Market and Plant Capacity R1

Market and Plant Capacity

Capacity is one amongst important items to be determined in building a

chemical plant

4/13/2014 yostri_tekim_unpar 1

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


Determination of Plant Capacity

Plant Capacity

Sales

Projection

Detailed

Production

Program

Before Project Formulation

1. Market size determination

2. Sales Income projection


MARKET & PLANT CAPACITY


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


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


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


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


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


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)


NOTES ON MARKET AND PLANT CAPACITY


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


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


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


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


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


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


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


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


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


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


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


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


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


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



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



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


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


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



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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


5. Investment and production costs

exp

1

212Q

QCC


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


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


Market and Plant Capacity R1

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