Technical Analysis

Purpose of Technical Analysis

To ensure that the project is technically feasible in the sense that all the inputs required to set up the project are available

To facilitate the most optimal formulation of the project in terms of technology, size location and so on.

Technical Analysis will include

Selection of Technology Material Input & Utilities Plant Capacity Location & Site Machinery & Equipment Structures & Civil Works Environmental Aspects Project Charts & Layouts

Choice of Technology

Choice of Technology is influenced by 1) Plant Capacity2) Principal Inputs3) Investment Outlay & Production Cost4) Use by other Units5) Product Mix6) Latest Developments7) Ease of Absorption

Material Input & Utilities

Material Inputs & utilities may be classified into 4 broad categories

(1) Raw Material(2) Processed Industrial Materials &

Components(3) Auxiliary Materials & Factory Supplies(4) Utilities

Raw Material: Can be in the form of Agricultural Products, Mineral Products, Livestock & Forest Products

Processed Industrial Materials & Components: Semi-processed materials, manufactured components or parts represent important input for many industries. Few Questions that need to addressed with reference are – Total requirement of the project? There domestic availability & foreign import? How dependable are their supplies?

Auxiliary Material & Factory Supplies: Apart from various raw material and manufactured components a project may even require various auxiliary material & factory supplies like packaging material, paint, varnishes, grease, oil, cleaning material. Their supplies should be taken into account in the feasibility study

Utilities: A broad assessment of utilities like power, water, steam, fuel etc needs to be done. Since the successful operation of the project depends on them so shortages, bottlenecks and alternative supplies should be answered in the beginning

Plant CapacityPlant Capacity (also referred to as Production Capacity) refers to the volume or number of units that can be manufactured during a given period of timeFactors affecting capacity decision:

Technological Requirement Input constraints Investment Cost Market conditions Resources of the firm Governmental Policies

Technological Requirement: In many industrial projects certain minimum production is determined by the type of technology being used.

Input Constraints: Many constraints are there on the availability of certain inputs like power supply, basic raw material my be scarce etc. These limitations should be addressed in the beginning while deciding upon the plant capacity.

Investment Cost: Identification of the investment cost is important. As plant capacity increases the investment cost per unit decreases.

Market Conditions: The anticipated market for the product/services has a direct bearing on the plant capacity. In a strong market situation the plant of higher capacity is preferable. In case of uncertain market conditions it is suggested to start with smaller capacity

Resources of the firm: Constitutes the Managerial & Financial resources. Firm cannot choose a capacity beyond its resources.

Govt. Policy: Capacity level gets influenced by the Govt. Policy. Concept of ‘minimum economic capacity’ adopted by the Govt.

Location & Site

Location & Site used synonymously. But Location refers to a broad area like city, industrial zone , coastal area. Site refers to a piece of land Eg. Where the industry is set up.

Choice of location influenced by a variety of considerations: Proximity to Raw Material, Availability of Infrastructure, Labour Situation, Governmental Policies.

Proximity to Raw Materials & Markets: Resource based projects like a cement plant & steel plant need to be need to be close to the resource supply but it is not applicable to all industries

Availability of Infrastructure: Adequate supply of water, power, communication, transportation should be assessed before a location decision is made.

Labour Situation: Labour intensive project have to carefully assess factors like skills of labour, state of IR & Unionization, prevailing labour rates.

Govt. Policies: Govt. policies have a bearing on both public & private sector projects. Eg. In most of the public sector projects Govt. selects the location of setting up the industries. In private sector Govt. poses restriction on setting up industries in congested areas. Gives special inducements to set up industries in backward areas.

Other Factors: Climate conditions, General Living conditions, Ease in coping with pollution

Site Selection: On the clear identification of the location in the next stage is to select the specific site for execution. Two to Three alternative sites should be considered with respect to 2 important criteria:

1) Cost of land: Cost of land differs from place to place in the same location. One near to the city will cost more in comparison to the one in the away from city.

2) Cost of site preparation & development: cost of demolish in the current site, obtaining utilities – power, water, communication facilities

Machines & Equipments

Requirement of machinery & equipment will depend upon Production Technology & Plant Capacity .

In order to determine the machinery & equipment required the procedure followed is:

1)Estimate the likely level of production over time 2) Define the operation3) Calculate the machine hours4) Select Machinery & Equipment for each function

Constraints in Selecting Machineries & Equipment Limited power Difficulty in transporting heavy equipment to

remote location Workers at least in initial phase not able to

operate certain highly technical machines Import policy of the govt. at some point of

time may preclude import of certain machineries & equipment.

Structures & Civil Works

Divided into Three Categories:1) Site Preparation & Development2) Buildings and Structures3) Outdoor Works

Environmental Aspects

Questions that need to be addressed What are the pollutants generated? What needs to be done for proper disposal Will the project be able to meet the statutory

requirements related to pollution?

Project Charts & Layouts

General Functional Layout: Focuses on smooth & economical movement of raw material, work-in-process and finished goods

Material Flow Diagram: Flow of material, utilities, intermediate products, final product & emissions.

Production Line Diagram: Shows how the production how the production would progress

Transport Layout: Shows distance & means of transport outside the production line.

Utility Consumption Layout: Shows the principal consumption points of utilities along with their quantity of requirement.

Communication Layout: How phone lines and communication network will be established

Organizational Layout: Organizational Setup along with the structure

Plant Layout: Physical Layout of the Factory

Financial Estimations

Project Costs

DefinitionThe sum total of all funds required to complete a business purchase transaction.

Typical project costs include: Business purchase price. Working capital. Closing costs. Professional fees such as those

charged by the CPA and attorney. Lender fees. Business appraisal fees. Business license fees.

Source of Funds for the ProjectInternal Sources Retained Profit Savings Limitations on working capital Trade Credit

External Sources Indigenous Bankers Advances Loans from Banks Venture Capital

Cost of Production

Cost incurred by a business when manufacturing a good or producing a service.

Production costs combine raw material and labor.

To figure out the cost of production per unit, the cost of production is divided by the number of units produced. A company that knows how much it will cost to produce an item, or produce a service, will have a clearer picture of how to better price the item or service and what will be the total cost to the company.