Factors considered in technical analysis, Factors Affecting Selections of Locations
Technical aspects relate to the production or generation of the project output in the form of goods and services from the projects inputs. Technical analysis represents study of the project to evaluate technical and engineering aspects when a project is being examined and formulated. It is a continuous process in the project appraisal system which determines the prerequisites for meaningful commissioning of the project.
Aspects of Technical Analysis
Technical analysis broadly involves a critical study of the following aspects, viz.,
1) Selection of Process/ Technology: For manufacturing a product, more than one process/technology may be available. For example, steel can be manufactured either by the Bessemer process or by the open-health process. Cement can be manufactured either by the wet process or by the dry process.
The choice of technology also depends upon the quantity of the product proposed to be manufactured. It the quantity to be produced is large, mass production techniques should be followed and the relevant technology is to be adopted. The quality of the product depends upon the use to which it is relevant technology is to be adopted. The quality of the product depends upon the use to which it is meant for. A product of pharmaceutical grade or laboratory grade should have high quality and hence sophisticated production technology is required to achieve the desired quality. Products of commercial grad do not need such high quality and the technology can been chosen accordingly.
A new technology that is protected by patent rights, etc., can be obtained either by licensing arrangement or the technology can be purchased outright. Appropriate technology: A technology appropriate for one country may not be the ideal one for another country. Even within a country, depending upon the location of the project and other features, two different technology may be ideal for two similar projects set up by two different firms at two different locations. The choice of a suitable technology for a project calls for identifying what is called the ‘appropriate technology’.
The term ‘appropriate technology’ refers that technology that is suitable for the local economic, social and cultural conditions.
2) Scale of operations: Scale of operations is signified by the 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 at by an analysis of capital and operating costs as a function of the plant size. Though the economic size of the plant for a given for a given project can be theoretically arrived at by above process, the final decision on the plant size is circumscribed by a number of factors, the main factor being the promoter’s ability to raise the funds required to implement the project. If the funds required implementing the project as its economic size is beyond the promoter’s capacity to arrange for and if the economic size is too big a size for the promoter to manage, the promoter is bound to limit the size of the project that will suit his finance and managerial capabilities. Whenever a project is proposed to be to be set up at a size blow its economic size, it must be analyzed carefully as to whether the project will survive at the proposed size (which is below the economic size). Performance of existing units operating at blow economic size will throw some light on this aspect.
3) Raw Material: A product can be manufactured using alternative raw materials and with alternative process. The process of manufacture may sometimes vary with the raw material chosen. If a product can be manufactured by using alternative raw materials, the raw material that is locally available may be chosen. Since the manufacturing process and the machinery/requirement to be used also to a larger extent depend upon the raw material, the type of raw material to be used should be chosen carefully after analyzing various factors like the cost of different raw materials available, the transportation cost involved, the continuous availability of raw material , etc. Since the process of manufacture and the machinery/ equipments required depend upon the raw material used, the investment on plant and machinery will also to some extent depend upon the raw material used, the investment on plant and machinery will also to some extent depend upon the raw material chosen. Hence the cost of capital investments required on plant and machinery should also be studied before arriving at a decision on the choice of raw material.
4) Technical Know-How: When technical know-how for the project is provided by expert consultants, it must be ascertained whether thee consultant has the requisite knowledge and experience and whether he has already executed similar projects successfully. Care should be exercised to avoid self-styled, inexperienced consultants. Necessary agreement should be executed between the project promoter and the know-how supplier incorporating all essential features of the know-how transfer. The agreement should be specific as to the part played by the know-how supplier (like taking out successful trial run, acceptable quality of final product, imparting necessary training to employees in the production process, taking out successful commercial production, performance guarantee for a specified number of years after the start of commercial production, etc). The agreement should also include penalty clauses for non-performance of any of the conditions stipulated in the agreement.
5) Collaboration Agreements: If the project promoters have entered into agreement with foreign collaborators, the terms and conditions of the agreement may be studied as explained above for know-how supply agreement.
Apart from this, the following additional points the deserve consideration:
(i) The competence and reputation of the collaborators needs to be ascertained through possible sources including thee Indian embassies and the collaborator’s bankers.
(ii) The technology proposed to be imported should suit to the local conditions. A highly sophisticated technology, which does not suit local conditions, will be detrimental to the project.
(iii) The collaboration agreement should have necessary approval of the Government of India.
(iv) There should not be any restrictive clause in the agreement that import of equipment/machinery required for the project should be channelized through the collaborators.
(v) The design of the machinery should be made available to the project promoter to facilitate future procurement and/or fabrication for machinery in India at a later stage.
(vi) The agreement should provide a clause that any dispute arising out of interpretation of the agreement, failure to, comply with the clauses contained in the agreement, etc., shall be decided only by courts within India.
(vii) It must be ensured that the collaboration agreement does not infringe upon any patent rights.
(viii) It is better to have a buy–back arrangement with the technical collaborator. This is to ensure that the collaborator would be serious about the transfer of correct know-how and would ensure quality of the output.
6) Product Mix: Customers differ in their needs and preferences. Hence, variations in size and quality of products are necessary to satisfy the varying needs and preferences of 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 requirements, which is very essential for the survival and growth of any organization.
For example, a plastic container manufacturing industry can be produced according to the market requirement. This will give the unit a competitive edge.
7) Selection and Procurement of Plant and machinery
Selection of machinery: The machinery and equipment required for a project depends upon the production technology proposed to be adopted and the size of the proposed. Capacity of each machinery is to be decided by making a rough estimate, as under; thumb rules should be avoided.
i) Take into consideration the output planned.
ii) Arrive at the machine hours required for each type of operation.
iii) Arrive at the machine capacity after giving necessary allowances for machinery maintenance/breakdown, rest time for workers, set up time for machines, time lost during change of shifts, etc.
iv) After having arrived at the capacity of the machinery as above, make a survey of the machinery available in the market with regard to capacity and choose that capacity which is either equal to or just above the capacity theoretically arrived at.
In case of process industries, the capacity of the machines used in various stages should be so selected that they are properly balanced.
Procurement of Machinery
Plant and machinery form the backbone of any industry. The quality of output depends upon the quality of machinery used in processing the raw materials (apart from the quality of raw material itself). Uninterrupted production is again ensured only by high quality machines that do not breakdown so often. Hence no compromise should be made on the quality of the machinery and the project promoter should be on the lookout for the best brand of machinery available in the market. The performance of the machinery functioning elsewhere may be studied to have a first hand information before deciding upon the machinery supplier.
The efficiency of a manufacturing operation depends upon the layout of the plant and machinery. Plant layout is the arrangement of the various production facilities within the production area. Plant layout should be so arranged that it ensured steady flow production and minimizes the overall cost.
The following factors should be considered while deciding plant-layout:
i) The layout should be such that future expansion can be done without much alteration of the existing layout.
ii) The layout should facilitate effective supervision of work.
iii) Equipments causing pollution should be arranged to be located away from other plant and machinery. For example, generator is a major source of noise pollution.
iv) There should be adequate clearance between adjacent machinery and between the wall and machinery to enable undertaking of regular inspection and maintenance work.
v) The plant layout should ensure smooth flow of men and material from on stage to another.
vi) The plant layout should be one that offers maximum safety to the personnel working inside the plant.
vii) The plant layout should provide for proper lighting and ventilation.
viii) The plant layout should properly accommodate utilities like power and water connections and provisions for effluent disposal.
8) Location of Projects: Choosing the location for a new project is to be done taking many factors into account. The study for plant location is done in two phases. First a particular region/ territory is chosen that is best suited for the project. Then, within the chosen region, the particular site is selected. Thus, we may say that there are two major factors, viz., Regional factors and site factors, to be considered.
i) Regional Factors
a) Raw Materials: Raw materials normally constitute about 50to 60 per cent of the cost of the final product. Hence, it is important that the cost of the raw material should be minimum. To procure raw material at minimum cost, the plant must be located nearer to the place where raw material is available, so that transportation cost will be reduced and the number of middle men involved in the procurement process also will be reduced.
b) Proximity to Market: If transportation of the finished product is more difficult (due to the special nature of the finished product) than transporting the raw material and also if the cost of transporting the finished product is more as compared to the transporting the raw material and also if the cost of transporting the finished product is more as compared to the transportation cost of transporting the finished product is more as compared to the transportation cost of raw material, it is advantageous to locate the plant nearer to the consumers, i.e., nearer to the market.
c) Availability of Labor: Though unemployed people are in plenty in our country, this does not mean that there will be no problem in getting the labor-force required for the project. Availability of skilled labor is what is the criterion rather than availability of unemployed who are unemployable. If the project needs skills of general nature, getting adequate skilled labor will not pose any problem if the plant is located in areas where skilled labor-force is available. People in different areas develop special skills in different activities by virtue of the work culture prevailing in their respective areas.
d) Availability of Supporting Industries: If a firm has proposed to get some of the production operations done from outside, there must be suitable industries existing in the surrounding areas to undertake such sub-contracting works. This can be seen by the existence of many ancillary industrial units surrounding major industrial establishments like BHEL, NTPC, etc.
e) Availability of Infrastructural Facilities: availability of power, water and transport facilities are the important aspects to be considered for availability of infrastructural facilities.
ii) Site Factors: After having chosen region that is comparatively more advantageous for the location of a project. For choosing a particular sit in the chosen region, considerations like cost of land, suitability of land, availability and suitability of ground water, facilities for effluent disposal, etc., are to be taken into account.
In general, industrial projects require considerable extent of land. If the unit cost of land is high, the investment required to be made on land may become prohibitively high which should be looked into.
a) Choice of Location: Decision on the choice the location for the given project is to be made after considering the points enumerated above. In view of the number of factors involved, deciding upon the project location is a complex problem. The problem is compounded further because of the existence of both tangible and intangible factors. If there are only tangible factors, the solution to the problem can be arrived at mathematical means. Arriving at a decision combining the tangible and intangible factors involve subjective estimate.
b) Choice of Location based on Tangible Factors: When tangible factors alone are considered, an ideal location is on for which the cost of setting up the project, cost of procuring raw materials, cost of processing the raw material into finished product and cost of distributing the finished product to the customers are minimum.
9) Project Scheduling: Scheduling is nothing but the arrangement of activities of the project in the order of time in which they are to be performed.
The schedule which broadly indicates the logical sequence of events would be as under:
i) Land acquisition,
ii) Sit development,
iii) Preparing building plants, estimates, designs, getting necessary approvals and entrusting the construction work to contractors,
iv) Construction of building, machinery foundation and other related civil works and completion of the same,
v) Placing order for machinery,
vi) Receipt of machinery at site,
vii) Erection of machinery,
viii) Commissioning of plant and taking trial runs,
ix) Commencement of regular commercial production.
Each of the above mentioned activities consume resources, viz., time, money and effort. The sequence of activities should be so planned as to minimize the resource consumption.