Chapter four

Technical analysis of
projects
Chapter objectives:
After studying this chapter students are expected to
understand how to analyze a project by
considering the following factors for launching of
projects
Market demand analysis
PROJECT ANALYSIS
Raw materials and supplies study
Location and site selection and environmental
impact assessment
Technology and engineering studies
Production program and plant capacity
Human resource and organization study
Cont’d

After Identifying promising project idea the next

step is project preparation or developing the idea
into project and analyzing it further its
viabilities .
Project analysis involves the analysis of a
number of factors like,
Cont’d

 Market and Demand

 Technical issues
 Technology and engineering
 Production and plant capacity
 Social aspect
 Financial analysis
 Environmental analysis
These and other factors will be discussed in this
and in the subsequent chapters
Market and Demand Analysis

Two important questions:

 What would be the total demand for the
product/service?
 What share of the total market will be enjoyed
by the proposed project?
Cont’d
To address the above two questions we require
information about the following issues.
Consumption trends in the past and current
consumption level
Past and present supply positions
Production possibilities and constraints
Imports and exports (when necessary)
Structure and nature of competition
Cost structure
Elasticity of demand
Cont’d

 The nature of the customers, their attitudes, and

preferences
 Distribution channels and marketing policies in use

 Constraints (Administrative, technical, and legal,

etc)
Cont’d
The analysis of demand and market requires
carefully structuring and planning of the analysis
process.
This helps to obtain relevant information for the
purpose within the time and cost limit.
Given the importance of market and demand
analysis, the analyst is advised to follow the
following steps.
Cont’d
 1. Situational analysis
Is conducted to get a clue as to how the product is
related with the market.
a project analyst may informally talk to customers,
competitors, middlemen, and others in the
industry.
Cont’d

 In so doing the analyst tries to understand the

preferences and purchasing power of customers,
actions and strategies of competitors, and practices
of the middlemen.
Cont’d
 May substitute a formal market analysis if it
generates sufficient data about the size of the
market and the possible market share that can be
controlled.
Where a more formal market and demand analysis
is needed, its objectives should be clearly
specified.
Cont’d
 Objectives are specified by setting questions
whose answer is supposed to help us meet
objectives in the market and demand study.
 The best way of spelling out the objective would
be to put the operational objectives in the form
of questions.
Cont’d
Example
 Suppose Yerer Flour Factory is considering to
expand its business activity by producing
Biscuit. In undertaking the situational analysis
there is a need to clearly spell out the specific
objective of the project.
Cont’d
For the sake of spelling out the objective it could put
relevant issues in the form of questions like,
 Who are the potential customers of the product?
 What is the total current demand for biscuit in the
town/ in the region?
 How is the demand currently distributed?
 What is the current price of the product and what
price will the consumers be willing to pay for the
product?
Cont’d
Do consumers need the new biscuit product as a
substitute for the biscuits in the market?
What is the nature of distribution and what market
channels are most suited for the product?
What are the possible sales of the product ?

If the satisfactory answer could be obtained form

the above analysis no further study is necessary as
a part of demand and market analysis
2. Collection of necessary information
 In order to address the aforementioned questions
formal study may be needed, if the situational
analysis fail to address all of them adequately.
 Further investigation require collecting necessary
information from variety of sources.
Cont’d
These sources are,
 Secondary sources : Provide secondary
information
 Primary sources: Provide primary data

 Collection of secondary information:

Secondary information provide the basis and
starting point for the market and demand
Cont’d
 Some of the sources of secondary information are,

 Census data

 National sample survey

 Records of different organization and market

agents
 Plan report

 Newspapers etc.
Cont’d
 However, the relevance, accuracy, and reliability
of the data has to be carefully scrutinize
 Collection of Primary Information: Analysis of
market and demand also requires collecting
primary data from the market.
Cont’d
3. Market survey is commonly undertaken to collect
primary information needed to analyze the market.
Market survey can be either census survey or
sample survey
Cont’d
Through the market survey the following
information can be obtained
 Total demand and the rate of growth
 Demand in different segments of the market
 Income and price elasticity of demand
 Motives for buying
 Purchasing plans and intentions
Cont’d
 Satisfaction with existing products

 Unsatisfied needs

 Attitude towards various products

 Distributive trade practices and preferences

 Socio-economic characteristic of buyers

Cont’d
Therefore the information obtained from both

primary and secondary sources is used to

characterize the market and to estimate

future demand.
4. Characterization of the market
On the basis of the collected data and its analysis the
market for the product or service may be
described in terms of the following aspects.
a) Effective demand in the past and present: This
is measured by the actual consumption level
b) Breakdown of demand : In order to get a better
picture about demand it is better to breakdown
the entire market into demand of different
segments of the market .
Cont’d
 The market can be segmented on the basis
different characteristics like,
 Geographic Location
 Sex
 Age category
 income etc
Cont’d
Segment analysis is required because the nature of

demand (consumption) vary from one segment

to another. (example: Consumers in high

income group tends to be less sensitive to price

change )
Cont’d
C) Suppliers: The market need to be characterized in
terms of supply of similar products.
 Sources of supply
 Location of suppliers
 Present capacity
 Planned expansion (if any)
 Problems in production
 Cost consideration ( if possible)
Cont’d
D. Government policy
 Government can influence the demand and market
for the product
 therefore it is essential that government plans,
policies, and legislations with a bearing on demand
and market for the product are specified
5. Forecasting Demand
 After collecting information from verities of sources the
next step is to estimate or forecast future demand
 Knowledge about future demand is useful when a firm
is planning
 Production schedule
 Inventory control (management)
 Advertisement activity
 Investment outlay
Market and Demand
Analysis
 Technical analysis
The purpose of technical analysis is
 To ensure that the project is technically
feasible in a sense that all the inputs required
to set up the project are available
 To select the appropriate technology
 To facilitate the most optimal formulation of
the project in terms of technology, size and
location
Cont’d

 The technical analysis is concerned with issues

related to
 Inputs and outputs of real goods or services

 The technology and technical process of

production
 35
Raw Materials and Supplies
• ThereStudy
is technical relationship between input and
output; the amount of input determines the output
amount.
• The selection of raw materials and supplies
depends primarily on the technical requirements
of the project and the analysis of supply market.
• The cost of raw material is an important factor
that influences the selection of raw material.
material

03/11/25
36

The raw materials and supplies study consists

of thorough analysis on
•What type of input?
•Where to find?
•How much it costs? Etc.
Thus, the following approaches are often used
to study raw materials and supplies.
03/11/25
37

Classification of Raw Materials &

1)Raw Materials (UnSupplies
processed and Semi-processed):
Agricultural product, Livestock and Forest products
Marine products and Fishery
Mining & Quarrying, Etc.
2)Processed Industrial Materials and Components
3)Factory Supplies: Aauxiliary material/Chemicals,
Additives, Packaging Materials, Paints, and Varnishes/
4)Utilities, and spare parts
5)Recycled waste
03/11/25
 38
Factors Affecting Project Input
Requirements:
1) Socio-Economic Factors: this refers to the social and
cultural background of the society where the project is
planned to be located. For example, meat factory should
not be opened where meat is not eaten.
2) Commercial and Financial (Business) Factors: The
Project input requirement depends on the type of raw
materials used, productivity of workers, market
demands for a given product, product mix, availability
of fund, etc.
3) Technical Factors: The project input requirement
depends on the type of the industry, technology and
production process, machinery and equipment 03/11/25
39 Cont…..
A. Specification Requirement
• The specification of raw materials and factory
supply is the basis for the assessment and
analysis of the availability of the project inputs.
inputs
• Measurement and specification of the required
raw materials and supplies, such as heat,
moisture, weight, size, colour, etc.

03/11/25
 40

• The specification of raw material must show the following

factors
1)User demands: i.e. consumers preferences & expectations
2)Quantities Required : Units produced applicable to Raw
Material, auxiliary materials required & etc.
 Machine or labour hours applicable
3)Qualitative prosperities – you have specify it
 E.g. Physical, mechanical, chemical, electrical properties

03/11/25
 41
B. Availability and Supply
• This involves in deep study about the availability and supply
of the raw materials and supplies.
supplies It can be available from
local and/or foreign suppliers.
1) Local Category
Source - Where to find?
Transport - What means of transport to use?
Quantity - How reliable is the availability?
Certainty / Uncertainty
2) Import Category
Source, Transport, Quantity and Certainty / Uncertainty
Input Alternatives: it i involves in searching for input
substitution other than the main raw material and supply.
03/11/25
 Cont..
42

C. Cost of Raw Materials and Supplies:

• It involves in determining:
• The total cost:
Raw material supplies cost
Overhead cost
• Unit cost
• Decision:
Decision after the raw materials and supplies study, the
analyst should decide on the abundance of the supply of
raw materials and supplies.
03/11/25
 43 Location, Site, and Environment
• The location of the project is highly affected by the
nature of the project itself. Projects can be
categorized under three forms of locations.
1)Rooted Projects:
Projects are projects rooted at certain area
(proximity to an input) because it is better to
transport end products than raw materials for the
cost involved in transporting raw materials is
greater than the cost incurred to transport end
products.
For example, Cement industry should be located
where limestone is located). 03/11/25
44

2) Tied Projects:
Projects are projects that are tied to the
market (proximity to the market) because the
transportation of the final product is uneconomical.
3) Foot Loose Projects:
Projects are projects that can be
located anywhere.
They are neither tied to the market nor rooted to the
raw materials.
For example, candy industry.

03/11/25
 45
A.Location Analysis (Location Selection)
• Location studies must be carried out over wider geographical
area. The strategic orientation of choice of location includes:
1)Proximity to market and raw materials
• For example, gold mining and cement factory are usually
projected at the raw material site.
2)Natural Environment Assessment
• Climate conditions (temperatures, rainfall, hurricane,
dust, wind, etc).
• Effect on agriculture, industry, transport, construction,
management, etc.
• Ecological requirement, such as avoiding contaminating
water smoke.

03/11/25
46

3) Environmental Impact Assessment

• It aims at ensuring the development projects are
environmentally sound.
• Assessment of environmental consequences of
the newly planned or existing project and of any
related activities.
• Assessment of environmental conflicts that is
potential conflicts with existing and future
neighboring industries, urban settlements should
be critically assessed for its consequences are
closedown, compensation, purification, etc.
03/11/25
47
Cont…….

Phases and Structure of Environmental Impact

Assessment
•Preliminary environmental impact assessment:
Use checklist to check which impact need to be
analyzed.
•Detailed analysis, site visit (in depth study)
•Preparation of environmental impact
statements report

03/11/25
 48 Location Analysis (Location
PoliciesSelection)…
4) Socio - Economic Policies: It involves in the study of,
• Government regulations and restrictions
• Local government policies: incentives, restrictions, fiscal and legal
regulations, procedures, utility supplies, building regulations,
taxes, etc.
5)Infrastructure Conditions:
Conditions It studies,
• Technical infrastructure; Transport and communication
• Social infrastructure (Police, Court, etc);
• Factory supplies (electricity, water, fuel, etc)
• Availability of human resources;
• Infrastructure services (construction, erection, garages, etc)

03/11/25
 49 Final location choice/Decision:
• It may be difficult to find out a location where all those
factors are available.
available
Therefore, a locational model is necessary to choose a suite
location.
The simplest locational model is to calculate the transport,
production, and distribution costs at alternative locations.
The best choice of location would be one where the cost of
production is the minimum.

03/11/25
50 Site Selection
• A project may depend on particular site
condition.
• Heavy machinery and technical installations
may require specific ground conditions.
• Site selection should pay attention to the cost of
site preparation (like; cost of demolishing,
relocation of existing structure, utility)

03/11/25
51

During site selection, the following requirements

and conditions should be assessed:
Site requirements such as ground condition, soil
condition, site preparation and development, etc.
Construction requirement such as requirements by
the municipality.
Land conditions that are infrastructure, such as an
out let to the main road.
waste matter and waste disposal;
disposal
03/11/25
52 CONT….
 Once the broad location is chosen, attention needs to
be focused on the selection of a specific site.
 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.
 Sites in an industrial area developed by a
governmental agency may be available at a
concessional rate. 03/11/25
 53 SITE SELECTION
 from site to site:
 power transmission lines from the main grid,
 railway siding from the nearest rail road,
 feeder road connecting with the main road,
 transport of water, and disposal of effluents.

03/11/25
54
Technology and Engineering Study
 An outcome of project analysis will be the selection of
the most appropriate methodologies and technologies.
technologies
 Technology and Engineering Study Covers:
A. Production program and plant capacity
B. Technology choice
C. Technology acquisition and transfer
D. Plant lay out and basic engineering
E. Civil engineering works
F. Maintenance and replacement requirement
G. Estimate of investment costs. 03/11/25
 55 A. Production Program and Plant
Capacity
 The production program and plant capacity study was
should be consider in determining production program:
• Market requirement
• Input requirement
• Technology (software and hardware)
• Plant capacity:
Feasible normal capacity
Nominal (maximum or design) capacity
03/11/25
56 B.Technology choice

 The selection of appropriate technology and know-how is

a critical element in any feasibility study because the
appropriate technology is suitable for the local labour,
local inputs, social and cultural condition.

03/11/25
57

The advocates of appropriate technology urge that

the technology should be evaluated as follows.
Whether the technology utilizes local Raw Materials?

Utilizes local human, goods produced centre to the

basic needs?
protects ecological balance?

 harmonious with social and cultural condition .

03/11/25
 58
C. Technology Acquisition and
 How to acquire those technologies? The analyst should consider
Transfer
the following factors:
1) Industrial property right (patent and franchise)
2) Means of technology acquisition: The acquisition of
technology from some other enterprises may be:-
• Licensing/
• It is a contract/Exclusive License/Non-Exclusive
License
 It gives the licensee the right to use patented technology
and get related know-how on mutually agreed basis.
03/11/25
59
Technology Acquisition and
Transfer…
• Outright Purchase of Technology
 ownership secured
 no additional support/know-how/
 pay purchasing price, no fee…
3)Contract terms and conditions
(warrants/certification/ and guarantees)
4)Cost of technology

03/11/25
 60
F. Civil Engineering Works
 The feasibility study should provide plans and estimates
for the civil works related to the project. It considers:
• Site preparation and development: grading and
levelling, relocation of pipelines and cables
connection of utilities and etc.
• Factory and other buildings: what type of building,
for what purpose (factory, administrative, residential
etc)
• Out door works: fencing, guardhouse, supply and
distribution of utilities, transportation, outdoor
lights.
03/11/25
 61 G. Maintenance and Replacement
Requirement
 Maintenance and replacement requirement is basically related to
the building and machineries and equipments. It covers:
• Establish ages (life span of each of the building, machinery and
equipment)
• Major repair schedule of building, machinery and equipment.
• Preventive maintenance, and Spare parts
 How to maintain? There are two ways:
1)Own workshop: own o workshop maintenance requires
acquisition of tools, equipment, trained manpower, etc for
maintenance.
2)Outside workshop services: but, are they knowledgeable
enough? Etc.
03/11/25
62 Factors Considered in setting the
Production Program
1. Production Level (Capacity Utilization):Production may
not be at full capacity during the initial period due to:
 Production and technological difficulties
 New technology,
 Design of the production process,
 Flow of operation, etc
2. Production Problems: Machine breakdowns and
problems of line balancing in operations; raw material
shortages or materials may not be up to the standard;
utilities shortage

03/11/25
63 3. Input Constraints:
 In developing countries, there often are constraints on the
availability of certain inputs
 Power supply may be limited
 Basic raw materials may be scarce
 Foreign exchange available for imports may be inadequate

4. Investment Cost: In general, investment cost per unit

of capacity decreases as the plant capacity increases (i.e.
capacity cost increases at a decreasing rate).
 In other words, as capacity increases, the investment cost
per unit of capacity decreases.

03/11/25
 64 5. Market Conditions:
The anticipated market for the product has an important
bearing on plant capacity.
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 small capacity.
If the market starting from a small base, but is expected
to grow rapidly, the initial capacity may be set to be
higher than the initial level of demand.

03/11/25
65 PROJECT CHARTS AND
 LAYOUTS
Plant Layout .
 The plant layout is concerned with the physical layout of
the factory.
 In certain industries, particularly process industries, the
plant layout is dictated by the production process adopted.
 In manufacturing industries, however, there is much greater
flexibility in defining the plant layout.
 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 03/11/25
T.H.A.N.K Y.O.U F.O.R
L.I.S.T.E.N.I.N.G