Technical analysis

Introduction

• The technical analysis of any project considers the technical feasibility of any project.
• The main and challenging task in this technical analysis is to identify the appropriate
technology for the objective the project is intended to meet.
• It concerns with the technical aspect of a project from both input supply side and output
delivery side and the technology of production.
• For example if you want to take up an agricultural project in a region, you may have to
examine the soil type of the region, water availability, crops grown, livestock breed
suitable for the area etc.
• This information can be used in estimating the possible yield and income from
agriculture.
• Such information can be collected through soil surveys, groundwater surveys, collection
of hydrological data, primary surveys of farmer households etc.
• The technical feasibility of a project is examined by the engineers in the bank.
• The feasibility reports furnished/provided by the borrowers are critically examined.
• Technical analysis is concerned primarily with:
 material inputs and utilities
 manufacturing process/technology
 product mix
 plant capacity
 location and site
 machineries and equipments
 structures and civil works
 project charts and layouts
 work schedule
A. Material inputs and utilities
An important aspect of technical analysis is concerned with defining the materials
and utilities required, specifying their properties in some detail and setting up
their supply programme.
Material inputs and utilities may be classified into four broad categories:
a. Raw materials,
b. Processed industrial materials and components,
c. Auxiliary materials and factory supplies (support material) and
d. Utilities (electricity, water, telephone,.etc.)
a. Raw materials
• Raw materials are those materials which can be taken as an input to produce an output.

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• Raw material could be: agricultural products, mineral products, livestock and forest
products, and marine products.
b. Processed industrial materials and components
• Processed industrial materials and components (base metal, semi-processed materials,
manufactured parts, components and sub assemblies) represents important input for a
number of industry.
• In studying them, the following questions needs to be answered.
• In the case of industrials materials;
• What are their properties?
• What is the total requirement of the project?
• What quantity would be available from domestic sources?
• What quantity would be procured from foreign sources?
• How dependable the supplies are?
• What has been the past trend in price/ what is the likely future behavior of
price?
c. Auxiliary materials and factory supplies
• In addition to the basic raw materials and processed industrial materials and components,
a manufacturing project requires various auxiliary materials and factory supplies like:
• chemicals,
• additives,
• Packaging materials, paints, varnishes, oil, greasing, cleaning materials,
etc.
• The requirement of such auxiliary material should be taken into account in the feasibility
study
d. Utilities
• A broad assessment of utilities (power, water, steam, fuel, etc.) may be made at the time
of input study though a detailed assessment can be made only after formulating the
project with respect to location, technology, and plant capacity.
• In general, in the materials and inputs study part of the feasibility study, the experts
assigned for the task have to:
• Identify the required types of inputs, their sources and brief assessment of alternative
types of inputs, their relative merits in terms of quality of the product (and hence
competitiveness in the market); and alternative sources of supply;
• Describe general availability of Raw materials, Auxiliary materials, Factory supplies, and
Utilities.
• List annual supply requirements of material inputs;
• Summarize availability of critical inputs and possible strategies of acquiring these inputs;
• Determine the procurement period of each imported input, if any.
• Out line costs related to procurement and storage of inputs (stores, containers of required
type; transport costs required e.g. forklifts etc.), and

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• Identify the number of personnel required for this function giving due emphasis for
quality of man power
B. Manufacturing process/technology
• It is to be ensured that the manufacturing process to be adopted is modern and at the same
time appropriate to the level of economic development of the country.
• Normally the choice of technology is influenced by a variety of consideration:
i. Plant capacity/production capacity/quantity of product proposed to be
manufactured: there is a close relationship between plant capacity and production
technology.
• If the quantity to be produced is large, mass production techniques should be followed
and relevant technology is to be adopted.
• Quality of product needed also determine the type of technology to be adopted.
• For example, pharmaceutical product should be produced in high quality, hence
sophisticated technology is required to achieve the desired quality.
• If the technology is protected by patent rights etc., it can be obtained either by licensing
arrangement or the technology can be purchased outright.
ii. Principal Inputs: the choice of technology depends on the principal inputs available
for the project.
• In some cases, the raw materials available influence the technology chosen.
• E.g. the quality of limestone determine determines whether the wet or dry process should
be used for a cement plant.
iii. Investment outlay and production cost:
• The more initial outlay and production cost, the more need of modern technology which
saves cost.
iv. Latest development:
• The technology adopted must based on the latest development in order to ensure that the
likelihood of technological obsolescence in the near future, at least, is minimized
v. Ease of absorption:
• Sometimes a high level technology may be beyond the adoptive capacity of a developing
country.
• Another issues related with technology is: acquiring technology, and appropriateness
of technology.
• Acquiring Technology
• The company can acquire technology by way of
a. Technology licensing
b. Outright purchases
c. Joint ventures arrangement
a. Technology licensing: this gives the licensee (the one who receive the technology) the
right to use patented technology and get related know how on a mutually agreed bases.
• The contract for technology licensing should be carefully scrutinized with respect to

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 i. Definition of technology to be acquired,
ii. Cost of technology licensing,
iii. Guarantees provided by the licensor,
iv. Duration of technology licensing,
v. Purchase of intermediate products, components etc.
b. Outright purchase (purchase of technology):
• This mode of acquiring technology may be used in certain kinds of industries. It’s
appropriate when
i. there is no possibility of significant improvement in technology in the foreseeable
future and
ii. there is hardly any need for technological support from the seller of technology
c. Joint venture agreement:
• The supplier of technology may participate technically as well as financially in the
project.
• Financial participation is typically in the form of equity holding/equity financing.
• It’s argued that financial participation may strengthen the motivation of technology
supplier to transfer improvement promptly/punctually.
• Appropriateness of Technology:
• Appropriate technology refers to those methods of production which are suitable to local
economic, social and cultural conditions.
• The technology should be evaluated in terms of the following questions:
• Whether the technology utilizes local raw materials?
• Whether the technology utilizes local manpower?
• Whether the goods and services produced cater/satisfy the basic needs?
• Whether the technology protect the ecological balance?
• Whether the technology is harmonious with social and cultural conditions?
C. Product Mix
• An important aspect in technical analysis of a project is product mix decision.
• Customers differ in their needs and preferences.
• Hence, variations in size and quality of products are necessary to satisfy the varying
needs and preferences of customers.
• The choice of product mix is usually guided by market requirements.
• For example, a garment manufacturer may have a wide range of choices in terms of size
and quality to cater to different customers.
• It may be noted that the variation in quality can enable a company to expand its market
and enjoy higher profitability.
• Hence, product mix as an element of technical analysis has to be done well in light of the
needs and wants of customers.

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 D. 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 plant capacity decision.
a. Technological requirements
b. Input constrains
c. Market condition
d. Resource of the firm
e. Governmental policy
a. 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 be expected to produce a capacity of at least
300 tones per day, otherwise it may not be cost effective and the like.

b. Input constraints:
• In a developing country like Ethiopia, 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 import may be inadequate.
• Constraints of these kinds should be borne in mind while choosing the plant capacity

c. Market conditions:
• The anticipated market for the product have 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.
• Addition to plant capacity may be effected by the growth of market.

d. Resource of the firm:

• The resource, 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 capacity.

e. Government policy: the capacity level may be influenced by government policy

E. Locations and Site
• The choices of location and site follow an assessment of demand, size, and input
requirement.
• Though often used synonymously, the term ‘location’ and ‘site’ should be distinguished.
• Location refers to a fairly broad area like a city, an industrial zone, or a coastal area;
while site refers to specific pieces of land where the project would be set up.

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• The choices of location are influenced by a variety of considerations:
• Proximity to raw materials and market,
• Availability of infrastructure,
• Government policy and other factor.
• Proximity to Raw Materials and Markets
• An important consideration for location is the proximity to sources of raw material and
nearness to the market for final products.
• In terms of a basic locational model, the optimal location is one where the total cost is
minimized.
• This generally implies:
a. A resource based project like cement plant should be located close to the sources
of raw material.
b. A project based on imported material may be located near a port,
c. A project manufacturing a perishable product should be close to the center of
consumption.
Availability of Infrastructure
• Availability of power, transportation, water and communication 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 constraints, particularly in the case of an electricity intensive project like
an aluminum plant.
• In evaluating power supply the following should be taken into consideration:
• Availability of power,
• Stability of power supply,
• The structure of power tariff, and
• The investment required to install this power from the supplying agency.
• For transporting the inputs of the project and distributing the output of the project,
adequate transport connections are required.
• Given the plant capacity and the type of technology, the water requirement for the
project can be assessed.
• In addition to power, transport and water, the project should have adequate
communication facilities like telephone.
Governmental Policies
• Government policies have a bearing on locations.
• In the case of public sector project, location is directly decided by the government.
• It may be based on a wider policy for regional distribution 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.

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• More specifically the government offers inducements for establishing industries in
backward areas.
• These inducements consists of subsidies, concessional loan (i.e., loan at a lower interest
rate), tax relief and other benefits.
Other Factors
• Several other factors have to be assessed before reaching a location decision:
• ease of coping with environmental pollution,
• labor situation,
• climatic conditions and
• general living condition.
Site Selection
• Once the broad location is chosen, attentions need to be focused on the selection of a
specific site.
• Two to three alternative site must be considered and evaluated with respect to cost of
land and cost of site preparation and development.
• The cost of land tends to differ from one site to another in the same broad location.
• Sites close to a city cost more whereas sites away from cities costs less.
• The cost of site preparation and development depends on the physical feature of the site,
the need to demolish and relocate/reposition existing structures, and the work involved in
obtaining utility connections to the site.
F. Machineries and Equipments
• The requirements of machineries and equipments are dependent on production
technology and plant capacity.
• It is also influenced by a type of project
• The equipment required for the project may include
- Plant (process) equipment - Instruments
- Mechanical equipment - Controls
- Electrical equipment - Internal transportation system and others
• In addition to the machineries & equipment, a list should be prepared of spare parts and
tools required. This may be divided into
a) Spare parts and tools to be purchased with the original equipment and
b) Spare parts and tools required for operational wear and tear.
G. Structure and Civil Works
• Structures and civil works may be divided into three categories:
Site development and preparation
Building and structure
Outdoor works
• Site Development and Preparation: This cover the following
1. Grading and labeling of the site
2. Demolition and removal of existing structures

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 3. Relocation of existing pipelines, cables, roads etc
4. Reclamation of swamps and draining and removal of standing water
5. Connections for the following utilities from the site to the public networks;
electric power, water for drinking and other purpose, communication (telephone,
fax, internet etc).
6. Other site preparation and development works
• Building and Structure
• Building and structure may be divided into
1. Factory or process building
2. Ancillary building required for stores, laboratories, utility supply centers,
maintenance service and others
3. Administrative building
4. Staff welfare building, cafeteria, medical service center etc.
5. Residential building
• Outdoor Works
• Outdoor works covers
1. Supply and distribution of utilities
2. Handling and treatment of emissions, wastages and effluents
3. Transportation and traffic arrangements
4. Outdoor lighting
5. Landscaping
6. Enclosure and supervision (boundary wall, fencing, barriers, gates, doors, security
pots etc.)

Summary
• The technical feasibility of the project is undertaken to make sure the appropriateness of
technology, material inputs, plant capacity, location, site etc.
• In the technical analysis part it has to be ensured that the manufacturing process to be
adopted is modern and appropriate to the level of economic development of the country.
• And also the analyst should have to consider the various factor which influences the
choice of technology.
• Plant (production) capacity, as a basic element of technical analysis, refers and market,
availability of infrastructure government policies and other factors have to be taken into
consideration.
• The machineries and equipment being selected for a project greatly depend on production
technology of plant capacity.
• Technical analysis part also comprises of structure and civil work, which incorporates
site development and preparation, building and structure, and outdoor works.