PROJECT MANAGEMENT

WHAT IS PROJECT?
• Projects are temporary in nature and have definitive start dates and
definitive end dates. The project is completed when its goals and
objectives are accomplished. Projects exist to bring about a product,
service or result that didn’t exist before. In this sense, a project is
unique. Thus a project produce the unique, tangible or intangible,
product or service or result.
• Project Vs Operations: Operations are ongoing & repetitive where
as projects are temporary.
• A project is successful when it achieves its objectives and meets or
exceeds the expectations of stakeholders. The stakeholders are the
people who are actively involved with the work of the project or have
something to gain or lose as a result of the project. The
stakeholders are thus: Project manager, Project sponsor, Customer,
Board of directors, Executive managers, Department mangers,
Vendors, Suppliers, Project management office etc.
 WHAT IS PROJECT MANAGEMENT?
• Project management brings together a set of tools and techniques –
performed by people – to describe, organize, and monitor the work of
project activities. Project management involves applying knowledge,
skills, and techniques during the course of the project to accomplish
the project requirements.
• Project managers are the people responsible for managing project
processes and applying the tools and techniques used to carry out
the project activities. It is the responsibility of the project manager to
ensure that project management techniques are applied and followed.
• Many times, stakeholders have conflicting interests. It’s the
responsibility of project manager to understand these conflicts and try
to resolve them. Project manager has to identify and meet all needs
and constraints of key stakeholders. And when in doubt, stakeholders
conflict should always be resolved in favor of customers.
 Project mgt. Continued…
• Project management is a process that includes planning, putting the
project plan into action, and measuring progress and performance. It
involves identifying the project requirements, establishing project
objectives, balancing constraints, and taking the needs and
expectations of the key stakeholders into consideration. Planning
sets the standard for the rest of project’s life and is used to track
future project performance.
• Programs: Programs are groups of related projects that are
managed using the same techniques in a coordinated fashion. When
projects are managed collectively as programs, they capitalize on
benefits that wouldn’t be achievable if the projects were managed
separately. This could be the case where a very large program exists
with many sub projects under it. Each sub project has its own project
manager, who reports to program manager. The management of this
collective projects is called as program management and it involves
centrally managing and coordinating groups of related projects to
meet the objectives of the program.
 Project mgt. Continued…
• Portfolios: Portfolios are collections of programs and projects that meet a
specific business goal or objective. Say a construction company under
retail portfolio might have number of programs and projects like – retails,
single family residential, multifamily residential, etc. The objective of any
program or project in this portfolio is to meet the strategic objectives of
the portfolio, which in turn should meet the objectives of the department
and ultimately the corporation. Portfolio management encompasses
managing the collections of programs and in the portfolio. This includes
weighing the value of each project, or potential project, against the
portfolio’s strategic objectives. It involves monitoring, finance
management and assuring the efficient use of resources. Portfolio
management is generally performed by a senior manager in the
organization.
• Project Management Offices: PMO is generally a centralized
organizational unit that oversees the management of projects &
programs. PMO has to establish and maintain procedures and standards
for the project management methodologies. They serve as mentors to
junior level project managers and act as consultants to senior level
managers.
 NECESSARY SKILLS FOR PROJECT
MANAGERS
1. Communication Skills :
One of the single most important characteristics of a first-rate project manager is
excellent communication skills. Written and oral communications are the backbone of
all successful projects. As a creator or manager of most of the project
communication (project documents, meeting updates, status reports, and so on), It’s
your job to ensure that the information is explicit, clear and complete so that the
audience will have no trouble understanding what has been communicated.
2. Organizational and Planning Skills :
Organizational and planning skills are closely related and probably the most
important, after communication skills, a project manager can possess. As project
manager, you will have project documentation, requirements information, memos,
project reports, personnel records, vendor quotes, contracts, and much more, to
track and be able to locate at a moment’s notice. You will also have to organize
meetings, put together teams, and perhaps manage and organize media release
schedules, depending on your project.
Time Management skills are closely related to organizational skills. Planning skills go
hand in hand with organizational skills. Combining these two with excellent
communication skills is almost a sure guarantee of your success in the project
management field.
 Skills Contd…
• 3. Budgeting Skills :
• Project managers establish and manage budgets and therefore need some
knowledge of finance and accounting principles. Especially important in this skill
area is the ability to perform cost estimates for project budgeting.
• 4. Conflict Management Skills :
• Conflict management involves solving problems. Problem solving is really a
twofold process. First, you must define the problem by separating the causes from
the symptoms. Often when defining problems, you end up just describing the
symptoms instead of really getting to the heart of what’s causing the problem. To
avoid that, ask yourself questions lie “Is it an internal or external problem?” To avoid
that, ask yourself questions like “Is it an internal or between team members? And “Is
is managerial?” and “What are the potential impacts or consequences?” These kinds
of questions will help you get to the cause of the problem.
• Next, after you have defined the problem, you have some decisions to make. It
will take a little time to examine and analyze the problem, the situation causing it, and
the alternatives available. After this analysis, the project manager will determine the
best course of action to take and implement the decision. The timing of the decision
is often as important as the decision itself. If you make a good decision but
implement it too lake, it might turn into a bad decision.
 Skills contd…
5. Negotiation and Influencing Skills :
Effective problem solving requires negotiation and influencing skills. Simply put,
negotiating is working with others to come to an agreement.
Negotiation on projects is necessary in almost every area of the project, from scope
definition to budgets, contracts, resource assignments, and more. This might involve
one-on-one negotiation or with teams of people, and it can occur many times
throughout the project.
Power and politics are techniques used to influence people to perform. Power is the
ability to get people to do things they would not do otherwise. It is also the ability to
change minds and the course of events and to influence outcomes. Politics involve
getting groups of people with different interest to cooperate creatively even in the
midst of conflict and disorder.
6. Leadership Skills :
Leaders and managers are not synonymous terms. Leaders impart vision, gain
consensus for strategic goals, establish direction, and inspire and motivate others.
Even though leaders and managers are not the same, project managers must exhibit
the characteristics of both during different times on the project. Understanding when
to switch from leadership to management and then back again is a finely tuned and
necessary talent.
 Skills Contd….
7. Team-Building and Motivating Skills :
Project managers will rely heavily on team-building and
motivational skills. Teams often formed with people from
different parts of the organization. These people might
or might not have worked together before, so some
component of team-building groundwork might involve
the project manager. The project manager will set the
tone for the project team and will help the team members
work through the various stages of team development to
become fully functional. Motivating the team, especially
during long projects or when experiencing a lot of bumps
along the way, is another important role the project
manager fulfills during the course of the project.
 PROJECT MGT. KNOWLEDGE AREAS

• Project Integration Management

• Project Scope Management
• Project Time management
• Project Cost Management
• Project Quality Management
• Project Human Resource Management
• Project Communication Management
• Project Risk Management
• Project Procurement Management
Project Integration Management
• Process Name • PM Process Group
• Develop Project Charter • Initiating
• Develop Preliminary project Scope • Initiating
Statement
• Develop Project management plan • Planning
• Direct & manage project execution • Executing
• Monitor & control project work • Monitoring & controlling
• Integrated change control • Monitoring & controlling
• Close project • Closing
 Project Scope Management
• Process Name • PM Process Group
• Scope Planning • Planning
• Scope Definition • Planning
• Create WBS* • Planning
• Scope Verification • Monitoring & Controlling
• Scope Control • Monitoring & Controlling

• * Work breakdown structure

 Project Time Management
• Process Name • PM Process Group
• Activity Definition • Planning
• Activity Sequencing • Planning
• Activity Resource • Planning
Estimating
• Activity Duration • Planning
Estimating
• Schedule Development
• Planning
• Schedule Control • Monitoring & Controlling
 Project Cost Management
• Process Name • PM Process Group
• Cost Estimating • Planning
• Cost Budgeting • Planning
• Cost Control • Monitoring & Controlling
 Project Quality Management
• Process Name • PM Process Group
• Quality Planning • Planning
• Perform Quality • Executing
Assurance
• Perform Quality • Monitoring &
Control Controlling
Project Human Resource Management

• Process Name • PM Process Group

• Human Resource • Planning
Planning
• Acquire Project Team • Executing
• Develop Project Team • Executing
• Manage Project Team • Monitoring & Controlling
 Project Communication Management

• Process Name • PM Process Group

• Communications • Planning
Planning
• Information Distribution • Executing
• Performance reporting • Monitoring & Controlling
• Manage Stakeholders • Monitoring & Controlling
 Project Risk Management
• Process Name • PM Process Group
• Risk Management • Planning
Planning
• Risk Identification • Planning
• Qualitative Risk Analysis • Planning
• Quantitative Risk • Planning
Analysis
• Risk Response Planning
• Planning
• Risk Monitoring & Control • Monitoring & Controlling
 Project Procurement management
• Process Name • PM Process Group
• Plan Purchases & • Planning
Acquisitions
• Plan Contracting • Planning
• Request Seller Response • Executing
• Select sellers • Executing
• Contract Administration • Monitoring & Controlling
• Contract Closer • Closing
Model Questions
 Project Identification
• Understanding How Projects Come About
• Needs & Demand
• Market Demand: The demands of the market place can drive the
need of the project.
• Business Need: Need sensed by Input – Process – Output system
of business.
• Consumer Request: Consumer request can drive the project. The
consumer can be internal or external.
• Technological Advances: Technological advances in various fields
brings in new projects.
• Legal Requirement: Private agencies and government agencies
generate new projects as a result of legislative amendments.
• Social Need: Projects come up as a result of social needs.
 Project Identification (cont.)
Project identification is concerned with collection, compilation and
analysis of economic data for the eventual purpose of locating
possible opportunities for investment and with the development of
such opportunities.

Opportunities according to Peter Drucker are of three kinds: additive,

complementary and breakthrough.
Additive opportunities are those which enable better utilization of
existing resources without change in character of business. These
opportunities involve minimum disturbance to the existing state of
affairs and hence carry least risk.
Complementary opportunities involve the introduction of new ideas and
lead to certain amount of change in the existing structure.
Breakthrough opportunities on the other hand involve fundamental
changes in both the structure and character of business.
 Sources of Project Ideas
1. Analysis of Industries’ Performance
2. Analysis of Inputs & Outputs of Industries
3. Analysis of Imports and Exports
4. Five year plan and Government Policies
5. Suggestions of Financial Institutions & Development Agencies
6. Survey of Local Resources
7. Analysis of Economic & Social Trends
8. New Technologies
9. Emulating Consumption Patterns from Abroad
10. Restoring Life to Sick Units
11. Analysis of Unsatisfied Needs of Consumers
12. International and National Trade Fairs & Industry Exhibitions
13. Stimulate Creativity for Generation of new Project Ideas
14. Chance Factor
 Criteria for Selecting Project
• Investment Size
• Location
• Technology
• Equipment
• Marketing
 Feasibility
• Feasibility Report: Before starting a small-scale industry,
it is mandatory for entrepreneurs to consult the Director
of Industries Service Institute (SISI) located in the state.
The SISI guides entrepreneurs as to the type of industry
to start, where to start and how to start it. SISI suggests
the lines on which the project reports for the proposed
units should be prepared for the consideration of various
financial institutions with a view to securing financial
assistance. It also provides technical guidance related to
selection of raw material, type of machinery &
information about various incentives available to the
small scale industries from various organizations.
 Project Feasibility Analysis
• Project feasibility analysis includes market analysis,
technical analysis, financial analysis & social cost-benefit
analysis.
• Market Analysis: A market analysis is a method of screening the
project ideas as well as means of evaluating a project’s feasibility in
terms of market. The market analysis should cover the following
areas.
1. A brief market description including market area, channels of
distribution, transportation & general trade practices.
2. An analysis of past & present demand, identification of major
consumers.
3. An analysis of supply & competitive position of product , such as
selling price, quality & marketing practices of competitors.
 Feasibility Analysis (cont.)
• The technical analysis of a project feasibility study
establishes whether the project is technically feasible or
not. It involves following aspects.
1. Description of product & alternative manufacturing processes.
2. Determination of plant size, selection of machinery & equipments, set
up time & technical factors.
3. An identification of plant location, building & plant layout.
4. A study of availability of raw materials, its cost, terms of payment,
sources of supply etc.
5. An estimate of labour requirements. Skilled, semi-skilled & unskilled
labour. Supervisory work force required.
6. Waste & waste disposal.
7. An estimate of production cost of the product.
 Feasibility Analysis (cont.)
• Financial analysis of feasibility study consists of
preparation of financial statements to evaluate
profitability. Risk analysis is necessary for the investment
decision. The financial analysis should include:
1. Statement of total project cost, initial capital requirement, and cash
flow statement in case of new companies.
2. Supporting schedules for financial projections, collection period,
inventory levels, payment period, element of production cost, selling,
administrative, & financial expenses.
3. Financial analysis showing returns on investments, returns on equity,
break-even volume, and price analysis.
4. A sensitivity analysis to identify items having substantial impact on
profitability or possibly a risk analysis.
 Feasibility Analysis (cont.)
• Social cost-benefit analysis is necessary to justify a project
from the national viability point of view. We not only take into
account direct costs & benefits but also the cost of all entities
connected with the project and the benefits which will be
enjoyed by all such entities. This analysis include following
aspects broadly:
1. Priorities as per national five year plan.
2. Employment capability.
3. Social acceptance.
4. Pollution & pollution control.
5. Conservation of energy.
6. Generation of foreign exchange.
7. Overall economic development.
 Project Formulation
• Project formulation is a process whereby the
entrepreneur makes an objective and independent
assessment of various aspects of an investment
proposition of a project idea for determining its total
impact and also its liability. This forms an important
stage in the pre-investment phase – that is the period
from the conception of an idea until the final analysis to
decide about the future of the project idea. This makes it
an analytical management aid. The aim of project
formulation is to achieve the project objectives with the
minimum expenditure and adequate resources.
 Steps in Project Formulation
• A project comprises of a series of activities for achieving
predetermined objectives. In this view the objectives of
the project should be defined as precisely as possible.
The objectives may be social, economic, or combination
of the both. They can be defined under the following
categories.
1. General objectives: A general objective merely states in broad terms
the achievements expected of the project.
2. Operational objectives: Operational objective specifically mentions
results expected from the implementation of project.
The definition of objectives in clear terms helps in quantifying
physical, financial, human & other resources requirements.
 Stages of Project Formulation
• The process of project development has seven distinct
& sequential stages. The project formulation is a result
of completion of these stages. The stages are:
1. Feasibility analysis
2. Techno-economic analysis
3. Project design and Network analysis
4. Input analysis
5. Financial analysis
6. Social Cost-Benefit analysis
7. Pre-investment analysis.
 Stages of… (cont.)
1. Feasibility analysis: At this stage, the project
idea is examined from the point of view of
whether to go for detailed investment proposal
or not. The project idea is examined in the
context of internal & external constraints three
alternatives could be considered – Project idea
seems to be feasible or not feasible or unable to
arrive at conclusion. If project idea is feasible we
go to second step else abandon the idea.
 Stages of… (cont.)
2. Techno-economic analysis: In this step,
estimation of project demand potential and
choice of optimal technology is made. It is
necessary to know the market for the
goods/services produced by the project
implementation. Therefore market analysis is
also in-built in this step. Techno-economic
analysis gives the project a unique individuality
and sets the stage for detailed design
development.
 Stages of… (cont.)
3. Project design and network analysis:
This important step defines individual activities
which constitute the project and their inter-
relationship with each other. The sequence of
events of the project is presented. Detailed work
plan of the project is prepared with time
allocation for each activity and presented in a
network drawing. Project design is the heart of
the project as based on this resources required
can be detailed and provided to the project.
 Stages of… (cont.)
4. Input analysis: This step assesses input
requirement during construction of the project
and also during the operation of the project. The
input requirements on quantitative and
qualitative basis for each activity is determined
and total input requirements are worked out.
This determines project feasibility from the point
of view of resource requirements. This analysis
also helps in assessing the cost and helps
financial analysis and cost-benefit analysis.
 Stages of… (cont.)
5. Financial analysis: This stage involves in
estimating project cost, operating cost & funds
requirements. Financial analysis also helps in
comparing various project proposals on common
scale, thereby aiding the decision maker. Some of
the analytical tools used in financial analysis are –
discounted cash flow, cost-volume-profit analysis
and ratio analysis. Since the costs & benefits as the
out come of the project has long time-horizon it is
necessary to exercise due care & foresight in
financial forecasts.
 Stages of… (cont.)
6. Cost-Benefit Analysis: Overall worth of the project
is the main consideration. There are three
categories –
Primary – Cost-benefit analysis from the point of
view of project implementing body.
Secondary – Cost-benefit from the point of view
of other than project implementing boy. Also
called as spill-over or multiplier affect.
Tertiary – Non quantifiable spill-over or multiplier
effect.
 Stages of… (cont.)
7. Pre-investment analysis: The project proposal
gets a formal and final shape at this stage. All the
results obtained in the above steps are
consolidated and various conclusions arrive at to
present a clear picture. Now, at this stage the
project sponsoring body, project implementing
body and the external consulting agencies are
able to decide whether to accept the proposal or
not. And investment decision regarding the project
can be taken by project implementing body.
 Project Risks
• Types of project risks
1. Design risk
2. Implementation risk
3. Operational risk
4. Environmental risk
5. Finance risk
6. Interest rate risk
7. Structural risk
8. Human resource risk
9. Execution risk
10.Management risk
11.Technology risk
12.Disruption risk
 Focusing on Constraints
• Theory of constraints recommends the manager’s
focus on constraints or bottlenecks. For projects, the
constraint is critical path. Once managers identify
bottlenecks the techniques of resource allocation,
resource leveling, monitoring, crashing etc. can be
used to reduce the risk of not completing project in
the planned time. But goldratt adds an important
second constraint to this framework that managers
often overlook: scares resources needed by tasks
not only on and off critical path but also by the other
projects.
 Identifying the Risks
• Kleindorfer has identified three main
categories as the primary sources of
supply chain disruption risk: Operational
contingencies, which include equipment
malfunctions and systemic failures, abrupt
discontinuity of supply, bankruptcy, fraud,
labour strikes; natural hazards such as
earthquakes, hurricanes, storms; and
terrorism or political instability.
 Risk Analysis
• Projects with quantified benefits: The internal rate of return
(IRR) is the measure most often used to indicate the
economic viability of Bank financed projects. Calculation of
IRR requires a set of assumptions regarding the conditions
faced by the project which prevail during its life. However,
such projects have very long life and conditions faced by
the project may change due to various reasons. Sensitivity
analysis is carried out to determine the effects of possible
changes in the values of key variables ( costs, yields, and
price of inputs and outputs) on project’s IRR. Risks are
generally higher in projects for which the base-case IRR is
only marginally higher than opportunity cost of capital.
 Risk Analysis (cont.)
• Projects for which Benefits are not Quantifiable: For projects in
certain sectors or sub-sectors such as education, health, sanitation
& family planning, project benefits cannot be quantified and the risks
cannot be measured by sensitivity analysis. The real benefit of this
type of project relate to broad socio-economic goals. In such cases,
the relationship of project risk to the project objectives should be
explained. The objectives should be discussed in relation to the
project cost and output, and also in relation to the socio-economic
objectives sought by the project. In case of projects for which
benefits can be quantified, the risk relating to both the costs and
benefits should be discussed. Investment costs, in such projects,
relate to construction of building and necessary infrastructure. The
risk on the cost side could be the delay in implementation of project.
In such projects, the risks are greater on benefit side. This risk is
that the quantified benefits are not achieved. While it may not be
possible to to eliminate such risks, it is essential to minimize them.
 Location of an Enterprise
• Location considerations for the establishment of manufacturing
plants is critical. An ideal site certainly contributes to the smooth and
efficient functioning of an enterprise. The study of location forms an
important branch of economic geography. The need for plant
location arises for new enterprise as well as established enterprise.
The established enterprise need it for various reasons such as –
expansion, decentralization, diversification, end of lease contract,
abandoning undesirable location, shifting of market, depletion of raw
materials etc.
• Selection of most economic site: According to Kimball & Kimbal, the
most advantageous location is that at which the cost of gathering
material, fabricating it into finished product and the cost of
distributing finished product to final consumer is minimum. The three
parameters form the three apex of triangle & location of enterprise is
at the most appropriate place within the triangle.
•
L
 Steps in Enterprise Location
• The selection of enterprise location involves three main steps.
Selection of region or general area, selection of particular community
and selection exact plant site. PM 1.doc
• Weber’s theory of Industrial Location: Weber’s theory divides the
factors influencing Industrial location into following :
1. The general regional factors of transport and labour costs. These are
regarded as primary causes affecting industrial location.
2. The local factor of ‘agglomerative’ forces regarded as the secondary
causes responsible for redistribution of industry.
• Limitations of Weber’s theory: The theory is base on wrong
assumption about labour supply. The transport cost depend on mode
of transport, nature of goods etc. Location & size of market may vary
with changes in economy. Non-economic forces also exert important
influence. Classification of materials is not proper.
 Legal & Govt. aspects
• The project site is sometimes determined by the government’s
licensing regulations and not by the choice of the promoters. The
government has eased restrictions on location of industries. A
notification issued by the Ministry of Industry mentioned that under new
industrial policy, industrial licensing exemption granted to all industries
except certain specified categories. These include that project should
not be located within 25 km from the periphery of standard urban areas
limits of city with population of more than one million, as per 1991
census. But if the industrial units were located in an area designated as
an ‘Industrial area’ by the concerned state government before July 25,
1991, then this restriction would not apply. The applications were
received for grant of relaxation on account of location. However, it is
only the environment, safety, land use, urban planning and related
factors that were kept in view while considering the industrial licence
applications received .
 Legal & Govt. aspects (cont.)
• Industrial Growth Centers scheme: For the promotion of industries
in backward areas, the scheme of establishing growth centers was
envisaged in 1988 for establishment of 100 growth centers around
the country. The criteria for the location of centers is as under:
i. Outside 50 km. of cities with population above 2.5 million.
ii. Outside 30 km. of cities with population above 1.5 million but below
2.5 million.
iii. Outside 15 km. of cities with population above 0.75 million but below
2.5 million.
The objective of the scheme has been to provide the best of the infrastructure
facilities nation wide. The growth centers were so located that sufficient land
was available for the development of housing and for the promotion of tertiary
activities. Further the locations prone to ecological problems were not
selected. Such centers were expected to cover an area of radius 20 – 25 km.
 Legal & Govt. aspects (cont.)
• State incentives provide assistance and facilities to allure &
motivate techno-entrepreneurs to start their venture in their
region. The nature of assistance, however, varies from
state to state. PM 2.doc
• Industrial location policy: Govt. of Maharashtra has
revised location policy for BMR. The policy has been in
force for two decades from its revision in Feb. 1984. The
revised policy is applicable to all industries in BMR
excluding cotton textile industry, service industries &
service industrial estates. The location clearance, however,
is subject to environmental approvals from center & state
govt. and also provisions of the regional plan.
 Industrial location policy M.S. (cont.)
• BMR was divided into three zone for the purpose of implementation
of policy.
a. Zone I : Consisting of Greater Bombay and areas of Thane
municipal corporation and Mira- Bhayndar Municipal council.
b. Zone II : Consisting areas of Kalyan & navi Mumbai corporations,
Ambarnath, Kulgaon- Badlapur Municipal councils, Bhivandi and
Uran sub-regions and Vasai-virar sub-regions.
c. Zone III : Consisting of the remaining areas of BMR
Industries were categorized into three categories – namely non-
polluting (listed in schedule I), highly polluting (listed in schedule II)
and other than the two. A new unit or expansion under the category
of schedule II is allowed only in the MIDC areas in Zone II.
 Factory Design & Layout
• Factory Design: The term factory design refers to the
for a particular type of building, arrangement of
machinery, and provision of service facilities, lighting,
heating, ventilation etc. in the building.
• Plant Layout: A simple, clear and comprehensive
definition given by Knowels & Thomson says that plant
layout involves –
i. Planning & arranging manufacturing machinery,
equipment and services for the first time in completely
new plants;
ii. The improvements in layouts already in use in order to
introduce new methods & improvements in
manufacturing procedures.
 Factors affecting Factory Design
The factory design and layout should be flexible so that it may
adapted easily to technological change, modernization,
diversification and expansion with minimum cost & time.
The following factors influence the design of a factory:
1. Location
2. Nature of manufacturing process
3. Plant layout
4. Material handling and movement
5. Cost of building
6. Lighting, ventilation and service facilities
7. Nature of product
8. Future expansion, modernization etc.
9. Projecting the image of factory
 Importance of Layout
The importance of layout lies in enhancing manufacturing functions
and supervision and control. Some advantages are:
1. Economies in material handling
2. Reduction in accidents,
3. Effective use of available area,
4. Minimization of production delays,
5. Avoidance of bottlenecks,
6. Better production control,
7. Maximization of production,
8. Improved quality control,
9. Improved utilization of labour,
10. Better supervision, and,
11. Increased revenues and profits.
Considerations in factory Layout
While choosing the layouts for a factory, the
following factors should be taken into
consideration.
1. Nature of product,
2. Volume of production,
3. Material handling,
4. Type of equipment,
5. Factory building,
6. System of manufacture,
7. Lighting & ventilation,
8. Service facilities.
 Optimum size of Plant
• The scale and size of operations of the unit determine its efficiency
and profitability.
• A small scale unit can easily be formed. It has flexibility and
ownership control. Such units are most suitable because of limited
demand and changing tastes, local market, Limited capital limited
risk of loss, shorter gestation period etc. A firm may start and
steadily move towards expansion in order to enjoy the benefits of
economy of scale. After reaching a particular level, the law of
diminishing returns or increasing cost begins and acts as a brake on
further expansion. This level is probably known as the optimum
level, indicating the most profitable combination of resources
providing equi-marginal utility or return. The optimum size of plant
achieves equi-marginal returns from all resources or factors of
production.
 Project Report
1. Objective & scope of project
2. Product characteristic
3. Market position & trend
4. Raw material
5. Manufacturing process
6. Plant & machinery
7. Land & building
8. Financial implications
9. Marketing channels
10. Personnel
 Project Report Numerical
• An entrepreneur wishes to start a new weaving factory by installing
96 automatic looms & related machinery. The looms with complete
installation are available for 2 lakhs rupees each. The pirn winding
machine is required for making weft pirns from yarn cones. The pirn
winding machine can be purchased at price of rupees 3 lakhs. The
dimension for each loom is 3m X 2m including working place around
the loom. The pirn winding machine measures 4m X 2m floor space.
The open space necessary for material handling measures 30% of
the machine space. Space necessary for storage of raw materials,
work in progress & finished goods measures 20% of machine
space. Total area necessary for inspection of cloth, grey folding,
maintenance & overall administration measures 50% of machine
space. The land cost per 100 m2 is 50000 rupees. Plot area : built
up area ratio allowed is 1:1. The construction cost rupees 10000 per
m2. The entrepreneur wishes to buy land double the present
requirement with view of future expansion. (cont.)
Project Report Numerical (cont.)
• The grey fabric to be produced as a continuous job order has linear
fabric weight of 200g. Each loom produces 100m of fabric per day of
three shifts. The yarn cost per kg is rupees 140. The buyer is ready
to supply necessary yarn 100% on credit & ready to pay conversion
cost at the rate of rupees 10 per linear meter. The maintenance cost
(including cost of lubrication oil) per machine is 5% of machine cost
per annum. The machines have expected life of 10 years and the
depreciation charge is calculated by straight line method. The
electric power required per day per machine is 18 units at the tariff
charge of rupees 5 per unit. Non motive power required per day is
5% of motive power @ rupees 3 per unit. Overall manpower
required for operations in each shift is 15 at average wage rate of
rupees 6000 per month. Managerial expenses per month are 30%
of operational charges. (cont.)
Project Report Numerical(cont.)
• Capital necessary is raised as under:
Owner’s capital 20%
Industrial development bank 80% at interest rate of 8.5%
Working capital funded by commercial bank at rate of 11%
Tax holiday for 5 years.
Excise duty 5% of value addition.

Consider additional suitable data by making explicit assumptions.

 Calculations
• Land cost
Required machine area
Area for looms = Area per loom X 96
= 6 X 96
= 576 m2
Area for Pirn winding = 4 X 2 = 8 m2
Total machine area = 576 + 8 = 584 m2
Additional area = 30% + 20% + 50% = 100%
Total built-up area = 584 + 584 = 1168 m2
Land area = Built-up area + Area for future expansion
= 1168 + 1168 = 2336 m2
Land cost = ( Land area ÷ 100) X 50000
= 11,68,000
 Calculations (cont.)
Building cost
Cost of building = Built-up area X construction rate
= 1168 X 10000
= 1,16,80,000
Machines cost
Cost of looms = Cost per loom X number of looms
= 2,00,000 X 96
= 1,92,00,000
Cost of one pirn winding machine = 3,00,000
Total machine cost = 1,92,00,000 + 3,00,000
= 1,95,00,000
 Calculations (cont.)
Total Non-recurring expenditure
Total expenditure = Land cost + Building cost + Machine cost
= 11,68,000 + 1,16,80,000 + 1,95,00,000
= 3,23,48,000
Note:
Material handling area = 30% of machine area
Storage (Raw material + Work in process + Finished goods) area
= 20% of machine area
Cloth inspection, Grey folding, Adm. Etc area = 50% of machine area
Ratio of land area: Built-up area = 1:1
Ratio current area: area for future expansion = 1:1
 Calculations (cont.)
Maintenance cost = 5% of machine cost
= 5% of 1,95,00,000
= 9,75,000
Depreciation
By straight line method
Total machine cost = 1,95,00,000
Expected life = 10 years
Depreciation Charge = 19,50,000
Power Bill
Motive Power: Total 97 machines & power rate 5 / unit
= 97 X 18
= 1746 KWH
 Calculations (cont.)
Motive power bill = 1746 X 5
= 8730 per day
Non-motive power = 5 % motive power
= 5% of 1746
= 87.30 KWH
Non-motive power bill = 87.30 X 3
= 261.90 per day
 Calculations (cont.)
Labour cost per month
= 15 X 3 X 6000
= 2,70,000
 Calculations (cont.)
Managerial expenses
= 30% of labour cost
= 30% of 2,70,000
= 81000
 Calculations (cont.)
Long term capital requirement
= Land cost + Building cost + Machine
= 11,68,000 + 1,16,80,000 + 1,95,00,000 = 3,23,48,000
Long term loan from financial institutions
= 80% of 3,23,48,000
= 2,58,78,400
Interest charges on long term loan 8.5%
= 21,99,664
Working capital requirement for 3 months
= Power bill + Wages & salaries + Maintenance Charge
= 8,09,280 + 10,53,000 + 2,43,750
= 21,06,030
Interest charges on short term loan = 57,915.8
 Calculations (cont.)
Total earning per day
= 96 X 100 X 10
= 96,000 per day
Yearly income from job work charges
= 96,000 X 300
= 2,88,00,000
Expenditure per year
= 21,99,664+ ( 57,915.8 + 21,06,030) X 4
= 1,08,55,447.20
 Financial Institutions
• Over the years, financial institutions are playing a key
role in providing finance and counseling to the
entrepreneurs to start new ventures as well as
modernize, diversify and even rehabilitate sick
enterprises. With the launching of the Five Year Plans, in
the absence of a sufficiently broad domestic capital
market, there was a need for adopting and enlarging
institutional structure to meet the medium and long term
credit requirements of the industrial sector. In this
context RBI took the initiative in setting-up statutory
corporation at the all-India and regional levels to function
as specialised financial agency purveying term credit.