsets of factors that describe the business context. Two such sub-sets, one constituting a bundle of factors that describe the entrepreneur’s personal attributes and another consisting of the enterprise specific attributes can be identified. The performance of enterprises is partly influenced by the ability of enterprises and entrepreneurs to larch on to the wider institutional contexts. This ability is an outcome of the resources that firms bring to the wider institutions either as individual firms or groups of firms and their entrepreneurs. In other words, the ability by entrepreneurs and their enterprises to interact with the rules describing other institutions depends on firm-level resources. These resources are in turn resident in entrepreneur/enterprise-specific attributes. The broader web of formal and informal institutions including social norms assigns the resources embodied in these attributes.

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It is possible to speculate firm-level attributes that may affect enterprise performance and productivity. Factors that are common to all firms such as corruption, regulations, taxes, infrastructure, overall education levels and cultural attitudes by the workforce, aggregate demand and political environment are important but tend to affect all firms equally across the board and cannot therefore explain variations in production between firms. In traditional societies, individuals occupy specific positions and the roles they play are determined in advance by their social positions including those that derive from gender and age. Consequently, the discharge of such functions and roles does not generate their differentiated existence but simply confirms it. For this reason " an individual is not socially recognized because he performs this or that particular task; in fact he performs it in accordance with an a priori social rule defining his social identity" (Platteau, 1994: 538). In these societies, individuals and their specific attributes matter because each is personally dependent on the social agency that ascribes them a specific natural place. A person therefore exercises responsibilities including economic responsibilities not on account of comparative advantage but simply on the basis of ascriptive principles found in the specific society.

Resarch results (Kimuyu) show that female ownership, informality and sole proprietorship have negative effects on enterprise productivity. Such productivity, however, increases with the entrepreneurs' age, educational achievement (level of education and training) and membership in business support groups. Rural-based enterprises and those that are irregularly operated are less productive than those that are urban based and regularly operated.

Productivity generally increases with the age of an enterprise. Intervention that improve the environment for rural commerce and increase the educational levels and training of the general population would promote enterprise productivity as would interventions for increasing the life expectancy of enterprises.

This paper is about the productivity of the small business sector in Kenya. Usually, production relations are defined around the traditional set of factors of productions that includes capital, labor and raw materials. However, institutional peculiarities are important. Recent studies have, for example, shown that membership in business support groups is important in accessing business and therefore have important productivity consequences. Social capital facilitates the adoption of technology and helps circumvent contract enforcement problems that undermine trade credit (Fisman 2000, Isham 2000)

3.3.0 Poor Policy Formulation and Implementation

Since the publication of Sessional Paper No.2 of 1992, an enormous amount of work has been done to identify various rules and regulations affecting start-up, operation and growth of MSEs in Kenya. However, very little positive action has resulted. The lack of progress in the implementation of the policy framework set out in the Sessional Paper was because:i) It overlooked the absence of the political will and financial resources that are

necessary to implement such an ambitious programme. ii) There were no measurable results clearly indicated.

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iii) There was no capacity in terms of technical and financial assistance to implement the various initiatives. In most cases, the guidelines required funding and technical expertise for implementation, which were not provided.

iv) Mechanisms for information dissemination were not put in place and, therefore, no major efforts were made to sensitize the key players about their respective roles in the policy formulation and implementation processes.

v) There were no mechanisms put in place for co-ordination, monitoring and evaluation of the various activities envisaged in the policy framework. Consequently, the various actors involved at different levels of implementation of the policy and strategy framework have lost the energy and momentum, resulting in minimal impact on target beneficiaries.

The results have been that, no programmes or activities were set up in the various ministries and other organizations that were expected to lead the policy formulation and subsequent implementation process. There was in general a lack of coherence in statement of intent made after the 1992 policy framework. So, despite government effort to provide a policy framework for MSEs, progress in improving the policy environment for the sector remains constrained. 3.4.0 The Effects of Social Policy Strategy on Productivity Improvement

The Social Policy Strategy focuses on social welfare e.g. employment creation as opposed to economic development e.g. wealth creation. MSE firms have gained a prestigious place in the firmament of social policy, where micro-credit and other MSE programs are seen as forming a safety net into which the poor can gently fall. Over the last decade or so, myriad programs, projects, and policy reforms have focused attention on MSE sector in general, as part of a broader social-policy agenda of reducing poverty and unemployment. Despite this welcome attention, many planners in developing countries nevertheless continue to view MSE programs as “only” welfare, rather than the stuff of “serious” economic development. The particular form taken by MSE support in many countries reinforces this view as does the way MSE support is often embedded in politics. This jeopardizes certain benefits, ironically, that we hold crucial to the current agenda of reducing poverty and unemployment:

• greater observance by enterprises of environmental and labor regulations, • sustained increases in efficiency and productivity in local economies and, as a

result, • improvement in the quantity and quality of jobs.

Much of the policy advice on this subject, however, focuses on the “burdens” themselves as the source of the problem–particularly, the costs of formalizing and observing tax, environmental, and labor codes. It advocates reforms, in turn, that grant special relief from these burdens to micro and small enterprises in the form of exemptions from or reductions of taxes and other costs associated with environmental and labor regulation.

The dynamic of the Social Policy Strategy also reinforces the distinctly dismissive attitudes held by many economic-development planners and by development-bank managers toward smaller and informal-sector enterprises. To the extent that these managers and civil servants acknowledge the importance of MSE assistance, they

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often view it as a “welfare” measure that belongs in “social” rather than economic-development agencies–in ministries or departments of labor or social welfare, or special MSE agencies. In their eyes, MSE support will help mop up the unemployment resulting from the necessary reforms and initiatives meant to restructure the economy and institutions of government for a trade-liberalized world.

In these terms, the MSE sector becomes mainly an instrument for preserving and even creating jobs–albeit often poor-quality jobs in poor-quality firms–rather than as an opportunity to stimulate economic development.

From this perspective, and more generally, MSE-assistance programs do the important work of helping to maintain the “social peace,” rather than necessarily to modernize the local economy. Contributing to this same perspective, many international donors and non-government organizations design their current support for MSE assistance, such as micro-credit and other programs, in terms of “safety-net” measures for poverty reduction.

Governments and Development Partners often grant MSE enterprises a particular kind of support in which there is something for everyone–special lines of cheap credit, blanket credit amnesties when times are bad, and blanket exemptions for small enterprises from certain taxes and regulations. The exemptions are “burden-relieving” in that they reduce the costs of small enterprises (or keep them from increasing) in a way that requires no effort on their part. They are also “universalist” or “distributive” in that they benefit all small enterprises–whether they want to grow or not, whether they are seeking to improve their efficiency or not, and regardless of sub-sector.

Classifying firms by their size (small, medium, or large) for purposes of public policy, rather than by their product or sector, reinforces the tendencies toward the burden-reducing approach. “Small,” that is, can encompass a quite diverse set of firms–rustic and sophisticated, producing in different sectors, and located in different places. For purposes of lobbying for burden-reducing measures, for example, “small” can even be meant to include a rustic brick making operation in the rural area or a sophisticated software firm in the urban area.

With such heterogeneity, the only way an association can serve a majority of its members is to appeal to the broadest common denominator–namely, size. But the kind of support that best fits the size denominator is the burden-reducing subsidies and exemptions because of, as seen above, their universal and distributive benefits. That is why we often find MSE associations pressing more for the universalist exemptions than for the strategic supports. In this sense, then, size is also the lowest common denominator, in that its associated subsidies and exemptions are the least likely to lead to sustained development. Organizing and lobbying according to firm size, moreover, may be the only way small firms can hope to compete with larger and more powerful firms for the attention of policymakers.

3.5.0 HIV/AIDS Pandemic

The HIV/AIDS epidemic is a global crisis, which demands urgent attention and committed, sustained action by alliances of individuals, organisations and sectors.

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The informal sector in Kenya is a critical yet neglected sector requiring responses from entrepreneurs, enterprise associations, government officials, small enterprise support agencies/development partners, and NGOs.

The socially stigmatized, illegal and clandestine nature of underground activities such as commercial sex work presents a very different set of social and political challenges with regard to HIV/AIDS intervention measures compared with other informal sector activities. In addition, entrenched gender discrimination and high-risk survival strategies (such as exchange of sex for cash) resorted to by women in poor communities demand gender-specific rather than sector-specific interventions.

3.5.1 HIV/AIDS and the Informal Sector

Informal enterprise operators and workers tend to be relatively youthful and therefore sexually active. The poverty associated with many operators, their families and their employees is, for well documented reasons, a major factor in the spread of HIV and means that the sector would in any case face a significant threat from the epidemic. The lack of access to education and skills training associated with the poverty of the families of operators and workers means that informal sector workers are more likely to engage in risky sexual behaviour. Female members of such families, physiologically more vulnerable to HIV infection than men, are of course more likely than women in more affluent households to have to resort to risky survival strategies such as commercial sex work in order to supplement household income. Apart from these factors, however, HIV/AIDS poses a particularly serious threat to informal enterprises because of their inherent dependence on a small labour base. Higher levels of education (alternatively by raising the knowledge) and training are likely to bring attitude change to operators and hence reduce the spread of HIV/AIDS among the operators.

3.5.2 Labour

The informal sector is characterised by labour intensive production: many informal enterprises consist of the operator plus one or two other workers, often paid or unpaid members of the operator’s family. The skills used by an operator and workers in an enterprise may be based on vocational training or previous formal sector job training, especially in the manufacturing sub-sectors. Generally, however, such skills are learned through on-the-job experience, and typically involve the operator passing on skills to informal apprentices. Furthermore, the low productivity and profitability of most informal enterprises depresses the wages of paid employees. It is therefore very difficult for informal enterprises to attract more highly skilled workers and it is time consuming to train new employees.

Consequently, when the operator of an informal enterprise develops an AIDS related illness and can no longer work, the firm’s activities very often cannot continue. The operator’s spouse, who may also work in the enterprise, will probably, also be infected with HIV. Even if the spouse and other relatives are not infected, caring for the sick individual will divert their time and effort from production and they will often be left with orphaned children to support. Hence, when the operator (and probably one or two other family members) falls ill and dies, the enterprise will die with them.

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3.5.3 Operations and services

The loss of non-family workers to AIDS-related illness and death will clearly also be a serious threat to enterprise operations, and the youth and high sexual activity of apprentices naturally increase their exposure to HIV infection. Moreover, since the majority of workers (as distinct from enterprise operators) in the informal sector as a whole are women, the vulnerability of women to HIV infection will exacerbate the sector’s vulnerability to the pandemic.

Few operators (and even fewer workers) enjoy occupational benefits and membership of formal social protection schemes. While informal sector social protection schemes have been organized by NGOs, operators and workers in a few localities, benefits tend to be limited to hospital and funeral costs and seldom include ongoing support of surviving relatives. Consequently, disruption of enterprise operations is bound further to impoverish the families of enterprise operators and workers, locking them into a downward spiral of poverty. Even if operators and workers are not infected with HIV, attending the AIDS-related funerals of other family members and friends will impose a burden on operations.

Informal enterprises generally do not have access to occupational health services or adequate communication channels with the authorities through which to advocate improvement of their working environment. In addition to normal diseases, operators and workers suffer from work-related diseases and health problems, which are rarely recognized by policy-makers and planners. The most prevalent occupational health hazards are inadequate workspaces, poor design of tools and workplaces, lack of protective equipment and clothing, awkward postures, long working hours, poor lighting and ventilation, excessive heat and noise, exposure to dangerous chemicals, poor housekeeping of materials, and waste and lack of hygienic facilities. Women working in informal enterprises carry the additional burden of domestic maintenance and care of children and other dependants.

These arduous working conditions place a greater health burden on informal sector workers relative to those in the formal sector, which is likely to result in the earlier onset of AIDS-related illness in HIV-positive members of informal enterprises and earlier death after developing full-blown AIDS. Such conditions tend to increase the abuse of alcohol and other substances among operators and workers, which further prejudice their health and which is also conducive to risky sexual behaviour.

As pointed out above, organizational and entrepreneurial networks are critically important to many informal enterprises in order to help them secure financial capital and other resources such as premises, materials, and tools and equipment, to engage in joint production and access markets. The onset of AIDS-related illness will naturally disrupt participation in such networks and diminish their effectiveness. This will reduce the productivity and profitability not only of the particular enterprise concerned, but also of the other enterprises relying on the network in question.

3.5.4 Financial and physical capital

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Formal financial institutions are generally reluctant to lend to informal enterprises, due to the low collateral of operators and the high transaction costs involved. Formal and informal commercial micro-lending is increasingly prevalent in some economies, but the major sources of capital investment and working capital for informal enterprises are the savings of the operator and loans from family members, and credit allocations from rotating savings and credit associations in the local community. The demise of an informal enterprise due to AIDS-related illness and death will prevent the repayment of any outstanding loans to the operator’s relatives, thus further impoverishing his or her extended family and reducing their willingness and ability to care for AIDS orphans. In addition, the loss of future contributions to the particular rotating savings and credit association from which the operator may have obtained capital will reduce the assets of the association and hence its ability to finance the needs of other families.

3.5.5 Markets

Informal enterprises, except for those in intermediary trade, are generally dependent on localised markets. In areas of high HIV prevalence they will therefore be especially vulnerable to falling consumer spending as customers become ill, can no longer work, and must divert the household’s remaining income into care of the sick, care of orphans, and funerals. As mentioned above, the informal sector involves intense competition between enterprises; but while elimination of rival firms by AIDS may ease competition in the short-term, in the medium-term the situation is likely to revert to one of fierce competition as the surviving enterprises compete for decreasing consumer purchasing power. 3.5.6 SUMMARY

• The informal sector consists of small-scale enterprises operating on the margins of the formal economy. The sector encompasses very diverse and dissimilar activities, organisational forms and institutional environments and should not be treated as a homogeneous sector. There is significant variation among enterprises by workforce size and potential for expansion, predominant gender of operators and propensity to form business networks. These factors should be taken into account when designing and targeting AIDS intervention initiatives.

• Poor and low level education associated with poverty means that informal enterprise operators and workers are more likely to engage in risky sexual behaviour. However, HIV/AIDS is a particularly serious threat to informal enterprises because of their inherent dependence on a small labour base. Many informal enterprises consist of the operator plus one or two other workers, often paid or unpaid members of the operator’s family. Hence, when the operator (and probably one or two other family members) falls ill and dies, the enterprise usually dies with them.

• AIDS-related illness will disrupt business networks and diminish their effectiveness, reducing the productivity and profitability of other enterprises relying on the business networks in question. In addition, the loss of contributions to rotating savings and credit associations will reduce the funding available to finance other informal enterprises.

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• Informal enterprises are generally dependent on localised markets, and in areas of high HIV prevalence are therefore especially vulnerable to falling consumer spending due to AIDS-related illness.

4.0 Perceived Barriers to Tackling Productivity Improvements

Various concerns may deter MSEs from implementing productivity improvements. The following are among them:

1. CostPerhaps the natural for an MSE is to react by saying, ‘We just can’t afford it’, but it may be better to focus on cost savings that result from potential improvements when considering a productivity improvement drive. The question should be ‘Can we afford not to improve productivity?’ View short-tem cost as a longer-term investment to reduce more significant costs to the organisation.

2. Employee resistance to change Even though MSEs are identified as having people who are open to change, the reverse can also be true. In particular, if certain employees have been with the MSE since the organisation was founded, it may be difficult to persuade them that the way they have always done things is not in fact the most effective way of working. From the perspective of the MSE, this way has been successful, so it may be hard to accept that these productivity improvements are not just the latest management fad.

3. Personnel resourceIt can be difficult to release employees for training in an MSE if they are multi-skilled and cannot easily be covered for by other staff. Larger companies may have staff dedicated to productivity improvement, who can dedicate their time to training and implementing productivity improvement initiatives. One way to get around the difficulty in MSEs is for management to lead by example. If other members of staff see them initiating and implementing improvements as a part of their job, they may get an understanding of what the organisation is trying to achieve.

4. Specialist knowledgeLarger companies may have staff who are dedicated to productivity improvement and have gained the knowledge necessary to champion improvement initiatives. It then becomes vital for senior staff to become acquainted with at least the basic principles of some of the productivity improvement tools and techniques outlined later in this report.

5. Activities not standardizedLarger companies will tend to have industrial engineering departments that have formulated standard operating procedures (SOPs) for each process. This may not be the case for MSEs. A central theme of continuous improvement is that the starting point is always a well documented SOP Trends that influence Productivity. The action of drawing up standard procedures itself can identify areas for potential improvements.

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5.0 Recommendations to solve the Low Productivity Improvement in the MSE Sector

5.1.0 The Role of Education and Training in Productivity Improvement

Education and training probably are two of the more important inputs for productivity improvement. However, they are likely to work best in combination with other inputs (e.g. experience - Mead 1999) and with a favorable environment. Equally, it is important to consider the likely implications of the growing levels of education in MSEs for the livelihoods of those who have only a basic education or none at all (King and McGrath 1998). It should, therefore, be emphasized that higher education levels in MSEs lead to better enterprise productivity.

Although basic education (i.e. primary and secondary education) is an important factor in enterprise success, it is not a sufficient condition for such success. There is not enough evidence to justify the assumption that a basic education alone will have a significant impact on individual productivity and enterprise performance. Higher levels of education (i.e. University degree or diploma) will often be necessary. A virtuous cycle needs to be encouraged that can allow more education to feed into better enterprise competitiveness, which in turn can encourage higher levels of education to take advantage of new technological niches.

Education is an important contributor to enterprise health and to individual chances of achieving sustainable livelihoods based on self-employment. Moreover, from the side of educational research, major claims have been made about the role of education in increasing individual productivity (and, hence, competitiveness) (Jamison and Lau 1982; Birks et al 1994).

However, evidence about education - performance relationships shows that education only has a major positive effect on individual and national productivity if it is supported by the overall trajectory of the economy (Mead 1999). Equally, there is a danger in arguing that a little education can have a major effect, as has been too common (Birks et al 1994). Mead argues that the international evidence from enterprise surveys suggests “while small amounts of education appear to have made little difference to enterprise profitability, going beyond a certain threshold (lower secondary in Zambia, upper primary in Kenya) is associated with substantial increases in enterprise profitability. In view of the standard problems of associating more education with more productivity (those who get more education are already more able and more highly motivated), these results may be important more for suggesting that a little education makes little difference, and a lot of education makes a lot of difference. (Mead 1999:67)”

5.1.1 The Effects of Low Education on Productivity Improvement in the MSE Sector

With the low level of education the entrepreneurs in the MSE sector are faced with the following disadvantages:

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• They cannot exploit the six economic trends (mention them here) above for the benefit of their businesses.

• They are unable to utilize the modern technology (e.g. the use of internet for market information, marketing, technology sourcing etc.).

• They are unable to take advantage of the available opportunities (e.g. training) for the benefit of their businesses.

• They lack planning in their businesses and as a result mismanage their incomes; decision-making is non-existence.

• They do not appreciate the importance of savings and investments, and the need for research and development.

• They do not understand their roles in society.• They do not know their rights and, therefore, they are taken for a ride

especially by civil servants who manage their programs.• They are not able to interpret rules and regulations and, as such they are not

able to fight for their rights.• They are weak in marketing and financial management.• Their organizations are weak because their officials lack sound management

skills. They always require someone to organize and lead them, and as a result they are cheated and exploited.

• They are unable to do costing and estimation; pricing is arbitrary, etc.

The consequences of these disadvantages (and others) are that the MSE productivity is considerably reduced, which results to no vertical growth for the sector.

It is evident that the low educational level in the Kenyan MSE Sector is actually the major constraints to productivity improvement; the entrepreneurs do not have the capacity to take advantage of the six factors (mention them here) that affect productivity. Therefore to improve productivity in the MSE Sector the standard of education in the sector should be raised to, preferably, university degree level. With university education, the MSE operators will be able to utilize the available opportunities to improve their productivity thus resulting in high development index in the MSE sector (It has been shown in another paper titled “University Education: A Strategy to raise Productivity improvement in the MSE sector” by the author that secondary school graduates can be educated up to degree level en mass cheaply using some secondary schools).

5.1.2 MSE Sector and the University Education

It is evident that the six economic trends together with the six factors that affect productivity described above require entrepreneurs to have very high level of understanding and comprehension, and hence high education level. In the Newly Industrialized Countries (NICs) of South East Asia more than 70% of the entrepreneurs in the MSE sector have University Degrees and, therefore, they are able to utilize the six economic trends. As result the NICs have been able to develop faster than other developing countries where more than 70% of the entrepreneurs in the MSE sector have primary education or lower.

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In Kenya more than 75% of the entrepreneurs in the MSE Sector are of primary education level and below. This scenario makes it very difficult to exploit the opportunities offered by the six economic trends above and, hence very little or no vertical growth in the sector. Lack of exploiting the opportunities offered by the six economic trends leads to low productivity in the sector and, therefore, less development of the sector and that of the whole country.

## At this moment I would like to quote Mr. Sunny Bindra’s article in the Sunday Nation of February 1, 2004 titled India’s slow trek to an Economic Powerhouse. Mr. Bindra a writer and management consultant in Nairobi starts …..”in the early 1980s Kenya was growing at a rapid clip and the future seemed entirely rosy. On all the measures ….. Kenya seemed streets ahead of India. And India seemed to have an entrenched problem with poverty. 20 years later India is a major force in the world economy, while Kenya is a nonentity. ….. India is believed to be on the threshold of eight per cent annual growth in GDP, having achieved an annual average of six per cent since 1990. ….. The World Bank places India’s services sector in the global top five. …. How? How was it done? What’s the secret? The secret to success in today’s global economy is knowledge. India and Indians have made huge and sustained investments in knowledge. The country produces 3.1 million college graduates every year, this number, too, is expected to double by 2010. In four years’ time, it will have nearly 1,600 engineering colleges….. India today sits on a deep source of brainpower: low on cost, high on IQ. Indian research and development activity employs the best brains in the world, but costs as little as a tenth of equivalent western programmes. ….. If India can turn into a fast growth economy, it will be the first developing nation that used its brainpower, not natural resources or the raw muscle of factory labour, as the catalyst.” ##

If Kenya is to rely on the MSE sector for its economic growth (so as to succeed like India) then the standard of education must be raised beyond secondary school level of education; preferably to diploma and/or degree level.

5.1.3 Strategy of Raising Education in the MSE to Degree Level

At present all our Universities are constrained by lack of enough resources – both human and teaching facilities. However there are a lot of resources in our secondary schools that are under utilized. These secondary school resources can be utilized to achieve this Strategy of Raising Education in the MSE to University Degree Level.

Secondary schools with good teaching facilities throughout the country can be identified and approved for degree courses; those schools with some teachers who hold at least second degrees e.g. Masters’ degree and over should be given preference. These schools will be made constituents of the Universities near them.

Secondary school leavers who qualify for degree courses will be selected and do their first, second and third year studies at the identified and approved secondary schools, then join the respective Universities for fourth and final year of studies. The respective Universities will supervise these degree course programs. This system is equivalent to returning A-level courses back to secondary schools.

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However, due to lack of adequate technical and laboratory facilities in the secondary schools, most degree courses will be in arts (e.g. history, geography, religious education, psychology, sociology, philosophy, education, economics, commerce etc.) and mathematics; these courses require only classrooms and teachers. Those secondary schools, especially the National Secondary Schools, with good science equipment can be equipped further and be used for science courses (e.g. chemistry, physics, biology etc.). Some of the Technical Training Institutions will also be equipped and be used for some technical courses.

This strategy will enable many students to be trained up to degree level en mass. The Universities will be left to handle only fourth and final year students, post graduate courses and the highly specialized courses e.g. medical and dental courses.

A program will be put in place to train more secondary teachers up to Masters’ degree level and above, to handle degree courses at the secondary schools. Some of the experienced teachers with first degrees can also handle degree courses (as it is done in many countries especially in the South East Asia).

It will be cheaper to train students to degree levels using this strategy. The degree students will be required to pay same amount of school fees just like the secondary pupils in the same secondary school. This school fees will be enough to compensate the teachers handling degree courses and to pay the school administration, and there will be enough money left the respective Universities for supervision and other activities (see appendix).

5.1.4 Other Education and Training Recommendations

1. Training in itself cannot address the very real constraints faced by enterprises. These constraints need to be tackled before turning to training (Bennell 1999; King 1999). The low education levels across Africa and Kenya, in particular, may be more significant in limiting enterprise's potential to benefit from training. Moreover those with the best technical skills and concerns about design have had better quality formal technical preparation (Afenyadu 1998b; King 1999; Oketch and Otieno 1999). Thus, whilst graduates of lower status technical institutes (e.g. youth polytechnics in Kenya) are most likely to end up in self-employment, they are less likely to be successful in exploiting high value niches than national polytechnic and university graduates.

2. From the enterprise perspective, it seems that many of those who succeed have had above average education and training. However, this is problematic in policy terms, as looking from the other direction, only a few Kenyan graduates from Universities and Higher training Institutions appear to become successfully self-employed. The challenge, therefore, is to make training provision more responsive to market needs and to improve selection and targeting procedures, and encourage University and other Higher training Institutions graduates to become self-employed instead of looking for formal employment.

3. The inclusion of the skills, knowledge and other inputs necessary for accessing real and potential market opportunities and the issue of whether training for those already in MSEs is more effective than training for those who may subsequently enter the sector should be considered. For long term strategy

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higher levels of education e.g. Diploma and Degree level of education are mandatory, but for those in the field skills upgrading and Linking MSEs to High Volume Buyers e.g. Network brokerage, subcontracting, Franchise, Intermediaries etc. are the solution to productivity improvement and hence competitiveness in the MSE sector.

4. Although education does seem to be an important factor in enterprise success, it is not itself a sufficient condition for such success. Moreover, it is unlikely that a basic education alone will be sufficient to have a major positive impact on productivity or competitiveness; higher levels of education are necessary.

5. Whilst they do not determine success entirely, education and training are important elements of the portfolio of assets of successful entrepreneurs and enterprises. This importance has increased as a result of global technological and economic change.

6. If education system in Kenya is to contribute more effectively to national attempts to respond to globalization, then it is important that attention be paid to the construction and delivery of a curriculum for competitiveness. Whilst current attainment rates and resourcing levels are poor, the challenge of competitiveness cannot be ignored. Strategies need to be developed to address both the pressing problems of poor educational performance and the longer-term challenge of education for learning-led competitiveness.

7. The challenge of learning-led competitiveness suggests the need to continue to look critically at arguments in favor of a lean curriculum concentrated on core subjects. Whilst, literacy and numeracy will continue to be vital to individual, enterprise and national development, education systems must take greater account of the other key elements of knowledge and skills for development in the context of globalization. A broader curricular vision will be difficult to implement, but it is an essential element of national strategies for competitiveness and poverty reduction.

8. Although, there is evidence of increasing self-employment orientation of school students in Kenya, efforts need to focus on preparing and orienting these students for high value niches. Quality, relevance and certification all appear important in promoting such an orientation. The possibility of orienting students towards sustainable self-employment through curricular specialization should be kept in mind when the nature of the curriculum is being debated.

9. Development policies, including structural adjustment, have been less successful than intended both in stimulating macroeconomic conditions and in directly assisting MSEs. Indeed, there is some evidence that economic policies and trends have made it harder for dynamic MSEs to flourish. This includes tendencies towards market saturation and customer price sensitivity. The ability to develop and maintain niches that support sustainable productivity improvement is constrained by such pressures.

10. High levels of corruption and low levels of trust also undermine enterprises' ability to grow and, crucially, to network. This undermines learning-led competitiveness by weakening enterprises' ability to acquire new information, skills and technology and reducing their responsiveness to new trends. Equally, the widespread inadequacies of infrastructure faced by MSEs and the problem of insufficient capital are constraints on enterprise responsiveness to productivity improvement. These factors may prevent entrepreneurs from becoming more competitive even where they have adopted appropriate learning strategies.

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11. Many entrepreneurs are far from following learning-led competitiveness strategies and, indeed, are not driven by entrepreneurial goals. Rather, such individuals see their enterprises as having the primary function of providing income that can then be invested in other household activities and strategies such as education for children and land acquisition. This non-entrepreneurial outlook is doubly significant. It reduces the likely profitability and growth of enterprises and, if not taken into account, can lead to reduced effectiveness of interventions.

12. Those planning interventions for productivity improvement in the sector must take all these obstacles to learning-led competitiveness into consideration. Enterprises often need to be helped to learn and the current focus on enabling environments could usefully encompass a new concern with enabling learning environments for micro and small enterprises.

13. It is important to highlight the role that MSE associations are playing in strengthening inter-firm relationships and providing services to their members. Whilst many such associations are still weak, they have considerable potential to coordinate competitive responses to new economic, political and technological challenges. They should be involved in the development of training programmes and other interventions for productivity improvement; possible modalities for their better integration into official development strategies, both for the MSE sector and beyond should be explored.

14. Although MSE policy has at its core a focus on enabling environments (particularly concerning regulatory frameworks), micro-credit and business development services, at globalization challenges should highlight the need to focus policy more deliberately on the promotion of competitiveness. The core of such a focus should include a new consideration of how learning can contribute to enterprise competitiveness and growth.

5.2.0 Institutions and Enterprise Productivity

Research results show that the entrepreneur's age, gender, levels of education and membership in business support groups exert systematic influences on the productivity of enterprises. Similarly, attributes specific to different enterprises such as its age, location, ownership structure, formality status and business activity determine production outcomes, and hence productivity improvement. Productivity generally increases with the age of an enterprise. Intervention that improve the environment for rural commerce and increase the educational levels of the general population would promote enterprise productivity as would interventions for increasing the life expectancy of enterprises.

These results have clear policy messages. Given the importance of education in enterprise performance, increasing the pool of diploma and degree level educated Kenyans from which small business entrepreneurs are drawn is key in promoting profitable entrepreneurship.

Female-owned enterprise shows poorer performance relative to those owned by male. Policy will need to redress gender imbalances and seek to mainstream informal enterprises. Given the evidence that positive network externalities are in play in the small business community, promoting increased promotion of business related groups (e.g. Jua Kali Associations) is key to the future of the sector.

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Considering the positive impact of entrepreneur's age and enterprise performance, demographic characteristics count for enterprise performance. This provides further justification for intensifying the fight against HIV/AIDS to increase life expectancy and tap the business-related benefits of longer life. A positive impact of the age of an enterprise on its productivity suggests that strategies for promoting enterprise longevity will be crucial for the development of the business sector.

Since majority of the enterprises are either sole proprietorships or family owned, strategies for making these businesses intergenerational would be boon. Given the negative impact of sole proprietorships as ownerships structures on performance, this mode of ownership is a dead end. It is necessary to design enterprise transformation mechanisms that release small businesses from the limitations posed by owner-managed sole proprietorship. Assuming a size factor in the business ownership structure, enterprise growth will be necessary in giving way to the more progressive ownership structures. Strategies for promoting enterprise growth are therefore important.

Spatial differences in enterprise performance can be addressed by improving public services in rural Kenya, particularly roads, telecommunication and electricity. Such improvement would encourage the development of profitable commerce in rural areas and create scale economies necessary for spatial spread of sustainable business-support services. These developments would in turn make rural commerce at least as productive as those in urban areas.

Since formality is important for enterprise performance, strategies for mainstreaming informal enterprises would shield enterprises against penalties associated with informality and give them an opportunity to realize their full potential; the Government will also gain by collecting taxes that it will use to improve infrastructure facilities for the operators. Such strategies would include reduction of business registration barriers such as direct registration costs and delays.

The improvement of the rural facilities will encourage the establishment of more rural industries that will assist in raising the productivity of agriculture; this will promote agricultural business from being for subsistence to a commercial business with the emergency of value-added products. Civic education that demonstrates the viability of small business as a separate business activity would assist in the shift towards specialization and in turn encourage enterprise productivity.

Unfortunately, there is very little information on how the small business sector is structured. Such information is crucial in the evolution of appropriate policies for promoting small enterprise development and increasing the sector’s impact on poverty reduction and overall development. It is not known how production relationships that include institutional components hold in the small business sector, so that a major information gap is evident. Since understanding these relationships is key in promoting small business, they need to be validated under country specific institutional conditions through research.

5.3.0 Linking MSEs with High Volume buyers

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As markets in developing economies liberalize, there are new opportunities for micro and small enterprises (MSEs) to supply high volume urban markets. However, competition from imports means that they must improve in order to be competitive in these potentially lucrative markets. In reality the participation of MSEs in mainstream mass markets has been severely limited because these market channels typically require reliable supplies of consistent quality products within tightly defined time limits. These are demands that MSEs acting individually (whether in agriculture or manufacturing) consistently fail to meet. Most MSEs are unable to reach large markets i.e. high volume buyers because:

1. the high volume buyers are deterred to buy from MSEs by the substandard quality products and lack of timeliness in fulfilling orders.

2. MSEs face challenges that include lack of market linkages, lack of Business Development Services support, lack of credit facilities, lack of appropriate production facilities and constant harassment by the licensing authorities.

Linkages between small firms and larger buyers can be an important source of learning and growth for small firms. But linkages between small firms and larger buyers will not necessarily lead to learning, and the mushrooming of demand for small firms in the area. However this will depend on the:

• Sector or business, • organizational structure of the large customer firm, • environment within which the smaller firms operate; • nature of the market segment served (by the customer), and • particulars of legislation in the country or local authority e.g. in the textile

industry legislation can lead to fierce competition between large firms and small, rather than collaboration. Or, as in the automotive sub-sector, the arrival of large firms in the auto-assembly sector may lead to a serious disruption of links between small local firms and the large assembler—at least initially—as the assemblers rely on either their follow sources, or seek out reliable, large suppliers who are already national players in the country.

Large firms insist on their (small suppliers’) making vast amounts of investment first to increase capacity even before they are given any commitment of future orders. Small firms are caught in a bind—they need to borrow the capital to make the required level of investment, but banks are reluctant to give them large loans without any guarantees that they will indeed get orders from the large assemblers or their first tier suppliers. Large buyers refuse to give this commitment in advance. This results in a vicious circle, where the circumstances are such that suppliers with already large capacity, or with financial reach are the ones who end up getting the orders. From this account it is clear that both the small suppliers, and the larger buyers have good reason for acting as they do. Clearly, there is a role here for some intermediation, either by government or by a partnership of a quasi-government group and local industry associations committed to helping deepen the local supply base by working around the impasses described above.

Inter-enterprise collaboration is key to successful integration and substantive participation of MSEs in lucrative markets, and also to their survival in the face of

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increasing global competition. To enable MSEs to access opportunities through the high volume marketing channels, models need to be explored that enable them to successfully and sustainably coordinate production by individual MSEs in such a way as to collectively comply with the rigors of supplying to these channels. Some of the benefits that are expected to result from this intervention include:

Increased income for the MSEs as they serve new and lucrative markets.Increased specialization among MSEs as they supply intermediate products.Increased access to BDS thereby reducing the current divide between the formal

and informal economies.An expanded range of products within the production capacities of MSEs.Improved work culture that is a closer fit with the discipline and standards

demanded by the formal economy.

These changes contribute to the productivity improvement that results in reduction in poverty in the immediate term, as well as set a favourable stage for longer-term poverty reduction interventions in the enterprise development field.

5.3.1 Methods to Assist MSEs improve their productivity and Compete Effectively

The following are two main approaches (or projects/programs) that can be used by the Government, Development Partners and private agencies (such as KEPSA, MSE Associations etc.) to assist MSE firms improve their productivity and compete effectively in a global environment. Both approaches stem from the view that the problem with small firms is not their size, but their institutional isolation. These efforts then are attempts at organizational and spatial “collective action.”

(1) Non-financial business development servicesThis approach attempts to put firms and local institutions together in ways that will lead to a demand-driven response to the critical problem of marketing that small firms face.

(2) Industrial clusteringThis approach is based on the idea that fostering linkages among firms in the same or related sectors, as well as among small firms and their large buyers helps improve their competitiveness and resilience. Industrial clustering is an approach that envisions innovation as the source of growth among inter-linked small firms. In this view, the collective efficiency of network forms of production can overcome the deficiencies of small-scale economies that individual small firms suffer from.

5.3.1.1 Non-Financial Business Development Services (the BDS Approach)

Next to finance, marketing is the key problem facing micro-enterprises, and it is a high research priority for BDS practitioners. A broad definition of marketing is “profitably meeting the customer’s needs and desires”, while the definition of marketing services includes “any service provided to micro-enterprises that helps them access markets.”

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The focus of most programs that provide small firms with non-financial business services is marketing, and market linkage. There are three categories of marketing intermediary institutions that work with small firms under the BDS framework:

(a) Marketing Business IntermediariesThese are nonprofit intermediary buyers e.g. NGOs who purchase products from local MSEs and “sell” them in the wider market at a small markup. In addition to providing a more-or-less guaranteed source of sales to its clients, these organizations offer producers feedback on product quality and market demand, and provide a variety of services: specifically, market research, product development, training, input supply, and access to technology.

These intermediaries adopt varying operational styles, ranging from working as membership organizations that potential suppliers have to join to avail of the group’s service, to procuring from a chosen subgroup of local producers (e.g., low income rural producers, or women producers in a particular spatial setting), to operating as sales hubs for cooperatives. Of the three organizational types discussed, marketing businesses are arguably the most “exclusionary.” (b) Marketing Service Providers (or ancillary service providers)These organizations broker sales by assisting small firms to reach the market, but do not buy any MSE products themselves, or sell them. These intermediaries tend to be more inclusive than the marketing businesses, in that they offer assistance to any small firm in their area of operation. The wide range of services these programs provide include information provision, training, and linking producers to buyers.

(c) Market Infrastructure DevelopersThese type of marketing intermediaries operate at a level higher than the other institutions, they focus on developing regional marketing infrastructure that can have long-term impact on the marketing ability of small local firms. For example, this type of intermediaries provide firms with access to large fairs and external exhibitions, they provide consulting services and information about new markets. The analysis by McVay (2000) of these three types of marketing programs include the following:

• Programs focusing on developing market infrastructure reach larger scale. • Larger programs reach larger scale, but seem to have less intense impact on

clients.• Cost-effectiveness is not related to scale or program model. • Marketing businesses reach sustainability more easily than the other two

types of organizations. • Smaller programs reach sustainability more easily. Smaller programs reach

sustainability faster than larger programs, which is completely opposite the experience of micro-finance programs that strive for large scale to reach sustainability. Why? One reason is that the brokers, which tend to be more sustainable, also tend to be smaller. The other is that the largest programs are the market infrastructure programs. These programs are significantly more expensive and complex to manage, and many of their services are considered a public good for which it is difficult to capture costs. These patterns are also

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connected to the tailored services provided by sector-specific BDS programs. It is harder to tailor services for large numbers of people.

Successful Programs Work with Visionary Leaders, Have Staff with Technical and Marketing Skills, Pay for Services, and Mimic the Private Sector.

5.3.1.2 Industrial Clustering

(a) Business linkages and Production NetworksNetwork forms of production or Industrial Clustering is an important instrument for strengthening MSE performance by creating powerful business linkages between firms and their productive environment. The four main instruments that are used to promote business linkages among small firms are: (a) franchising, and (b) network brokerage, (c) subcontracting, (d) production network.

(a) FranchisingThis is an instrument for fostering business linkages where one enterprise sells to another firm the right to produce or sell a particular commodity/product for which the franchiser holds the trademark. Because the (often) small firm that is the franchisee must sell under the original producer's trademark, it must follow the standards and procedures laid down by the franchiser.

Although this is a circumscribed relationship, and relatively static in terms of the potential evolution of the technical alliance between the franchiser (usually a large firm with brand name recognition in a standardized product line) and (usually small) franchisee, it has important merits. This instrument has been widely used in industrial economies and is a simple and effective way for a small producer to start a business (Mead 1994). Although circumscribed, this instrument provides at least four kinds of learning opportunities for small franchisees:

• In providing the novice firm a ready product and knowledge of its production technology, it allows the small, novice producer to become familiar with the market and with the task of production.

• While the absence of any guaranteed purchase of the franchised goods by the franchiser may leave the small franchisee vulnerable to the fluctuations of sales, it also "forces" the small firm to learn about marketing and how to cope with the responsibility and demands of this key business activity.

• A third form of learning that can occur under franchising is driven by the fact that the franchisee has to meet a prescribed quality standard. The continuation of the franchising agreement, as well as eventual sales depend on the franchisee meeting these standards. This learning would benefit the franchisee most if over time, its increased confidence in meeting performance standards, and mastery over simpler production processes allows it to move out of/beyond the static franchising relationship and into a position of greater autonomy and challenge.

• As some observers have pointed out, franchising may also benefit the small franchisee firm in terms of access to credit. Evidence from low-income, first-time borrowers in the U.S. A shows that being tied to an established product that has brand name recognition makes it more likely that the franchisee will

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get access to formal sector credit (South Shore Bank example, cited in Mead 1994:7).

The lesson learnt from this instrument is that franchising is a simple, but circumscribed instrument for fostering business linkages. Its traits make it particularly relevant to small firms with relatively low technologies, or capital constrained start-ups.

(b) Network Brokerage For MSE Development

Network Brokerage is the process of bridging between MSEs and high volume buyers. The Network Brokers play the role of interfacing in order to supply mass markets by “networking” the production capacities within selected MSEs clusters.

The Network Broker identifies regional or national demand and brokers linkages between the High Volume Buyers (HVBs) and the small producers (MSEs) who produce the goods according to the specifications provided by the HVBs. As production processes have increased in complexity, intermediaries like the Network Brokers are now often replaced by specialized agencies, or firms, which are themselves small, but have a key asset--knowledge of a particular market, design skills, or extensive access to distribution, marketing and procurement channels.

Brokerage is usually a sign of growth, and increased productive complexity of an Industrial regime. The Network Broker is expected to provide all the support the MSEs needed, and closely coordinate production activities in order to fulfill an order. (i) Strategies for Training and Product Development Within a general product range, brokers place orders that specify particular attributes and then provide an orientation or training to help producers meet the specifications. Although strategies vary, all brokers provide some level of product development and training service. The programs also offer some training in problem identification and solutions, as well as in interviewing customers to get good market information.

In contrast, ancillary service providers generally link micro-enterprises with private-sector suppliers of training and product development rather than supplying them directly. Within the market infrastructure programs, entrepreneurs receive training and product development assistance, though they may not get it directly from the market services provider. Training and product development are integral to these market infrastructure programs.

Product development and technical training vary significantly in intensity and strategy, depending on market conditions, the skill level of the target population, and the project strategy. Brokers, ancillary service providers, and market infrastructure developers are equally likely to provide either intensive or somewhat marginal services in these areas.

(ii) Brokers Implement Strict Quality ControlThe need for quality standards depends on a program’s market niche, and the appropriateness of engaging in quality control activities depends on the role of the program. Some marketing programs target a low- to moderate-income market that is willing to compromise quality for price, while others focus on high-value, high quality

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markets. Obviously, controlling quality is more important when serving the latter. Regardless of the niche they serve, all brokers sell directly to customers and must offer products of consistent quality to ensure that their customers remain satisfied. Quality control strategies have evolved over time.

Brokers in business for many years usually accept all items and absorb the loss of items they cannot sell. This practice is rarely the case anymore. Most brokers today specify quality standards up front and reject products that do not meet those standards. Managing quality control is key to any brokerage program.

Programs offering ancillary and market infrastructure services are generally less involved with quality control. They do, however, help producers capture, interpret, and respond to signals and information from customers and the market. They also provide training to the buyers to help them maintain quality up to the customer purchase point. Depending on circumstances and strategy, these programs use a variety of different approaches to address quality issues, but they are not directly involved with quality control.

(iii) Brokers Price According to Market DemandOne major justification for investing public funds in marketing companies that serve the poor is that these companies offer producers fair prices for their goods, which often exploitative, private-sector middlemen do not always do. Brokers now operate more like private-sector businesses; indeed, some are. They set prices with margins based on their costs and the ability to negotiate a lower price with the producer. Margins vary from 10 to 40 percent and can be used to cover the cost of ancillary services. In general, the focus is less on fair pricing and more on pricing according to market demand. In this system, micro-entrepreneurs may receive a bit less for their products, but brokers are able to offer them long-term access to markets. (c) SubcontractingSubcontracting is most commonly used to refer to an arrangement where large customer firms contract out a portion of their work to smaller suppliers. In reality however, subcontracting refers to a complex variety of vertical as well as horizontal linkages where small firms subcontract work to other small firms, medium sized firms, or to micro enterprises down the production chain.

Subcontracting can be a powerful channel of learning and especially important source of technical capability for small suppliers. But its performance as a source of learning depends strongly on how the subcontracting relationships are structured. For example, the Japanese case is perhaps the most vivid and evolved illustration of conditions under which subcontracting linkages can benefit not only small suppliers and their larger customer firms, but also the industrial economy as a whole. In most sectors of the Japanese economy, supplier relationships tend to be stable and long term, where the large customer firms invest--often heavily--in converting their small suppliers into world-class manufacturers in their own right.

By contrast, several studies have pointed out the relatively weak effects of subcontracting as a source of technical learning for small firms (World Bank 1994, Porter 1990, Kang and Park 1990). Other studies document how some small suppliers are exploited by large multinational buyers seeking a price advantage by farming out

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work to unregulated MSEs who have low factor costs. Thus, a common and legitimate worry among policy makers is the regressive ness of some subcontracting systems for small suppliers. An approach that has worked well is the legislation of policy, which mandates timely payment of subcontractors and small suppliers by their large buyers. These policies that ensure timely payments are far more effective--if enforced-- than polices that either limit the relationship between large and small firms, or heavily legislate price floors for suppliers. Notwithstanding, the effectiveness of any subcontracting exchange is affected by the way it is organized and/or designed (with respect to the structure of the firms it seeks to serve).

(d) Production Networks

In contrast to the three familiar ways of linking small firms with large firms described above, Production Network is a powerful new approach to understanding small firm competitiveness, and inter-firm relations. This approach focuses on small firms not as individual firms, but as part of production networks, or spatially concentrated clusters or industrial districts.

We have examined three sets of instruments that have long been used to foster business linkages among firms. Despite some common features, this set of instruments differs in several ways from production networks. The key distinction is that while each of the three instruments listed above refer to a relatively narrow contractual arrangement between a limited set of firms (most often two), network production refers to a much broader system of organizing production, and of learning. It involves linkages between a variety of actors--firms of various sizes, specialized service providers, workers, local institutions such as business associations, training institutions, R&D networks, and agencies of the state--that thoroughly embed a firm within its productive environment. In several cases collaborative manufacturing networks may subsume other instruments of individual linkage, such as subcontracting or procurement.

(i) Focusing on groups of firms vs. taking the single firm as the unit of analysis:The significance of these complex and dynamic institutional linkages of production network is best seen in relation to the view in the literature that the problem with small firms is not their size but their institutional "isolation." That is, MSEs acting alone face tremendous challenges in gaining access to key resources: capital, technical knowledge, skills, marketing information and political "voice." This isolation is further reinforced by the tendency among researchers and practitioners of taking the single firm as the unit of MSE analysis--both in thinking about business development policy, and designing service delivery mechanisms, as well as assessing their performance and impact.

By contrast, recent research in industrialized and industrializing countries on groups or clusters of firms located within geographically-based, specialized, and/or product-centered industrial networks shows that when groups of firms work together—and when MSE assistance programs congruently target such groups, rather than individual firms--small firms do better at getting past these bottlenecks. The "collective

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efficiencies" deriving from strong inter-firm linkages that embed a firm in its environment encourage MSE competitiveness and help mitigate the problems of isolation. Thus, an important distinction between business linkage instruments such as franchising, brokerage, subcontracting on the one hand and production networks on the other is that while the former foster narrow linkages between individual firms, the complex and dynamic (i.e., changing over time) linkages in the latter case embed a firm in its larger environment and focus attention not on the individual firm, but the production network, the local economy and even the region. This allows policy and program attention to be focused not just on firms, but precisely on those connections between local firms and other institutions that help MSEs defray costs, spread or share risks, and cope with uncertainty in product and input markets.

(ii) Sector or product-specific vs. generic assistanceTypically, initiatives for assisting small and medium firms tend to be generic, rather than sector or product-specific, or problem driven (Tendler 1994). For example they provide generic services--such as credit, training, marketing assistance--to all firms below a certain size or capacity, irrespective of the particular sector or region of which they are a part. There are several good reasons for doing so. For example, there are high costs involved in customizing assistance to suit the needs of particular firms, regions, or sectors. In addition, there is often a political justification for the "universalization" of service provision on grounds of equity--e.g. of not appearing to exclude some eligible beneficiaries because they do not belong to the sub-sector being targeted. Another reason for tending towards generic MSE assistance across firms and sectors is the consideration of scale--of trying to reach as many firms as possible per dollar spent. The problem with such supply-driven approaches however, is that they are not sufficiently rooted in a region's economy and hence often fail to address the particular problems in a region, sector, or firm that gave rise to the need for assistance in the first place.

As recent research on networks, and sub-sector analysis (Boomgard 1991) is showing, the challenge is to identify problem-driven and sector specific interventions that are not costly or exclusionary (Tendler 1994). For example, these could include interventions (technical assistance or training) where the costs of working this way has been reduced, or where there are strong spillover effects on other firms in the regional economy (Tendler 1994). This is where focusing on product-centered industrial networks with sector specific, and customized assistance provided by local public and private agencies may be an easier vehicle to providing demand-based, product or sector-specific assistance to MSEs.

However, this kind of decentralization of service provision, although desirable, is far from a panacea. Numerous studies have pointed out that it is often the local elite, who hold key, and often coercive positions in the local hierarchy that benefit disproportionally from efforts to decentralize development assistance. Transparency, openness of negotiations, ongoing discussions among the various actors involved, and public scrutiny might make it easier to deal with the problems of supervision and accountability associated with customized ways of delivering technical assistance and other services.

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5.4.0 Green Production (GP)

Green Productivity is defined as “A strategy for enhancing productivity and environmental performance for overall socio-economic development”. It is the application of appropriate techniques, technologies and management systems to produce environmentally compatible goods and services. GP can be applied in manufacturing, service, agriculture, and communities. Broadly speaking, Green Productivity is a concept that can help enterprises to identify ways to strengthen business performance either through or in conjunction with better environmental management.

In the context of MSEs, Green Productivity approaches productivity improvement through or in combination with environmental performance improvement. Environmental practices amongst MSEs will not only save them money, but will actually enhance their business position. The most effective way to communicate this message is to link sound environmental practice to improvements in product quality (and market) or overall productivity; MSEs must be convinced that improving environmental performance should be a business priority. To be effective the concept Green Productivity is developed and implemented as a component of productivity improvement programs.

In its simplest form, productivity is a measure of efficiency or output per unit of input (material, labor, capital). MSEs typically demonstrate low levels of manufacturing efficiency due to lack of expertise or access to suitable technology. Poor efficiency means high wastage and lost profits. Green Productivity for MSEs is posited partially on the assumption that introduction of good housekeeping techniques and waste minimization practices will lead to improvements in productivity (and therefore profit) as well as reductions in environmental impact.

GP implementation among MSEs relies primarily on tools that can instill good fundamental management practices within the enterprise and typically show a quick return on investment. Furthermore, Green Productivity emphasizes the productivity benefits of implementing the systems rather than the environmental benefits. In general, MSEs are much more receptive to programs introduced to improve their bottom line than initiatives to improve environmental performance.

In practice, GP implementation relies primarily on basic environmental management concepts to improve overall environmental performance, including: waste minimization/pollution prevention techniques (source reduction, recycle/reuse opportunities), life cycle assessments, and environmental management systems. For enterprises just starting to address environmental issues (such as the typical MSE), a GP program typically focuses on approaches to improving material productivity. As enterprises become more advanced in their approach, their GP programs may expand to utilize more complex environmental management tools such as environmental management systems or life cycle assessment.

Over the medium to long term, GP will seek to incorporate environmental criteria directly into cost- and quality-control methodologies used by productivity improvement programs. Ultimately, Green Productivity aspires to develop into a comprehensive management system that helps an enterprise maximize product quality,

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minimize costs, and maintain minimal environmental impact. The system would integrate existing quality, cost, and environmental management methodologies and would also develop ways to drive productivity improvement strategies towards those options, which maximize environmental benefits.

The outreach programs developed to promote environmental management tools are a step in the right direction, but further incentives are needed to encourage MSEs to actively pursue Green Productivity and even to seek a higher standard than the law requires. Perhaps the best strategy for promoting Green Productivity or any other environmental management strategy lies in making “the business case” for pursuing the initiative. Improving material productivity can quickly bring benefits to the bottom line and also significantly improve environmental performance. Many of the options to be adopted are simple housekeeping changes or low-tech alterations to the production process. In addition to highlighting cost savings, it is also important to point out any gains in productivity. Much of the benefit of any GP program comes from the improved productivity rather than cost savings. The operator’s interest in Green Productivity is likely to stem from the program’s potential value as a complement to the productivity improvement program and the possibility of creating a higher value-added product. Demonstrating that programs designed to improve productivity can also bring environmental benefits will likely make it easier to convince MSEs that the reverse is also true. Perhaps the biggest challenge is the question of how to effectively reach the majority of the MSE community in the country. There are more than 6.9 million of MSEs in the country, the largest proportion of which lack the basic skills and knowledge to undertake Green Productivity and other environmental programs. Due to the limited amount of resources the government will be willing to invest, most technical extension programs will only be capable of supporting a few hundred MSEs per year. To improve the depth and scope of GP outreach programs it is, therefore, recommended to include the following suggestions:

Establish networks of GP advocates and practitioners to facilitate the exchange of information;

Increase the number of demonstration projects and encouraging intra-industry exchange;

Strengthen the knowledge and skills of environmental consultants; andDisseminate the results through technical training and university engineering

programs.

Most MSEs don’t place a priority on environmental improvements because they believe their capital (human and financial) is better invested in other areas of their business. Poor enforcement of regulations only further reinforces such SME priorities. To change this perception, NPC and/or GoK must seek to weave incentives for better performance into the fabric of the market environment through the use of market instruments and, more important, by encouraging large customers to demand that MSE suppliers achieve minimum levels of environmental performance. When MSEs see that environmental performance is a direct component of their profitability and sustainability as an enterprise, environmental programs will be come the first priority.

Regardless of the specific promotion strategy, Green Productivity programs have much to offer the MSE sector. At the same time, there are still numerous barriers in

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terms of introducing GP-related techniques, convincing management that they merit investment, and ensuring that MSEs have the resources to undertake the effort. NPC (in conjunction with NEMA) should initiate Specific researches with the following objectives:

1. Review the existing national efforts to promote GP and GP-related tools such as pollution prevention, etc.;

2. Develop case studies of GP implementation in MSEs and analyze barriers to further adoption of GP practices; and

3. Provide recommendations on how to further develop GP in various sectors of the economy.

The results of these researches will enable NPC to:Formulate and implement strategies for encouraging MSEs to improve

environmental performance. To develop various outreach programs that offer training in the technical aspects

of strategies to prevent or minimize pollution.

In addition to the GP programs, the GoK should offer tax incentives for equipment purchases. While these efforts are generally viewed as positive, it is likely that more will still be needed, particularly in the area of financing improvements within MSEs. An alternative to regulation is to rely on market forces where the key motivating factor is management’s belief that improved environmental performance will help secure the enterprise’s competitive position. More direct appeals can be made to the potential of GP programs to improve product quality, which relates directly to profitability and competitiveness with other products in the market.

5.5.0 Production Management and Control Techniques

There are many factors that have a direct impact on the operational capabilities of MSEs. The following section reviews the major factors with regard to production management and control.

5.5.1 Lean Manufacturing

Lean production methods use less of everything (human effort, capital investment, facilities, inventories and time) in manufacturing, product development, parts supply and customer relations. The key lean-thinking principles include the following:

• Recognise that only a fraction of the total time and effort in any organization actually adds value for the end customer. By clearly defining value for a specific product or service from the end customer’s perspective, all the non-value activities - or waste - can be targeted for removal. For most production operations only 5% of activities add value, 35% are necessary non-value adding activities and 60% add no value at all. Eliminating this waste is the greatest potential source of improvement in corporate performance and customer service.

• Few products or services are provided by one organisation alone, so waste removal has to be pursued throughout the whole value stream - the entire set of activities across all the firms involved in jointly delivering the product or

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service. New relationships are required to eliminate inter-firm waste and to effectively manage the value stream as a whole.

• Instead of managing the workload through successive departments, processes are reorganised so that the product, or design, flows through all value-adding steps without interruption. Obstacles to uninterrupted flow are identified and removed using the toolbox of lean techniques. Activities across each firm are synchronised by pulling the product or design from upstream steps at just the time when required to meet the demand from the end customer.

• Removing wasted time and effort represents the biggest opportunity for performance improvement. Creating flow and pull starts with radically reorganising individual process steps but the gains become truly significant as these process steps link together. As this happens more and more layers of waste become visible and the process continues towards the theoretical end point of perfection, where every asset and every action adds value for the end customer. In this way, lean thinking represents a path of sustained performance improvement - and not a one-off programme.

• The organisation must view itself as just one part of an extended supply chain and think strategically beyond its own boundaries. Because value streams flow across several departments and functions within an organisation, it needs to be organized around its key value streams. Stretching beyond the firm, some form of collective agreement or organisation is needed to manage the whole value stream for a product family, setting common improvement targets, rules for sharing the gains and effort and for designing waste out of future product generations. This collective group of organisations is called a ‘lean enterprise’.

Lean thinking can be applied to any organisation in any sector. Its results are found in all kinds of activities, including order processing, product development, manufacturing, warehousing, distribution and retailing. As more and more organisations strive to become lean, they will expect their suppliers to do the same. These expectations will be communicated through such things as:

the responsibility for quality inspectionthe responsibility for some aspects of product developmentrequests for engineering changesexpectations of reliable quality and delivery performances.

These may all be pushed further down the supply chain. In order to meet these types of requirements from larger companies, MSEs will need to progress towards becoming lean themselves. It is logical that a lean manufacturer at the head of a supply chain will prefer to work with suppliers who can align their processes to comply with lean manufacturing.

A Lean Enterprise Research Centre (LERC) should be established (preferably by the National Productivity Centre) to be dedicated to:

developing pioneering, leading-edge lean-thinking research tools and techniques;helping organisations achieve world class performance through the application of

lean-thinking and supply-chain principles and techniques; anddisseminating lean-thinking and supply-chain knowledge through a broad range of

education programmes and management courses and by communicating with the broader management population.

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The aims of the LERC are to develop a detailed knowledge of lean-management principles and techniques and identify new methods of applying them for the benefit of businesses and other organisations. 5.5.2 Enterprise Resource Planning (ERP) Systems

Enterprise Resource Planning (ERP) systems are software solutions that integrate and provide data in real time to users in any part of a manufacturing enterprise. A well-designed ERP system will have separate components to control data related to each aspect of an enterprise’s operations while simultaneously providing an overall or integrated view of the entire enterprise. The components of a typical ERP system are:

• finance/accounting• manufacturing planning/scheduling• human resources• distribution management• customer order management• cost management• shop-floor management• inventory management• procurement management• production control.

By linking the business processes of an enterprise, ERP connects the parts of an organisation together to form a system of supply chain management. This links all the departments of a business, like accounting, marketing, finance, human resources and distribution, to one main system. One of the goals of ERP is to facilitate and improve cross-departmental communication as part of the same business process. This integration leads to a greater organisational impact. In the long run it may lead to greater efficiency and, in turn, greater profits.

The Internet represents the next major technology enabler, which allows rapid supply chain management between multiple operations and trading partners. Most ERP systems are enhancing their products to become `Internet enabled' so that customers worldwide can have direct access to the supplier's ERP system. Some systems have workflow management functionality built in, which provides a mechanism to manage and control the flow of work by monitoring logistical aspects such as workload, capacity, throughput times, work queue lengths and processing times.

Enterprises can extend their ERP software to the Internet, revealing essential data such as manufacturing production schedules and inventory levels to key suppliers. Of course, to reap the benefits of such information provision, MSEs will have to have access to the Internet.

5.5.3 Supply Chain Management (SCM)

Recent research on supply chain management in general has focused on the subject of closer relationships between customers, suppliers and other relevant parties in the pursuit of competitive advantage. Within any supply chain, companies from raw materials suppliers to manufacturers and even retailers should work together to

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achieve a level of supply performance that is beyond the capabilities of any individual company.

The control of a supply chain is usually carried out by the organisation that performs the last significant transformation of the product before it reaches the customer. For the organisation ’in control’, supplier development is vital to maintain an integrated supply chain. However, MSEs sometimes lack the engineering resources, equipment, information systems and employee skills needed to carry out the suggestions for improvement generated by such supplier-development programmes. Ways in which larger companies are looking to overcome these difficulties include the following:

• Looking for ‘quick wins’: To minimise investment, high-impact but low-cost areas of improvement should be identified and actioned. The productivity improvement areas listed in this paper are areas for consideration.

• Utilising larger companies’ resources where possible: For example, the larger company may be able to offer personnel support in areas that are lacking in the MSE.

• Building training centers: A further development of the provision of personnel support would be for the larger company to set up a training centre. The training centre could consist of a facility dedicated to providing training to internal groups, customers and suppliers.

5.5.4 The Internet

The barriers to the adoption of Internet-based opportunities for MSEs include the following:

• a lack of understanding of the opportunities available to MSEs;• a lack of understanding of how to implement these techniques;• a lack of skills amongst the workforce in using them;• the prices of the technology.

The use of both e-mail as a communication medium and the World Wide Web as a source of information are both areas that MSEs need to take full advantage of in order to continue to be effective players in any major supply chain. In addition to the existing supply chain implications, the World Wide Web offers exciting new opportunities for MSEs to extend their customer base into the global marketplace.

5.5.5 Waste Management

The reduction of waste is a key area in the application of low-cost productivity improvement ideas. The following are the main seven categories of waste programs that should be applied in any manufacturing organization to minimize waste:

Overproduction: The aim of any manufacturing operation should be to produce what the customer requires at the right time and at the right level of quality. Producing more than is required leads to undesirable stock levels. In some situations companies overproduce and move away from the idea of just-in-time to the safety of just-in-case. Some bonus systems that reward performance based on targets exceeding what is actually required will naturally encourage overproduction. In both cases high stock levels and thus waste may result.

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Waiting Waste categorised as waiting occurs in situations such as the following: when raw materials wait in goods-inwards stock before processing if they are not delivered when required; when products wait internally between operations because the flow of production is not smooth or balanced and operators are left waiting for work (and so are not contributing or ‘adding value’ to the product); and when products wait for longer than necessary as finished goods to be shipped to the customer if delivery schedules are not optimised.

Transport: Product movement within the manufacturing operation is often unavoidable, but adds no value to the finished item and so should be minimized wherever possible. Transporting the product not only wastes time and effort but can also result in damage during transit. Transport waste is visible and can be easily identified through product-flow studies. Drawing a physical diagram of the production flow and clearly marking product movement is one method of revealing transport waste. This simple exercise can often highlight areas of product movement, which may have evolved without consideration to the effect on total distance travelled by a product during the manufacturing life cycle. Often, re-location of key operations can yield large savings in transportation wastes.

Inappropriate processing: In carrying out a job, it is wasteful to use tools and machinery that are not the most appropriate – for instance, CNC machinery, with its vast capability and flexibility, for producing a simple component. It is often the case that a sizeable investment in such machinery results in pressure to run it constantly, even when it is not the right tool for the job. This type of waste can also be related to machines or processes that do not have the capability to produce the required level of quality. More often most Jua Kali artisans use wrong tools and end up either spoiling the work or damaging the tool or taking a long time to finish a simple job.

Unnecessary inventory: The ‘evils’ of stock are well documented, and include: unnecessary storage; unnecessary transportation; interruption to the smooth flow of goods; increased lead times to accommodate unwanted items, which when complete will go directly into stock rather than to a customer; inability to detect defects through not seeing the ‘wood for the trees’ ; deterioration of ageing stock.

Unnecessary motion: Motion does not refer to transport of product but more to the ergonomic aspects of work to be carried out. As well as placing undue effort on the individual carrying out the operation, poor workplace design can lead to inefficient methods of working. As with transport waste, areas for potential improvement can be identified through time-and-motion studies of particular operations.

Defects: The production of non-conforming product is a fundamental waste as the output will have to be either reworked or scrapped. Both of these options carry their associated costs and may be affected by any of the above waste categories.

5.5.6 Visual Management

Visual control is an essential part of a lean manufacturing environment. This involves the logical placement of all tools, parts, raw materials, and the prominent display of relevant production information for everyone involved to be able to see and

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understand the status of the system. Five key areas of information displayed in a visual factory are:1. Safety – example of data displayed are:

• number of lost-time accidents• number of near misses• details of recent risk assessments• personal protective equipment (PPE) stored in a labelled storage area

2. Quality– example of data displayed are:defect rate (by shift, by area, by department, for example)details of recent root cause analysisrecent quality issues

3. Production– example of data displayed are:target production levelsactual production levelsrecent production issues

4. Cost– example of data displayed are:key consumables, both direct and indirectutility consumptionovertime worked

5. People– example of data displayed are:team memberstraining recordsteam or personal achievements

Visual Control helps in undertaking the following actions in the most efficient manner:

identifying the location of the problemphysically visiting the locationexamining the situation and understanding the problemconsidering the most appropriate action andtaking action.

Different coloured lights are normally used to signify different operating conditions, for example:

• green = operating within agreed tolerances; no operator intervention required;• amber = beginning to deviate from normal operation; operator should check

the machine at agreed intervals and take corrective action where appropriate to restore normal operating conditions;

• red = machine stopped; urgently requires attention.

The ultimate objective of using this coloured lights is to prevent problems from occurring.

The Five Visual Programs to assist in Quality maintenance: The following five visual programs can be used to establish and maintain all aspects of quality in an organization:

1. Proper arrangement, sorting out:• Identify what is needed and what is not needed.• Keep what is needed and eliminate what is not needed.• Do not produce waste or consume more resources than necessary.

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• Introduce measures to prevent the build-up of unnecessary items.2. Orderliness, tidying up:

• Put things in order.• Determine a location for all identified, needed items.• Make it easy for anyone to find, use and return these items by

providing information as to where things are now stored.• Use standard equipment where possible.• Find alternative storage for tools, parts, equipment and supplies that are

needed but not used daily. 3. Cleanliness

• Shine equipment, tools and the whole workplace.• Eliminate dirt, dust, oil, scrap and other foreign matter to make the

workplace clean.• Adopt cleaning as a form of inspection. Cleaning exposes abnormal

conditions and corrects pre-failure conditions.• Integrate cleaning into everyday maintenance tasks by all staff.

4. Standardizing, housekeeping: This is a state beyond the first three programs, in which they are thoroughly maintained by sharing information so there is no searching for information such as delivery dates, production schedules and so on. Everything is standardized and standards are made visible so that all abnormalities can be easily and immediately recognized.

5. Discipline:• Maintaining correct procedures becomes a habit.• Proper training of all workers has occurred.• All workers have ‘bought-in’ and a change in work habits has been

achieved.• The workplace is well ordered and run by agreed procedures.• When applied to the organisation, it could also be applied to external

relationships.

The five visual programs define a process for the normal to see the abnormal. These programs can lead to improved behaviour because the abnormal becomes much more obvious (or visual) on the shop floor. The five visual programs’ principles underpin the low-cost productivity improvements. All the five visual programs can be accomplished with little or no capital investment whilst the financial returns from the resulting productivity improvements – in the form, for example, of improved storage facilities – can be quickly realized, and will offset any cost involved.

5.5.7 Standard Operations The first three visual programs of proper arrangement, orderliness and cleanliness can be relatively straightforward to introduce but not so easy to maintain. Key to the successful implementation of the five visual programs methodology is the fourth visual program of standardization. In order to maintain the good workplace arrangement that has been created by the first three visual programs, there is a need to

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share information concerning not only the method of production, but also delivery dates and production schedules.

Visible standardisation of everything allows abnormalities to be easily and immediately recognised. To achieve this, standard operations must be set for all sections of the organisation and adhered to utilising the best combination of machines and people working together to produce a product or provide a service.

Standard work is the starting point for improvement. Standard operations can be used to train new people, as a visual indicator of proper work sequence and work in progress, and have helped organisations to minimise the variability of a given process and thus improve reliability.

Standardised work is a tool to support the manufacture of quality products. The application of standard working results in working methods is centred on human movements. They improve efficiency by highlighting and eliminating waste from the process and hence reducing unnecessary costs.

Standardised work forms the basis of lean production and without it consistent process improvements are difficult to implement. It defines the actions needed to complete an operation, but should not be considered immutable. The consistent update of standard operations is the cornerstone of continuous improvement initiatives. Improvements to standard work should be arrived at based upon suggestions for improvement from operators and possibly from changes in customer demand, which would result in takt time changes.

Standard Operating Procedures (SOPs) are used:• To ensure that an operation is carried out in the same way by all operators who

carry out a particular process, whether in a team or across multi-shift operations;

• To train new operators to carry out the process; • As a starting point for continuous improvements; and• As a means of monitoring the standard to which work is being performed.

The three key elements of standardised work are takt time; work sequence; and standard work-in-process stock:

• Takt time - A German term used to describe the time in which one product or component needs to be produced in order to satisfy the demand for that component. Takt time is used as the basis for calculation of production loadings, and may be expressed as: Net daily operating time (Takt time = Daily customer requirement). The takt time determines the frequency at which products must be made in order to satisfy the customer.

• Work sequence - formally lists the order in which work should be carried out to ensure that work cycles are completed in the most efficient manner. The consequence of not conforming to standard work sequences can be seen in the fluctuation of cycle times, work being forgotten or missed and the misuse of equipment or machinery. Possible results of not conforming to standard work sequences could be a reduction in quality performance, increased equipment breakdown or the creation of an unsafe working environment.

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• Standard work-in-process stock - Standard work-in-process stock is the minimum quantity of incomplete or part-complete product that is required in any process for the work to be completed without leading to any unnecessary waiting time for the operator.

Standardised work is based around a set of work sequences and operator movements that are repeatable. It is based on the assumption that equipment provided to the operators is reliable and well maintained. If that is not the case, then stoppages or breakdowns will occur and disrupt the workflow. This kind of interruption will make it very difficult, if not impossible, for the same standard work sequence to be repeated, and production efficiencies will be lost. The effective maintenance of all machinery and equipment is therefore a vital prerequisite of the application of standard work.

To facilitate the consistent application of standard work, standard work charts (SWCs) are often displayed at the point where the work is carried out. The four basic steps in the construction of a SWC are as follows:

• Observe the actual work being carried out and record the basic steps.• Construct a floor layout drawing of the work area – not necessarily to scale,

but as representative of the actual set-up as possible. • Add the location of each work area to the layout in sequence.• Add the standard work-in-process stock at each location where it is kept.

An important point to note is that if at any time the actual work being carried out does not reflect the displayed standard (or vice-versa) then standardised work will not provide the benefits of control and structured improvement that can otherwise be expected. Standardised work relies on the effective control of the displayed standards.

5.5.8 Agility

Manufacturing is becoming the provision of complete service over the whole product lifecycle. This new service provision requires manufacturers to get much closer to their customers and to operate far more responsively than they have in the past. In order to achieve such responsiveness, the organisation must become and remain agile. Many definitions of agile manufacturing exist. Here are a few:

• a manufacturer’s ability to thrive in a continually and unpredictably changing environment while operating profitably in a competitive climate ( Moskal 1995);

• Agile manufacturing is the solution to meeting customer demands for products in less time at lower costs (Sheridan 1993);

• Agile manufacturing implies breaking out of the mass-production mould and producing much more highly-customised products in an attempt to satisfy a wider spectrum of customers (Sheridan 1993);

• Ideally, [agile manufacturing] is the ability to deliver the right quantity of a unique product to the customer when and where required – all for a price equal to mass production conditions (Willis 1998).

In order to respond quickly to changes in a dynamic market environment, manufacturers must become agile in order to grow and prosper whilst remaining responsive to customer demands. Agile manufacturing allows the design of production

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systems and processes that facilitate adaptation in order to meet the demands in true production environments quickly. One of the main purposes of agility is to get the product from concept to the marketplace as quickly as possible. Agility takes lean manufacturing further by making work teams, tools of production, and products reconfigurable.

Agility in manufacturing involves a wide array of ideas and philosophies, including:doing things right the first timecustomer responsethe voice of customerself-managed teams andquality-related ideologies.

An agile company can, for example:rapidly bring to market products that are variable combinations of hardware,

information, and services;design products that are easy to re-configure and upgrade;produce goods and services to individual customer order in arbitrary order

quantities;bring out a continually changing array of models within longer-lived product

families;fragment mass markets into niche markets;create continuing, rather than single-instance, sales relationships by continually

adding value for current customers; and co-operate intensively with other companies, including competitors, to create

global production resources.

5.5.9 Mass Customization Kenya’s vision of manufacturing (Industrial Transformation by the year 2020) in 2020 should be of a customer-driven, high value-added environment with an emphasis on the manufacture of individual products to meet individual requirements. Traditionally, manufacturing has been closely identified with systems of keeping production costs low through economies of scale, i.e. mass production. However, recently mass-production concepts have evolved and mass customisation techniques have developed using flexible manufacturing systems. Mass customisation aims for variety in products and services so that customers can buy a tailored product at prices near to that of a mass-produced item. This involves manufacturing customised products using mass-production tools and techniques.

A mass-production organisation is often hierarchical or bureaucratic, exhibiting the following characteristics:

Workers are closely controlled and supervised.Work tasks are repetitive.Products are low-cost and standardised.

A mass-customising organisation is different. It is flexible and responsive and consists of independent individual workers.

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Methods and Benefits of Mass Customisation: The five fundamental methods of mass customisation are:

• customising services around standard products and services• creating customisable products and services• providing point-of-delivery customization• providing a quick response throughout the value chain and• modularising components to customise end products and services.

The benefits of mass customisation include the following:• Higher profits: By providing tailored products to meet particular needs,

comparative sourcing is made difficult and the focus is shifted from price to benefits. Whilst it is possible to manufacture at a mass-produced price, there is the option of charging a premium whilst still retailing below the price of a custom product. This opens wider market opportunities.

• Value for money products: Mass customisation allows customers to acquire a product that has been produced to meet their own particular needs at a competitive price, thus providing exceptional value for money.

• Market Exploitation: Personalised and customised products and services will differentiate against commodity-type products. Lead customers will provide a rich source of new ideas that can also be exploited with other customers or with new prospects. As a result, new product development has a lower risk of failure and a higher chance of beating the competition. On-going service can be adapted throughout the customer's life because it can be linked to the unique product. Companies should establish closer relationships with their suppliers, distributors and customers as they return for further unique products.

A number of technologies, including ERP and the Internet, are enabling improvements to be made to the total supply chain in such areas as ordering, manufacturing, delivering and servicing products. These improvements will help to support a move towards mass customisation. Mass customisation is not ideal for every company, and any organisation will have to consider the supply chain and likely market developments before implementing any change programme.

5.6.0 HIV/AIDS Strategy to deal with the pandemic in the informal sector

HIV/AIDS poses one of the greatest threats to Kenya in its battle to bring a large percentage of the population out of poverty and into the full economy. The effects of HIV/AIDS on one family member can produce an economic shock to the entire household and extended family network. For families living at or below the poverty line and struggling to create a better life for themselves, an economic shock can produce dramatic negative results to the welfare of the household. A temporary loss of income for a household that is just scraping by can drop that household below the poverty line and makes it extremely difficult for family members to work their way out of the problem. However, the chronic nature of HIV/AIDS makes these economic shocks even more dangerous as they last longer and families are forced to sell off assets. For many poor households, this prolonged economic shock can throw the family into destitution.

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While one can address the issue of the impact of micro enterprise development on the coping strategies of households, this section is actually focused on the impact of HIV/AIDS on MSE enterprises. It is important to separate the issue of people who are infected with HIV/AIDS from those who are affected. At the enterprise level, we are interested in the effects of HIV/AIDS on individuals and the ways those effects can affect the MSE. Given that a very large percentage of the people who are infected with HIV/AIDS are unaware that they are infected, it is necessary to find other ways of determining the levels that they are being affected.

HIV/AIDS is a threat to enterprise performance. The world of work is affected by increasing costs due to health care, absenteeism, burial fees, recruitment, training and re-training. For smaller firms in both the formal and informal sectors, the loss of employees has major implications. Overall, there will be a reduction of growth if rapid measures are not taken to prevent the impact of HIV/AIDS. People living with HIV/AIDS are often forced to leave their jobs and are isolated in their communities, with minimal opportunities to earn an income. HIV/AIDS appears to be having an effect on many small firms in Kenya, either by reducing their markets, increasing their costs, or reducing their productivity.

5.6.1 Sectoral Response

To be effective, support for the Informal sector against the impact of HIV/AIDS should always take its diversity into account. Thereafter, any support for the informal sector that succeeds in improving its financial and physical capital base, working conditions, skill levels, productivity and profitability will to some extent mitigate the impacts of HIV/AIDS.

With regard to support aimed specifically at combating the effects of HIV/AIDS, four basic levels of intervention can be distinguished:

1. preventing informal enterprise operators and workers from becoming infected;

2. helping operators/workers who are infected but still productive to provide for their future care and for the future survival of their families

3. supporting the care of ill and dying enterprise operators and workers and their families;

4. supporting the care of orphans left behind by enterprise operators and workers who die of AIDS-related disease.

The third and fourth items above are best achieved through non-sector specific programmes of care and welfare, given that these are problems common to all people with AIDS and that the appropriate responses are subject to significant economies of scale. The first two involve responses, which must be tailored to the specific circumstances and needs of informal sector workers, necessitating sector-specific interventions. As highlighted above, for such interventions to be effective, their planning and implementation must be based on analysis of the institutional environment, organisational structure, sub-sectoral characteristics and networking experience of the informal sector or sub-sector concerned.

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Characteristic of the informal sector in general is an absence of comprehensive coverage by MSE associations that are tight-knit and effective; trade union representation; and government involvement in and contact with the informal sector that is pervasive, efficient, and supportive. This means that conventional tripartite initiatives against HIV/AIDS by unions, management organisations and government are generally not feasible within the informal sector. However, as discussed, the sector is also characterized by various forms of networking, which are key to the effectiveness of HIV/AIDS programmes. In addition, a range of support agencies, mainly NGOs, succeeds in reaching informal enterprises in many economies, and their contacts and networks can assist in the targeting of such firms.

5.6.2 HIV/AIDS prevention

Sex education and the provision of condoms should be integrated with programmes of support to the informal sector. Further than this, however, the detection and use of business networks to reach and educate informal sector operators and workers and their customers can be extremely beneficial. Backward or forward linkages with large firms, particularly common in intermediary trade and manufacturing, can be useful in locating and gaining access to informal enterprises to carry out HIV education.

Forward linkages with clients can also be exploited to gain access to a large section of the general public, and can be used to establish peer education of consumers by those enterprise operators and workers, who, particularly in the retail trade, have sufficient time to interact at length with their customers. Horizontal linkages between enterprises, which are formed by operators in all sub-sectors to secure finance, and by operators particularly in manufacturing for production and marketing, can be used to initiate peer education on HIV prevention among operators and workers themselves.

Gender-specific prevention programmes should aim particularly at the retail (food) and manufacturing (soft goods) sub-sectors, where women enterprise operators and workers predominate. Effective interventions in this regard would include not only information on HIV prevention measures, but referrals to NGOs providing training to the informal sector in product design and diversification, and the facilitation of enterprise networks to increase competitiveness in production and marketing. The latter will help women entrepreneurs to avoid risky survival strategies such as exchange of sex for cash.

5.6.3 Business Risk Management

Informal enterprises are vulnerable to falls in consumer spending and to the disruption of the business networks vital for resources and markets caused byAIDS-related illness. Accordingly, interventions in the sector could usefully include training in the management of business risks posed by the pandemic,such as the training in product design and diversification mentioned above, facilitation of access to other markets (for example the export market for handicrafts) and assistance for credit provision to informal enterprises through judicious support to appropriate financial institutions.

At the very least, enterprise operators would be well-served if they were encouraged to consider the two critical issues of what they would do if (a) their current market

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disappeared, and (b) their business networks disintegrated. Entrepreneurs in some countries in East and Central Africa, where the pandemic is well advanced, have already had to deal with these eventualities and the study and dissemination of their coping strategies would be highly beneficial to the informal sector in Kenya.

5.6.4 Social Protection

Enterprise operators and workers need to provide for the future survival of their families in case they should become infected, and especially if they are already infected with HIV. This is naturally not easy; people engaged in an arduous struggle against poverty have shorter time horizons and, in societies troubled by unrest, become fatalistic and resigned. Nevertheless, there is generally great demand among informal sector operators and workers for access to social protection schemes to assist with unforeseen expenditures such as hospital and funeral costs. This demand has in a few instances been met by co-operation among the entrepreneurs themselves.

Intervention in the informal sector should attempt to broaden this concern into recognition of the value of social protection schemes, which include household income maintenance in the event of illness or death of family members due to HIV/AIDS. The International Labour Organisation and other bodies have launched initiatives to pilot social protection schemes for the informal sector in certain countries.

These are seeking to resolve critical issues such as the need for comprehensive, area-based participation (and financial contribution) by informal sector workers, as well as adequate government funding and supervision. Innovations introduced in the formal insurance industry to cope with the impact of HIV/AIDS on provident payouts, such as reduced premiums for people remaining HIV negative, could be adapted to such informal sector social protection schemes to encourage low-risk behaviour. However, a major obstacle to the effective implementation of such schemes remains the administrative burden they entail.

5.6.5 Essential Components of a Workplace HIV/AIDS Prevention Programme

• Policies and practices should be clearly defined, understood and consistently followed. They form the foundation of a workplace HIV/AIDS prevention programme and assist in defining the company's position on how they deal with the HIV/AIDS infected and affected workforce;

• Peer education – There may be need to train peer educators who will then discuss with co-workers HIV/AIDS issues, condom promotion, distribution and use, sexually transmitted infections (STIs) symptom recognition and referral, whilst working during lunch or after hours at recreational places;

• Condom distribution systems that make condoms readily and consistently available and comfortable to assess. Condom availability helps to promote safe sex;

• Sexually transmitted infections (STIs) diagnosis, treatment and management. STIs cause illnesses that may lead to absenteeism at the

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workplace, reduce productivity and increase possibility of HIV/AIDS transmission;

• Counseling, testing and support services f o r employees and families. Confidentiality should be emphasized at all levels at the workplace. Infected persons should be given adequate information about HIV/AIDS and tests should be voluntary. Counseling is beneficial to the physical and mental welfare of employees and their families. Counseling increases the probability of sustained behavior changes that will help prevent the transmission of the AIDS virus;

• Workplace education programmes will raise workers awareness about HIV/AIDS, motivate them to adopt safer sexual practices and reduce HIV infection;

• Information provision on HIV/AIDS. It will be necessary to incorporate HIV/AIDS in the training manuals for the different courses rather than developing new training materials for the awareness campaigns as that tends to distance HIV/AIDS from the daily activities of the enterprise.

[Adapted from UNAIDS]

5.6.6 Summary of Recommendations

• Support for the informal sector against HIV/AIDS should take its diversity into account. Thereafter, any support for the sector that succeeds in improving its financial and physical capital base, working conditions, skill levels, productivity and profitability will to some extent mitigate the impacts of HIV/AIDS.

• There are four basic levels of intervention directly related to HIV/AIDS: (i) preventing informal enterprise operators and workers from becoming infected; (ii) helping operators/workers who are infected but still productive to provide for their future care and for the future survival of their families; (iii) supporting the care of ill and dying enterprise operators and workers and their families; and (iv) supporting the care of orphans left behind by enterprise operators and workers who die of AIDS-related disease.

• The prevalence of business networking in the informal sector is key to the effectiveness of HIV/AIDS programmes - these networks have significant potential to reach and educate informal sector operators and workers and their customers.

• Gender-specific HIV prevention programmes should aim particularly at the retail (food) and manufacturing (soft goods) sub-sectors where women enterprise operators and workers predominate.

• Training in the management of business risks posed by the pandemic should be provided, such as training in product design and diversification, facilitation of access to other markets, and support to institutions providing credit to informal enterprises.

• The value of social protection schemes, which include household income maintenance in the event of illness or death of family members due to HIV/AIDS, should be recognised. Initiatives launched by the ILO and other bodies to pilot social protection schemes for the informal sector in certain countries should be adapted and replicated.

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• A variety of tools should be identified for increasing awareness and action amongst the MSE sector and develop an HIV/AIDS and MSE pamphlet. A roster of HIV/AIDS experts who can be called upon to assist awareness workshops should also be developed. A sample awareness workshop (community based awareness raising meetings, media campaigns and dissemination of pamphlets) and the necessary support materials should be developed. The MSE target group should include entrepreneurs, workers within the sector, trainers and other field workers, and directors of MSE support agencies.

• Components of an effective HIV/AIDS Workplace prevention programme should include the following:

• ongoing formal and informal discussion and education on HIV/AIDS for all staff;

• an equitable set of policies that are communicated to all staff and properly implemented, including protection of rights at work and protection against any discrimination at work;

• the availability of condoms; • prevention and rehabilitation programmes on drugs and alcohol; • diagnosis, treatment and management of sexually transmitted diseases,

for employees and their sex partners; and • voluntary HIV/AIDS testing, counselling, care and support services for

employees and their families.

5.7.0 Legal and Regulatory Environment

Cumbersome laws and regulations, some of which are either hostile to the MSE activities, or not sensitive to the needs and situations of these enterprises, inhibit MSEs. An enabling environment for MSE must be provided if Kenya's need for growth and employment opportunities is to be met effectively and sustainable. An important part of creating such an environment is the removal of legal and regulatory obstacles. In order to promote MSEs, there is need to speed up the work already started to review legal constraints that restrict the development of the sector. Concrete policy interventions are urgently needed in the areas of trade licensing, business registration, access to work space and security of tenure, and finance.

1. Trade licensing should be streamlined and should be made affordable to MSE operators. The fees should be uniform irrespective of the type of business. The fee to be reviewed from time to time as the situation improves. MSE organizations should be involved in this issue of licensing MSE operators.

2. Registration of business names and Associations should be decentralized and be done at districts and division levels, and should not take more than one month to process. In some exceptional places, mobile registration can be arranged at certain times of the year so as to enable those in remote areas to register.

3. All land identified and earmarked for MSE activities should be registered and be issued with title deeds in the names of the appropriate associations/organizations. Those grabbed should be returned and more land should be allocated. All MSE land should be given free of charge. The land procurement committee that was formed in 1993 to address the issue of

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procurement of land for MSE development should be activated and be entrusted to looking land for the MSE activities. The land use should not be changed without proper authorization (MSE organizations to be involved).

4. An MSE Act should be enacted by parliament to enforce the proper implementation of the MSE Sessional Paper. The act should clearly define what MSEs are for the purpose of policy implementation. This will also resolve the conflicting of MSEs among government departments and the private sector.

5. The Industrial Training Act should be reviewed to allow MSE associations to register and benefit their members. The training should be modernized and more relevant employer-based training should be incorporated to facilitate moving skill upgrading closer to productivity and employment. The directorate of Industrial Training (DIT) should develop la long-term national skills training strategy that would be more responsive to productive sector training needs.

6. Minimum compliance standards relating to health, safety and the environment should be developed, adhered to by MSE sector and enforced uniformly.

7. The notes of the central Government and local authorities should be clearly identified. All the MSE activities should be coordinated by one Ministry.

8. The private sector (especially the MSE umbrella organizations and their primary Associations) should be involved in formulating and implementing policies and strategies related to MSEs. These organizations should use their networks to undertake the information dissemination campaigns through workshops, posters, brochures, newsletters and mass media to educate their members and the business community at large. Sensitization workshops, of example, could be held to strengthen both local and umbrella organizations. This will help them raise funds through registration and subscription fees, hence pool resources to support associations that would help the groups to take up on-site training of their members and workshops to create legal awareness.However, initially these organizations should be funded so as to enable them have permanent offices with qualified and experienced secretariat staff to run their affairs - the Government together with development partners should assist in this initial financing of these organizations.

5.8.0 Reverse Social Policy Strategy

The Social Policy Strategy focuses on social welfare e.g. employment creation as opposed to economic development e.g. wealth creation. MSE firms have gained a prestigious place in the firmament of social policy, where micro-credit and other MSE programs are seen as forming a safety net into which the poor can gently fall. Over the last decade or so, myriad programs, projects, and policy reforms have focused attention on MSE sector in general, as part of a broader social-policy agenda of reducing poverty and unemployment. Despite this welcome attention, many planners in developing countries nevertheless continue to view MSE programs as “only” welfare, rather than the stuff of “serious” economic development. The particular form taken by MSE support in many countries reinforces this view as does the way MSE support is often embedded in politics. This jeopardizes certain benefits, ironically, that we hold crucial to the current agenda of reducing poverty and unemployment:

greater observance by enterprises of environmental and labor regulations,

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sustained increases in efficiency and productivity in local economies and, as a result,

improvement in the quantity and quality of jobs.

Much of the policy advice on this subject, however, focuses on the “burdens” themselves as the source of the problem–particularly, the costs of formalizing and observing tax, environmental, and labor codes. It advocates reforms, in turn, that grant special relief from these burdens to micro and small enterprises in the form of exemptions from or reductions of taxes and other costs associated with environmental and labor regulation.

The dynamic of the Social Policy Strategy also reinforces the distinctly dismissive attitudes held by many economic-development planners and by development-bank managers toward smaller and informal-sector enterprises. They often view the support to MSEs as a “welfare” measure that belongs in “social” rather than economic-development agencies and, therefore place them under ministries or departments of labor or social welfare, or special MSE agencies. In their eyes, MSE support will help mop up the unemployment resulting from the necessary reforms and initiatives meant to restructure the economy and institutions of government for a trade-liberalized world.

In these terms, the MSE sector becomes mainly an instrument for preserving and even creating jobs–albeit often poor-quality jobs in poor-quality firms–rather than as an opportunity to stimulate economic development. To reverse this negative trend of the Social Policy Strategy the following recommendations should be considered and adopted:

1. Focusing on the difficulties MSE enterprises face in meeting the costs of environmental and labor standards distracts our attention from pursuing opportunities for enterprises to, indeed, rise to the occasion and meet these standards, rather than be exempt from them. Though we are used to thinking that MSEs need protection from these “excessively” burdensome costs, there are many cases in which MSEs have actually met those costs and, contrary to the burden-relieving scenario, have been better off for it. They became more efficient, produced higher quality goods, and gained new access to more demanding markets.

2. How did such dynamic clusters get from where they were before–when they were the pathetic, low-productivity small firms of the welfare scenario–to where they are today? The answer to this question will reveal lessons on how to promote MSE dynamism while not compromising–in contrast to the burden-reducing approach–our concerns for increasing the rule of law, reducing environmental problems, protecting worker rights, and skills upgrading labor. The lessons will also provide insights into the sequences of events and other circumstances under which local actors make the transition from burden-relieving to more strategic and transformative deeds.

3. The widespread sympathy for MSE enterprises as a special category–and in particular their “inability” to pay taxes and conform to environmental and labor standards–tends to undermine other important concerns about appropriate strategies for reducing poverty, increasing employment and development, and improving governance. These include:

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reducing environmental degradation (to which MSE clusters can be major contributors);

protecting worker rights to organize, and improving health and safety in the workplace;

expanding the coverage of social security, health, and other social insurance to poorer workers;

increasing the tax yield of governments so as to better finance public services and, in so doing, drawing government and enterprises together in a contract–in this case, to promote a more inclusive style of economic development.

4. Researchers and funding institutions could contribute to breaking the stranglehold of the Social Policy Strategy by exploring the paths by which informal enterprises or sectors actually:grew into formality, treated workers better and upgraded their skills, and worked toward improving their environmental practices.

These kinds of cases–where firm agglomerations succeeded in meeting regulatory requirements, became more competitive, and were better off for it–need to be sought out and chronicled, such that lessons for policy can be learned from them. This would help to show policymakers–particularly at the sub-national level, where such enforcement and economic development support increasingly takes place–another path and another set of possibilities.5. Showing that such outcomes are perfectly imaginable, and familiarizing planners with the felicitous outcomes of actual cases and the paths that led to them, might also contribute toward reducing the generalized antipathy in the economic-development sector of Kenya and many developing countries toward the enactment or enforcement of environmental and labor standards.6. While the policy sympathy for small enterprises as a category of assistance is desirable on many grounds, the concern about protecting MSEs from reasonable regulations–let alone from the vicissitudes of the market–can become toxic when combined with the political dynamics of the Social Policy Strategy. The waiving of tax, labor, and environmental regulations that results from sympathy for the “plight” of small enterprises may hinder rather than help local economies if it condemns them to low-level economic stagnation, degradation of the environment, and violation of worker rights. The latter all clearly increase unemployment and poverty, as well as burdening unnecessarily the task of poverty-reducing social policy. 7. The kind of support (i.e. universalist and burden-relieving) advocated by the Social Policy Strategy to small enterprises is not ideal, however, for stimulating local economic development that is sustained and employment enhancing. Today the most widely agreed-upon forms of public support for local economic development do not have this universalist and burden-relieving character. In some ways, in fact, they are just the opposite. They strategically identify and try to remove bottlenecks to improved efficiency, productivity, and marketing for the sector as a whole. Before any significant support is rendered, they often require or elicit broad involvement of the sector in a process of discovering exactly what the problem is and what to do about it. And they may benefit directly–at least at first–only those firms most capable and most interested in upgrading their production which, in turn, often leads to the latter’s formalization (i.e. prioritization). The histories of dynamic small-enterprise clusters often reveal this particular kind of strategic public support, which in turn has been

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central to the formation of strong local economies and the reduction of unemployment and poverty.

5.9.0 MSE Coordinating Council

At the present there are many weaknesses in the mechanisms for the co-ordination of MSE activities at policy and implementation levels. Poor co-ordination at operational level leads to duplication of efforts and poor utilization of scarce resources. Information concerning government policies and strategies, research findings from research institutions and other organizations is scattered, inadequately shared and not readily accessible to MSEs. The implementation of most MSE sponsored projects is poorly done, and at the completion there are no mechanism put in place for the purpose of sustainability.

Although the Government, according to Sessional Paper No.2 of 1992, recognized the potential of the MSE sector in employment creation, income generation and poverty alleviation, institutional structure for effective co-ordination of the various MSE policies, projects and programs was not put in place. There was no Government institutional mechanism for identifying and resolving policy conflicts, or to oversee implementation of policies, projects and programs within the Government.

At present the responsibility for support and assistance to MSE falls upon a wide range of private and public organizations, associations, NGOs and donor agencies.

Despite the GoK efforts, the MSE remain rather fragmented, weak and with little capacity to respond more efficiently and effectively to the changing environment. This tends to make MSEs less dynamic and unable to contribute substantially to the national goals of employment creation and poverty reduction.

There is need, therefore, to support and build the capacities of the different players. In this way they are likely to play a more meaningful role in providing assistance to their members, which will result in new opportunities that are likely to stimulate sustainable economic activities. It is proposed that a more effective institutional structure for MSE activities co-ordination be put in place immediately, both to encourage the diversity of support agencies and to ensure that scarce resources are channeled to MSEs in the most efficient and effective way.

The proposed institutional framework to be known as “Small Enterprise Development (SEDEC)” should be an inclusive and fully autonomous and independent consultative Council. The Council should be an advisory and steering committee to provide guidance on MSE business support activities. The Council should take responsibility for coordinating the formulation and implementation of national MSE policies, support programs and activities, and become an effective mouthpiece of MSE business interests and concerns (cf KAM for the large enterprise sector). SEDEC should comprise representatives from MSE Stakeholders, Government of Kenya and Development partners, and it should operate in close interaction with relevant stakeholders.

6.0 The Establishment of a National Productivity Centre (NPC)

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A National Productivity Centre (NPC) should be established by the Government of Kenya (GoK). The main objective of the Centre should be to promote productivity improvement in enterprises to make their products more competitive both in price and quality in the world as well as the local markets, with the following specific objectives:

1. Identify strategies to improve productivity of enterprises;2. Recommend productivity improvement measures for immediate implementation; and3. Develop capability to provide other forms of technical assistance to the various sectors of the economy.

6.1 Components of Assistance

1. Productivity Consultancy Services2. Business Audit3. Training4. Technical Assistance5. Venture Financing6. Prototype Development – Product Design and Development

6.2 Consultancy Procedure

The National Productivity Centre should have Extension Section to assist enterprises (especially in the manufacturing sector) to attain and sustain higher productivity. The Extension Section should have field productivity consultancy teams composed of industrial engineers and experts to undertake productivity consultancy services throughout the country as follows:

1. Each Extension team prepares a work program for NPC’s approval.

2. Each enterprise designates their own personnel to assist the Extension team during project implementation.

3. Basic performance indicators to be assessed /measured at the start of the consultancy include capacity utilization, output per worker, wastage levels, existing manufacturing and related operations.

4. An assessment of product design and packaging, materials used, processes and operations involved, machines and equipment used, plant and other facilities, layouts, production planning and control system, materials management system, quality control system, overall organization and human resource utilization, as well as support services employed will be done.

5. The Extension team in consultation with the enterprise identifies areas where potential for productivity improvement is great.

6. The Extension team then carries out an in-depth analysis of the selected productivity improvement concerns and formulates recommendations for

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implementation of enterprise beneficiary.

7. If needed, services of technology experts relevant to the enterprise’s operations will also be tapped.

8. Recommendations are discussed and validated with the enterprise’s management and whenever possible, implemented immediately.

9. A technical report shall be submitted by the team to NPC at the end of the consultancy documenting the assessment, analysis, evaluation and recommendations made.

6.3 Productivity Improvement Concerns

1. Capacity Utilization2. Wastage Levels3. Product Design and Development, and Packaging4. Layout5. Production Planning and Control6. Materials Management System7. Quality Control Assurance System8. Safety and Housekeeping Practices / Facilities9. Financial Systems and Control10. Human Resource Utilization11. Work Organization12. Manufacturing System13. Processes and Operations14. Machine & Equipment Utilization15. Plant Maintenance

6.4.0 Productivity Improvement Action Plan (PIAP)

The National Productivity Centre should develop a Productivity Improvement Action Plan (PIAP) to include the following strategies for effecting national productivity improvement:

6.4.1 Science and Technology (S&T)

A competent and competitive science and technology community shall be developed through institutional changes that shall secure greater private sector involvement in S & T/R & D and through the transfer of skills and information.

To achieve the goal, the following strategies will be pursued:

Strengthen networking of innovation resources among private industry, academe and government;

Increase private sector investments in S & T;

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Regularly upgrade S & T support service facilities, equipment and product standards;

Regionalize S & T services/ activities of the government;

Develop and maintain critical pool of technology managers and R & D experts;

Strengthen technology promotion and information dissemination to facilitate technology delivery; and

Privatize the acquisition or installation of support facilities.

Key Activities

In order to develop a competent and competitive science and technology community, the government will implement activities that will:

Strengthen linkages among industry, academe, and government on the transfer of skills and information;

Increase private sector investments in R & D;

Upgrade S & T support facilities; and

Upgrade S & T management capabilities.

The Ministry of Education, Science and Technology - Department of Science and Technology with the assistance of the Ministry of Trade and Industry (MTI) shall shepherd the implementation of activities in this key result areas (KRA).

6.4.2 Human Resources and Labour-Management Relations

The Productivity Improvement Action Plan policy interventions shall focus on human resource development and labor management relations. These shall be conducive to the expansion of employment opportunities in the private sector, and ultimately to greater income for workers.

The Ministry of Labour, Human Resource and Development (MLHRD), in collaboration with the private sector, shall take the lead in implementing programs and projects to enhance the skills of the workforce as well as to promote harmonious labor-management relations.

Key Activities

A. Human Resource Development

The continuous development of the country's human resource skills shall be carried out through:

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• Improved quality of technical-vocational education; • Integration of basic productivity and quality improvement concepts in tertiary

and vocational technical curricula; and • Participation of workers in productivity improvement programs.

B. Labour Management Relations

Labour-management relations shall be made more harmonious by promoting the adoption of a flexible wage system at the enterprise level as well as the forging of social accords. Moreover, the mechanism for a joint labour-management consultation that will cover MSEs and allow for the operationalization of the "Big Brother/ Small Brother concept" shall be strengthened.

Advocacy activities shall also be pursued underscoring the need to modernize the Labour Code and to enact a Productivity Incentives Act.

6.4.3 Efficiency of Product Markets

Through the partnership of the private and public sector, Kenyan products and services should be able to compete in a market and technology driven environment. The Kenyans can produce products and services that can compete in the world market in terms of price, quality and timeliness of delivery.

The Ministry of Agriculture (MoA) and the MTI shall implement activities that will enhance the competitiveness of Kenyan products and services in the domestic and global economy.

Key Activities

The Major activities should include the following:

• Upgrading the quality of Kenyan products by setting up testing centers that charge competitive service rates and strengthening the implementation of product standards to enable industries to conform with regulating and quality requirements of the market;

• Strengthening the networking among industry, academe, research and development institutions (RDI's) and other government agencies; and

• Improving access of MSE's to larger markets through dissemination of market and technological information and development of industry clusters.

6.4.4 Infrastructure Support

Productivity of the production sectors shall be enhanced through policies that will facilitate investment in infrastructure and reduce the cost of infrastructure services while improving their quality. In view, of the government's limited resources, the role of the private sector and local government units in the provision of local infrastructure will be strengthened.

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With the Ministry of Finance at the helm of this key result areas (KRA), it shall strongly seek the active participation of the private sector and the local Authority units (LAUs) to reduce the cost of infrastructure while improving its quality.

Key Activities

Support shall be given to major projects that shall:

• Strengthen existing programs and operational mechanisms for power generation and distribution;

• Accelerate rural electrification; • Review existing regulations and policies regarding transportation services; • Fast track the implementation of infrastructure projects; • Accelerate the development of alternative means of transportation in selected

urban centers; • Intensify traffic safety programs and urban transport management; • Institutionalize mechanisms for right of way acquisition; • Improve telecommunications services • Establish new guidelines and rules on telecommunications interconnection; • Rationalize existing mechanisms for water resources management; • Strengthen the national water resources data management information system; • Building the capability of local government units in tapping private sector

participation in infrastructure development; and • Fast track the implementation of infrastructure programs that will enhance

agriculture productivity.

6.4.5 Public Sector Governance

The thrust in public sector governance shall be to enhance the government's responsiveness and accountability. Policies and support systems to increase productivity in various aspects of the bureaucracy shall be established. The government shall give the people value for their money by ensuring that basic social services and quality public infrastructure services are provided. The private sector, civil society, and local government units shall continue to be recognized as partners in development.

Key Activities

Under the leadership of the Ministry of Finance and the Public Service Commission, the major activities deemed critical in raising the productivity of the public sector shall be focused among others, on the following areas:

• Government reorganization and rightsizing; • Continued computerization of frontline services of revenue-generating and

regulatory government agencies; • Formulation of performance standards and indicators system to improve the

productivity and enhance the integrity and accountability of the civil service; and

• Review of the government remuneration system and employment qualification standards for government employees.

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6.5 National Productivity Advocacy Plan

Objectives

Establish alliances among concerned institutions and individuals for a concerted productivity advocacy implementation

Allocate sufficient resources for the implementation of Productivity Improvement Action Plan and of relevant Productivity and Quality improvement programs; and

Provide policy support for the specific action agenda in the Productivity Improvement Action Plan.

Accompanying the Productivity Improvement Action Plan is an Advocacy Plan that spells out the advocacy and promotional strategies needed to gather broad-based support for productivity improvement.

Establishment of partnerships among public and private organizations for Productivity Quality promotions.

Establishment of linkages among MSEs themselves, and between MSEs and large companies. Many MSE characteristics lend themselves to the introduction of new ways of improving productivity as the usual barriers identified in larger companies do not exist. The resources often at the disposal of larger companies are not always required for MSEs to implement productivity improvements. MSEs can learn from some of the methods employed by larger companies to improve productivity to become and remain preferred suppliers.

6.6 National Productivity Centre (NPC) Support Services It is expected that the National Productivity Centre (NPC) will have Innovation and Technology Counselors, Design Counselors and other specialist staff, available to provide advice to enterprises. The centre should aim to:

• help all businesses realise their potential, especially by minimising the burden of regulation;

• promote world-class business support services to enhance the performance of businesses;

• promote enterprise across society and particularly in under-represented and disadvantaged groups; and

• achieve the highest standards of service delivery and provide value for money.The NPC should have:

A range of activities to help enterprises to improve different aspects of their business management and operations.

Benchmark Indices for measuring and comparing SMEs performance against that of other firms of similar size, location and type of business.

An arrangement that enables SMEs to visit other companies and exchange ideas with them about how to improve particular aspects of their business.

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An easy to use series of programmes (provided on CD-ROMs) that brings together the latest proven techniques and thinking to help SMEs to improve a range of different aspects of their business.

6.7 Productivity Indicators and Monitoring System

A technical working group led by the National Economic and Social Council (NESC) shall take charge of developing sectoral and aggregate total factor productivity (TFP) indicators as part of official statistical system of the government. These shall aid the NPC in monitoring the country's TFP performance.

Key Activities

Institutionalize national/ sectoral TFP-based indicators;

Development and monitoring of KRA output indicators; and

Preparatory activities for regional TFP estimates

6.8 Further Sources of Support Available to MSEsThe National Productivity Centre should establish many business-advice providers to help and guide MSEs on the subject of productivity and process management. MSEs can get advice and information from NPC and from their network of local providers. Like NPC, these business-advice providers will also have Innovation and Technology Counsellors, Design Counsellors and other specialist staff, available to provide local advice.

The National Productivity Centre (NPC) should aim at:• helping all small businesses realise their potential, especially by minimising

the burden of regulation;• promoting world-class business support services to enhance the performance of

small businesses;• promoting enterprise across society and particularly in under-represented and

disadvantaged groups; and• achieving the highest standards of service delivery and provide value for

money. 7.0 ConclusionsThe basic concepts of continuous improvement highlighted in this paper are fundamental to the improvement of productivity. Companies of any size can apply these techniques to realise the benefits. The productivity improvement tools highlighted in this report are all low-cost; indeed some incur no direct cost at all. They are about working smarter rather than harder.

A gradual implementation of selected tools and techniques should lead to reduction in production waste and improve the morale of employees involved as they see the immediate visual impact of their productivity improvement ideas. The challenge (especially) for the MSEs is to overcome barriers to the adoption of productivity tools and to understand and implement some of the productivity improvement tools and

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techniques identified in this report. The application of such tools should mean that MSEs can become – and remain – preferred suppliers in the ever developing agile supply chains of which they are a key element.

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