Technical Analysis HANDOUT (3)

8/6/2019 Technical Analysis HANDOUT (3)

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Project Analysis & Management Project Preparation-Technical Analysis

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II. TECHNICAL ANALYSIS

4.2 INTRODUCTION

The proposed project is analyzed from technical point of view to ascertain whether itwill be technically viable in the sense of being able to actually deliver planned products or

service with detail examinations of the resource requirement to make the project operates

efficiently. Technical analysis finds out the facility needs, suitability of production

technology, where the project will be located, availability and suitability of site, raw

materials and others such as labor availability and qualified management personnel. The

assessment is based on an outline design of system requirements in terms of Input,

Processes, Output, Fields, Programs, Procedures and etc.

4.2.1 ELEMENTS OF A TECHNICAL ANALYSIS

A technical analysis should be complete and competent enough to be used as a reliable base

for final operating decision. To this end, Considerable experience and technical expertise

are required to gather the proper information, analyze it, and reach practical conclusions.

Improper technical analysis and respective decisions made during this step may go

undetected or unchallenged throughout the remainder of the process. In the worst case,

such an error could result in the termination of a valid project or the continuation of a

project that is not technically feasible.

Thus, a technical analysis broadly involves a critical evaluation of a project in the following

key areas:

Prepared By: Firezer A AUC 1


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1. Material inputs & Utilities

2. Selection of

process/technology

3. Product mix

4. Scale of operations/plant

Capacity

5. Location and site of the

project

6. Selection and procurement of

machineries and equipment

7. structures and related civil

works

8. project layout

9. Project scheduling

1. Selection of Material inputs & Utilities

A product can be manufactured using alternative raw material and with alterative

processes. The technical analysis at this stage is primarily concerned with assessment,

identification and specification of the material requirement of a project in terms of

type, quantity, availability, supply sources, cost, etc. The technical dimension of the

analysis at this stage encompasses the availability of the required inputs in the

appropriate levels of quality and quantity. The assessment of availability involves an

evaluation of past trends for both quantity and quality of the inputs. The analysis is

also concerned with the physical movement of the inputs from their origination points

to the facilities where they will be processed. Different sources of supply are

evaluated for their quality and quantity.

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 themachinery/equipment 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 materials available, the transportation cost

involved, the continuous availability of material, the quality of materials, etc.



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Major Categories of material inputs and utilities

For analysis purpose Material input and utility may be classified into four broad

categories: (i) basic raw materials (ii) processed industrial materials and components,

(iii) auxiliary materials and factor supplies and. (iv) Utilities.

I. Basic Raw materials

Basic Raw materials (processed and/or semi-Processed) may be further classified into

four types:

A. Agricultural products: In studying agricultural products the quality must first

be examined. Then, an assessment of quantities available is required. The

questions that may be raised in this context are: What is the present marketable

surplus? What is the present area under cultivation? If there are seasonal

variations, changes in cost have to be checked.

B. Mineral products: In assessing mineral raw materials, information is required on

the quantum of exploitable deposits and the properties of raw materials. The

study provides details of the location, size, and deposits and the viability of

opencast or underground mining. In addition information should be generated on

the composition of the ore, level of importing need for beneficiation and physical,

chemical and other properties.

C. Livestock and forest products:Secondary sources of data and specific survey

on livestock and forest products may be required to obtain more reliable data on

the quantum of livestock and forest products.

D. Marine products: Assessing the potential availability of marine products and the

cost of collection is somewhat difficult. Preliminary marine operations, essential

for this purpose, have to be provided for in the feasibility study.

II. Processed Industrial Materials and Components



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Processed industrial materials and components (base metals, semi-processed

materials, manufactured parts, components, and sub-assemblies) represent important

inputs for a number of industries. In studying them the following questions need to be

answered: In the case of industrial materials, what are their properties? What is the

total requirement of the project? What quantity would be available from domestic

source? What quantity can be procured from foreign source? How dependable are the

supplies? What has been the past trend in prices? What is the likely future behavior

of prices?

III. Auxiliary Materials and Factory Supplies

In addition to the basic raw materials and processed industrial materials and

components, a manufacturing project requires various auxiliary materials and factory

supplies like chemical additive, packing materials, Paints, varnishes, oils, grease,

cleaning materials, etc. the requirements of such auxiliary materials and supplies

should be taken into account.

IV. Utilities

A broad assessment of utilities (power, water, steam, fuel, etc.) may be made at the

time of input study though a detailed assessment can be made only after formulating

the project with respect to location, technology, and plant capacity. Since the

successful operation of a project critically depends on adequacy of utilities the

following questions should be raised while conducting the input study. What quantities

are required? What are the sources of supply? What would be the potential

availability? What are the likely shortages/bottlenecks? What measures may be taken

to augment supplies? Etc.

2. Process or technology analysis

The primary purpose of this analysis is to assess and select appropriate technology

or process and to identify the right means of acquiring it.



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2.1 Selection of a 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-hearth process. Cement can be manufactured either by the wet process or by

the dry process.

In general, the choice of a technology may be influenced by several factors. Some

of the factors are:

Basic inputs: The choice of technology / manufacturing process may

sometimes vary with the raw material chosen i.e. the quality, availability and other

related special nature of inputs used in the production process. For example,

depending on the type of lime stone, Cement can be manufactured either by the

wet process or by the dry process

Plant capacity: If the quantity required to be produced is large, mass

production techniques should be followed and the relevant technology is to be

adopted.

product mix:The technology chosen must be judged in terms of the total

product-mix, generated by it, including saleable by-products

Investment costs: the acquisitions costs of a technology as well as its

effect on investment of other outlays such as machineries and production cost

over a period of time should be carefully assessed.

Age of the technology: In the choice of technology, as far as possible, thelatest technology should be chosen provided there are no other constraints.

However, in choosing the latest technology it must be seen that the technology has

been proved successful for production at factory level. Relying only on the

technology proven in the laboratory is to be avoided. Adoption of the latest



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development is preferred in order to ensure that the likelihood of technological

obsolescence in the near future, at least, is minimized.

NB: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 technologies may be ideal for two similar projects set up by

two different firms at two different location. The choice of a suitable technology for

the project calls for identifying by what is called the appropriate technology. The

term appropriate technology refers that technology is suitable for the local entomic,

social and cultural conditions. Hence, the choice of appropriate technology should be

with adequate care. Appropriate technology can by selected asking the following

questions.

Does the technology make use of the locally available raw material?

Can the technology by implemented and maintained by the locally available man

power?

Is the technology in tune with the local social cultural conditions?

Doesthe technology protect ecological balance? Etc.

2.2 Means of technology acquisition

A technology may be acquired in different ways as appropriate to the project under

preparation. The following are some of the most common means of technology

acquisition:

Technology Licensing: A technology that is protected by patent rights

etc. can be obtained by licensing arrangement. Under licensing arrangement,

the rights to use the patented technology and to get the related technical

know-how and support are mutually agreed upon between the licensor



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(technology supplier) and licensee. Provided that there are no other

constraints, getting a technology under licensing arrangement is suited when

the cost of purchasing the technology outright is huge, when there is a rapid

technological advancement in the filed with the result that there is every

possibility of the technology becoming outdated shortly and when continuous

technical support from technology supplier is needed.

Outrage purchase of technology: Technology can be purchased outright if

the cost of acquisition is affordable, if there is no likelihood of significant

improvement in technology in the foreseeable future and if the technology

can be implemented and maintained without the need for continuous support

from the seller of the technology.

Joint-venture arrangement: The supplier of technology may participate

technically as well as financially the project. Financial participation is

typically in the form of equity holding. It is argued that financial

participation may strengthen the motivation of technology supplier to

transfer improvements promptly.

3. Product mix

Customers differ in their needs and preferences. Hence variations in size, color,

shape, quality and other attributes 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.



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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.

Investment costs: adding flexibility to the production facilities is not without cost.

It involves additional cost. However, a cost benefit analysis keeping in view the long-

term benefits will indicate the need for such additional cost to be incurred.

Basic Materials: the variations of a product in color, size and quality implies a varying

raw materials. Thus, availability, quality, quantity and cost of raw materials should be

considered. For example, a plastic container manufacturing industry can be planned to

have more number of dies (principal input) of different sizes, so that goods of

different sizes can be produced according to the market requirement.

4. Scale of operation/ plant capacity

Plant capacity refers to the maximum output or volume of production attainable

through proposed project. Several factors have a bearing on the capacity decision.

Some of them are:

Input constraints: - there may be 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. Constraints of these kinds should

be borne in mind while choosing the plant capacity.

Resources of the Firm: - The resources, both 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.

Market Conditions:-The anticipated market for the product/service 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



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uncertain, it might be advantageous to start which 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-further additions to capacity may be

affected with the growth of market.

Process or Technology: the capacity, availability and appropriateness of

planned technology influence the planned production volume.

5. Location & Site Analysis

Choosing the appropriate location and site for a new project is to be done taking many

factors into account. The study for plant site is done in two phases: First a particular

region/territory is chosen that is best suited for the project. Then within the chosenregion, the particular site is selected. Thus, there are two major factors:

Location/Regional factors and factors, to be considered.

5.1 Selection of Location

The following Regional factors are to be considered in selecting the suitable

location/region with in which the proposed project is to be placed.

a. Proximity to raw materials, labour & market

Proximity to Raw material: Raw material normally covers a lion share of the

cost of the final product. Hence, it is important that the cost of the raw material

should be at possible minimum level. To acquire raw material at minimum cost, the

plant must be located nearer to the place where raw material is easily available so

that transportation cost will be reduced and the number of middle men involved in

the procurement process also will be reduced. The transportation cost will constitute

a major portion of the raw material cost if the raw material is bulky and procured

from distant places. This is the reason why sugar factories are located in sugarcane



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growing areas, cement factories are located nearer to areas where lime stone is

available and steel mills are located nearer to places where iron ore and coal deposits

are available. Another common example is brick and tile industry which is set up on

the land where clay suitable for the manufacture of brick/tile is available. If the

raw material is bulky and is imported from abroad, the ideal location of plant will be

nearer to port. Thus, when the raw material is bulky nearness to the place of

availability of raw material acts as a major deciding factor in choosing the plant

location.

Availability of labour: - Though unemployed people are in plenty in our

country, this does not mean that there will be no problem in getting the labour force

required for the project. Availability of required labour is what is the criterion

rather than availability of unemployed who are unemployable! If the project needs

labour of general skills, people can be recruited and trained to the requirement. If

the project needs labour of special skills, getting adequate labour will not pose any

problem if the plant is located in areas where the required type of labour force is

available. People in different areas develop special skills in different activities by

virtue of the work culture prevailing in their respective area. It is not always

impossible to hire skilled laborers from distant places. However, the following

difficulties may be encountered.

The laborers may demand a higher wage since they would like to be compensated for

leaving their birth place and migrating to a new location.

Continuous availability of skilled laborers may be affected.

The organization may have to provide additional benefits like housing and recreational

facilities in order to retain the laborers. However, this may lead to higher cost of

labour as well as cost of production.



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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 transportation cost of raw material, it is advantageous to locate the

plant nearer to the consumers i.e., nearer to the market. Special nature of finished

product mentioned above deserves special consideration. The finished product may

be one that is easily fragile and difficult to handle (glassware, clayware); the

finished product may be one that is perishable in short duration (cake, bread, pastry

products). Such products of special nature make it mandatory to locate the plant

nearer to the market.

b. Availability of infrastructural facilities

Availability of power, water, and transport facilities are the important aspect to be

considered under this head.

Power: - Power intensives industries should be located at places whether

regular power supply is made available. If the manufacturing process is such that

sudden power failure may disturb the manufacturing activities and may cause

considerable losses, it is always advisable to establish them in a region where

continuous and stable power supply is available. For example in plastic goods

manufacturing industries, if there is sudden power failure, the molten material in

the extruder will get cooled and solidified. After the resumption of power supply,

the extruder is required to be heated up for a considerable length of time to bring

the machine into operation. This also will result in wastage of raw material. In such

situations, if power generator is available, the production can be continued without

any interruption even if there is sudden power failure. In such cases, the cost of

generator should be included in the project cost increasing the production cost.



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Water: - If the project is going to use water in its manufacturing process, the

quality and quantity of water requirement for the project should be correctly

arrived at. Hence, the proposed project should be located at places where regular

water supply is easily available. . After having arrived at the water requirement, it

must be checked if the required quality and quantity of required water can be

obtained from the territory.

Transport Facilities: - Transport costs are incurred in two stages. Firstly, for

the transport of raw materials and fuel into the factory site and secondly for the

movement of the finished goods from the factory site. Thus, if a project is so

located that the industry is to incur additional transportation cost (which is

recurring in nature), this will increase the cost of finished product. Hence, it is

always advisable to establish a project in a region where adequate transport

facilities and connections (whether by rail, Road, Sea, inland water, or air) both

for transporting the inputs to the project and distributing the outputs of the

project to the target market are easily available at minimum cost.

C. Government Policy

Government Policies have bearing on where a particular project is to be located. In

the case of public projects, location is directly decided by the government. It may be

based on a wider policy for regional dispersion of industries.

In the case of private sector projects, together with others locations are influenced

by certain governmental restrictions and inducements. The government may prohibit

the setting up of industrial projects in certain areas, which suffer from urban

congestion, air pollution etc..

On the other hand, on the basis of the degree of industrial development in the region,

government often identifies regions which are lacking in industrial development as

backward area and others as growth centers which have potential for high growth.



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Accordingly, the Government offers many incentives in the form of capital subsidy,

sale tax concessions, etc., for industries set up in these areas with the objective of

ensuring dispersal of industrial activity throughout the country and to reduce regional

disparities in industrial development. The incentives offered by the Government can

be availed by setting up project in such notified area. However, the project promoter

should not merely get carried away by the attractiveness of the incentives and

concessions available, but should make a judicious and unbiased analysis of all other

factors. Normally such notified areas lack in infrastructure and other facilities, with

is the reason why these area remain undeveloped and industrially backward. If the

advantages out weigh the shortcomings, locations coming under such notified backward

areas can be chosen for the project.

D. Other factors

Sseveral other factors have to be assessed before reaching a location decision such

as environmental pollution, climatic conditions, etc.

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 locations study should analyze the costs

of mitigating environmental pollution to tolerable levels at alternative locations.

Necessary consent for effluent disposal is obtained from the concerned authorities.

If the effluent is of polluting nature (as in the case of leather industries, chemical

industries, paper plants etc.) there may be restriction even for the disposal of the

treated effluent if the location of the factory is nearer to water courses.

Climatic Conditions: Climatic factors (humidity, wind, sunshine, dry, hot, rainfall,

snowfall, dusts, etc.) have some influence in certain type of industries. Textile

spinning mills, for example require high humidity for the spinning of cotton yarn.

Hence places with high ranges of humidity are suitable for locating cotton-spinning



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mills. Similarly, paperboard industries find hot and dry climate more suitable since

paperboards that are in wet condition immediately after production can be sun-dried

in open atmosphere.

5.2 Selection of a Site

After having chosen a region that is comparatively more advantageous for the location

of a project, for selecting a particular site in the chosen region, considerations like

cost of land and land preparation, land suitability, suitability for future expansion.

Cost of Land: - In general, industrial projects require

considerable extent of land and the cost of land usually differs from one site to

another in the same broad location. For example,a plot of land close to a main street

costs more whereas a site away from the main street costs less. 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. Apart from acquisition cost of land, the cost of

land preparation and developments such as grading, leveling digging and other are to

be analyzed.

Land or Soil suitability:- Since industrial projects mostly involve construction ofbuildings, heavy machinery which need strong foundations, the load bearing capacity of

the soil should be sufficient to withstand the pressure. For example, Clay and black

cotton soil are not suitable because of poor load bearing capacity and because of

swelling nature when exposed to moisture.

6. Plant Machineries and Equipments

Plant machineries & Equipment form the backbone of any industry as they are real

operational assets. The quality of project out put depends upon the quality of

machinery and equipment used in processing the raw materials (apart from the quality



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of raw material itself). Hence, analyzing machineries and equipments requirement of a

project should be carefully made.

The machinery and equipment required for a project depends upon the production

technology proposed to be adopted, the size of the plant proposed, planned product

mix, investment need, availability of power (for example, If availability of power is

limited in the proposed location of the factory, care should be exercised in selecting

power intensive equipments like electric ovens, electric furnaces etc so that their

power requirements matches with the power availability.). It is also influenced by the

type of project. For a process-oriented industry, like a petrochemical unit, for

example, machineries and equipments required should be such that the various stages

are matched well.

a) The type and Capacity of each machinery is to be decided by making a rough

estimate, as under; thumb rules should be avoided.

b) Estimate the planned maximum attainable output.

c) Identify the activities or operations requiring machine service

d) Estimate the machine hours required for each type of operation taking in to

account the planned plant capacity

e) Estimate the machine capacity after giving necessary allowances for machinery

maintenance/break down, rest time for workers; set up time for machines, time

lost change of shifts etc.

f) After having arrived at the capacity of the machinery as above, make a surveyto know whether 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. Apart from the availability of the machinery the



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following points are to be given due attentions before selecting certain

machinery

Quality (performance) of the machinery- the quality of machinery has

bearing on the quality of out puts. Uninterrupted production is again ensured only

by high quality machines that do not break down so often. Hence no compromise

should be made on the quality of the machinery and the project promoter should

be on the look out for the quality machinery available in the market.

Availability of skilled manpower: -workers may not be able to operate, at

least in the initial periods; certain sophisticated equipments such as numerically

controlled machineries. While selecting highly sophisticated machinery which

requires highly skilled personnel to operate them, the availability of skilled

manpower should be studied.

Availability of spares and tools: - Along with the main machinery, adequate

numbers of tools and spares are also to be studied.

Age:- If the promoters propose to purchase second hand machinery, its

working condition, estimated future life and its value are to be ascertained

through a competent engineer.

Government policy:the import policy of the government may preclude the

import of certain machineries and equipments.

7. STRUCTURES AND RELATED CIVIL ENGINEERING WORKS

Depending on their nature structure and civil works may be divided into three

categories: (I) site preparation and development, (ii) buildings and structures, and (iii)

outdoor works.



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Site preparation and development: It refers to all physical activities and

civil works performed in association with land until it is made ready to the

planned construction works. This covers (i) grading and leveling of the site. (ii)

Demolition and removal of existing structures such as trees, houses.. (iii)

relocation of existing pipelines, cables, roads, power lines, etc. (iv) reclamation

of swamps and draining and removal of standing water,

Buildings and structures: The appropriate buildings and structures are to be

determined after having considered such factors as the nature of operation,

planned plant capacity, planned plant layout, the cost of acquiring the buildings,

size of land etcThe following are the types of buildings and other structures

that are normally required for most projects: (i) Main factory or process

buildings (ii) Ancillary building required for stores, warehouses, laboratories,

utility supply centers, maintenance services, and others (iii) administrative or

office buildings (iv) Staff welfare buildings and structures for cafeteria,

medical service buildings, guesthouses, and toilet blocks, valley ball courts,

etc...

Outdoor Works:Outdoor works include (i) supply and distribution lines for

utilities (water, electric power, communication, steam, and gas); (ii) handling and

treatment of emission, wastages and effluents; (iii) internal roads and traffic

arrangements ( truck paths, parking areas, sheds, garages, traffic signals. etc.);

(iv) outdoor lighting; (v) Enclosure and supervision (boundary wall, fencing,

barriers, gates, doors, security posts, etc.)

8. Project charts and Layout

After having determined the principal dimensions of the project-market size, plant

capacity, production technology, machineries and equipments, buildings and civil works,



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plant location & site, and supply of inputs .The project charts and layouts have to be

prepared to define the scope of the project and provide the basis for detailed project

engineering and estimation of investment needs and production costs. Project charts &

layout show the relationship among machineries, equipment, material inputs, utilities,

and buildings & other structures to facilitate smooth and economic flows of resources

and operations.

In practice, different types of project charts and layouts may be prepared. However,

the most important charts and layouts include:

General Functional Layout: It shows the general relationship between

equipments, buildings, and civil works in accordance with their uses or functional

area. In preparing this layout, the primary consideration is to facilitate smooth and

economical movement of raw-in-process, and finished goods. For example it suggests

that Go downs, workshops, and other services must be functionally situated with

respect to the main factory buildings.

Materials Flow Diagram: it presents the flow of materials, intermediate

products, filial products, by-products, scraps and emissions. It is supplemented by

quantity flow of materials.

Utility consumption layout: this show the principal consumption stage of

utilities (power; water, gas compressed air, etc) in the production system and their

required quantities and qualities.

Plant layout: The plant layout is concerned with the exact and physical

arrangements of various production facilities with in the production area. It

identifies the exact location of each piece of equipment and machineries keeping in

view of proper utilization of space, potential expansion, smooth flow of resources to

minimize production costs, safety of workers, proper lighting and ventilation,

adequate space between adjacent machineries, etc



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9. Project scheduling

Project Scheduling is nothing but the arrangement of the project activities in the

order of time in which they are to be performed keeping in view of the logical

sequence or chronological order of the activities.

The following summarized schedule broadly indicates the logical sequence of events

(for simplicity many actual activities are ignored):

activities Time required

Company registration 3 weeks

Land acquisition 5 weeks

Site development. 2 weeks

Preparing building plans, estimates, designs, getting necessary approvals and

entrusting the construction work to contractors.

4 weeks

Construction of building and other related civil works and completion of thesame.

45 weeks

Placing order for and acquiring machinery and equipment. 3 weeks

Constructing machinery foundation and Erection of machinery 3 weeks

Commissioning of plant and taking trial runs. 1 week

Commissioning of regular commercial production. 2 weeks

Each of the above mentioned activities consume resources such as time, money and

effort. The sequence of activates should be so planned as to minimize the resource

consumption. Without proper scheduling, resources are very likely to be wasted.

Hence, as a part of technical appraisal, the project promoters, sponsors and other

interested groups call for detailed project implementation schedule indicating therein

the various steps to be taken up in the Project implementation in chronological order

and time required for the completion of each stage.

Documents

Technical Analysis HANDOUT (3)