market and plant capacity r1
DESCRIPTION
EEPKTRANSCRIPT
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Market and Plant Capacity
Capacity is one amongst important items to be determined in building a
chemical plant
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Sales Income Projection
Project Feasibility study requires data of Sales income projection and manufacturing cost
Sales income projection during FS must take into account
1. Technology
2. Plant capacity
3. Production program
4. Marketing strategy
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Determination of Plant Capacity
Plant Capacity
Sales
Projection
Detailed
Production
Program
Before Project Formulation
1. Market size determination
2. Sales Income projection
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MARKET & PLANT CAPACITY
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Market & Plant Capacity
Typical steps to determine plant capacity
1. Demand & Market Study
2. Sales Forecast and marketing of product/ by product
3. Production program
4. Plant Capacity
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Step-1: Demand & Market Study
Data & alternative projection methods
Determination of demand & market size
Present effective demand (total and by segment)
Projection for the market (total and by segment)
Estimated market penetration
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Step-2 Sales Forecast & Marketing
1) Data & alternativesAdditional data required and alternative marketing program
2) Selection of sales program and marketing strategy
3) Reason for selection of sales program
4) Reason for selecting marketing strategy
5) Estimate of sales revenue
6) Estimate sales and distribution costs
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Step-3: Production Program1
1) DataData required to set production programPossible alternative production programRemember other things: anticipated sales, minimum stock, expected waste, plant capacity parameters, after sale requirement, operational reserves
2) Selection of production programReason for selectionDescribe detail production programDescribe for each product/by product: quality spec, annual quantity, time schedule start up, trial runs, full capacity production)Emissions : Waste & effluent (treated/ untreated): dust, fumes, noiseEmission quality, quantity, time schedule and means of treatment
3) Estimate costs of emission disposal
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Step-3: Production Program2
1) Data
2) Selection of production program
3) Estimate costs of emission disposalTreatment (unless covered in scope of equipment or civil)Disposal (dump and/or sewage)Compensation payments to neighbor for damage
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Step-4 Plant Capacity
1. Data and alternativesDescribe data for the determination of plant capacityList of possible alternatives on plant capacity
2. Determination of feasible plant capacity Select and describe in detail the feasible normal plant capacityState the reason for selectionDescribe nominal maximum capacityThe selection should be based on parameter of production program and minimum economic equipment sizePlant capacity should be determined as feasible normal capacity for the entire plant and main departments (semi-finished products)
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NOTES ON MARKET AND PLANT CAPACITY
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Notes-1: Demand & Market Analysis
Effective demand represents the total quantity of a specific product purchase at a given price in a a particular market, over a given period
A market in narrow terms: a set of consumers, existing and potential
in a broad terms: consumers plus such influences as the government policies obtaining in a particular country or region
demand and market in developing countries often considered as interchangeable
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Demand & Market Analysis
1. Nature of demand analysis
2. Contents of demand analysis
3. Size and composition of present effective demand
4. Analysis by segment
5. Demand projection (domestic and export)
6. Forecasting techniques
7. Market surveys
8. Competition: domestic and foreign suppliers
9. Export projection
10. Total demand
11. Market penetration
12. Sensitivity analysis
13. Precautions for statistical analysis
14. Data for demand and market analysis
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1. Nature of Demand Analysis
In almost all cases secondary data do not exist, however, during early stages of development data can be obtained in import substitution
Special situation may occur, where broad analysis is not necessary
o Abundant natural resources with international market exist
o Product be sizably unsatisfied, e.g fertilizer in a large agricultural country
Demand at a given time is a function of several variable: market composition, competition from other resource, substitution, income, price elasticity of demand, market response, distribution channels, consumption growth not only estimate the demand of particular product, but also to identify product-mix, segmentation, social/institutional constraints
Inadequate/ inaccurate analysis of demand/growth pattern and market penetration usually results in excess production (poor capacity utilization) or insufficient capacity to meet market need and unable to take advantage o the economic of scale
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2. Content of Demand Analysis
Providing certain basic product information Size and composition of present demand in a defined geographical limits
Market segment: end use, consumer groups (e,g different income level), geographical
Demand projection, preferably 10 years
Market penetration
Pricing structure
Establish sales promotion, after-sales service, packaging, sales organization
Factors governing export markets, which is more complex
Despite of definitive characteristics of a product, it may be necessary to modify the specification o product, design, performance, packaging etc without changing basic character of the product
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3. Size and Composition of Present Demand
Actual consumption figure during relevant period can be used to determine current effective demand
Begin with apparent Consumption (Co):
Adjustment should be made e.g consumption by producers, abnormal factor, existence of monopolistic/ oligopolistic or free competition
Apparent consumption must be recognized as being indicative only
Co = P + (I E) + (So - Sc)
where
P = Prod during the period
I = import, E = Export
So = initial stock, Sc = end stock
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4. Analysis by Segment
Demand analysis (present or potential) can be made for whole market or for each market segment separately
After estimation for entire market, it is necessary to segment the market to make future projection and determine the product mix
Segmentation: nature of product, end user, geographical etc, including habit, e.g a higher income segment may show greater response in accepting higher-priced product which in turn greater growth
Market segmentation may facilitate marketing strategy
Market segmentation differ from product to product as well as from country to country
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5. Demand Projection (Domestic & Export)
Market demand projection is the most complex element of market and demand analysis and critical in determining the project viability and appropriate plant capacity
First is to project the potential demand for a product over a reasonable period
Start first with national market (except a wholly export oriented)
Steps necessary is to: define existing consumption and rate of change over period
classify the consumption data by market segment
identify principle determinants of past demand
project the future development of the determinants on demand
forecast the demand
Forecasting a new product is more difficult, may refer to other country
Certain products relate with to specific conditions, e.g television income, fertilizer population growth, newspaper literacy etc
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6. Forecasting Techniques
There are various forecasting techniques ranging from simple to sophisticated one depend on the type of product and the nature of the market
Trend (extrapolation) method
Consumption level method (including income and price elasticities of demand)
The end-use (consumption coefficient) method
Leading indicator method
Regression
Software
etc
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7. Market Survey
Expensive and time consuming, involving extensive fieldwork
The extent depend on how detailed the survey is
Usually a limited surveys are undertaken as a part of a demand and market analysis and to cross check the results of certain forecasting techniques
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8. Competition domestic & foreign Suppliers
Projections of supply of a product are a matter of judgment as they depend on the availability of a product through domestic and imports
Domestic production can take the form of expansion of the existing or from a new industrial unit
The availability of a product in a particular market is also determined by governmental policies relating to import
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9. Export Projection
Export sales have to be taken into consideration (not only import substitution) in determining plant capacity
Can be developed in order to be able to offer a product of international quality standard at a competitive price
The evaluation of export markets has different emphasis than domestic
Products that already exported start with the collection and evaluation of data (quantity, units, price, countries, special characteristics of exported product etc)
Product that have just started to be exported start is to collect the data of pasts imports into the home country, unit cost, exporting country etc
Geographical division of possible exports should be defined in context of particular product, which has to be competitive
Economic of scale may become a determining factor in defining export market e.g car industry
Information on imports and sources of imports into developed country can be obtained without too much difficulty
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10. Total Demand
Both the national and export markets and relates to the phasing of market penetration for a particular product
The demand or market study should also highlight the broad requirement of pricing, quality, technology, customer preference etc
Also define the necessary market strategy
This demand study can serve an effective purpose in determining plant capacity and the strategy to be followed in project formulation and implementation
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11. Market Penetration
This would relates to
Competitiveness
Consumer response
Possible substitution
The conditions of market penetration must be defined, e.g product quality, packaging, marketing & distribution arrangements, after-sales service as to achieve a target of sales and income
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12. Sensitivity analysis Step-3: Production Program1
A number of factors relating to demand are not apparent and can never be fully accounted
Estimates and forecast may go wrong because of Error in base data
Inadequacy of data
Unforeseen economic and socio-political development
Limitations of statistical methods
Unknown factors and relationship
Unrealistic or imprecise assumptions
Technical and technological changes
Changes in economic relationships and structure
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12. Sensitivity analysis Step-3: Production Program2
Things to consider related to uncertainties Increase in income per capita
Technological development
Emergence and disappearance of a dominant competitor
Changes in the structure of family budgets
Emergence of substitute
Bilateral or multilateral trade agreements
Discovery of new raw material
Changes in transportation cost
Changes in tariff barriers
Inflationary price rise (or decline)
New application of the product
Only by systematic approach the uncertainty is reduced to minimum
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12. Sensitivity analysis Step-3: Production Program3
The objective of sensitivity analysis is to determine the impact on the size of demand, aggregate or by segment if the factors influencing demand turn out to be more or less favourable than has been assumed
Example: if the growth rate of demand has been identified at 6.5 % over a period, with rates of annual growth ranging from 2.5 % to 10 %, then the projection may be made on the basis at mid-points between the highest and the lowest or average growth 6.5
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13. Precautions for Statistical Analysis
The applications of demand forecasting techniques requires the utmost caution or can lead to highly misleading results The definitions of characteristics should be precise
When identifying averages, standard, trends etc the statistical test of significance should be taken into account
Data and coefficients associated with one market or a market segment should not be transplanted to others
Etc . etc
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14. Data for Demand and market analysis 1
Basic Data General economic indicators
Government policies, practices and legislation directly related to consumption of the products
Existing level of domestic production
Magnitude of imports
The existing production and imports of substitutes or near substitutes
Data on major/ critical input and complementary product
National production targets
Export volume, if any
Behavioral data e.g consumer habits and responses
Legal information
Specific Demand and market data
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14. Data for Demand and market analysis 2
Specific Demand and market data Should be identified
Depends on the nature of product and type and degree of market research
Past production figures may be decisive, in another but misleading
The same holds true for import data
In developing country, free market forces are hardly operative
etc
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14. Data for Demand and market analysis 3
Specific Demand and market data Should be identified
Depends on the nature of product and type and degree of market research
Past production figures may be decisive, in another but misleading
The same holds true for import data
In developing country, free market forces are hardly operative
etc
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Note-2: Sales Forecast and Marketing
1. Production cost and product-price relationship
2. Direct or partial costing
3. Promotional measures
4. Distribution system
5. Sales revenue
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1. Production cost and product-price relationship
Product pricing impact on the volume of sales and income
The base of any pricing policy: production cost & the market structure of the product
A monopolistic enterprise could perhaps sell its product at the maximum prices obtainable
For enterprises planning an expansion, the production cost and product price relation can be determined fairly accurately
For a new project, the costs have to be anticipated or certain standard cost have to be assumed
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2. Direct or Partial Costing
Analize product pricing in terms of projected sales income from sale can be determined difficult as various alternative can be taken
When estimated production costs will be high during initial production years, the implication should be assessed
In many cases, product pricing has to be adjusted to market response
Product prices in developing country may have to be so determined that are comparable to international prices or within a differential of 20-25 %
Such plants need to be wholly protected
Part of the production costs may have to be absorbed by enterprise and estimated as lost
Lower price production cost may enable to entry domestic market
Product pricing may also be considered in the context of monopoly
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3. Promotional measures
Sales promotion efforts and the target for market penetration should be broadly defined
Sales promotion (advertising, advisory services) is expensive and should be identified and expressed in cost terms
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4. Distribution system
Sales and distribution organization for marketing a particular product should be broadly defined and its costs of operation estimated
All sales are handled by the manufacturing enterprise itself or by a subsidiary marketing company
Products having an international market can be spread over a number of countries
In most cases actual sales and distribution are handled through agents
The appropriate marketing structure should be defined in FS
In some cases, distributions outlets provided by a foreign partner orlicensor
The distribution agencies may be set up directly or jointly with the manufacturers of complementary products
An important part of product marketing is the after-sales facilities and services that products require
A close estimation of freight costs is important
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5. Sales revenue
Projection of sales can only be made according to the market structure, market requirement and marketing strategies
A reasonable projection can be made (annual sales in units and revenue)
The projection could be 15-20 years for machinery and a short life-span 5-10 years for pharmaceuticals
It must be decided in advance whether to include tax, which is need for the fund-flow analysis
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Notes-3: Production Program 1
Define the levels of output during specified period and related to the specific sales forecast
Various production stages should be considered
Full production may not be practicable for most projects during the initial production operations
Initial production problems include growth of sales, market penetration, production problem, adjustment of feedstock, manpower, equipment etc
40-50 % of overall capacity for the first year should not be considered low until the third or fourth year that full production level can be achieved
Growth of skill in operations can also be limiting factor
Production integration of assembly-type industry may initially be low and increase only gradually
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Production Program 2
The determinants of a production program during the initial production years vary considerably from project to project
Single-product, continuous process e.g cement factory the growth of sales may not be a great problem unless excess for domestic
Multiple continuous process, e.g refinery production and sales problem may arise
Batch/ job order production e.g engineering workshop the production aspects may present difficulties, order book would be critical
Assembly/ mass manufacture e.g motor cars sales aspects in relation to price would be dominant
Specific requirement of materials and labor should be quantified
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Production Program 3
The inputs requirements and costs have to be assessed for Basic materials: raw material, semi-processed etc
Auxiliary material and factory supplies
Major utilities
Direct labor requirement
It is also necessary to provide for wastage, damage , or rejection elements in preparing material consumption estimates
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Notes 4: Determination of Plant Capacity
1. Capacity definition
2. Determination of the feasible normal plant capacity
3. Minimum economic size and equipment constraints
4. Resource and input constraints
5. Investment and production costs
6. Projected sales and plant capacity
7. Quantitative relationship SALES PLANT CAPACITY MATERIAL INPUTS
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Capacity definition
Can be generally defined as the volume or number of units that can be produced during a given period
Terminology
Feasible normal capacityThe number of units produced during one year under normal working conditions (equipment and technical of the plant e.g stoppage, downtime, holidays, maintenance tool changes, shift pattern, management system etc
Nominal maximum capacityFrequently corresponds to the installed capacity as guaranteed by the supplier of the plant
Overtime, excessive consumption of supplies, utilities, spare parts and wear and tear will inflate the normal level of productive costs
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2. Determination of the feasible normal plant capacity
Prior to the capacity determination
Minimum economic size
Availability of production technology & equipment
Relative interaction of various components of FS: technology, equipment, availability of resources, investment & production cost, sales & marketing coverage
Several project Constraints Availability of basic materials and inputs or resources
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3. Minimum economic size and equipment constraints
Minimum economic size concept: A cement plant of less than 300 t/d is not usually economic as this may necessitate vertical shaft kiln ( not competitive with rotary kiln in competitive market)
Equipment needs and technological application, though various combinations are possible
Available process technology and equipment are often standardized at specific capacities
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4. Resource and input constraints
Lack of availability of domestic/ external resources and of basic production inputs (raw materials or intermediate products) mainly in developing countries
etc
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5. Investment and production costs
exp
1
212Q
QCC
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6. Projected sales and plant capacity
For new market development the initial production capacity should be higher than initial demand. However this planned under utilization should not go below BEP
The impact of relevant components of the FS at various level of production has to be quantified and alternative cash flows may need to be prepared
etc
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7. Quantitative relationship SALES PLANT CAPACITY MATERIAL INPUTS
Qproduction program = Qsales + Qlosses+
+ Qwarranty services +
+ Qby product +
+ Q production waste
QPlant capacity = Qsales + Qlosses+ Qwarranty
services
Qsupply program = Qfactory inputs + Qlosses
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