Subject: Project Management

Unit 2

Technical Analysis
While making project appraisal, the technical feasibility of the project also needs to be taken
into consideration. In the simplest sense, technical feasibility implies the adequacy of the
proposed plant and equipment to produce the product within the prescribed norms. As regards
know-how, it denotes the availability or otherwise of a fund of knowledge to run the proposed
plants and machinery.

It should be ensured whether that know-how is available with the project manager or is to be
procured from elsewhere. In the latter case, arrangement made to procure it should be clearly
checked up. If project requires any collaboration, then, the terms and conditions of the
collaboration should also be spelt out comprehensively and carefully.

In case of foreign technical collaboration, The project manager should be aware of legal
provisions in force from time to time specifying the list of products for which only such
collaboration is allowed under specific terms and conditions. The project manager, therefore,
contemplating for foreign collaboration should check these legal provisions with reference to
their projects.

In addition to above, the location of the enterprise decided after considering a gamut of points
also needs to be mentioned in the project. The Government policies in this regard should be
taken into consideration. The Government offers specific incentives and concessions for setting
up industries in notified backward areas. Therefore, it has to be ascertained whether the
proposed enterprise comes under this category or not and whether the Government has already
decided any specific location for this kind of enterprise.

Technical analysis is concerned two aspects-(a) to ensure that the project is technically
feasible in the sense that all the inputs required to set up the project are available (b) to
facilitate the most optimal formulation of the project in terms of technology, size,
location and so on. Thus, technical analysis of a project idea includes designing the
various processes, installing equipment, specifying material, and prototype testing. The
project manager has to be careful in finalizing the technical aspects of the project as the
decision is irreversible and the investments involved may be high. The project manager
has to select the technology required in consultation with technical experts and
consultants. Thus it means to ensure that the project is technically feasible or not.
While assessing the technical feasibility of the project, the following inputs covered in
the project should also be taken into consideration:

(i) Availability of land and site.

(ii) Availability of other inputs like water, power, transport, communication facilities.

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(iii) Availability of servicing facilities like machine shops, electric repair shop, etc.

(iv) Coping-with anti-pollution law.

(v) Availability of work force as per required skill and arrangements proposed for
training-in-plant and outside.

(vi) Availability of required raw material as per quantity and quality. Need for
considering alternatives, Technology selection. Sources of technology, appropriate
technology

Factors considered in technical analysis/Technical Analysis includes

1) Manufacturing Process/Technology
2) Technical Arrangement
3) Material inputs and Utilities
4) Product Mix
5) Plant Capacity
6) Location and site
7) Machinery and Equipments
8) Structures and civil works
9) Environmental aspects
10) Project chart and layouts
11) Schedule of project implementation
12) Need for considering alternatives

1) Manufacturing process/ technology- For manufacturing a product/service

often two or more alternative technologies are available. For example:
􀂾 Cement can be made either by the dry process or the wet process.
􀂾 Soap can be made by semi boiled process or fully boiled 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 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 grade 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: he choice of a suitable technology for a project is called the

‘appropriate technology. The term ‘appropriate technology’ refers that technology that
is suitable for the local economic, social and cultural conditions. 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

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technology may be ideal for two similar projects set up by two different firms at two
different locations.

Choice of technology

Choice of technology is influenced by the following factors:

• Plant capacity
• Principal inputs
• Investment outlay and production cost
• Use by other units
• Product mix
• Latest developments
• Ease of absorption

Plant capacity- Plant capacity (also referred to as production capacity) refers to the
volume or number of units that can be manufactured during a given period. Several
factors have a bearing on the capacity decision. In a developing country like India, 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. 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 uncertain, it might be advantageous
to start with a smaller capacity.
Principal inputs- The choice of technology depends on the principal inputs available
for the project. In some cases, the raw materials available influences the technology
chosen. For example, the quality of limestones determines whether the wet or dry

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 process should be used for a cement plant. It may be emphasized that a technology
based on indigenous inputs may be preferable to one based on imported inputs because
of uncertainties characterizing imports, particularly in a country like India.
Investment outlay and production cost- The effect of alternative technologies of
investment outlay and production cost over a period of time should be carefully
assessed.
Use by other units— The technology adopted must be proven by successful use by
other units, preferably in India.
Product mix— The technology chosen must be judged in terms of the total product-
mix generated by it, including saleable byproducts.
Latest developments— The technology adopted must be based on latest development
in order to ensure that the likelihood of technological obsolescence in the near future, at
least, is minimized.
Ease of absorption— The ease with which a particular technology can be absorbed can
influence the choice of technology. Sometimes a high-level technology may be beyond
the absorptive capacity of a developing country which may lack trained personnel to
handle that technology.
Technology Selection, Sources of technology
One of the basic accountabilities of the project manager is to ensure that the right
projects are selected. This includes ensuring a good fit with the company’s business
strategy, understanding the future trends in product markets and selecting the best (and
most cost effective) technology for the particular project.
Right technology can provide substantial capital and operating cost benefits. Wrong
technology can increase risk of failure.
Circumstances could be such that a technology is strategically important and a company
has no choice but to develop itsown technology in-house.
For example:
 Existing producers closely hold the technology and are not prepared to license it;
 No technology is available that is suitable for a particular unique feedstock;
 High licence fee/royalties that make the project marginally economical, and;
 Restrictive conditions such as “one plant only” licence which restricts future plans.

Technology selection represents a crucial decision in the early stages of a project which
can have a substantial impact on the economic viability of the project.  Hence the need
for a disciplined technology evaluation methodology is to ensure that the most
appropriate, efficient and cost effective solution is selected.  New technology can
provide benefits and this should be weighed up against the increased risk resulting from
inaccuracies in, or insufficient, design data and often prolonged start-up duration.
In-house technology development may be the only choice and an in depth evaluation of
company resources, expertise and equipment (pilot plants) should be carried out.  A
realistic schedule should be compiled, including all key development activities,
following the R&D stage gate model.
2) Technical arrangements-Satisfactory arrangements must be made to obtain the
technical know-how needed for the proposed manufacturing process. When

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 collaboration is sought, inter alia, the following aspects of the agreement must be
worked out in detail.
Following should be worked out in detail

 The nature of the support provided by collaborators

 Process and performance guarantees
 The price of technology
 The continuing benefit of R&D work
 The period of the collaboration agreement
 The assistance to be provided and restrictions to be imposed
 The level of equity participation and the manner of sharing management control
 Mode of payment

3) Material input and utilities-These can be analyzed under following

categories.

Raw materials-It may be used as inputs. It can further be classified into four
categories-agricultural products, Mineral products, livestock and forest product and
marine products.

Manufactured industrial materials and components- The answer of the following

questions are essential in this regard.

 What is the total requirement of the project?

 What are the sources of supply?
 How dependable are the suppliers?
 What has been the past trend in prices?
 What is the likely future trend in prices?

Auxiliary material-These include chemicals, consumable, paint, oil, grease etc

Utilities-Utilities include power, water, fuel, steam etc.

2) Product mix-The technology chosen must be judged in terms of the total product-mix
generated by it, including saleable by-products. Choice of Product Mix is guided by the
market requirements. While planning the production facilities some flexibility in
product mix should be sought.
The dimension of product mix permits the company to expand its business in four ways.
a) Adding new product lines
b) Lengthening each product line
c) Adding more product to each variant
d) Pursuing product line consistence

3) Plant capacity-Several factors have a bearing on the capacity decision.

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 Technological requirements— For many industrial projects, particularly in process
type industries, there is a certain minimum economic size determined by the
technological factor. For example, a cement plant should have a capacity of at least 300
tonnes per day in order to use the rotary kiln method; otherwise, it has to employ the
vertical shaft method which is suitable for lower capacity.
Input constraints— In a developing country like India, there may be constraints on
the availability of certain inputs. (has been discussed)
Investment cost— When serious input constraints do not obtain, the relationship
between capacity and investment cost is an important consideration. Typically, the
investment cost per unit of capacity decreases as the plant capacity increases.
Market conditions— The anticipated market for the product/service has an important
bearing on plant 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.
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.
Governmental policy— The capacity level may be constrained by governmental
policy. Given the level of additional capacity to be created in an industry, within the
licensing framework of the government, the government may decide to distribute the
additional capacity among several firms.
6) Location and site- The choice of location and site follows an assessment of
demand, size, and input requirement. Though often used synonymously, the terms
'location' and 'site' should be distinguished. Location refers to a fairly broad area like a
city, an industrial zone, or a coastal area; site refers to a specific piece of land where the
project would be set up.
The choice of location is influenced by a variety of considerations:
 Proximity to raw materials and markets
 Availability of infrastructure
 Labour situation
 Governmental policies
 Nearness to supporting industries
 Other factors.
Proximity to raw materials and markets— An important consideration for location is
the proximity to sources of raw materials and nearness to the market for final products.
In terms of a basic locational model, the optimal location is one where the total cost
(raw material transportation cost plus production cost plus distribution cost for final
product) is minimized. This generally implies that: (i) a resource-based project like a
cement plant or a steel mill should be located close the source of basic material (for
example, limestone in the case of a cement plant and iron-ore in the case of a steel
plant); (ii) a project based on imported material may be located near a port; and (iii) a
project manufacturing a perishable product should be close to the center of
consumption.
However, for many industrial products proximity to the source of raw material or the
center of consumption may not be very important. Petro-chemical units or refineries, for
example, may be located close to the source of raw material, or close to the center of
consumption, or at some intermediate point.

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Availability of infrastructure— Availability of power, transportation, water, and
communications should be carefully assessed before a location decision is made.
Adequate supply of power is a very important condition for location— insufficient
power can be a major constraint, particularly in the case of an electricity-intensive
project like an aluminium plant. In evaluating power supply the following should be
looked into:
 The quantum of power available
 The stability of power supply
 The structure of power tariff
 The investment required by the project for a tie-up in the network of the power
supplying agency.
For transporting the inputs of the project and distributing the outputs of the project,
adequate transport connections—whether by rail, road, sea, inland water, or air— are
required. The availability, reliability and cost of transportation for various alternative
locations should be assessed. Given the plant capacity and the type of technology, the
water requirement for the project can be assessed. Once the required quantity is
estimated, the amount to be drawn from the public utility system and the amount to be
provided by the project from surface or sub-surface sources may be determined. For
doing this the following factors may be examined: relative costs, relative
dependabilities, and relative qualities.
In addition to power, transport, and water, the project should have adequate
communication facilities like telephone and fax etc.
Labour situation – The labour situation at alternative locations may be assessed in
terms of:
 the availability of labour, skilled, semi-skilled, and unskilled;
 the past trends in labour rates, the prevailing labour rates, and the projected
labour rates;
 the state of industrial relations judged in terms of the frequency and severity of
strikes and lockouts
 the attitude of labour and management.

Governmental policies— Governmental policies have a bearing on location. In the

case of public sector 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, location is 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. More positively, the
government offers inducements for establishing industries in backward areas. These
inducements consist of outright subsidies, concessional finance, tax relief, and other
benefits.

Nearness to supporting industries-Plant location must be near its supporting

industries and services. If it purchases spare parts from an outside agency, then these
agencies must be located very close to the business. If not, the business will have to
spend a lot of extra money on transport. It will also be difficult, to control the quality of
the spare parts because of the distant location.

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 Other factors— Several other factors have to be assessed before reaching a location
decision: These are
 Ease in coping with environmental pollution
 Labour situation, Climatic conditions
 General living conditions.
A project may cause environmental pollution in various ways: it may throw gaseous
emission; it may produce liquid and solid discharges; it may cause noise, heat, and
vibrations. The location study should analyse the costs of mitigating environmental
pollution to tolerable levels at alternative locations.
The climatic conditions (like temperature, humidity, wind, sunshine, rainfall, snowfall,
dust and fumes) have an important influence on location. They have a bearing on cost.
General living conditions, judged in terms of cost of living, housing situation, and
facilities for education, recreation, transport, and medical care, need to be assessed at
alternative locations.

7)Machinery and Equipment

Technical analysis of a project idea should include the study of required machinery and
equipment to run the project.
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;

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.
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.

Thus, requirement of machinery and equipment is dependent on the production

technology and plant capacity. Plant and machinery procurement decisions are taken by
the top management of a company.
In short, the factors to be considered are
 Desired quality of machinery
 Level of technological sophistication

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  Reputation of the vendor
 Expected delivery schedule
 Required performance guaranteed.

8) Structures and civil works-Structures and civil works may be divided into three
categories: (i) site preparation and development, (ii) buildings and structures, and (iii)
outdoor works.
(i) Site preparation and development— This covers the following:
(i) grading and leveling of the site
(ii) removal of existing structures
(iii) relocation of existing pipelines cables, roads, power lines, etc.
(iv) reclamation of swamps, draining and removal of standing water
(v) connections for the following utilities from the site to the public network: electric
power, water (use water and drinking water), communications (telephone, fax, etc.)
(vi) other site preparation and developmental work.
(ii) Buildings— Buildings and structures may be divided into: (i) factory or process
buildings; (ii) ancillary buildings required for stores, warehouses, laboratories, utility
supply centers, maintenance services, and others; (iii) administrative buildings; (iv)
staff welfare buildings, cafeteria, and medical service buildings; and (v) residential
buildings.
(iii) Outdoor works— Outdoor works cover (i) supply and distribution of utilities
(water, electric power, communication, steam and gas); (ii) handling and treatment of
emissions, wastages, and effluents; (iii) transportation and traffic arrangements (roads,
railway tracks, paths, parking areas, sheds, garages, traffic signals, etc.): (iv) outdoor
lighting; (v) landscaping; and (vi) enclosure and supervision (boundary wall, fencing,
barriers, gates, doors, security posts, etc.).

9) Environmental Aspects: Following key issues should be considered in

respect of environment

a. What are the types of effluents and emissions generated?

b. What needs to be done for proper disposal of effluents and treatment of waste?

c. Will the project be able to secure all the environmental clearances?

10)Project charts and layouts- Charts and layouts define the scope of the
project and provide the basis of detailed engineering and estimation of
investment and production costs. The important charts and layouts are
 General functional layout
 Material flow diagram
 Production line diagram
 Transport layout
 Utility consumption layout
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  Communication layout
 Organisational layout
 Plant layout

General Function Layout- It shows relationship between equipments, buildings and

civil works. The primary function is to facilitate smooth and economical movement of
raw materials, WIP and finished goods. The flow of materials should be in one direction
with minimum possible crossing. Godowns, workshops etc. must be functionally
situated with respect to main factory building.
Material Flow Diagram- it shows the flow of materials, utilities, intermediate
products, final products, by products and emissions. Quantity flow diagram may also be
prepared.
Product Line Diagram- This shows how the production would progress along with the
main equipments.
Transport Layout- This shows the distances and means of transport outside a product
line.
Utility Consumption Layout- This shows the principal consumption points of utilities
and their required quantities and qualities (water, power, gas etc.)

Communication Layout- This shows how various parts of the project will be
connected by telephone, internet, intercom etc.
Organizational Layout- This shows the organizational set up of the project along with
information on personnel required for various departments and their inter- relationships
Plant Layout- It concerns with the physical layout of the factory. In some industries
the plant layout is dictated by the production process adopted. The important
considerations in preparing the plant layout are: – Consistency with production
technology, smooth flow of goods from one stage to another, proper utilization of
space, scope of expansion, minimization of production cost, safety of personnel
11) Schedule of project implementation -As part of technical analysis, a project
implementation schedule is also usually prepared. For preparing the project
implementation schedule the following information is required:

 List of all possible activities from project planning to commencement of

production
 The sequence in which various activities have to be performed.
 The time required for performing various activities.
 The resources normally required for performing various activities.
 The implications of putting more resources or less resources than are normally
required.
Work Schedule
The work schedule, as its name suggests, reflects the plan of work concerning
installation as well as initial operation. The purpose of the work schedule is:

􀂾 To anticipate problems likely to arise during the installation phase and suggest
possible means for coping with them.
􀂾 To establish the phasing of investments taking into account availability of finances.

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􀂾 To develop a plant of operations covering the initial period (the running in period).
Often, it is found that the required inputs like raw material and power are not available
in adequate quantity when the plant is ready for commissioning, or the plant is not
ready when the raw material arrives.
12) Need for Considering Alternatives
There are alternative ways of transforming an idea into a concrete project. These
alternatives may differ in one or more of the following aspects:
• Nature of project-Various alternatives are available. The project may
consist of processing upto the finished stage or may stop at a semi
finished stage. It may also be related with manufacture of all parts or
manufacturing of components only.
• Production process-While deciding about production process, the
availability and characteristics of raw material, cost structure and nature
of markets are the factors to be considered.
• Product quality-The quality and product range decisions depend on the
characteristics of the market, the elasticity of demand, consumer
preferences and the nature of competition.
• Scale of operation and time phasing-The choice of a particular scale
depends on the financial resources available, nature of competition,
nature of demand and economies of scale. Further, it may be installed in
one stage or in phases. This also depends on cost.
• Location-The same demand could be satisfied by a single plant for the
entire market or one large plant for the bulk of the market or several
plants of similar size spread over the market areas.

Key Project Inter-linkages-to be discussed in class room

Market and demand analysis

  Market analysis is concerned primarily with two questions:

a) What would be the aggregate demand of the proposed product / service in

future?
b) What would be the market share of the project under appraisal?
 One of the most important steps in project analysis is to estimate the potential size of
the market for the product proposed to be manufactured and get an idea about the
market share that is likely to be captured.  To make an idea about these things, an in
depth study and assessment of various factors like patterns of consumption growth,
income and price elasticity of demand, composition of the market, nature of
competition, availability of substitutes, reach of distribution channels and so on is
required.  Market and demand analysis should be carried out in an orderly and
systematic manner. 

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 i) The objectives of the market and demand analysis may be to answer the
following questions:
Who are the buyers of our product?
ii) What is the current demand?
iii)
How is the demand distributed?
iv)
What is the break-up of demand?
v)
What the price customers willing to pay?
vi)
How can potential customers be convinced about the superiority of our product?
vii)
What channels of distribution most suited?

Steps in market and demand analysis

1) Situation analysis and specification of objectives
2) Collection of secondary information
3) Conduct of market survey
4) Characterization of the market
5) Demand forecasting
6) Market planning

1) Situation analysis and specification of objectives

   In order to get an idea about the relationship between the product and its market, the
project analyst may informally talk to customers, competitors, middlemen, and others in
the industry.  Wherever possible, he may look at the experience of the company to learn
about the preferences and purchasing power of customers, actions and strategies of
competitors, and practices of the middlemen.  If such a situation analysis generates
enough data to measure the market and get a reliable handle over projected demand and
revenues, a formal study need not be carried out, particularly when cost and time
considerations so suggest.  The informal goals that guide situation analysis need to be
expanded and articulated with greater clarity. A helpful approach to spell out objectives
is to structure them in the form of questions. The kinds of information required are:

Consumption trends in the past & the present consumption level, Past & Present supply
position, Production possibilities & Constraints, Imports & Exports, Structure of
competition, Cost Structure, Elasticity of Demand, Consumer behaviour, Distribution
channels & marketing policies in use etc.

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2) Collection of secondary information
Information may be obtained from secondary or primary sources.  Secondary
information is information that has been gathered in some other context and is already
available.  Primary information on the other hand, represents information that is
collected for the first time to meet the specific purpose on hand.  Secondary information
provides the base and starting point of market and demand analysis.  It indicates what is
known and often leads for gathering primary information required for further analysis.
General sources of secondary information

  The important sources of secondary information useful for market and demand
analysis in India are mentioned below:
a) Census data published every ten years containing information on population,
demographic characteristics, household size and composition and maps.
b) National sample survey reports containing data on various economic and social
aspects like patterns of consumption, distribution of industries etc.
c) Planning commission reports containing data on plan proposals, physical and
financial targets, actual outlays, accomplishments etc.
d) Statistical abstracts published by Central Statistical Organisation which contain
data on demographic characteristic, national income estimates, agricultural and
industrial statistics.
e) India Year Book published by Ministry of Information and Broadcasting
containing wide-range of data on economic and other aspects.

The advantage of secondary sources of data is that it is readily and economically

available. But the accuracy, reliability and relevance of such data must be
studied carefully.

3) Conduct of market survey

    Secondary information, though useful, often does not provide a
comprehensive basis for market and demand analysis.  It needs to be
supplemented with primary information gathered through market survey,
specific to the project being appraised.  The market survey may be a census
survey or a sample survey.  Census surveys are employed principally for
intermediate goods and investment goods when such goods are used by a small
number of firms.  In other cases, a census survey is costly and may also be
infeasible.  In market survey a sample of the population is observed and relevant
information is gathered.  On the basis of such information, inferences about the
population may be drawn.

Steps in a sample survey

a) Define the target population-In defining the target population the important
terms should be carefully and unambiguously defined.  The target population

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 may be divided into various segments which may have differing characteristics.

b) Select the sampling scheme and sample size-There are several sampling
schemes: simple random sampling, cluster sampling, stratified sampling,
systematic sampling and non-probability sampling.  Each scheme has its
advantages and limitations.  The sample size has a bearing on the reliability of
the estimates- the larger the sample size, the greater is the reliability.

c) Develop the questionnaire-The questionnaire is the principal instrument for

eliciting, information from the sample of respondents.  The effectiveness of the
questionnaire depends on its length, the type of questions, the wording of the
questions.   Developing the questionnaire requires a thorough understanding of
the product and its usage, imagination, insight in to human behaviour, the
familiarity with the tools of descriptive and inferential statistics to be used later
for analysis.  Since the quality of the questionnaire has an important bearing on
the results of the market survey, the questionnaire should be tried out in a pilot
survey and modified in the light of difficulties noted.

d) Recruit and train the field investigators -Recruiting and training of field

investigators must be planned well since it can be time consuming.  Great care
must be taken in recruiting the right kind of investigators and imparting the
proper kind of training to them.

e) Obtain information as per Questionnaire from the sample of

respondents- Respondents may be interviewed personally, telephonically, or by
mail for obtaining information.  Personal interviews ensure a high rate of
response.  But they are expensive and likely to result in biased responses
because of the presence of the interviewer.

f) Scrutinize the information gathered-Information gathered should be

thoroughly scrutinized to eliminate data which is internally inconsistent and
which is invalid.
f) Analyse and interpret the information- Information gathered in the survey
needs to be analysed and interpreted with care and imagination.  After tabulating
it as per plan of analysis, suitable statistical investigation may be conducted, if
necessary.  For purposes of statistical analysis, a variety of methods are
available.  These may be divided into two broad categories: parametric method
and non-parametric methods.  Parametric methods assure that the variable or
attribute under study conforms to some known distribution.  Non-parametric
methods do not pre suppose any particular distribution.
Results of the data based on the sample survey will have to be extrapolated to
the target population.  For this purpose, appropriate inflationary factors, based
on the ratio of the size of the target population to the size of the sample studies,
will have to be used.

Problems

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 Heterogeneity of the country
Multiplicity of languages
Design of questionnaires

4) Characterization of the market

Based on the information gathered from secondary sources and through market survey,
the market for the product or service may be described in terms of the following
Breakdown of demand

 Effective demand in the past and present

 Breakdown of demand
 Price
 Methods of distribution and sales promotion
 Consumers
 Supply and competition
 Government policy
Effective demand in the past and presen t- To gauge the effective demand in the past
and present, the starting point typically is apparent consumption.
The figure of apparent consumption has to be adjusted for consumption of the product
by the producers and the effect of abnormal factors.  The consumption series, after such
adjustments, may be obtained for several years.
Breakdown of demand – To get deeper insight into the nature of demand, the
aggregate market demand may be broken into demand for different segments of the
market.  Market segments may be defined by (i) nature of product, (ii) consumer group,
and (iii) geographical division.
Price - Price statistics must be gathered along with statistics pertaining to physical
quantities.  It may be helpful to distinguish the following types of prices: (i)
manufacturer’s price quoted as FOB price or CIF price, (ii) landed price for imported
goods, (iii) average wholesale price, and (iv) average retail price.

Methods of distribution and sales promotion – The method of distribution may vary
with the nature of product, capital goods, Industrial raw materials or intermediates, and
consumer products tend to have differing distribution channels.  Further, for a given
product, distribution methods may vary.  Likewise, methods used for sales promotion
may vary from product to product.
Consumers – Consumers may be characterized along two dimensions viz, demographic
and sociological.
Supply and Competition- It is necessary to know the existing sources of supply and
whether they are foreign or domestic.  Competition from substitutes and near substitutes
should also be specified.

15
Government policy – The role of government in influencing the demand and market
for a product may be significant.  Government plans, policies, legislations etc. have a
bearing on the market and demand of the product.

5) Demand forecasting
After gathering information about various aspects of the market and demand from
primary and secondary sources, an attempt may be made to estimate future demand.  A
wide range of forecasting methods is available to the market analyst.  These may be
divided into three categories: qualitative methods, time series projection methods and
casual methods.
I) Qualitative methods
These methods rely essentially on the judgment of experts to translate qualitative
information into quantitative estimates.  The important qualitative methods are as
follows.
a) Jury of executive opinion method-  It is very popular in practice. This method calls
for the pooling of views of a group of executives on expected future sales and
combining them into a sales estimate.  A small number of top executives are requested
to register their individual opinions relating to the probable amount of future sales.  A
forecast is derived from the average of these figures.  As executives are fully aware of
the market conditions, capabilities of the firm etc., a forecast under this method gives a
better result.
b) Sale Force Opinion method - In this method, sales personnel from different sales
territories are asked to provide sales forecasts.  These individual sales forecasts are then
combined, modified and refined by the top executives to predict the total or master
forecast for the firm.
c) Delphi method –The steps involved in this method are:
i) A group of experts is sent a questionnaire by mail and asked to
express their views.
ii) The responses received from the experts are summarized without
disclosing the identity of experts, and sent back to the experts for
reviewing their views in the light of other experts' opinion.
This process may be continued for one or more rounds till a reasonable agreement
emerges in the view of the experts.        

Quantitative methods
    These methods generate forecasts on the basis of an analysis of the
historical time series.  The important methods are as follows:

a) Trend projection method – The trend projection method involves

determining the trend of consumption by analyzing past consumption

16
 statistics, and projecting future consumption by extrapolating the past
trend onto the future.

b) Moving average method – According to this method, the forecast for the next
period represents a simple arithmetic average or weighted arithmetic average of the last
few observations.

c) Exponential smoothing method – This method is used in case of

short range sales forecasts.  It is a type of moving average representing a
weighted sum of all past numbers in a time series, with the heaviest
weight placed on the most recent data.  This is used to reduce the gap
between the actual and the forecasts. In exponential smoothing, forecasts
are modified in the light of observed errors.

Casual methods
    These methods seek to develop forecasts on the basis of cause-effect
relationships specified in an explicit, quantitative manner.  The
important methods under this category are as follows:
a) Chain ratio method – In this method the sales of a product may be
estimated by applying a series of factors to measure of aggregate
demand.  For example, a firm planning to manufacture stainless steel
blades in India can be estimate its potential sales in the following
manner.
Adult male population in the country                    : 150 million
Proportion of adult male using shaving blades            : 0.60
Adult male population using shaving blades                : 90 million
Number of times a person uses shaving blades in a year        : 100
Total shaving done per year                        : 9,000 million
Proportion of shaving done with stainless steel blades        : 0.40
Average number of shaving per stainless steel blade            : 4
Number of stainless steel blades used per year            : 900 million
Proportion of stainless steel blade market the firm could capture    : 0.20
Potential sales                                : 180 million

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 c) Consumption level method – This method estimates consumption
level on the basis of elasticity coefficients, the important ones being the
income elasticity of demand and the price elasticity of demand.
(Practical part to be discussed in class rooms)
d) End use method – This method is suitable for estimating demand for intermediate
products. The end use method, also referred to as the consumption coefficient method,
involves the following steps:

 Identify the possible uses of the product.

 Define the consumption coefficient of the product for various
uses.
 Project the output levels for the consuming industries.
 Derive the demand for the product.

e) Leading indicator method – Leading indicators are variables which change ahead
of other variables, the lagging variables.  Hence, observed changes in leading indicators
may be used to predict the changes in lagging variables.  For example, the change in the
level of urbanization may be used to predict the change in the demand for air
conditioners.

f) Econometric method – An econometric model is a mathematical representation of

economic relationship derived from economic theory.  An econometric model consists
of two types of methods namely, regression model and simultaneous equations model.

Regression model-It may be simple or multiple

If only one variable affects the demand, then it is called single variable demand
function. Thus, simple regression techniques are used. If demand is affected by many
variables, then it is called multi-variable demand function. Therefore, in such a case,
multiple regression is used. For example, suppose in a city, the demand for items like tea
and coffee is found to depend largely on the population of the city, then the demand
functions of these items are said to be  single-variable demand functions.

On the other hand, if it is found out that the demand for commodities like sweets, ice-
creams, fruits, vegetables, etc., depends on a number of variables like commodity’s own
price, the price of substitute goods, household incomes, population, etc. Then such demand
functions are called as multi-variable demand functions.

Simultaneous Equations Model

There are two types of variables that are included in this model, which are as follows:
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i. Endogenous Variables:
These are controlled variables.

ii. Exogenous Variables:

These are uncontrolled variables.

Examples are time, government spending, and weather conditions. These variables are
determined outside the model.

For developing a complete model, endogenous and exogenous variables are determined
first. After that, necessary data on both exogenous and endogenous variables are
collected. Sometimes, data is not available in required form, thus, it needs to be
adjusted into the model.

After the development of necessary data, the model is estimated through some
appropriate method. Finally, the model is solved for each endogenous variable in terms
of exogenous variable. The prediction is finally made.

Uncertainties in demand forecasting

Demand forecasts are subject to error and uncertainty which from three principal
source.

A) Data about past and present market. The analysis of past and present
markets, which serve as the springboard for the projection exercise, may be
vitiated by the following inadequacies of data:

 Lack of Standardization: Data pertaining to market features like

product, price, quantity, cost, income, etc. may not reflect uniform
concepts and measures.
 Few observations: observations available to conduct meaningful
analysis may not be enough.
 Influence of abnormal factors: Some of the observations may be
influenced by abnormal factors like war or natural calamity.
B) Method of forecasting. Methods used for demand forecasting are characterized
by the following limitations:
 Inability to handle unquantifiable factors: most of the forecasting
methods, being quantitative in nature, cannot handle unquantifiable
factors which sometimes can be of immense significance.
 Unrealistic assumptions: Each forecasting method is based on certain
assumptions. For example, the trend projection method is based on the
mutually compensating affects premise and the end use method is based

19
 on the constancy of technical coefficients. Uncertainty arises when the
assumptions underline the chosen method tend to be realistic and
erroneous.
 Excessive data requirement In general, the more advanced a method,
the greater the data requirement. For example, to use an econometric
model one has to forecast the future values of explanatory variables in
order to project the explained variable.

C) Environmental Change. The environment in which a business functions is

characterized by numerous uncertainties. The important sources of uncertainty are
mentioned below:

 Technological Change: This is a very important and very hard-to-

predict factor which influences business prospects. A technological
advancement may create a new product which performs the same
function more efficiently and economically, thereby cutting into the
market for the existing product. For example, electronic watches are
encroaching on the market for mechanical watches.
 Shift in Government Policy: Government resolution of business may be
extensive. Changes in government policy, which may be difficult to
anticipate, could have a telling effect on the business environment.
 Development on the International Scene: Development on the
International Scene may have a profound effect on industries.
 Discovery of New Sources of Raw Material: Discovery of new sources
of raw materials, particularly hydrocarbons, can have a significant effect
on the market situation of several products.
 Vagaries of the Weather: Weather plays an important role in the
economy of a country, is somewhat unpredictable. Extreme weather
influences, directly or indirectly, the demand for a wide range of
products.

Coping with Uncertainties:

Given the uncertainties in demand forecasting, adequate efforts, along the following
lines, may be made to cope with uncertainties.

o Conduct analysis with data based on uniform and standard definitions.

o In identifying trends, coefficients, and relationships, ignore the abnormal
and out-of-the-ordinary observations.
o Critically evaluate the assumptions of the forecasting methods and
choose a method which is appropriate to situation.
o Adjust the projections derived from quantitative analysis in the light of
unquantifiable, but significant, influences.
o Monitor the environment imaginatively to identify important changes.
o Consider likely alternative scenarios and their impact on market and
competition.

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 o Conduct sensitivity analysis to access the impact on the size of demand
for unfavorable and favorable variations of the determining factors from
their most likely levels.

6) Market planning
To enable the product to reach a desired level of market penetration, a suitable
marketing plan should be developed. Broadly, it should cover pricing, distribution,
promotion and service.  A marketing plan usually has the following components:
a) Current Marketing Situation
    This part of marketing plan deals with the different dimensions of the current
situation.  It examines the market situation, competitive situation, distribution situation,
and the macro environment.
Market situation deals with size, the growth, the consumer aspirations, and buying
behaviour in the market under consideration.  Competitive situation exhibits who are
major competitors, their objectives, strategies, strengths etc.  Distribution situation
compares the distribution capabilities of the competitors and available distribution
systems which are suitable for our product.  Macro-environment describes the effect of
social, political, economic, technological, and other external variables on the market.

b) Opportunity and Issue Analysis

The management should conduct a SWOT analysis for the product and the core issues
before the product be identified.  The strength may be the use of distribution channel
already established for the existing products.  The weakness may be its limited
resources.  The opportunities might be the favourable consumer preference.  The threat
might be the competition from substitutes.
The core issues may be how to use our strengths to offset probable threats, how can
succeed with the product with identified weaknesses, and how to exploit the available
opportunities.
c) Objectives
Objectives have to be clear-cut, specific, and achievable.  These objectives form the
basis for selection of marketing strategies.  Objectives should be expressed
unambiguously, preferable quantitatively and with an indication of time span within
which the objectives are planned to be achieved.
d) Marketing Strategy
The marketing strategy covers target segment, positioning, product line, price,
distribution, sales force, sales promotion, and advertising.
    The market segment the firm wants to target should be clearly specified.  It needs to

21
be described clearly in terms of the psychographics.
    Positioning is how a product is placed in the mind of the customer.  Having decided
the target market, the positioning should be done in appropriate with its characteristics.
Product line refers number of similar products a firm offering.  So it has to decide
whether to introduce the product with varieties or a single variant.
    Price should be in a range existed within the segment.  It should have a bearing on
positioning also.
    The various distribution channels may be available to our product.  Then decision has
to be taken to use an effective combination of distribution channels
Sales force should be planned in such a manner that to achieve the objectives.  So
strategy in this regard specifies their size, probable abilities, and method training which
is proposed to be given to them.
Sale promotion strategies should also be formulated. A balance should be made
between dealer level sales promotion and consumer level sales promotion. 
Strategy should also be formulated regarding advertisement.  The firm can choose from
a large variety of advertisement media. Before selecting an advertisement media the
firm should analyse its effectiveness with respect to our product.

Network techniques

Network technique is a technique for planning, scheduling

(programming) and controlling the progress of projects. This is
very useful for projects which are complex in nature or where
activities are subject to considerable degree of uncertainty in
performance time.

These technique provides an effective management, determines

the project duration more accurately, identifies the activities
which are critical at different stages of project completion to
enable to pay more attention on these activities, analyse the
scheduling at regular interval for taking corrective action well in
advance, facilitates in optimistic resources utilisation, helps
management for taking timely and better decisions for effective
monitoring and control during execution of the project.
Network techniques-PERT and CPM
PERT and CPM techniques have become useful to management in many ways. These
are:
(i) The graphic representation of how each activity is dependent on others helps in

22
 better scheduling, monitoring and control of project activities.
(iii) Network techniques can serve as indicator of bottle necks and potential trouble
spots.
(iv) Network diagram illustrates the type and extent of coordination required amount
several functionaries of the project team, viz., designers, managers, contractors
and others.
(v) Network diagram helps in identifying critical tasks and thereby helps diversion
of resources to them so that they are not lagging behind schedule.
(vi) Network techniques help in resource allocation. Resources such as labour and
machine can be better allocated to project activities with the help of a network
analysis.
(vii) Network techniques help in ascertaining whether or not advisable to crash
project time and the impact of crashing on cost of the project. What activities
have to be speeded up so as to minimize cost escalation on account of crashing
are known with network analysis.
(viii) Network techniques help in cost control too. Starting works by their LST could
help in lock up of capital for a less period than when works are started by their
EST. This is a cost control exercise facilitated by network analysis.
Practical part to be done in class room

CPM
According to John L. Burbidge, “One of the purpose of critical path analysis to find the
sequence of activities with the largest sum of duration times, and thus find the
minimum time necessary to complete the project. This critical series of activities is
known as the ‘Critical path”.
Determination of critical path
The critical path analysis is an important tool in production planning and scheduling.
Gantt charts are also one of the tools of scheduling but they have one disadvantage for
which they are found to be unsuitable. The problem with Gantt chart is that the
sequence of operation of a project or the earliest possible date for the completion of the
project as a whole cannot be ascertained. This problem is overcome by this method of
Critical Path Analysis.
CPM is used for scheduling special projects where the relationship between the
different parts of project is more complicated than of a simple chain of task to be
completed on after the other. This method (CPM) can be used at one extreme for the
very simple job and at other extreme for the most complicated tasks.
A CPM is a route between two or more operations which minimizes (or maximizes)
some measures of performance. This can also be defined as the sequence of activities,
which will require greatest normal time to accomplish. It means that the sequences of
activities, which require longest duration, are singled out. It is called at critical path
because longest duration is singled out.
Under CPM, the project is analyzed into different operation or activities and their

23
relationship are determined and shown on the network diagram. So a network diagram
is drawn. CPM marks critical activities in a project and concentrates on them. It is
based on the assumption that the expected time is actually the time taken to complete
the entire project.
Main Objectives of CPM
(i) To find difficulties and obstacles in the course of production process
(ii) To assign time for each operation,
(iii) To ascertain the starting and finishing times of the work
(iv) To find the critical path and the minimum duration time for the project as a hole.
Situations where CPM can be effectively used:
(a) In production planning
(b) Location of and deliveries from a warehouse
(c) Road systems and traffic schedules
(d) Communication network
Advantages of CPM
i. It provides an analytical approach to the achievement of project objective which are
defined clearly.
ii. It identifies most critical elements and pays more attention to these activities.
iii. It assists avoiding waste of time, energy and money on unimportant activities.
iv. It provides a standard method for communicating project plains, schedules and
cost.

Float or slack

In project management, float or slack is the amount of time that a task in a project
network can be delayed without causing a delay to subsequent tasks and project
completion date.

Types of floats

Total float

Float is also known as total float. Total float is how long an activity can be delayed,
without delaying the project completion date. On a critical path, the total float is zero.

Free Float

Free float is how long an activity can be delayed, without delaying the Early Start of its
successor activity.

Independent float

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Independent float is that portion of the total float within which an activity can be
delayed for start without affecting the float of the preceding activities.

Total float is often known as the slack.

Practice of practical questions

Find the EOT, LOT, EST, LST, EFT, LFT and critical Path.

PERT Model
PERT (Programme Evaluation and Review Technique)
There are so many modern techniques that have developed recently for the planning and
control of large projects in various industries especially in defence, Chemical and
construction industries. Perhaps, the PERT is the best known of such techniques.
PERT is a time-event network analysis technique designed to watch how the parts of a
programme fit together during passage of time and events. The special project office of
the U.S. Navy developed the technique in 1958. In PERT analysis, individual tasks
should be shown in a network. Events are shown by circles.
Each arrow represents an activity.
Three times estimates are made.
Optimistic time- It is the best estimate of time if everything goes exceptionally well
Most likely time- It is an estimated time what the project engineer believes necessary
to do the job or it is the time which most often is required if the activity is repeated a
number of times.
Pessimistic time- It is the longest time and rather is more difficult to ascertain.
Time estimates are made based on past experience, the job nature and availability of
resources. In PERT, three estimates of time for each activity are made. In CPM only
one time estimate is made as it assumes certainty condition. But estimates may be
revised in both the cases.

25
Once time estimates and sequential relations are known, activities scheduling can be
prepared. The project manager has to find out EST, EFT, LST, LFT, total slack and free
slack. Then activities can be taken up as per their EST or LST or some in between times
taking advantage of slack of activities. Of course, for critical activities EST and LST are
same, also EFT and LFT are same. That is they have no slack.
Under PERT we can find the probability of finishing a project by certain date. For this
the standard deviation of activity times for critical activities is to be calculated.
We may find the probability of completion of a project using PERT analysis.
We need to know the three time estimate for the critical activities which are as follows:

Activity Tp Tm To (Tp-To) / 6

B 10 9 2 (10 – 2) / 6 = 4/3

H 9 4.5 3 (9 – 3) / 6 = 1

J 5 3 1 (5 – 1) / 6 = 2/3

L 5 3 1 (5 – 1) / 6 = 2/3

M 5 1.5 1 (5 – 1) / 6 = 2/3

N 5 1.5 1 (5 – 1) / 6 = 2/3

The next step is the compute the critical path and the slack time. A critical path or
critical sequence of activities is one, which takes the longest time to accomplish the
work and the least slack time (practical part to be done in class room)
Advantage of PERT
PERT is a very important of managerial planning and control at the top level concerned
with overall responsibility of a project. PERT has the following merits.
(i) Pert forces managers and subordinate mangers to make a plan for production.

26
(ii) PERT encourage management control by exception. It concentrates attentions on
critical element that may need correction.
(iii) It enables forward-working control, as a delay will affect the succeeding events
and possibly the whole project.
(iv) The network system with its sub-systems creates a pressure for action at the right
spot
(v) PERT can be effectively used for re-scheduling the activities.
Limitations in using PERT
The uses of PERT techniques are subject to the following limitations:
(i) It is a time-consuming and expensive technique.
(ii) PERT is not suitable when a reasonable estimate of time schedule is not possible.
(iii) It is not useful for routine planning of recurring events such as mass production.
(iv) The expected time and the corresponding variance are only estimated values.

Example:The following information is available in respect of a project.

Optimistic time Most likely time Pessimistic time

Activity
A-B 3 6 15
A-F 2 5 14
B-C 6 12 30
B-D 2 5 8
C-E 5 11 17
D-E 3 6 15
E-H 1 4 7
F-G 3 9 27
G-H 19 25 43
On the basis of above information
1) Draw the network diagram
2) Find the critical path and critical activities
3) Find out variance and standard deviation of critical path
4) Find the probability that the project will be completed in 35 days.

Scheduling when Resources are limited

When the project management team and or the project management team leader
proceed to plan out the projects schedule and where each individual component of
the project will lie along the project life cycle, there are often a number of factors that
may play into exactly how the scheduling is going to play out. However, nearly all of
the factors trace back to one common thread, and that commonality is the lack or
abundance of resources. This is where the concept of the resource-limited schedule
comes in. The resource-limited schedule is a project schedule whose schedule

27
 activities start dates, and finish dates directly reflect the availability of all resources
in question. Typically, a resource-limited schedule will not have any start dates that
are early or late. The concept of the resource-limited schedule can also be referred to
in other settings as the resource-constrained schedule. PERT and CPM help in
resource allocation and resources leveling.
Resources allocation means how much resources should be diverted to the project
concerned day after day as the project progresses.
The resource requirement depends on when the activities are scheduled to begin, i.e.,
as per their EST or LST or any intermediary time.
Why it is done
The reasons are:
(i) Resources constraint can be one of the reasons. Say, not more than 12 persons
are available on any one day, whereas we need as much as 19 persons on one
day. By rescheduling non-critical activities using their slack times, the above
purposes can be served.
(ii) Practically speaking, too much needs on some days and too little needs on other
days are not signs of good planning.
(iii) Also, disruption in work is more probable when the peaks and through in
resource needs are not ironed out.
(iv) Optimum utilization of permanent/owned facilities, avoiding ideal time, is
possible with resource leveling exercises.
Say in our case only 12 labours are available on any one day. Is it possible to
complete the project on time with only 12 persons? May be some rescheduling can
be thought of. The method adopted here is called as ‘heuristic programming’. A
resource leveling is suggested here.
Crashing an activity
It refers to taking special costly measures to reduce the duration of an activity below its
normal value. These special measures might include using overtime, hiring additional
temporary help, using special time-saving materials, obtaining special equipment, etc.
Crashing the project refers to crashing a number of activities in order to reduce the
duration of the project below its normal value.
The CPM method of time-cost trade-offs is concerned with determining how much
(ifany) to crash each of the activities in order to reduce the anticipated duration of the
project to a desired value.

The project duration can be reduced by assigning more resources to project activities.
This is known as crashing. But, doing this would somehow increase project cost!
Project crashing is a method for shortening project duration by reducing one or more
critical activities to a time less than normal activity time. Critical activities take less
than normal activity time. Here, we adopt the “Trade-off” concept

28
We attempt to “crash” some “critical” events by allocating more resources to them, so
that the time of one or more critical activities is reduced to a time that is less than the
normal activity time.
Project time-cost relationship
Total project costs include both direct co sts and indirect costs of performing the
activities of the project. If each activity of the project is scheduled for the duration that
results in the minimum direct cost (normal duration) then the time to complete the
entire project might be too long and substantial penalties associated with the late project
completion might be incurred. At the other extreme, a manager might choose to
complete the activity in the minimum possible time, called crash duration, but at a
maximum cost. Thus, planners perform what is called time cost trade-off analysis to
shorten the project duration. This can be done by selecting some activities on the
critical path to shorten their duration. Shortening the duration on an activity will
normally increase its direct cost. A duration which implies minimum direct cost is
called the normal duration and the minimum possible time to complete an activity is
called crash duration, but at a maximum cost.
■ Let us look at this diagram and first we will find out critical path.

■
■ Practical part to be done in the class room.

■ PERT and CPM Differences

Meaning PERT is a project CPM is a statistical technique

management technique, of project management that
used to manage uncertain manages well defined activities
activities of a project. of a project.

What is it? A technique of planning and A method to control cost and

29
 control of time. time.

Orientation Event-oriented Activity-oriented

Evolution Evolved as Research & Evolved as Construction

Development project project

Model Probabilistic Model Deterministic Model

Focuses on Time Time-cost trade-off

Estimates Three time estimates One time estimate

Appropriate for High precision time estimate Reasonable time estimate

Management of Unpredictable Activities Predictable activities

Nature of jobs Non-repetitive nature Repetitive nature

Critical and No differentiation Differentiated

Non-critical
activities

Suitable for Research and Development Non-research projects like civil

Project construction, ship building etc.

Crashing Not Applicable Applicable

concept

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