UNIT FOUR

PROJECT PREPARATION
4.1. Markets and Demand Analysis
• Market analysis is a process of assessing the level of demand for the
product or service to be produced from the project.
4.1.1. Objective of markets & demand analysis:
• To systematically assess the market and the customer demand
• To collect, analyze, and report data about a specific market situation
• To obtain insight about the target market structure
• To design the marketing mix
• To identify available distribution channels
• To identify competitors and their characteristics in the target market
• To determine the socio-economic aspects relevant to the
preparation and evaluation of the project’s market strategy
• To project the level of demand expected
• To define marketing opportunities and threats
• To develop sales program of the firm.
 4.1.2. Collection of Secondary Information
• Secondary sources are information gathered in some
other places or context and are already available.
• Information for market and demand analysis may be
obtained from;
– central statistics office,
– sample survey reports,
– planning reports,
– academic studies, etc.
• These sources may provide starting point for market
and demand analysis.
• However, their reliability, relevance, and accuracy for
intended purpose should be carefully examined.
 4.1.3. Conduct Market Survey /PRIMARY information

• There are two types of survey;

– census survey and
– a sample survey.
• In a census survey, the whole population is
included (covered).
• These types of surveys often tend to be costly
and infeasible.
• In a sample survey, a sample of population may
be drawn.
• This method is found to be cheaper and easier.
The information gathered in a market survey should be
related to;
• Total demand and rate of growth of demand,
• Demand in different segments of the market,
• Income and price elasticity of demand,
• Motives of seeking the product or service,
• Unsatisfied needs or demand,
• Purchasing power of customers,
• Satisfaction with the existing product or service,
• Distribution patterns and preferences,
• Attitude towards the product or service,
• Socio – economic conditions of the consumers,
Note:- These information need to be collected and analyzed
in the context of the proposed project.
 4.1.4. Techniques Of Demand Forecasting

• After gathering information about various aspects of the

market and the marketing environment from primary and
secondary sources, attempt may be made to estimate future
demand.
• There are two common methods through which we can
conduct demand forecast;
i. Qualitative Methods.
ii. Quntitative methods
1. Qualitative Methods.
• These methods depend on essentially on the judgment of
experts to translate qualitative information in to quantitative
estimates. The important qualitative methods are:
– Jury of executive method
– Delphi method
 A. Jury of Executive Option Method
• It is the opinions of a group of managers on expected
future sales and combining into sales estimate.
• It is a speedy method for developing a demand
forecast.
Advantage
• It is an expeditious method for developing a demand
forecast.
• It permits inclusion of No. of subjective factors
Disadvantages
• The biases underlying subjective estimates can not be
easily avoided.
• The reliability of this technique is questionable.
B. Delphi Method

• This method involves extract the opinions of group of

experts, who don’t interact face – to – face, usually
with help of a mail survey.
• In this method, a questionnaire is sent to a group of
experts and responses received are summarized
without disclosing the identity of the experts.
• Delphi method used by many organizations for the
following reasons:
– It is intelligible to users.
– It seems to be more accurate and less expensive
than the traditional face – to – face group
meetings.
2. Quantitative Forecasting
• In opposite to qualitative approach, quantitative
models are objective in their very nature and they
employ numerical information.
• This model includes time series model and causal
models.
• Time series method includes;
– Naive forecast
– Simple Moving Averages
– Weighted Moving Averages
– Trend projection
 4.2. Technical Analysis
4.2.1. Manufacturing Process Technology
• Selection of appropriate technology and know–how
is a critical element in any feasibility study.
• Such selection should be based on a detailed
consideration and evaluation of technological
alternatives.
• What may be appropriate in industrialized
economies with high labor costs may not necessarily
be the optimum for low – age developing countries
• Competitive production capability in intended
markets is one of the most crucial factors for
technology choice
 Generally, technology choice must be directly
related;
• market,
• Resource
• environmental conditions
• corporate strategies
• Plant capacity
• Principal inputs
• Investment outlay and production cost
• Use by other units
• Production mix
• Latest developments
• Ease of absorption
 4.2.2. Material Inputs and Utilities
• It is concerned with defining the materials and
utilities required, specifying their properties in
some detail, and setting up their supply
programme.
• There is a close relationship between the
definition of input requirements and other
aspects of project formulation, such as the
definition of plant capacity, location and
selection of technology and equipment, as these
inevitably interact with one another.
Classification of Raw Materials and Supplies
1. Raw materials (Unprocessed and Semi-processed)
a. Agricultural products: its’ quality, quantity &
proximity must be checked
b. Livestock and Forest Products
c. Marine Products:-availability, the yields, and cost of
collection as well as national policies and bilateral
or multilateral agreements must be considered.
d. Mineral Products: -detailed information on the
proposed exploitable deposits is essential, and
proven reserves are needed.
 2. Processed Industrial materials and Components

• Auxiliary Materials:- such as chemicals,

packaging materials, paints, and factory
supplies such as Maintenance materials, oils,
greases, and cleaning materials.
• Utilities: A detailed assessment of the utilities
required (electricity, water, steam, compressed air,
fuel, and their efficient disposals)
• Spare Parts: All machinery and equipment will finally
break down after a certain lifetime. Various spare
parts will be required to keep a plant in operation.
 4.2.3. Plant Capacity
• The term plant capacity can be defined as the volume or
number of units that can be produced during a given
period.
• Plant capacity may be seen from two perspectives:
a. Feasibility normal capacity (FNC) refers to capacity
achievable under normal working conditions, taking into
account such as normal stoppages, down time, holidays,
maintenance, tool changes, desired shift patterns and etc.
• Hence, the feasible normal capacity is the number of units
produced during one year under the above conditions.
a. Nominal Maximum Capacity (NMC) is the technically
feasible capacity, which frequently corresponds to the
installed capacity as guaranteed by the supplier of the
plant.
 2.4.4. Location and Site
• The choice of location and site necessitates an
assessment of demand, size, and input requirement.
• The location & site requirements should be judged
against the defined corporate strategies and the
financial and economic impacts.
• Although most often the terms ‘location’ and ‘site‘
are used synonymously, they should be
distinguished.
• Location refers to a relatively broad area like a city, an
industrial zone, or a costal area.
• Site refers to a specific piece of land where the
project would be set up.
 Choice of Location
• The choice of location is influenced by a variety of
considerations: proximity to raw materials and
markets, availability of infrastructure, labor situation,
governmental policies, and other factors.
A. Proximity to Raw Materials and Markets
• Proximity to the sources of raw materials and
nearness to the market for the final products are an
important considerations for location.
• In light of a basic location model, optional location is
one where the total cost (raw material transportation
cost plus production cost plus distribution cost for
the final product) is minimized.
Practically, it means 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.
B. Availability of Infrastructure
• In a feasibility study, availability of power,
transportation, water, and communications
should be carefully assessed before a location
decision is made.
C. Governmental Policies
• Policies and regulations of a government have a
considerable influence on location.
• In most of the cases of public sector projects location is
directly decided by the government.
• In the case of private sector projects, location is influenced
by certain governmental restrictions and inducements.
• Most often the government may forbid the setting up of
industrial projects in certain areas which suffer from urban
congestion.
• Particularly, the government may offer inducements for
establishing industries in back ward areas.
• These inducements consist of subsidies, acknowledgment
finance, sales tax loans, power subsidy, income tax benefits,
lower promoter contribution, and so on.
 Site Selection
• After the completion of final location selection, a
specific project site and, if available, site alternatives
should be defined in the feasibility study.
• For sites available within the selected area, the following
requirements and conditions are to be assessed:
– Ecological conditions on site (soil, site hazards, climate etc.)
– Environmental impacts (restrictions, standards, guidelines)
– Socio – economic conditions (restrictions, incentive,
requirements)
– Local infrastructure at site location
– Strategic aspects (corporate strategies regarding possible
future extension, supply and marketing policies)
– Cost of land
– Site preparations and development, requirements and costs
 Site cont…
• 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.
• The cost of site preparation and development depends
on the physical features of the site, the need to
demolish and relocate existing structures, and the
work involved in obtaining utility connections to the
site.
• Some sites may require substantial work on site
preparation and development, or it may be exposed to
site hazards such as strong winds, fumes, and flue
gases from nearby industries or to risks of floods.
 4.2.5. Environmental Aspects

• The feasibility study should include, a thorough and

realistic analysis of the environmental aspects of the
projects.
• Underestimation of the environment has resulted in
negative consequences such as poor human health,
social disruption, reduced productivity and
ultimately, the undermining of development.
• The general objective of environmental impact
assessment in project analysis is to ensure whether
the development projects are environmentally
sound.
 Cont..
• The specific objectives of environmental impact assessment are as follows:
– To promote a comprehensive, interdisciplinary investigation
of environmental consequences of the project and its
alternatives for the affected natural and cultural human
habitat.
– To develop an understanding of the scope and magnitude of
incremental environmental impacts of the proposed project
for each of the alternative project designs.
– To incorporate in the designs any existing regulatory
requirements.
– To identify measures for mitigation of adverse environmental
impacts and for possible enhancement of beneficial impacts.
– To identify critical environmental problems requiring further
investigation.
8. Organization and Human Resource

 A division of the Company into organizational

units, in line with the marketing, supply,
production and administrative functions is
necessary for efficient management of operations
and designing a proper organizational structure in
accordance with the corporate strategies and
policies.
 The recommended organization will depend on
the social environment as well as techno-
economic necessities. The organizational set-up
depends to a large extent on the industrial,
enterprise, strategies, polices and values of those
in power in the organization.

Project Management and Analysis 24

 A design of the organization usually includes the
following steps:

• Goals and objectives of the business are

stated
• Then functions are identified
• Functions are grouped or related
• Organizations structure or framework
designed
• All key jobs are analyzed, designed, and
described
• A recruitment and training program
prepared.
Project Management and Analysis 25
 The two reasons for preparing an
organization:-
1. To achieve optimal coordination and control
on all project inputs.
2. To structure the investment and production
costs and to determine the costs linked with
corresponding organizational units.

8.1 Organizational Structure

 Usually the organization structure is designed
primarily in line with the different functions.
Such as finance, marketing, production and
purchasing. However, there is no unique
organizational pattern.
Project Management and Analysis 26
 Human Resource
 The successful implementation and operation of industrial
projects need different categories of human resources.
 Example, management, supervisory staff and workers- with sufficient skill and
experience.
 The following factors should be given due consideration
when the availability and employment of human resources
are analyzed:-

i. The general availability of relevant human resource

categories in the country and the project region.
ii. The supply and demand situation in the project
region
iii. Recruitment policy and methods
iv. Training policy and program
Project Management and Analysis 27
 Financial and Economic Analysis:
 Since reliable cost estimates are
fundamental to the appraisal of an
investment project it is necessary to check
carefully all cost items that could have a
significant impact on financial feasibility.
 Cost estimates cover:-
 Initial investment cost
 Cost of production
 Marketing and distribution costs
 Plant and equipment replacement costs
 Working capital requirements and
decommissioning at the end of the project life.

Project Management and Analysis 28

 Generally, the total outlays will include the following:

• Land and site development

• Buildings and civil works
• Plant and machinery
• Technical know – how and engineering fees
• Expenses on foreign technicians and training
• Miscellaneous fixed Assets
• Preliminary and capital issue expenses
• Pre – operative expenses
• Provision for contingencies
• Margin money for working capital
• Initial cash losses
 Initial Investment Cost
 Initial investment costs are the total of fixed assets (fixed
asset costs plus pre-production expenditures) and net working
capital, with fixed assets constituting the resources required
for constructing and equipping an investment project, and net
working capital corresponding to the resources needed to
operate the project totally or partially.
1. Pre-production Expenditures:
 In every industrial project certain expenditures are incurred
prior to commercial production. They are:-
i. Preliminary capital – issue expenditures: these are
expenditures incurred during the registration and formation
of the company.
Eg. Legal fees, preparation and issue of a prospectus, ad,
public announcement, brokerage commission, etc.

Project Management and Analysis 30

 Cont…
ii. Expenditures for preparatory studies: these includes expenditures
for pre-investment studies like opportunity and feasibility and
other expenses for planning the project.
iii. Other pre-production expenditures: like
- Salaries, fringe benefits and social security contributions of
personnel engaged during the pre-production period.
- Travel expenses
- Preparatory installations, such as work camps, temporary
offices and stores.
iv. Cost of trial-runs, start up and commissioning expenditures.
These include:
 Fees payable for supervision or start up operations,
 wages, salaries, social security contributions of personnel
employed,
 consumption of production materials and supplies, utilities
and other incidental start up costs.

Project Management and Analysis 31

 Land and Site Development cost

• Basic cost of land including conveyance and

other related charges.
• Premium payable on lease hold and
conveyance charges.
• Cost of leveling and development.
• Cost of leveling approach reads and internal
roads.
• Cost of gates.
• Cost of tube wells.
 Buildings and Civil Works

• The cost of the buildings and civil works depends on

the types of structures required. Mainly, buildings and
civil works cover the following:
– Buildings for the main plant and equipment.
– Buildings for auxiliary services such as steam supply,
workshops, laboratory, water supply, power house, etc.
– Non – factory buildings like lounge, guest houses, time
office, etc.
– Silos, tanks, wells, chests, basins, cisterns hopers, bins and
other structures which are necessary for installation of the
plant and equipment
– Garages
– Sewers, drainage, etc.
– Other related engineering works.
 Plant and Machinery

• In a project undertakings, the cost of plant and

machinery constitute the major component of the
project cost, & it consists of the following:
• Cost of imported machinery: It is the total of (i) FOB
(free on board) value, (ii) shipping, freight, and
insurance cost, (iii) import duty, and (iv) clearing,
loading, unloading, and transportation charges.
• Cost of indigenous machinery: it consists of (i) sales
tax, and other taxes, if any, and (ii) transportation
charges to the site.
• Cost of stores and spares.
• Foundation and installation charges.
 Production Cost
 It is essential to make realistic forecasts of production
and manufacturing costs for a project proposal in
order to determine the future viability of the project.
 Production costs should be determined for the
different levels of capacity utilization. The production
costs are classified into four major categories. They
are:
 Factory costs
 Administrative overhead costs
 Depreciation and cost of financing
 Operating cost (the sum of factory and
administrative overhead costs).

Project Management and Analysis 35

 Marketing Costs:
• Marketing costs comprise the costs for all marketing
activities and may be divided into direct marketing
costs and indirect marketing costs.

 Direct marketing costs – are costs for packaging and

storage, sales, product advertisement, transport and
distribution costs.

 Indirect marketing costs – are costs related to

marketing department. They are salaries for
personnel, materials and communication, market
research, public relation and promotional activities.
Project Management and Analysis 36
Thanks !!