Project management

By: Abdata Fago (Instrutor)

 Project Concept/Definition

• Project is a means of implementing the firm’s plans.

• As a means of plan implementation, project involves a
complex process.
• Projects require resources.
• They are also expected to derive benefits.
• Projects are said to desirable if their benefits are
greater than the costs incurred on them.
• It is a non-repetitive activity. A project is viewed as a
conversion process.
• This implies that a project involves a transformation of
some form of inputs into an output.
 Project Concept cont….

• Project: is a conversion process which serves in

transforming inputs into outputs.
• Inputs: is want or need whereas outputs
represent satisfied need.
• Constraints: are factors such as financial, legal,
ethical, environmental, time, and quality.
• Mechanisms: include people, knowledge of
expertise, capital, tools and techniques, and
technology
1.3 .Types Of Capital Investments/Projects
• The term capital refers to investments in fixed assets.
• Capital investments: deal with the whole process of
identifying and analysing which projects should be pursued.
• Capital investments may be classified into physical assets,
monetary assets, and intangible assets.
• Capital investments in physical assets include investments
in building, machinery, equipment, vehicles, and
computers.
• Investments in monetary: assets include investments in
debt or equity securities.
• Debt securities: involve in bonds, notes, deposits etc
whereas equity securities include equity shares (common
stock and preferred stock) options, warrants and the like.
 1.3 Types of capital
investments/projects
• Projects may also be classified into:
• Replacement investments: aim at replacing the worn out
equipment with new equipment to reduce operating costs
increase the yield (productivity), and/or improve quality.
• An expansion investment: is meant to increase the capacity
to cater to a growing demand in the form of entering new
markets (market development), introducing new products to
the existing market (product development), operating with
the same products in the existing markets (penetration), or
introducing the new product for new market (diversification).
• A mandatory investment: is a capital expenditure required to
comply with statutory requirements, such as pollution control,
fire fighting, medical dispensary and so on.
 1.3 Types Of Capital Investments/Projects

• Projects may also be classified into

development projects and business projects.
• Business (industrial) projects : aimed at
profit or value maximization of the owners,
where as development projects aim at
reducing poverty and are pursued by the
government or NGOs.
 1.5 Difficulties Of Capital Investments
• They have long-term effects : They provide
the framework for future activities and have a
significant impact on the basic character of a
firm.
• Irreversibility: A wrong capital investment
decision often cannot be reversed without
incurring a substantial loss
• Substantial outlays : require huge amount of
resources.
 1.5 Difficulties of capital investments
• Measurement problems: It is difficult to
identify and measure the costs and benefits of
capital investment proposals.
• Uncertainty: It is impossible to predict exactly
what will happen in the future.
• Temporal spread : Difficulty in estimating
costs in discount rates and establishing
equivalences.
 1.6 Objectives Of Capital
Projects/Investments
• According to financial theory, the goal of financial
management is to maximize the present wealth of the firm’s
stockholders’ equity.
• The wealth of equity stockholders is reflected in the market
value of the equity shares.
• Should firms solely act to further the shareholders’ welfare?
• In fact, firms may pursue several goals at a time, these are:
 seek to achieve a high rate of growth
 increase market share
 attain product and technology leadership
 promote employee welfare
 further customer satisfaction
 improve community life and other societal problems
 1.7 . Phases Of Capital Investments
What are the major phases of capital budgeting? As it involves a complex process, capital
budgeting process is divided in to six broad phases.

Planning

Analysis

Selection

Financing

Implementation

Review
1. Planning : It is an articulation of the firm’s
broad investment strategy and the
generation and preliminary screening of
project proposals.
Followed by the identification of a project
proposal, a preliminary project analysis is done
which is performed before the full blown
feasibility study.
• The purpose of preliminary project analysis is:
to assess whether the project is prima facie (at
first sight) worthwhile to justify a feasibility
study.
to assess what aspects of the project are
critical to its viability and hence warrant an in-
depth investigation
Analysis : involves in gathering, preparing,
and summarizing relevant information about
various project proposals.
This information basis for costs and benefits
of the project.
Selection : Selection phase addresses the
question. “Is the project viable?” In order to
select the project, a wide range of appraisal
techniques can be used.
• Financing : There are two possible sources of
financing the projects; namely, debt financing
(loans, bonds etc) and equity financing
(common stock, preferred stock, retained
earnings etc.)
• The firm should decide on the optimal mix of
debt and equity financing.
• The key business considerations that influence
the mix are flexibility, risk, income, control,
and taxes (FRICT)
• Implementation
Project and engineering designs
Negotiations and contracting
Construction
Training
Plant commission (start the actual operation)
 Review

• Review is helpful:
 to throw light on how realistic were the
assumptions underlying the project
 to provide a documented log of experience that is
highly valuable in future decision making
 to take corrective action in light of actual
performance
 To uncovering judgmental biases
 to induce a desired caution among project
sponsors.
 UNIT 2: PROJECT LIFE CYCLE
2.3. PROJECT LIFE CYCLE – BAUM (WORLD BANK) APPROACH

Project identification

Project preparation

Project Appraisal

Project Implementation

Project evaluation
1. Project identification (pre-feasibility studies)
Project ideas may come from:
 New experiments from previous project failures
 New experiments from expansion
 Replication of successful project tested elsewhere
 New experiments from shortages or excess of
resources
 External threats
 Opportunities
 Internal strengths and/or weaknesses
 Other sources
1. Project identification (pre-feasibility
studies)
1. Project identification : is concerned with elimination
of inferior alternatives (projects) from the identified ones.
2. Project preparation( feasibility study): is concerned
with the detailed study of all aspects of the projects.
3. Project Appraisal: is comprehensive and systematic
assessment of all aspects of the proposed project.
• The project is reviewed (appraised) to confirm that it
accords with the broad objectives.
• The project is appraised from technical, commercial
(market), financial, economic and ecological.
 4. Project implementation
• It is the stage at which the conclusions are reached &
decisions made are put into action.
• Some of the major activities during project
implementation phase include:
 Detailed designs and specifications are drawn
 Tender documents are prepared
 Bids are invited and evaluated
 Orders for inputs are placed
 Contracts are signed; workers are hired, trained and
put to work;
 Materials are moved to sites etc.
 5. Project Evaluation
• Project evaluation is a monitoring (checking)
activity in order to:
 Find out how things are going
 Encourage the project team
 Check that promised resources are in fact
working on project tasks
 Rapidly learn about concerns and difficulties
 Show concern for the success of the project
 Take corrective action if things go wrong
 5. Project Evaluation cont….
• According to UNIDO, project cycle involves
three major phases.
• These are:
Pre-investment phase
Investment phase (Implementation phase)
Operation phase (operation and ex-post
evaluation)
 2.4.1 Pre-investment phase
• Pre-investment phase involves in:
 project identification
 pre–selection
 project preparation, and
 appraisal
• Project Identification / opportunity study/
• Opportunity study: is the main instrument used to quantify the
parameters, information and data required to develop a project idea in to
a proposal.
• In opportunity study, the firm is required to analysis the following:
 Availability of resources
 Future demand for goods, increasing population and increasing purchasing
power.
 Import and export substitutions
 1.4. Importance of capital investment
• Pre-selection /pre-feasibility study/
• This phase involves the analysis of the following
factors:
 Examination (investigation) of all possible project
alternatives
 Ensure that the detailed analysis of the project is
justified.
 In-depth investigation of critical areas of the project
 Examine the attractiveness (viability) of the project
 Investigate the stability of the environmental situation
at the location site
 Preparation (feasibility study)
• This stage provides all data, define, and critically examine the
commercial, technical, financial, economic, and
environmental aspects for each projects.
• In feasibility study phase, window dressing approach should
be avoided.
• The components of feasibility study are:
1. Project Background and history
 Name and address of the promoter
 Project Background
 Project objectives
 Outline of the proposed basic project strategies
 Project location
 Economic and industrial policies supporting the project
 Preparation (feasibility study)
 Summary of market analysis and marketing
 Raw materials and supplies
 Location, site, and environment
 Engineering and Technology
 Organization and Management
 Implementation planning & budgeting
 Financial Analysis and investment appraisal
• After the three phases (opportunity study, pre-
feasibility, and feasibility study), the supporting data
should fulfil the following minimum reliability
standards.
 Feasibility study

Pre – feasibility study

Opportunity study

30% -20% 10% 0 10% 20% 30%

• Preparation (feasibility study)
• The above figure is interpreted as follows:
• After opportunity studies, the project should
be reliable about 70% for implementation
• The project should be reliable about 80% for
implementation after pre- feasibility studies
• After feasibility studies, the project should be
about 90% reliable for implementation.
 Project Appraisal

• The appraisal of project is based on the

objectives set earlier, the expected risk, costs,
and gains.
• The quality of feasibility studies makes easier
the appraisal work.
• If the objective of the appraiser is ROI, the
project is appraised on this base.
• Investment Phase(implementation phase)
• It includes the following activities:
 Establish legal, financial and organizational basis
 Technology acquisition and transfer
 Detailed engineering, design, contracting, tending
& negotiations.
 Acquisition of land, construction works, and
installations
 Pre- production marketing, securing of supplies,
and setting up administration.
 Recruitment, training, and placement of workers.
 Plant commissioning and start-up
 Operating phase
• operation involves producing the envisaged
goods, and sale to the target market, or
renders the envisaged service to the target
market.
• The project also requires evaluation, which
deals with the review of whether the project is
being implemented as per expectation.
• The necessary corrective actions should also
be taken if deviation is identified
 UNIT 3: PROJECT IDENTIFICATION
• The objective of identification stage is to identify
investment opportunities, which are feasible and
promising and which deserve further in-depth
study and appraisal.
• To briefly discuss the identification stage, the
following points are explored.
 Generation of ideas
 Preliminary screening
 Monitoring the environment
• Necessity is the mother of invention’ sounds
rhythmic with projects, as they are roots of needs
and wants.
• These needs may be social, political, economic,
commercial, technical or environmental that
drives the actions of entrepreneurs to pursue
some creative actions.
• That is project ideas are generated in order to
satisfy the needs and wants.
• These actions will impact both the macro and
micro perspective of mankind.
• Stimulating the flow of ideas:
• Most organizations adopt a causal and
haphazard approach to the generation of
ideas.
• To stimulate the flow of ideas, the following
are helpful:
i. SWOT Analysis : SWOT analysis represents a conscious,
deliberate and systematic effort by an organization to
identify their internal strengths and weaknesses and the
opportunities and threats in the environment.
ii. This analysis helps to identify opportunities that can be
profitably exploited by the organization in light of its
strength and weakness.
Thus, SWOT analysis facilitates the generation of ideas.
i. Clear articulation of objectives : A clear articulation and
prioritization of objectives of an organization helps in
canalizing the efforts of employees and helps them to
think more imaginatively.
ii. Fostering a conductive climate – To tap the creativity of
people and to harness their entrepreneurial urges, a
conducive organizational climate has to be fostered.
3.3 MONITORING THE ENVIRONMENT
• Business external environment can broadly be
divided in to two categories, namely:
1.Macro external environment, and
2.Micro external environment
• Macro external environment : include the
economic, political and legal, social and
cultural, and technological forces) and its
important aspects studied in monitoring
consists of the following:
Economic sector - State of the economy
- Overall rate of growth
- The growth rate of primary, secondary and tertiary sectors.
- Projected national income trends, GNP trends
- Projected industry output, projected price movements
- Trends in fiscal, credit and monetary policies
- Cyclical fluctuation of the economy
- Corporate taxation and incentives
- Provisions of infrastructure
- Inflation rate, interest rate, exchange rate
- Unemployment level
- Linkage with the world economy
- Balance of payment (trade surplus/deficit)
- Budget deficit/surplus
Governmental (political - Manifestoes of party in power and the opposition
and legal) sector - Attitude towards investors
- Restrictions on areas of investment by private sector
- Restrictions on imports
- Industry policy
- Import and export policies
- International trade regulation
- Government programs and projects
- Tax framework
- Subsidies, incentives
- Financing norms
- Lending conditions of financial institutions and commercial
banks
- Environmental protection laws
- Control over prices and distribution of goods
• Micro External environment(Task
environment) : is mainly concerned with
industry, market, competitors, etc. and the
major factors to be studied consists of:
Competition sector (analysis of - Number of firms in the industry and the market
the industry and the market) share of the top few
- Degree of homogeneity and differentiation
among products
- Exit and Entry barriers
- Comparisons with substitutes in terms of quality,
price and functional performance
- Marketing policies and practices
- Capacity utilization
- Product life cycle
- Foreign opportunities

Supplier sector - Availability and cost of raw materials and sub-

assemblies
- Availability and cost of energy
- Availability and cost of money
- Exit and entry of suppliers
- Power of suppliers
 CHPTER FOUR
Market and Demand Analysis
4.2. Objectives of Market & demand analysis
• To determine the effective demand for the
envisaged (proposed) project
• To determine the characteristics of the
corresponding market in terms of unsatisfied
demand, competition, imports, exports etc.
4.3 Marketing Elements
 Marketing is defined as a managerial and social process by which
individuals and groups obtain what they need and want through
creating, offering and exchanging products of value with others.
Marketing is characterized by the following elements:
 Business philosophy
 Marketing puts the problems, needs, and desires of the existing or
potential consumer groups at the center of business activities
Marketing research
 provides information to develop marketing strategies.
Marketing instruments
 The successful implementation of marketing strategies requires
shaping and influencing the market in a well-planned manner,
using the necessary combination or mix of marketing instruments.
Marketing plan and budget
 Based on the findings of market research, it is necessary to
determine the required means and to prepare plans of actions in
achieving marketing objectives.
4.4. Situational Analysis and Specification of
Objectives
• The project analyst should be able to establish
the relationship between the product and its
market.
• To do so, she/he may informally talk to the
following parties:
customers,
competitors
middlemen (wholesalers and retailers)
 4.5. Collection Of Information

• Sources of Secondary information

Census.
Economic survey
Annual reports on imports and exports
Industry specific sources
• The reliability, accuracy and relevance of
secondary information should be examined
carefully in terms of:
 who gathered the information and the purpose
(objective) for which it was gathered
 The time of information gathering and
publication
 The relevance of information gather for the
period
 Target population
 The means of choosing the sample
 The representativeness of the sample
• What kind of information should be gathered
through market survey?
 Total demand and rate of growth of demand
 Motives for buying
 Demand in different segments of the market
 Income and price elasticity of demand
 Purchasing plans and intentions
 Satisfaction with existing products
 Unsatisfied needs
 Attitudes towards various products
 Distribution and price practices and preferences
 Socio-economic characteristics of buyers
• The steps in sample market survey include:
 Define the target population
 selecting the sampling method and sample size
 Develop the questionnaire
 Recruit and train the field investigators
 Obtain information as per the questionnaire from
the sample of respondents
 Secnitinize the information gathered
 Analyse and interpret the information
 4.6 Characterization of the Market

effective demand in the past and present

breakdown of demand/segmentation
price
methods of distribution
promotion
consumers
supply and competition
government policy
4.6.1 Effective Demand in the Past and
Present
• In order to gauge (measure) the effective demand
in the past and present, apparent consumption
can serve as the starting point.
 Apparent consumption can be computed as
follows:
Consumption = P + I – E – CSL
where
P = production
I = Imports
E = Exports
• Market segmentation is process of dividing of the target
market into subgroups of consumer population with
identifiable, distinct and homogeneous characteristics.
• The main reasons of market segmentation are:
 efficient use of marketing resources
 better understanding of customer needs
 better understanding of the competitive situation
 accurate measurement of goals and performance
 formulate marketing programs and strategies
 Design marketing mix (5ps).
 Pay proper attention to particular area
 Bases of Market segmentation

1. Geographic segmentation: divide the market into

different geographic units such as western, eastern,
northern, southern, central etc.
2. Demographic segmentation: divide the market on the
basis of age, sex, family size, marital status, language,
religion and so on
3. Socio-economic segmentation: divide the market on the
basis of income levels, consumption levels, caste level
(exclusive social class), culture and the like
4. Psychographics segmentation: divide the market based
on how consumers think, feel, and behave
5. Buyer behaviour segmentation: customers knowledge,
attitudes, rules, or responses to a product.
 External factors that affect pricing decisions include:
 Demand for the product/service
 Competition
 Consumer’s quality perceptions
 Middlemen (distributors, detailers etc)
 Suppliers
 Government
 Economic conditions
 Ethical considerations
 Cost of materials and labor (or cost of inputs)
Internal factors
Organizational factors
Marketing mix
Product differentiation (different product
attributes such as color, size, attractive
package, attractive uses, style etc).
Cost of products
Objective of the firm
 What pricing strategy the firm may
follow?

• A firm that is planning to introduce new product

may follow any one of the following pricing
strategy:
 Market skimming pricing : It is the approach of
setting a relatively high initial price for a new
product.
Market penetration pricing: It is the strategy of
setting a relatively low initial price for new
product.
 4.6.4 Distribution

• Distribution system has two components; namely,

channels of distribution, and physical distribution.
• Channels of distribution: refer to intermediaries or the
process through which the products are transferred
from the producers to the ultimate users.
• Channels of distribution: include wholesales, retailers,
dealers, agents and other parties involved in
transferring the product or service to the consumers.
• On the other hand, physical distribution is concerned
with the flow of goods to the ultimate consumers.
• Physical distribution includes transportation,
warehousing, and inventory management.
 4.6.5 Promotion

• promotion is defined as “any identifiable

activities (efforts) on the parts of the seller to
persuade buyers to accept the seller’s
information and store it in retrievable form”.
• The promotional function of any organization
involves the transmission of message to
present, past, and potential customers.
• The means of promotion
i. Personal selling: It involves face-to-face contact between
seller’s representative and the buyer
ii. Advertising: It is paid form of non-personal mass media
communication by an identified sponsor. The media may
include print media, direct mail, TV, radio, billboard,
Internet
iii. Sales Promotion: It includes activities that seek to
indirectly induce or indirectly serve as incentives to
motivate a desired response on the part of target
customers, company sales people and middlemen, and
their sales force.
iv. Publicity: It involves the news carried in the mass media
about a firm and its products, policies, personnel or
actions, such as news releases, press conference etc.
v. Public relations: It is a planned effort by an organization
to influence the attitudes and opinions of a specific
group.
 primary objectives of promotion

• to develop an awareness of, and an interest in,

the organization and its products and services
• to communicate the benefits of buying product
• To influence eventual purchase of the product
• To build the positive image of the organization
• To differentiate the product/service from its
competitors
• To remind the people of the existence of the
product/service and the organization
 4.6.5 Supply and Competition

• The following information should be gathered

for domestic sources of supply.
Location
Present production capacity
Planned expansion
Capacity utilization level
Bottlenecks in production
Cost structure
 4.6.6 Government Policy

 production targets in national plans

 trade control on imports and exports
 import duties
 export and import incentives
 excise duties
 taxes
 industrial licensing
 credit controls
 financial regulations
 subsidies or penalties of any kind
 CHPTER Five
TECHNICAL ANALYSIS
5.2.1. Choice of Technology
The choice of technology is influenced by a variety of
considerations.
Some of these are:
1. Plant Capacity: Often, there is a close relationship
between plant capacity and production technology.
2. Principal Inputs: In some cases, the raw materials
available influence the technology chosen. For
example, the quality of limestone's determines
whether the wet or dry process should be used for a
cement plant.
3. Investment Outlay and Production Cost
4. Uses by Other Units.
5. Product Mix: The technology chosen must be judged
in terms of the total product mix generated by it,
including saleable by products.
6. Latest Developments: The technology adopted must
be based on the latest developments in order to ensure
that the likelihood of technological obsolescence in the
near future, at least, is minimized.
7. Ease of Absorption: The ease with which a particular
technology can be absorbed can influence the choice of
technology.
 5.2.2. Appropriateness of Technology

• Appropriate technology: refers to those methods of

production, which are suitable to local economic, social, and
cultural conditions.
• Technical Arrangements
• When collaboration is sought, inter alia (among other things),
the following aspects of the agreement must be worked out in
detail:
• The nature of support to be provided by the collaborators
during the designing of the project, selection and
procurement of equipment, installation and erection of the
plant, operation and maintenance of the plant, and training of
the project personnel.
• Process and performance guarantees in terms of plant
capacity, product quality, and consumption of raw materials
and utilities
.
• The price of technology in terms of one-time licensing fee
and periodic royalty fee.
• The continuing benefit of research and development work
being done by the collaborator.
• The period of collaboration agreement.
• The assistance to be provided and the restrictions to be
imposed by the collaborator with respect to exports.
• The level of equity participation and the manner of sharing
management control.
• Assignment of the agreement by either side in case of
change of ownership.
• Termination of the agreement or other remedies when
either party fails to meet its obligation.
• Material Inputs And Utilities
• Material inputs and utilities may be classified into
four broad categories:
1. Raw Materials: Raw materials (processed
and/or semi-processed) may be classified into
four types:
 agricultural products,
 mineral products,
 livestock and forest products, and
 Marine products.
Agricultural products: In studying agricultural
products, the quality must first be examined.
Then, an assessment of the quantities available,
currently and potentially, is required.
2. Auxiliary Materials and Factory Supplies : a
manufacturing project requires various auxiliary
materials and factory supplies like chemicals,
additives, packaging materials, paint, varnishes, oils,
grease, cleaning materials, etc.
3. Utilities: A broad assessment of utilities (power,
water, steam, fuel, etc.) may be made at the time of
the input study though a detailed assessment can
be made only after formulating the project with
respect to location, technology, and plant capacity.
 5.5. PRODUCT MIX

• The choice of product mix is guided by market requirements. In the

production of most of the items, variations in size and quality are aimed at
satisfying a broad range of customers. For example, a garment
manufacturer may have a wide range in terms of size and quality to cater
to different customers.
• It may be noted that variation in quality can enable company to expand its
market and enjoy higher profitability. For example, a toilet soap-
manufacturing unit may, by variation in raw material, packaging, and sales
promotion, offer a high profit margin soap to consumers in the upper-
income brackets.
• While planning the production facilities of the firm, some flexibility with
respect to the product mix must be sought. Such flexibility enables the
firm to alter its product mix in response to changing market conditions
and enhances the power of the firm to survive and grow under different
situations.
• The degree of flexibility chosen may be based on a careful analysis of the
additional investment requirement for different degrees of flexibility
 5.6 PLANT CAPACITY

• Plant capacity (also referred to as production capacity) refers to the

volume or number of units that can be manufactured during a given
period.
• Plant capacity may be defined in two ways: feasible normal capacity
(FNC) and nominal maximum capacity (NMC).
• The feasible normal capacity refers to the capacity attainable under
normal working conditions. This may be established on the basis of
the installed capacity, technical conditions of the plant, normal
stoppages, and downtime for maintenance and tool changes,
holidays, and shift patterns.
• The nominal maximum capacity is the capacity, which is technically
attainable, and this often corresponds to the installed capacity
guaranteed by the supplier of the plant.
• Several factors have a bearing on the capacity
decision.
• These are:
 Technological requirement
 Input constraints
 Investment cost
 Market conditions
 Resources of the firm
 Governmental policy
 5.6.1. Technological Requirement

 For many industrial projects, particularly in process type industries,

there is a certain minimum economic size determined by the
technological factor.
5.6.2. Input Constraints
 Power supply may be limited; basic raw materials may be scarce;
foreign exchange available for imports may be inadequate.
 Constraints of these kinds should be borne in mind while choosing the
plant capacity.
5.6.3. Investment Cost
 Typically, the investment cost per unit of capacity decreases as the
plant capacity increases. This relationship may be expressed as follows:
C1 = C 2 Q1 a
Q2
C1 = 2,000,000 x 14,000 0.8 = Br. 3,482,202
7,000
5.6.4. Market Conditions
 If the market for the product is likely to be very strong, a
plant of higher capacity is preferable. If the market is likely to
be uncertain, it might be advantageous to start with a smaller
capacity.
 If the market, starting from a small base, is expected to grow
rapidly, the initial capacity may be higher than the initial level
of demand and further additions to capacity may be effected
with the growth of the market.
5.6.5. Resources of the Firm
 The resources, managerial and financial, available to a firm
define a limit on its capacity decision.
 Obviously, a firm cannot choose a scale of operations beyond
its financial resources and managerial capability.
5.6.6. Government policy
• Traditionally, the policy of the government
was to distribute the additional capacity to be
created in a certain industry among several
firms, regardless of economies of scale.
• This policy has been substantially modified in
recent years and the concept of ‘minimum
economic capacity’ has been adopted in
several industries.
 5.7.1. Proximity to Raw Materials and Markets

• In terms of a basic location model, the optimal location is

one where the total cost (raw material, transportation cost
plus production cost plus distribution cost for the final
product) is minimized.
• This generally implies that:
• A resource- based project like a cement plant or a steel mill
should be located close to the source of the basic material
(for example, limestone in the case of a cement plant and
iron – ore in the case of a steel plant);
• A project based on imported material may be located near
a port; and
• A project manufacturing a perishable product should be
close to the centre of consumption.
 LOCATION AND SITE

• The choice of location and site follows an assessment

of demand, size, and input requirement.
• Location refers to a fairly broad area like a city, an
industrial zone, or a coastal area; site refers to a
specific piece of land where the project would be set
up.
• The choice of location is influenced by a variety of
considerations: proximity to raw materials and
markets, availability of infrastructure, labor situation,
governmental polices, and other factors.
• However, for many industrial products proximity to the source of
raw material or the centre of consumption may not be very
important.
• Petro-chemical units or refineries, for example, may be located
close to the source of raw material, or close to the centre of
consumption, or at some intermediate point.
5. 7.2. Availability of Infrastructure
• Availability of power, transportation, water, and communications
should be carefully assessed before a location decision is made.
• Adequate supply of power is a very important condition for location
• In evaluating power supply the following should be looked into: the
quantum of power available, the stability of the power supply, the
structure of the power tariff, and the investment required by the
project for a tie-up in the net work of the power supplying agency.
• For transporting the inputs of the project and
distributing the outputs of the project, adequate
transport connections-whether by rail, road, sea inland
water, or air-are required.
• The availability, reliability, and cost of transportation
for various alternative locations should be assessed.
• Given the plant capacity and the type of technology,
the water requirement for the project can be assessed.
• Once the required quantity is estimated, the amount to
be drawn from the public utility system and the
amount to be provided by the project from surface or
sub-surface sources may be determined..
• adequate communication facilities like telephone and
Internet
 5.7.3. Labor Situation

• In labor-intensive projects, the labor situation in a

particular location becomes important. The key factors
to be considered in evaluating the labor situation are:
 Availability of labor, skilled semi-skilled and unskilled
 Prevailing labor rates
 Labor productivity
 State of industrial relations judged in terms of the
frequency and severity of strikes and lockouts
 Degree of unionization
 5.7.5. Other Factors

 Climatic conditions
 General living conditions
 Proximity to ancillary units
 Ease in coping with pollution
 Climate Conditions
 The climatic conditions like temperature,
humidity, wind, sunshine, rainfall, snowfall, dust,
flooding, and earthquakes have an important
influence on location decision.
• General Living Conditions
• The general living conditions like the cost of living, housing situation,
safety, and facilities for education, health care, transportation and
recreation need to be assessed carefully.
Proximity to Ancillary Units
• Most firms depend on ancillary units for components and parts.
• If the ancillary units are located nearby, coordination becomes easy,
transportation costs are lower, and inventory requirements become
considerably less.
• Ease in Coping with Environmental Pollution
• A project may cause environmental pollution in various ways: it may throw
gaseous emissions; it may produce liquid and solid discharges; it may
cause noise, heat, and vibrations.
• The location study should analyze the cost of mitigating environmental
pollution to tolerable levels at alternative locations.
 5.8. Site Selection

• Two or three alternative sites must be

considered and evaluated with respect to cost
of land and cost of site preparation and
development.
• The cost of land tends to differ from one site
to another in the same broad location.
• Sites close to a city cost more whereas sites
away from the city cost less.
 5.9 MACHINERIES AND EQUIPMENT

• The equipment required for the project may

be classified into the following types:
• Plant (process) equipment,
• Mechanical equipment,
• Electrical equipment,
• Instruments,
• Controls,
• Internal transportation system, and others
 5.9.1. Constraints in Selecting Machineries and Equipment

• In selecting the machineries and equipment, certain

constraints should be borne in mind. Some of these are:
• There may be a limited availability of power to set up an
electricity-intensive plant like, for example, a large electric
furnace;
• There may be difficulty in transporting heavy equipment to
a remote location;
• Workers may not be able to operate, at least in the initial
periods, certain sophisticated equipment such as
numerically controlled machines;
• The import policy of the government may preclude the
import of certain machineries and equipment.
• 5.9.2. Procurement of Plant and Machinery
• 5.10. STRUCTURE AND CIVIL WORKS
• Structure and civil works may be divided into three categories: (i) site preparation and
development, (ii) buildings and structures, and (iii) outdoor works.
• 5.10.1 Site Preparation and Development
• This covers the following: i) grading and leveling of the site; (ii) demolition and removal of existing
structures; (iii) relocation of existing pipelines, cables, roads, power lines, etc.; (iv) reclamation of
swamps and draining and removal of standing water; (v) connections for the following utilities from
the site to the public network: electric power (high tension and low tension), water for drinking
and other purposes, communications (telephone, telex, internet, etc.), roads, railway sidings; and
(vi) other site preparation and development work.
• 5.10.2 Buildings and Structures
• Buildings and structures may be divided into: (i) factory or process buildings; (ii) ancillary buildings
required for stores, warehouses, laboratories, utility supply centers, maintenance services, and
others; (iii) administrative buildings; (iv) staff welfare buildings, cafeteria, and medical service
buildings; and (v) residential buildings.
• 5.10.3. Outdoor Works
• Outdoor works cover (i) supply and distribution utilities (water, electric power, communication,
steam, and gas); (ii) handling and treatment of emission, wastages, and effluents; (iii)
transportation and traffic signals; (iv) outdoor lighting; v) landscaping; and (vi) enclosure and
supervision (boundary wall, fencing, barriers, gates, doors, security posts, etc.)
 5.10.2 Buildings and Structures

• factory or process buildings;

• ancillary buildings required for stores, warehouses, laboratories, utility
supply centers, maintenance services, and others;
• administrative buildings;
• staff welfare buildings, cafeteria, and medical service buildings
• residential buildings.
• 5.10.3. Outdoor Works
 supply and distribution utilities (water, electric power, communication,
steam, and gas);
 handling and treatment of emission, wastages, and effluents;
 transportation and traffic signals;
 (outdoor lighting;
 landscaping; and
 (enclosure and supervision (boundary wall, fencing, barriers, gates,
doors, security posts, etc.)
 ENVIRONMENTAL ASPECTS

• A project may cause environmental pollution in

various ways: it may throw gaseous emissions; it
may produce liquid and solid discharges; it may
cause noise, heat, and vibrations
• Projects that produce physical goods like cement,
steel, paper, and chemicals by converting natural
resource endowments into saleable products are
likely to cause more environmental damage.
 5.12 PROJECT CHARTS AND LAYOUTS

• The important charts and layout drawings are

briefly described as follows:
• General functional Layout. this shows the
general relationship between equipment,
buildings, and civil works
• This means that ,The layout should seek to allow
traffic flow in one direction to the extent
possible, with a minimum of crossing.
• Go downs, workshops, and other services must
be functionally situated with respect to the main
factory building.
• Material flow diagram: This shows the flow of
materials, utilities, intermediate products, final
products, by-products, and emissions. Along with
the material flow diagram, a quantity flow
diagram showing the quantities of flow may be
prepared.
• Production Line diagrams: These show how the
production would progress along with the key
information for the main equipment.
• Transport Layout: This shows the distances and
means of transport outside the production line.
• Utility Consumption Layout. This shows the
principal consumption points of utilities
(power, water, gas, compressed air, etc.) and
their required quantities.
• Communication Layout: This shows how the
various parts of the project will be connected
with telephone, intercom, etc.
• Organizational Layout: This shows the
organizational set-up of the project along with
the information on personnel required for
various departments and their interactions.
• Plant Layout: The plant layout is concerned with
the physical layout of the factory.
• The important considerations in preparing the
plant layout are:
 Consistency with production technology
 Smooth flow of goods from one stage to another
 Proper utilization of space
 Scope of expansion
 Safety of personnel
 5.13. SCHEDULE OF PROJECT IMPLEMENTATION
• As part of the technical analysis, a project
implementation schedule is also usually prepared. In
order to prepare the project implementation schedule,
the following information is required:
• List of all possible activities from project planning to
commencement of production.
• The sequence in which various activities have to be
performed.
• The time required for performing the various activities.
• The resources normally required for performing the
various activities.
• The implications of putting more resources or less
resources than are normally require
• The schedule of project implementation begins
with the identification of key stages. There are
two ways of identifying the key stages.
• These are:
• Top- down Approach: This involves the listing of
all interim and final deliverables (outputs) of the
project as outcomes from a collection of activities
that forms a key stage
• Bottom up Approach: It involves identifying as
many activities as possible and the grouping of
related activities together to form the key stage.
• The Work Breakdown Structure (WBS)
• It is a convenient means of graphically presenting the
work of the project in readily understandable format.
• The project key stages form the highest level of the
WBS, which is then used to show the detail at the
lower levels of the project.
• The WBS does not show dependencies and is not time
based (no time scale on the drawing).
• The sample of WBS is shown bellow:
• Gantt chart: It is a convenient graphical means of
picturing a schedule. Gantt chart, developed by Henry
L. Gantt, is a useful project scheduling method for
small projects with few activities. Gantt chart is also
called bar chart. It does not show the precedence
constraints.
• Critical path method (CPM): Critical path method
is useful for purely deterministic problems in
which each activity has definite time of
completion.
• In order to apply CPM, the project is first
represented as a network. Network explicitly
shows the precedence constraints. A network is a
collection of nodes and direct arcs. A node
represents an event and an arc represents an
activity.
• Project Evaluation & Review Technique (PERT):
PERT is a generalization of CPM to allow
uncertainty in the activity times. It allows
randomness in the activity times. PERT is useful
for more complex projects having many activities.
5.14. NEED FOR CONSIDERING ALTERNATIVES

• These alternatives may differ in one or more

of the following aspects:
• Nature of project
• Production process
• Product quality
• Scale of operation and time phasing
• Location
• 1. Nature of Project. The project may envisage the manufacture of
all the parts and components in a vertically integrated unit or it may
consist of an assembly type unit, which obtains the bulk of the parts
and components from outside suppliers. The project may consist of
processing up to the finished stage or may stop at a semi-finished
stage. These alternatives are available with respect to the nature of
the project.
• 2. Production Process. There may be several alternatives with
respect to the production process. The availability and
characteristics of raw materials, the cost structure, and the nature
of markets served are factors that have to be borne in mind while
deciding about the process.
• 3. Product Quality. Barring a few products where a certain
standard has to be maintained, the choice with respect to quality is
fairly wide. This is particularly true in the case of consumer
products like textiles, footwear, etc. The quality and product range
decisions would depend on the characteristics of the market, the
elasticity of demand, consumer preferences, and the nature of
competition.
4. Scale of Operation and Time phasing.
• The choice of a particular scale would depend on
the financial resources available, the nature of
competition, the nature of demand, and the
economics of scale.
• Further, a given capacity may be installed in one
stage or in phases.
• The capital cost of capacity installation is usually
lower when it is done in one stage.
• The cost of idle capacity, however, is higher when
it is built in a single stage.
• The trade-off between these costs would
determine the optimal pattern of time phasing.
5. Location: Location and size are closely
interrelated. Perhaps the same demand could be
satisfied by:
• a single plant for the entire market; or
• one large plant for the bulk of the market with a
few smaller plants for the remaining market; or
• several plants of a similar size spread over the
market areas.
• The choice would depend mainly on the trade-off
between economies of scale in manufacturing
and economies of distribution.