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Feasibility literally means whether some idea will work or not. It knows beforehand whether there exists a sizeable market for the proposed product/service, what would be the investment requirements and where to get the funding from, whether and wherefrom the necessary technical know-how to convert the idea into a tangible product may be available, and so on. In other words, feasibility study involves an examination of the operations, financial, HR and marketing aspects of a business on ex ante (Before the venture comes into existence) basis. Thus, you may simultaneously read this lesson and the lessons on marketing, finance etc. to have a better idea of the issues involved. What we present hereunder is a brief outline of the issues impinging upon the various aspects of the feasibility of the proposed project. By now, you would have understood that feasibility is a multivariate concept; that is, a project has to be viable not only in technical terms but also in economic and commercial terms too. Moreover, there always is a possibility that a project that is technically possible may not be economically viable. For instance, you can construct a dust free factory in Rajasthan, but it is more economically sensible to do so in Chandigarh/ Bangalore. As even as we take up the various aspects of feasibility one by-one, it must not mislead into believing that there is a sequence and that there are no interdependencies. Examination of the feasibility requires skills that you may fall short of. You may take the help of the Technical Consultancy Organisations (TCOs) such as HARDICON (Haryana-Delhi Industrial Consultancy Organisation) towards this purpose. There are district-wise industrial potential surveys available with the SISIs and DICs that may serve as a good starting point. You may also make use of the Project Reports published by the directorate of industries and private consulting firms. Obviously, as you use these off-the- shelf project reports, you need to re-validate their assumptions and findings and resist the temptation of jump-starting. Whether you use the already published project reports or wish to start afresh, you need to examine all the facets of the feasibility of the proposed project idea, viz. marketing, technical, financial, economic and legal.
Technical Feasibility is primarily appraised for any project. Technical appraisal is mainly undertaken to ensure that the project is technically viable no possible gaps or gray areas in technology know-how, equipment, input supply, organization of production facilities etc. exists. Technical appraisal is key to assess the financial viability of the project. The computation of projects’ ability to earn satisfactory return on investment made and ability to service equity and debt depend on the project technical viability. Technical appraisal is basically concerned with aspects like technology, design, layout of the plant, infrastructure
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facilities envisaged for the project and the possible problems in various areas related to these technical aspects, which can be broadly grouped under the conception, construction and continuation phases.
Technical feasibility analysis broadly involves a critical study of the following aspects, viz, • • • • • • • • • •
Selection of process/technology Scale of operations Raw material Technical know-how Collaboration agreements Product mix Selection and procurement of plant and machinery Plant layout Location of the project
Selection of process/technology:
For manufacturing a product, more than one process/technology is available. For example: cement can be manufactured either by the wet process or by the dry process. The choice of the technology also depends upon the quality and quantity to be produced. If the quantity required to be produced is large, mass production techniques is to be followed. The quality of the product depends upon the use to which it is meant for. In the choice of the technology, as far as possible, the latest technology should be chosen provided there are no other constraints. A technology that is appropriate for one country may not be ideal for another country. Even with in the country, depending upon the location of the project and other features, two different technologies may be ideal for similar projects set up by two different firms at two different locations.
2) Scale of operations:
Scale of operations is signified by size of the plant. The plant size mainly depends on the market for the output of the project. Economic size of the plant varies from project to project. Economic size of the plant for a given project can be arrived by an analysis of capital and operating costs as a function of plant size. Factors like fabrication of equipments, transportation and erections of equipments, problems associated with the availability of production inputs on a sustained basis, etc. Also impose restrictions on the plant size.
3) Raw material:
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Some product can be manufactured using alternative raw materials and with alternative processes. The process of manufacture may sometimes vary with raw material chosen. If the product can be manufactured by using alternative raw materials, the raw material that is locally available should be chosen. Since the manufacturing process and the machinery/equipment to be used should be chosen carefully after analyzing various factors the cost of different raw materials available, the transportation cost involved, the continuous availability of the raw material, etc. Since the process of manufacture and the machinery/equipment depend upon the raw material used, the investment of the plant and machinery will also to some extent depend upon the raw material chosen. Hence the costs of investments required on plant and machinery should also be studied before arriving at a decision on the choice of the raw material.
4) Technological know-how:
When technical know-how for the project is provided by expert consultants, it must be ascertained whether the consultant has a requisite knowledge and experience and whether he has already executed similar projects successfully. Care should be exercised to avoid selfstyled, inexperienced consultants. Payment of know-how fee should as far as possible made in stages along with the progress of the project.
The unit might require transfer of technical know-how or services of technical and specialized personnel for the manufacturing process to maintain the quality and meet global competition. For this pre-determined contracts and finalization of terms even before the commencement of the project at the conceptualization stage is necessary. The type and duration of the technical arrangements and nature and extent of training and development activities need to be examined before entering into actual contract as this has financial impact on the project.
6) Product Mix:
Customers differ in needs and preferences. Hence variations in size and quality of products are necessary to satisfy the varying needs and preferences of customers. In order to enable the project to produce goods of varying size nature and quality as per the requirements of the customers, the production facilities should be planned with an element of flexibility. Such flexibility in the production facilities will help the organization to change the product mix as per customer’s requirements, which is very essential for survival and growth of any organization.
Selection and procurement of plant and machinery:
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The selection of proper plant and machinery, appropriate and latest technology is very important in the success of the project. The availability domestically or need to import the complete range of plant and machinery and need for training the technical personnel manning the machines, cost of such training, deputation abroad for training are also taken into account while computing the landed cost of the machinery. The cost of locally available machinery, its record of performance, facilities for servicing and maintenance are taken into account before importing the machinery. But no compromise on machine quality and performance is made when comparative cost advantage is analyzed in selection of machinery. The order time, lead time for delivery, time for installation, tests and trials all would be taken into consideration. As investment in plant and machinery will be huge in larger projects time and cost factor from the first day of investment is considered. In certain projects pre order discussions are held to avoid undue time and costs overruns on machinery procurement. In case of new projects, purchase of machinery is timed to coincide with civil work completion.
The efficiency of production depends on how well the various machines; production facilities and employee’s amenities are located in a plant. Only the properly laid out plant can ensure the smooth and rapid movement of material, from the raw material stage to the end product stage. Plant layout encompasses new layout as well as improvement in the existing layout. It may be defined as a technique of locating machines, processes and plant services within the factory so as to achieve the right quantity and quality of output at the lowest possible cost of manufacturing. It involves a judicious arrangement of production facilities so that workflow is direct. Plant layout refers to the arrangement of physical facilities such as machinery, equipment, furniture etc. within the factory building in such a manner so as to have quickest flow of material at the lowest cost and with the least amount of handling in processing the product from the receipt of material to the shipment of the finished product. Plant layout is an important decision as it represents long-term commitment. An ideal plant layout should provide the optimum relationship among output, floor area and manufacturing process. It facilitates the production process, minimizes material handling, time and cost, and allows flexibility of operations, easy production flow, makes economic use of the building, promotes effective utilization of manpower, and provides for employee’s convenience, safety, comfort at work, maximum exposure to natural light and ventilation. It is also important because it affects the flow of material and processes, labour efficiency, supervision and control, use of space and expansion possibilities etc. Plant layouts are of following types: (a) Product or line layout: Under this, machines and equipments are arranged in one line depending upon the sequence of operations required for the product. The materials move from one workstation to another
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sequentially without any backtracking or deviation. Under this, machines are grouped in one sequence. Therefore materials are fed into the first machine and finished goods travel automatically from machine to machine, the output of one machine becoming input of the next, e.g. in a paper mill, bamboos are fed into the machine at one end and paper comes out at the other end. The raw material moves very fast from one workstation to other stations with a minimum work in progress storage and material handling.
Suitability: Product layout is useful under following conditions: 1) Mass production of standardized products 2) Simple and repetitive manufacturing process 3) Operation time for different process is more or less equal 4) Reasonably stable demand for the product 5) Continuous supply of materials (b) Process Layout: In this type of layout machines of a similar type are arranged together at one place. E.g. Machines performing drilling operations are arranged in the drilling department, machines performing casting operations be grouped in the casting department. Therefore the machines are installed in the plants, which follow the process layout. Hence, such layouts typically have drilling department, milling department, welding department, heating department and painting department etc. The process or functional layout is followed from historical period. It evolved from the handicraft method of production. The work has to be allocated to each department in such a way that no machines are chosen to do as many different job as possible i.e. the emphasis is on general purpose machine. The work, which has to be done, is allocated to the machines according to loading schedules with the object of ensuring that each machine is fully loaded. Suitability: Process layout is adopted when 1. Products are not standardized 2. Quantity produced is small 3. There are frequent changes in design and style of product 4. Job shop type of work is done 5. Machines are very expensive Thus, process layout or functional layout is suitable for job order production involving nonrepetitive processes and customer specifications and non standardized products, e.g. tailoring, light and heavy engineering products, made to order furniture industries, jewellery. (c) Fixed Position or Location Layout In this type of layout, the major product being produced is fixed at one location. Equipment
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labour and components are moved to that location. All facilities are brought and arranged around one work centre. This type of layout is not relevant for small scale entrepreneur. The following figure shows a fixed position layout regarding shipbuilding. Suitability: The fixed position layout is followed in following conditions 1. Manufacture of bulky and heavy products such as locomotives, ships, boilers, generators, wagon building, aircraft manufacturing, etc. 2. Construction of building, flyovers, dams. 3. Hospital, the medicines, doctors and nurses are taken to the patient (product). (d) Combined layout Certain manufacturing units may require all three processes namely intermittent process (job shops), the continuous process (mass production shops) and the representative process combined process [i.e. miscellaneous shops]. In most of industries, only a product layout or process layout or fixed location layout does not exist. Thus, in manufacturing concerns where several products are produced in repeated numbers with no likelihood of continuous production, combined layout is followed. Generally, a combination of the product and process layout or other combination are found, in practice, e.g. for industries involving the fabrication of parts and assembly, fabrication tends to employ the process layout, while the assembly areas often employ the product layout. In soap, manufacturing plant, the machinery manufacturing soap is arranged on the product line principle, but ancillary services such as heating, the manufacturing of glycerin, the power house, the water treatment plant etc. are arranged on a functional basis. FACTORS INFLUENCING LAYOUT While deciding his factory or unit or establishment or store, a small-scale businessman should keep the following factors in mind:
a) Factory building: The nature and size of the building determines the floor
space available for layout. While designing the special requirements, e.g. air conditioning, dust control, humidity control etc. must be kept in mind. b) Nature of product: product layout is suitable for uniform products whereas process layout is more appropriate for custom-made products. c) Production process: In assembly line industries, product layout is better. In job order or intermittent manufacturing on the other hand, process layout is desirable. d) Type of machinery: General purpose machines are often arranged as per process layout while special purpose machines are arranged according to product layout. e) Repairs and maintenance: machines should be so arranged that adequate space is available between them for movement of equipment and people
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required for repairing the machines. Thus, the layout should be conducive to health and safety of employees. It should ensure free and efficient flow of men and materials. Future expansion and diversification may also be considered while planning factory layout.
1) Location of Projects:
Location analysis is a dynamic process where entrepreneur analyses and compares the appropriateness or otherwise of alternative sites with the aim of selecting the best site for a given enterprise. It consists the following: (a) Demographic Analysis: It involves study of population in the area in terms of total population (in no.), age composition, per capita income, educational level, occupational structure etc. (b) Trade Area Analysis: It is an analysis of the geographic area that provides continued clientele to the firm. He would also see the feasibility of accessing the trade area from alternative sites. (c) Competitive Analysis: It helps to judge the nature, location, size and quality of competition in a given trade area. (d) Traffic analysis: To have a rough idea about the number of potential customers passing by the proposed site during the working hours of the shop, the traffic analysis aims at judging the alternative sites in terms of pedestrian and vehicular traffic passing a site. (e) Site economics: Alternative sites are evaluated in terms of establishment costs and operational costs under this. Costs of establishment is basically cost incurred for permanent physical facilities but operational costs are incurred for running business on day to day basis, they are also called as running costs. The important considerations for selecting a suitable location are given as follows: a) Natural or climatic conditions. b) Availability and nearness to the sources of raw material. c) Transport costs-in obtaining raw material and also distribution or marketing finished products to the ultimate users. d) Access to market: small businesses in retail or wholesale or services should be located within the vicinity of densely populated areas. e) Availability of Infrastructural facilities such as developed industrial sheds or sites, link roads, nearness to railway stations, airports or sea ports, availability of electricity, water, public utilities, civil amenities and means of communication are important, especially for small scale businesses. f) Availability of skilled and non-skilled labour and technically qualified and trained managers. g) Banking and financial institutions are located nearby. h) Locations with links: to develop industrial areas or business centres result in
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savings and cost reductions in transport overheads, miscellaneous expenses. i) Strategic considerations of safety and security should be given due importance. j) Government influences: Both positive and negative incentives to motivate an entrepreneur to choose a particular location are made available. Positive includes cheap overhead facilities like electricity, banking transport, tax relief, subsidies and liberalization. Negative incentives are in form of restrictions for setting up industries in urban areas for reasons of pollution control and decentralization of industries. k) Residence of small business entrepreneurs want to set up nearby their homelands. One study of location considerations from small-scale units revealed that the native place or homelands of the entrepreneur was the most important factor. Heavy preference to homeland suggests that small-scale enterprise is not freely mobile. Low preference for Government incentives suggests that concessions and incentives cannot compensate for poor infrastructure.
How to write a Technical Feasibility Analysis?
The Technical Feasibility Study assesses the details of how you will deliver a product or service (i.e., materials, labour, transportation, where your business will be located, technology needed, etc.). Think of the technical feasibility study as the logistical or tactical plan of how your business will produce, store, deliver, and track its products or services.
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A technical feasibility study is an excellent tool for trouble-shooting and long-term planning. In some regards it serves as a flow chart of how your products and services evolve and move through your business to physically reach your market. The Technical Feasibility Study Must Support Your Financial Information Do not make the mistake of trying to entice investors with your staggering growth projections and potential returns on their investment that only includes income (revenue) to the business. With any increase in revenue there is always an increase in expenses. Expenses for technical requirements (i.e., materials and labour) should be noted in the technical feasibility study. You should also not strictly rely on feasibility study conclusions to impress an investor. An experienced investor or lending institution will read your entire report and come to their own conclusions. Therefore, it is critical that the technical and financial data in your study reconcile. If other parts of your feasibility study shows growth, you will also have to project labour and other costs and the technical ability to support that growth. The technical component serves as the written explanation of financial data because if offers you a place to include detailed information about why an expense has been projected high or low, or why it is even necessary. It demonstrates to potential investors and lenders (and in some cases, potential clients) that you have thought about the long-term needs your business will have as it grows. Preparing an Outline for Writing Your Technical Feasibility Study The order that you present technical information is not as important as making sure you have all the components to show how you can run your business. You do not have to include specific financial information in the technical portion of your feasibility study, but all information in this component must support your financial data represented elsewhere. Basic things that most businesses need to include in their technical feasibility study include: • • • • • Materials Labor Transportation or Shipping Physical Location Technology
Calculating Material Requirements In this section you list the materials you need to produce a product or service, and where you will get those materials. Include information such as if volume discounts will be available as your business grows, or if you ever plan to manufacture your own parts at some point in time. Things to include in your list of materials:
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• • •
Parts needed to produce a product, Supplies (glue, nails, etc.), and Other materials that are involved in producing or manufacturing your product
Calculating Labor Requirements You cannot run a business, offer services, or manufacturer products for free. Even if you start your business with you as your only employee, at some point, if you plan to grow you will need to add to your labor pool. In most cases, labor will be one of your biggest small business expenses. In this section you will list the number and types of employees needed to run your business now, and that may be employed in the future as your business grows. You can break labor into categories if necessary: • • • • • Senior Level Management Office and Clerical Support Production or Distribution Professional Staff (i.e., lawyers, accountants, engineers, marketing) Fulfillment (i.e., mail room, shipping department)
If you plan to outsource (hire another company to do a job for you) order fulfillment, fundraising, or other aspects of your company’s business be sure to list what functions will be outsourced and to where. Transportation and Shipping Requirements If you need to ship items from one place to another, how will you transport these items? Small items can be shipped via local carriers, DHL, USPS, but heavy or bulk items may need to be transported via a freight or trucking company. If you are shipping perishable items, you will need special overnight handling. You may also need special permits to ship certain items, and nonprofits organizations should consider applying for discounted postal rates. These are all things that affect the technical, or “how” of moving your goods from one place to another. If you offer services, how will trainers, educators, consultants, sales personnel get to customers and clients? If you offer a product that is governed by state or federal law (such as medications or prescription medical supplies), do you need a licensed distributor or pharmacy to ship on your behalf? In the Transportation Feasibility component, list things that will affect how you get your goods or services to other businesses or individuals, including:
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• • • •
The methods of transportation and shipping services that will be needed to get your product or services to a customer; Special handling or other unique arrangements required to transport your product; Any special permits that will be required, including postal rate discounts; and Cars (company- or privately-owned) and other vehicles needed to conduct your business.
Physical Location of Your Business Where you run your business will have an effect on your success. If you are starting out in a home-based office, project whether or not, and when, you might need any of the following: • • • • • • A “Brick and Mortar” Office (office space outside your home) Warehouse Facilities Your Own Factory Your Own Trucking Facility Retail Storefront Any other purchased or rented facilities needed to conduct your business.
In the Physical Location Feasibility component, you should also discuss the pros and cons of where these facilities will be located. Should they be in one central location, or across state lines? Do you need to have special parking considerations for customers or trucks? Do you need to be near other facilities such as an airport, commerce center, or shopping mall? Technology Requirements to Run Your Business Every business needs at least some kind of technology to operate. The Technology component includes discussions about, and a list of the following: • • • • • • • • • Telephone Answering Systems Computer Hardware and Software Inventory Management Cash Registers, Credit Card Collection, Check Processing Special Devices to Accommodate the Disabled Teleconferencing Facilities and Equipment Cell Phones, PDA’s, or Other Devices Needed to Conduct Business Alarm or Camera Systems Manufacturing Equipment
Summary of the Technical Feasibility Study The order in which you present your technical requirements is not as important as making sure that you include all the technical requirements of your business from production to customer receipt.
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This information will help investors know more about the operations of your business. Having a great idea for a product or business is not enough; you have to show how you can make money from the idea. The technical feasibility study addresses the physical and logistical mechanics of if, and how, you will be able to get something into product, and back out the door to customers.
Location: Right Space, Wrong Place
Jim Teal opened Jimmy T’s Rib House and within the first ten months, he was making profits. One day a commercial realtor advised Jim that a restaurant four times the size of his
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current space was on the market. The realtor said he could get Jim a good deal on the lease if he liked. Jim knew that the city where the restaurant was located no other barbecue rib restaurant. He researched and verified the population numbers and demographics for the geographical area. It was in a good neighbourhood, on the main road, just off the freeway. He even did a traffic flow study, and the numbers were terrific. The “Grand opening week” went well. But then business began to fall off. Yes, there was plenty of traffic, but jimmy T’s was on the wrong side of the street. Customers coming west from the freeway exit couldn’t cross the centre island, and there was no U-Turn sign at the corner. When Jim tried to improve his visibility and the signs attract more freeway traffic, he found that city regulations prevented it. After six months, Jim took his loss and closed the new restaurant. Questions:
1. What questions about location should Jim have asked the realtor before assuming the
lease? 2. Who else should Jim have questioned about the location?
CASE STUDY-Product Mix
New headaches for the home building boom
New home demand caused by rapid population growth in parts of the country has resulted in some builders cutting corners. A new home can be built in about three months, but owner’s nightmare can begin a few years later. Sharyn and Bruce lier lived in an upscale Houston suburb. Inspectors found the source of sharyn’s constant dry cough, exhaustion, and blurred vision: a thick black model between the stucco and drywall in several rooms. Some mold was identified as stachybotrys atra, a fungus linked to problems from sinus infections to brain damage. An industrialist hygienist warned the liers to evacuate immediately, taking only their pets. Thousand s of homeowners are suing builders, landlords, and insurers for damages to their property and health. The California senate set the country’s first limits for acceptable levels of mold indoors and required disclosure of mold problems. Melinda Ballard of Texas was awarded $32 million for mold damage to her home and mental anguish. The Delaware Supreme Court upheld a $1 million award to Elizabeth Stroot, who claimed that mooldy water leaking into her apartment bathroom inflamed her asthma and caused cognitive disorders.
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Insuers and homebuilders are looking for ways to minimize their liability. Farmers insurance estimates that it will have to pay $85 million in mold claims in Texas alone. It has eliminated coverage in 30 states. The California building industry tried and failed to push a “home warranty” bill under which homeowners could be required to enter into arbitration instead of suing. How much of the crisis is based on fact is hotly debated. Mold can be found everywhere. From the Roquefort cheese in a salad to the back stuff clinging to bathroom grout. Some mold can trigger allergic reactions. Asthma, and others respiratory ailments and cause cancer, but proving that mold causes nosebleeds or mental confusion in difficult. The biggest winners are the industries feeding off mold-mania. One attorney gets 50 calls a week from potential clients, and one industrialist’s hygienist charges $150 an hour for mold inspections. Many consumers cannot afford the $5000 to $10000 retainer that lawyers often charge. It is also hard to sallow the financial loss that occurs after a home has been cleared of mold. Even resolved mold problems must be reported to prospective buyers for five years. The stigma causes homes to lose value and buyers to stay away.
Questions: 1. Who should be made accountable for home mold problems? 2. Why do insurance companies and builders spend a lot of time lobbying congress? 3. Why are some insurance companies dropping mold coverage and not talking new homeowner policies? 4. What occupation has boomed due to the mold problem? 5. What ethical issues are involved in this case?
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