Chapter One

Introduction

What is a project?

1
 What is a project?

Organizations perform work

Work generally could be classified into either operations or
projects, although in some cases both of them may overlap
Both operations and projects share many characteristics in
common like:
 People perform both the activities.
 Both are constrained by limited resources.
 Both are planned, executed, and controlled.

2
Cont….
However, operations and projects differ primarily in
their repeatability.
Operations are ongoing and repetitive whereas
projects are temporary and unique.
A project is a unique endeavor to produce a set of
deliverables within clearly specified time, cost and
quality constraints.

3
Projects are different from standard business
operational activities as they
 Are unique in nature: They don’t involve repetitive
processes
 Every project undertaken is different from the
last
 Have a defined timescale: projects have a clearly
specified start and end date
 Have an approved budget: projects are allocated a
level of financial expenditure

4
Examples of projects could include:
Developing a new product or service.
Effecting a change in structure, staffing, or style of an
organization.
Developing a new or modified information system.
Implementing a new business procedure or process.

5
What is Project management?
is the application of knowledge, skills, tools, and
techniques to project activities to meet project
requirements.
N.B :Project management is accomplished through the
use of the following 5 processes:
 Initiation Controlling and
 Planning Closure.
 Execution

6
 Project and Plan

The hierarchical relationship among development plans,

programs, tasks, and work packages is depicted below:
Development Plans
Programs
Projects
Tasks
Work Packages

7
Is there d/ce b/n projects and programs ?
A project refers to an investment activity where
resources are used to create capital assets, which
produce benefits over time and has a beginning and an
end with specific objectives.
A program is an ongoing development effort (plan)
involving a number of projects.
For instance, a health program may include a water
project as well as construction of a health center; both
aimed at improving the health of a given community
that previously lacked easy access to these essential
facilities.
8
Development plans
 Most forward looking (futuristic)
 Broad and require systematic thinking, preparation
and appraisal
 Attempts to bring welfare in the society

Programs:
 Derived from development plans
 Exceptionally large with long term objectives
 Explores specific area with broader scope

9
Projects:

 Derived from a program

 Unique investigative tool
 A development activity with specific objectives
 Funded by a program
 An implementation element (entity
Tasks:
 Work elements under a project
 Specific approaches for doing things
 Set of activities comprising a project

10
Interdepence b/n plan and project
Sound development plans require good projects, just
as good projects require sound planning. The two are
interdependent.
 Realistic planning involves knowing the amount that
can be spent on development activities each year and
the resources that will be required for particular kind
of project.

11
Cont….
 Projects aim mainly at increasing the production of
goods and services, which are fundamental
components of people’s welfare, and the main
objective of any development effort is, of course, to
advance social well-being.

12
Differences:
PROGRAMS
PROJECTS
 General objectives
 specific objectives
 No specific project areas
 Specific project areas
 No Specific beneficiaries
 Specific beneficiaries group group
 Clearly determined and  No clear and detailed
allocated funds financial resource allocation
 Specific lifetime  No specific lifetime

13
Similarities:

Projects and programs have similar characteristics in a

way that both are:
 Having objectives;
Requiring financial, human, material, etc inputs (or
resources);
Generating outputs, (goods/services), of value;
Serving as instruments for the execution of
development plans in order to boost/increase the
national economy.

14
10 Q
T E R
A P
Thank C H
you
End of chapter one
O F E
N D O N
E

15
Chapter Two
The Project Cycle

What is project Cycle?

 The way in which projects are planned and carried out
follows a sequence that has become known as the
project cycle.
 The cycle starts with the identification of an idea and
develops that idea into a working plan that can be
implemented and evaluated.

16
Project life cycle acc to World Bank
the first basic model of a project cycle developed by
Warren. C. Baum in 1970 was by then adopted by the
World Bank as a project cycle
Initially, this model had recognized only four main
stages in the project cycle, namely:
• Identification
• Preparation
• Appraisal and Selection
• Implementation

17
Cont…….
 Later in 1978, the author has added additional two
stages called “Negotiation” and “Evaluation”.
1. Identification :
The first stage in the project cycle and in the planning
process is to find potential projects.
The sources of projects/idea may be one or more of the
following:
 resource based
 market based/dd based

18
Cont…..
 availability of technical specialists and local
leaders.
2. Preparation/formulation:
 At this stage, the project is being seriously considered
as a definite investment action.
 covers the establishment of commercial, technical,
institutional, financial, and socio-economic feasibility.
 Decisions have to be made on the scope of the project,
location and site, soil and hydrological requirements,
project size .
19
3.Appraisal and Selection:

 re-examine every aspect of the project plan and

determine whether the proposal is appropriate and
sound or not before large sums are committed.
Appraisals should cover at least seven aspects of a
project, each of which must have been given special
consideration during the project preparation phase:
A. Technical :verifying whether what is proposed will
work in the way suggested or not.

20
Cont…
B. Financial: requirements of money needed by the
project have been calculated properly
 their sources are all identified
 reasonable plans for their repayment are made
where necessary.(verify all)
C. Commercial:: the way the necessary inputs for the
project are conceived to be supplied is examined and
the arrangements for the disposal of the products are
verified.

21
Cont…
D. Incentive: the appraisers see to it whether things are
arranged in such a way that all those whose
participation is required will find it in their interest to
take part in the project, at least to the extent envisaged
in the plan.
E. Economic: the appraisers here try to see whether
what is proposed is good from the viewpoint of the
national economic development interest.

22
Cont….
F.Managerial: this aspect of the appraisal examines if the
capacity exists for operating the project and see if those
responsible ones can operate it satisfactorily. Moreover, it
tries to see if the responsible are given sufficient power
and scope to do what is required
On the basis of an appraisal report, decisions are made
about whether to go ahead with the project or not.
The appraisal may also change the project plan or
develop a new plan, that is, comment made at the
appraisal stage frequently give rise to alternations in the
project plan (project appraisal).
23
Cont……
G.Organizational: the appraisers examine the project it
is organized internally and externally into units,
contract, policy, institution, etc so as to allow the
proposals to be carried out properly and to allow for
change as the project develops
After appraisal, the viable/workable project proposals
are chosen for implementation on the basis of the
priorities of the stakeholders and the available
resources.

24
4.Negotiation and Financing :

Once the project to be implemented is agreed on, for

donor funded projects, discussions are held on
funding and associated aspects of funding such as
conditions for grants, repayment period, interest rates
on loans, flow of funds, contributions from
stakeholders, and whether there is co-financing or not.

25
5.Implementation:

 The objective of any effort in project planning and

analysis clearly is to have a project that can be
implemented to the benefit of the society.
 Thus, implementation is, perhaps, the most
important part of the project cycle.
 In this stage, funds are actually disbursed to get the
project started and keep running.
 A major priority during this stage is to ensure that the
project is carried out in the way and within the period
that was planned.
26
Cont….
Some of the aspects of implementation that are of particular
relevance to project planning and analysis are the following:
 The first is that, the better and more realistic a project plan is, the
more likely it is that the plan can be carried out and the expected
benefits realized.

 The second is that, project implementation must be flexible.

 Circumstances will change and project managers must be able to
respond intelligently to these changes.
 The common ones are: technical changes (soils, water logging, and
nitrogen application); price changes; economic policy and
environmental changes; political changes, etc. and these all will alter
the ways in which projects should be implemented.
27
6.Evaluation:

 The final phase in the project cycle is evaluation.

 Once a project has been carried out, it is often useful,
(though not always done), to look back over what took
place, to compare actual progress with the plans, and
to judge whether the decisions and actions taken were
responsible and useful.

28
Cont…..
 Evaluation is not limited only to completed projects.
 It is a most important managerial tool in on-going
projects and rather, formalized evaluation may take
place at several times in the life of a project
 Evaluation may be undertaken when the project is in
trouble as the first step in a re-planning effort.

29
Cont….
Evaluation can help not only in the management of
the project after the initial phase, but also help in the
planning of future projects.

Who evaluates the project?

1. Project’s management unit and etc

30
Project life cycle acc toUNIDO
The UNIDO has established a project cycle comprising
the following three distinct:-
1. The pre-investment phase
2. The investment phase, and
3. The operating phase.

31
1.The pre-investment phase:

According to the UNIDO manual, the pre-investment

phase comprises several stages:-
Identification of investment opportunities
(opportunity studies)
Analysis of project alternatives and preliminary
project selection as well as project preparation (pre-
feasibility and feasibility studies), and
Project appraisal and investment decision (specialized
appraisal reports)

32
A. Opportunity Studies

 It should analyze:
 Natural resources
 The existing agricultural base (it may be the basis for agro-
industries)
 Future demand for consumer goods
 Imports substitution and export possibilities
 Environmental impacts (mandatory or non-revenue
producing projects)
 Expansions of existing capacity
 Manufacturing sectors (successful in other countries)
 Diversification
33
Cont….
B. Pre-Feasibility Studies
 The project idea must be elaborated in a more
detailed study.
 However, formulation of a feasibility study that
enables a definite decision to be made on the project is
a costly and time-consuming task.
 Therefore, before assigning larger funds for such a
study, a further assessment of the project idea might
be made in a pre-feasibility study.

34
Cont……
 This is to see if:
All possible project alternatives are examined,
The project concept justifies detail study,
All aspects are critical and need in-depth investigation,
and
The project idea is viable and attractive or not.
A pre-feasibility study should be viewed as an
intermediate stage between a project opportunity study
and a detailed feasibility study, the difference being in the
degree of detail of the information obtained and the
intensity with which project alternatives are discussed.
35
C. Feasibility Studies

 A feasibility study should provide all data necessary for

an investment decision.
 The commercial, technical, financial, economic, and
environment prerequisites for an investment project
should, therefore, be defined, refined/advanced and
critically examined based on alternative solutions
already reviewed in the pre-feasibility study.

36
D. Appraisal Report

 When a feasibility study is completed, the various

parties will carry out their own appraisal of the
investment project in accordance with their individual
objectives and evaluation of expected risks, costs, and
gains.
2.The Investment/implementation Phase
 The investment phase can be divided into the
following stages:
 Establishing the legal, financial, and organizational
framework/structure.
37
Cont…..
 tendering, evaluation of bids, and negotiations
 Technology acquisition and transfer
 Detailed engineering design and contract, including
tendering, evaluation of bids and negotiations
 Acquisition of land, construction work and installation
 Pre-production marketing, including the securing of
supplies and suppliers and setting up the
administration of the firm.
 Recruitment and training of personnel
 Plant commissioning and start-up
38
3.The Operating Phase

 The problem of the operating phase needs to be

considered from both a short and a long-term view
point.
 problems may arise concerning such matters as the
applications of production techniques, operation of
equipment, or inadequate labor productivity owing to
lack of qualified staff and labor(short term)
 The long-term view relates to chosen strategies and
the associated production and marketing costs as well
as sales revenues.

39
Cont…EN
D
OF O U
CH K Y
AAPN
T H T ER
TW
O
40
CHAPTER THREE
PROJECT IDENTIFICATION

Project Identification:- is the process of searching for and

subsequently finding potential projects that could feasibly
generate benefits in excess of costs accruing to the society and
contributing towards the attainment of specified development
objectives.
PRE-IDENTIFICATION

 Involves surveying, reviewing, inventorying, and analysis of

strategies and policies, data about natural resources, and socio-
economic variables.
 This stage is a synonym to opportunity study under the UNIDO
cycle, which is very important phase in project planning.
41
PROJECT IDENTIFICATION

 The search for promising/hopeful project ideas is the first step

towards establishing a successful venture.
 The key to success lays in getting into the right business at the
right time.
SOURCES OF PROJECT IDEAS
1. Macro Source of Project Ideas
 Among the various institutions, and sources, the following are
the most important ones in developing countries at the macro
level:
 Federal/central or Regional Government
 Bilateral and Multilateral Agreement
 International Development Agencies.
42
Cont…
In general, in developing countries, the government
remains to be the major source of project for the
reason that it:
 Has the necessary resource for the task
 Has unlimited access to data and information
 Has the required facilities to conduct survey,
studies and reviews
 Is fully familiar with the development objective
priorities and strategies, i.e.

43
Cont…
 the development goals, priorities, and strategies often
are not clear to private groups. [Ambiguity exists
regarding the development goals or it may not be in
their best interest]
Specifically, project ideas emerge from the following
macro sources:
 At the macro-level, project ideas can also originate
from multilateral or bilateral agreements, development
agencies, and as a result of regional or international
agreements in which the country participate

44
Cont….
 Unusual events such as droughts, floods, earthquakes,
hostilities
 Constraints on the development process due o
shortage of essential infrastructure facilities, problems
in the balance of payments, etc.
 General surveys, resource potential surveys, regional
studies, master plan, and statistical publications,
which indicate directly or indirectly investment
opportunities

45
Micro Source of Project Ideas

At the micro-level, many institutions/entities could

generate project ideas, among which the following are
the main ones:
 Private and Public Enterprise
 Local groups or Organizations
 Consumer groups and Associations
 Financial Institutions/ Credit Associations
 Cooperatives, Farmers’ Unions, etc
 New technology Suppliers.

46
Cont…
There are quite diverse micro-sources of project ideas
that emanate from:
 The identification of unsatisfied demand or needs
 The existence of unused or underutilized natural or
human resources and the perception of opportunities
for their efficient use
 The need to remove shortages in essential materials,
services, or facilities that constrain development efforts
 The initiative of private or public enterprises in
response to incentives provided by the government
47
Screening Potentially Promising Ideas

 Once a list of project ideas has been put forward, the

first step is to select one or more of them as potentially
promising.
 This, calls for a quick preliminary screening by
experienced professionals who could also modify some
of the proposals.
During the preliminary screening to eliminate ideas, it
is required to look into the aspects such as:
A. Compatibility with the promoter

48
Cont….
B. Consistency with government priorities
C. Availability of inputs
D. Adequacy of market
E. Reasonableness of costs
F. Acceptability of risk level
During preliminary selection, the analyst should
eliminate project proposals that:-
 Are technically unsound and risky;
 Have no market for the output;

49
Cont…
 Have inadequate supply of inputs;
 Are very costly in relation to benefits;
 Assume over-ambitious sales and profitability.
As a result of the preliminary screening exercise,
- a project profile,
- an opportunity study report , or
- an identification study report, as appropriate, is
prepared showing which project alternatives should be
rejected and which ones may be advanced to the next
stage.
50
Project Idea Generation Process

*Survey & Review of Endowments and Facilities

(infrastructure):Surveying, reviewing and analysis of
existing policies, resource endowments, and socio-
economic variables.
 Natural resource: review of the natural resource
endowments of the country.
 Human resource : review of educational standard and
facilities

51
Cont…
 Socio-economic variables : review of various socio
economic factors such as :
 Housing facilities & standard
 Utilities services
 health and nutrition services
 income distribution
* Field survey and interview:
 Asking people what goods or services they want in
order to identify their unsatisfied needs.
 Asking people what their problems are.
52
Cont….
*Observing and analysis of prevailing situation:
 Observing and examining current demand & supply
situation for goods/services
 Examining past& future trends for goods and services
 Observing possibilities for improvements/ quality &
quantity
 Observing opportunities & threats in the invention &
introduction of new technology

53
Cont…
Feeling of feasibility:
 The observation studies, discussions, etc made in accordance
with the above manner could ultimately lead to the
generation of project ideas.
 The individuals or entities generating the idea develop a kind
of feeling that the project ideas could be feasible.
 Those project ideas that seem to be feasible would then
become the basis for identification of potential projects that:
 Could be thoroughly investigated & assessed
 Need be supported by tangible and factual evidences.

54
STEPS IN PROJECT
IDENTIFICATION
Step 1: Generation of project ideas.
Step 2: Screening project ideas: giving priorities based
on resources, compatibility to objectives, potential to
enhance competitiveness, and value adding in the
society.
Step 3: Identification of candidate projects passing the
screening criteria
Step 4: Propose for pre-feasibility/ feasibility studies

55
PROBLEMS IN PROJECT IDENTIFICATION

 Ambiguity about the development objectives of the

country:
 People may not clearly identify development goals
 development goal may not be well communicated
 may not be in the best interest of units or groups
 may not get full hearted acceptance from the public
 Priority issues in the existing development objectives:
 Conflict regarding the priorities set
 opposing views may result in lack of interest &
commitment
 Differences in views regarding critical aspects of priority
56
Cont…
 Limited information and data and obstacles in
data/information flow and accessibility:
 Data and information flow problem
 accessibility of data flowing
 limited data& information
 data may not be dependable(reliable) to use

57
Cont….
RE E
U TH
O
Y PTER
N K HA
AF C
D HO
EN T

58
 CHAPTER 4
PROJECT PREPARATION (FORMULATION)

MARKET 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.
This in other words means determining the
marketability of the product or the service of the
project under consideration.
 Different techniques of demand forecasting are used
in analyzing the availability of market for the products
and assessing the level of demand.
59
Cont…
 The study of market and demand analysis, being the
first in project preparation, has the following main
objectives:
 To collect, analyze, and report data about a specific
market situation
 To obtain insight about the target market structure
 To identify customers needs and behavior in the
market.
 To design the marketing mix fit in the context
 To identify available distribution channels and etc
60
Cont…
Market and Marketing Concepts:
 It is a locus of all potential customers involving in exchange of values
to satisfy their needs.
 It channels/transfers resources from one unit to another unit (entity)
in a given context.
 Market participants may be described as :
i. Producers of inputs/outputs
ii. Sales agents, distributors (wholesalers and retailers), and
commission brokers.
iii. Transportation agents (distribution channels)
iv. Competitors and partners
v. consumers
vi. regulators
61
Cont…
 Elements of the Commercial dimension in project
preparation:
 Market Research: the first & basic task in any market
and demand analysis is to generate relevant
information useful for doing the subsequent tasks.
 Marketing Plan and Budget: A plan of action and
budget prepared on the basis of the results of the
marketing research.

62
Cont..
 Projection of Sales Revenue
 The projection of sales revenue is essentially an
extension of marketing research, (i.e. it is made in
light of the outputs in the market and demand
analysis).
 on the basis of which, the project’s sales will be
developed in terms of specific sales volume expected
during the different periods after the project goes into
production.

63
Cont…
 Factors to be considered in Forecasting sales:
 The following items affect the size of sales revenue:
 Plant capacity and production program
 marketing strategies
• Expenditure
• Mixes (4Ps)
• Competitive strategy (Cost, quality, delivery performance, and
flexibility and customer service)
 Production technology : capital Vs labor intensive, computerized
Vs manual, etc.
 project life : estimated economic life
 market price of product(s): expected selling price
64
 Cont…
 Sales Value(Revenue):
 The alternative in determining the amount of sales revenue
should be identified as follows:
i. Gross sales value
ii. Sales tax amounts
iii. Sales value net of taxes.
 Marketing Costs:
 In addition to sales revenue, the associated marketing costs
should be estimated and accounted for in terms of the following
components:
i. Variable-advertisement, promotion, salesperson salaries etc.
ii. Fixed
65
 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.
 A wide range of forecasting methods is available to the
market analyst.
 These may be classified in two categories as shown below:
Qualitative methods: These methods rely essentially on
the judgment of experts to translate qualitative
information into quantitative estimates. Examples in
these groups are :
66
 Cont…
Expert opinion method: this method calls for the
pooling of views of group of experts on expected future
sales and combining them into a sales estimate.
 The major advantage of this method is the pooling of
expertise knowledge in the forecasting process.
 However, the accuracy of the forecast will depend on
the care and experience of the people providing the
inputs.
 The reliability of this technique is questionable.

67
 cont…
 Delphi method: this method involves converting the
views of a group of experts, who do not interact face-
to-face, into a forecast through an iterative process; it
is used for eliciting/obtaining the opinions of a group
of experts with the help of a mail survey.
 The processes may include the following steps:
i. A group of experts is sent a questionnaire by mail
and asked to express their view.

68
 Cont…
i. The response received from the experts are
summarized without disclosing the identity of the
experts, and sent back to the experts, along with a
questionnaire meant to probe/get further the
reasons for extreme views expressed in the first
round.
ii. The process may be continued for one or more
rounds till a reasonable agreement emerges in the
view of the experts.

69
Cont…
 Delphi method appeals to many organizations for the
following reasons:
i. It is intelligible/clear to users
ii. It seems to be more accurate and less expensive than
the traditional face-to-face group meetings.
iii. However, it may be time taking for reaching on
common consensus and hence, the final estimate.

70
 Quantitative methods:
 uses a formal mathematical method to fit cost
functions to past data observations,
 Examples include Time series analysis, Regression
(correlation) analysis, moving average, exponential
smoothing etc.
TREND PROJECTION METHOD (TIME SERIES
ANALYSIS):
 Time series analysis forecasts based on an analysis of
how variables of interest have moved historically over
the past periods
71
Cont…
 It is more suitable when changes have a certain pattern
and the same pattern is expected in the future too.
 Time series analysis is becoming a very simple task
with advancement of computer spreadsheet
technologies.
 When the trend projection method is used, the most
commonly employed relationship is the linear
relationship,
Y=a + bx

72
Cont…
 Y= demand for the year (dependent variable)
 x=time variable (independent variable)
 a=intercept of the relationship
 b=Slope of the relationship

 b= ∑xy – nxy
∑x2 – nx2
 a= y – b(x)

73
Cont…
Illustration:
Consider the following sales data for product A for the
past 14 years.

74
Cont….
 Required:
A. State the sales forecast equation/demand function.
B. Forecast sales for the next 7 years.
Solution:
 For purpose of time series analysis, the actual year
(time) is converted into year for analysis

75
Cont…

76
Cont…

77
Cont…
X= ∑x/n = 91/14=6.5
Y = ∑y/n =269,000/14 = 19,214.29
b= ∑xy – nxy = 1,998,000-14(6.5)(19,214.29) = 1,096.7
∑x2 – nx2 819-14(6.5)2
a= y-bx = 19,214.29 – 1,096.7(6.5) = 12,085.74
Sales forecast equation : y=a+bx
y=12,085.74 + 1,096.7x
 Sales forecast for the next 7 years
y=12,085.74 + 1,096.7x

78
Cont…

79
 Cont…
HIGH-LOW METHOD: It uses only the
highest and lowest observation values of the
dependent and independent variables.
The demand function is estimated by using
these two points to calculate the slope
coefficient and the constant or intercept.
Slope coefficient (b) = difference between
the highest demand and the lowest demand
in the past divided by the difference between
the highest and the lowest of the
independent variable.
80
 Cont…
To compute the constant (a), we can use
either the highest or the lowest observation
of the data.
Both calculations yield the same answer
because the solution technique solves two
linear equations with the two unknowns,
the slope coefficient and the constant
because;
y=a+bx
a= y-bx

81
 Illustration:
The following observations were extracted from
12 years data

82
 Cont…
Required: Estimate the demand function
using High-Low method.
Solution:
y=a+bx
b=yb –yl / xb-xl = 220,000-50,000/4,000-
800 = 53.125
a = y-bx = 220,000-53.125 (4,000)= 7500
y=a+bx
i.e. y=7500+53.125x
83
 Cont…
 REGRESSION ANALYSIS: is a very popular demand
forecasting tool in practice.
 It involves extrapolating the past trend of demand with
identified factor affecting the demand such as income to
project the future consumption.
 It measures the average amount of change in the
dependent variable associated with a unit change in one
or more independent variables.
 There are two types of regression analysis : simple
regression (using one independent variable) and multiple
regression analysis (that uses several independent
variables). It involves

84
 Cont…
Determining the trend of consumption by
analyzing past consumption statistics and
Projecting future consumption by
extrapolating the trend.(refer other methods
of demand forecasting from different
references)

85
4.2 RAW MATERIALS & SUPPLIES STUDY
General
 An important aspect of technical analysis is concerned
with defining the materials and supplies required,
specifying their properties in some detail, and setting up
their supply program.
 There is close relationship between the study of raw
materials and supplies required and other project
formulation stages, such as definition of plant capacity,
location, and selection of technology and equipment, as
these inevitably interact with each other.
 The main basis for selection of materials and inputs is,
however, the demand analysis, the production program
and finally the plant capacity.
86
 Cont…
Objectives of Input Study:
 To determine:
i. types of raw materials and supplies required
ii. Availability of basic raw material suppliers
iii. quantity of raw materials needed for the plant
iv. quality of raw materials and suppliers
available and needed
 To estimate the cost of raw materials and supplies
needed
 To develop supply programs and devise supply
marketing schemes.
87
 cont…
UNIDO Approach in the study:
 The approach followed by UNIDO in the study of raw
materials and supplies is as follows:
Step 1: Classification of raw materials:
1. Raw materials (unprocessed and semi processed.
a) Agricultural products
b) livestock and forests products
c) marine products, and
d) mineral products
2.Processed Industrial materials and components
3.Factory supplies: Auxiliary materials, utilities, and spare
parts.
88
 Cont…
Step 2: Specification of requirements:
 Product characteristics and material inputs
 Requirements of raw materials and factory supplies.
Step 3: Check Availability and supply of the raw
materials
Step 4: Supply marketing and supply program:
 Supply Marketing, with the objective of :
a) Cost minimization
b) Risk minimization (reliable supplies sources)
c) Cultivating relations with the suppliers
d) supply program
89
 cont…
Step 5: Estimate costs of raw materials and supplies
 Unit costs, annual costs, and overhead costs.
 The approach followed by the UNIDO is adopted and each
of the aspects indicated in the above five steps is explained
next.
Step 1 .CLASSIFICATION OF RAW MATERIALS AND
SUPPLIES
1. Raw materials (Unprocessed and Semi-processed)
Agricultural products: If the basic material is an agricultural
product, first the quality of the product must be identified.
 .Assessment of the quantities currently and potentially
available may be a cardinal and/or functional feature in pre-
investment studies involving the use of agricultural
products.
90
 Cont…
Marine Products: The major problem in marine-based
raw materials is to assess the potential of availability,
the yields, and cost of collection.
 Availability of marine products may not only depend
on ecological factors, but also on national policies and
bilateral or multilateral agreements. (Fishing Quotas)
2. Processed Industrial materials and
Components:
 Such inputs can generally be classified under:
• Semi-processed materials, and
• Manufacturing parts: components for assembly type
and engineering goods industry.
91
 Cont…
3. Factory Supplies
A. Auxiliary Materials: All manufacturing
projects require various auxiliary materials
and utilities summed to be factory supplies.

Example :chemicals, additives, packaging

materials, paints, and varnishes and factory
B. Utilities: A detailed assessment of the
utilities required (electricity, water, steam,
compressed air, fuel, and their efficient
disposals)
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 Cont…
can only be made after analysis and
selection of location, technology and plant
capacity. However, the general assessment of
these is a necessary part of the input study.

C. 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.
93
 Cont…
Step 2. DETERMINATION/SPECIFICATION OF
REQUIREMENTS:

In order to estimate the requirements of

materials and supplies during the future
operation of the plant, the requirement
should be identified, analyzed, and specified
in feasibility study, both quantitatively and
qualitatively.

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 Cont…
Project characteristics and material
Inputs: For a given industry, the envisaged
plant can be capital or labor intensive,
computerized or mechanized, complex or
fairly simple.
Requirements of Raw Materials and
Factory Supplies: The determination of
requirements of raw materials and factory
supplies forms the basis for the supply
program and subsequent cost estimates.

95
 Cont…
The specifications of requirements should be made in
view of (or include):
I. User Demand: Users of the produced finished goods
have their own expectations and demand that will
have implications over not only on the choice of
technology, machinery, and equipment, but also on
the type and quality of materials and inputs used.
II. Qualitative Properties: These include Physical
properties (size, dimension, form, state, etc);
Mechanical properties (formability, elasticity, fatigue,
and hardness); Chemical properties (form,
composition policy, oxidizing, etc)
96
 Cont…
Step 3: AVAILABILITY AND SUPPLY OF RAW
MATERIALS:

A feasibility study must show how the

materials and inputs required will be
provided.
 Final input requirement will be determined
only after the plant capacity, technology,
and equipment to be used are defined.

97
 Cont…
Step 4: SUPPLY MARKETING AND SUPPLY
PROGRAM:
An enterprise acts as a buyer on supply
markets when purchasing required raw
materials and factory supplies and a seller in
the markets for finished goods/services.
Supply Marketing: The objective of supply
marketing are basically cost minimization,
risk minimization (by identifying reliable
suppliers), and creating better relationships
with suppliers. 98
 Cont…
Cost Minimization: Input costs can be
reduced by selecting appropriate suppliers and
by choosing a proper volume and frequency of
the orders,( Economic order quantity/size).
Minimization and reliability of suppliers:
Risk reliability with regard to quantity, quality,
deadlines (schedule), and prices is significant
for the entire manufacturing process. (Late
deliveries, lack of quality, or poor maintenance
services negatively influence the projects
activities).
99
 Cont…
Cultivating relations with suppliers:
Purchases should be focused not only on
acceptable prices, but also on establishing
smooth, productive, and long-term relations
with the suppliers.
Purchasing prices and conditions largely
depend on the bargaining power of the project
and its management. It is essential to identify
possible supply alternative, suppliers, and the
quantities to be purchased from each should
be determined in the study.
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 Cont…
Supply Program: Supply program is needed to
show how supplies of materials and inputs will
be secured.
 Cost estimates should be based on the supply
program presented. A supply program should
deal with:
i. Identification of supplying sources and
suppliers
ii. Agreement and regulations
iii. Quantities and qualities
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 Cont…
Iv Consignments
v Means of transport
Vi Storage
Vii Risk assessment.
In the identification of supplier,
consideration should be given to:
 geographic location,
 ownership,
 main activities,
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 Cont…
financial strength and profitability,
production capacity, and business experience
with the product.
The types of agreement, such as long term
contracts and license agreements should be
presented.
Letters of intent regarding supply contract
and obligation; and agreements such as
period of validity, payment terms, currency
conditions, and guarantees should be
outlined. 103
 Cont…
Step 5: COST OF RAW MATERIALS AND
SUPPLIES:
Unit costs: Not only the availability but also the
unit costs of basic materials and factory supplies
have to be analyzed in detail, as this is a critical
factor for determining project economies.

 In the case of domestic materials, current prices

have to be viewed in the context of past trends
and future projection of the elasticity of supply.

104
 Cont…
For imported material inputs: prices
(including costs, insurance, and freight)
should invariably be adopted together with
 Clearing charges (including loading, port
charges, tariffs, local insurance, and taxes),
and cost of internal transport to the plant.

The prices of imported inputs generally

fluctuate and depend on international market
situations.
105
 Cont…
Overhead Costs of Suppliers: When
estimating material and input requirements
by project components, the project planner
has to plan not only at the level of
production cost centers, but also at the level
of service, administration and finance, and
sales cost centers.
Thus, estimation of suppliers and their costs
should be made.

106
 Cont…
Location, site, and environmental impact
assessment

Location refers to a fairly broad area like a

city, an industrial zone, or a coastal area;
whereas site refers to a specific piece of land
where the project would be set up.

107
 Cont…
Dimensions for Location and Site selection:
Traditional:
Accessibility to market
Accessibility to raw material sources
Availability of infrastructure services (like
transportation) and Utilities

108
 Cont…
New Dimensions Added (Public policies):
Level of urbanization and implications to
bring balanced development among
localities
Regionalization and Decentralization policy
Investment policy and Incentives
Population concentration and impacts on
Migration
Environmental impacts and pollutions due
to over concentration
109
 LOCATION AND SITE SELECTION ASPECTS:

 In Location and site selection, the following considerations

should be made:

 The choice of location should be made from a fairly wide

geographical area, within which several alternative sites can be

considered.

 Within a recommended location one or more specific project

sites should be identified and assessed in detail.

110
 Cont…
 For each project alternative, the environmental impact of erecting and

operating the industrial plant should be assessed.

Location Analysis

 The choice of suitable locations require an assessment of, among others,

 Market and marketing aspects

 The availability of critical project inputs, such as:

I. Raw materials

II. Factory supplies

111
 Cont…

 Technical projects requirements

 The type of industry

 Technology and process

 Characteristics of products or outputs

 Size of the plant

 Organizational requirements and management structure.

112
The Natural Environment

Climatic Conditions:

temperature,
rainfall,
flooding,
dust,
fume and other factors for
different locations.

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