Unit – IIISmall Enterprises and Enterprise Launching FormalitiesIntroductionDefinitionsNature and Characteristics of Small BusinessSmall Vs. Large UnitsRelationship between Small and Large UnitsRole of Small Business in National EconomyProblems of Small BusinessRationale of Small BusinessSSI as Seedbed for EntrepreneurshipPackage for Promotion of MSMEMSMEsRegistration of Small Scale Industries(SSIs)Incentive SchemesManagement of the Small BusinessOperating and Financial CharacteristicsExports in SSI SectorVenture CapitalThe Business PlanSources of finance for a start-up businessProject Appraisal MethodsProject Management – PERT/CPMSpecimen Performa of Project Report
Introduction • Natural habitat of Entrepreneurs – SSI • Most entrepreneurs start small and then nurture their units into large industries. • The SSI Sector provides an opportunity for them to hone their skills and talents, to experiment, to innovate and transform their ideas into goods and services needed by the society. • Mostly this sector exhibited positive growth trends even during periods when other sectors of the economy experienced either negative or nominal growth. • 95 percent of the industrial units • provides nearly 80 percent of manufacturing employment • contributes around 35 percent of exports. • produces 7500 items • provides employment to more than 195 lakh persons.A vibrant small-scale sector holds the key to economic prosperity in an economy like India.DefinitionSmall Enterprise: • An industrial undertaking in which the investment in fixed assets in plant and machinery whether held on ownership terms on lease or on hire purchase does not exceed Rs 10 million. Ancillary Industrial UndertakingsThe following requirements are to be complied with by an industrial undertaking for being regarded asancillary industrial undertaking: - • An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or production of parts, components, sub-assemblies, tooling or intermediates, or the rendering of services and the undertaking supplies or renders or proposes to supply or render not less than 50 per cent of its production or services, as the case may be, to one or more other industrial undertakings and whose investment in fixed assets in plant and machinery whether held on ownership terms or on lease or on hire-purchase, does not exceed Rs 10 million.
An industrial undertaking • engaged or is proposed to be engaged in the manufacture or production of parts, components, sub-assemblies, tooling or intermediates, or the rendering of services and the undertaking supplies or renders or proposes to supply or render • not less than 50 per cent of its production or services, as the case may be, to one or more other industrial undertakings and • whose investment in fixed assets in plant and machinery whether held on ownership terms or on lease or on hire-purchase, does not exceed Rs 10 million.TINY ENTERPRISE • A unit is treated as a tiny enterprise where the investment in plant and machinery does not exceed Rs. 2.5 million (Rs. 25 Lakhs) irrespective of the location of the unit. • Many shops, schools, parlours, Photostate and STD booths in your vicinity are all examples of tiny units.Investment limit in plant and machinery in respect of tiny enterprises is Rs 2.5 millionirrespective of location of the unit.SSSBES • Small Scale Service & Business (Industry related) Enterprises • Industry related service/ business enterprises with investment uptoRs 10 lakhs in fixed assets, excluding land and building, are called Small Scale Service/ Business Enterprises (SSSBEs). • Example Advertising Agencies, Marketing Consultancy, Auto Repair, services and garages, Laundry and Dry CleaningWOMEN’S ENTERPRISES • A Small Scale Industrial Unit/ Industry related service or business enterprise, • managed by one or more women entrepreneurs in proprietary concerns, or in which she/ they individually or jointly have a share capital of not less than 51% as Partners/ Shareholders/ Directors of Private Limits Company/ Members of Cooperative Society.EXPORT ORIENTED UNIT [EOU] • A unit with an obligation to export at least 30 percent of its annual production by the end of the third year of commencement of production and • having an investment ceiling up to Rs. 10 million (Rs. 1 crore) in plant and machineryHousehold Industries • Cover artisans, skilled craftsmen and technicians who can work in their own house if their work requires less than 300 sq ft space, less than 5 workers and no pollution is caused. • Example: Handicrafts, doll manufacturing
NATURE AND CHARACTERISTICS of Small Business: • Personal Character • Closely Held • Flexibility • Labor Intensive • Local Area of Operation • Short Gestation Period • Limited Scale of Operation • Indigenous ResourcesSmall Vs. Large UnitsSmall Units Large UnitsPersonal character ImpersonalLocal area of Operation Wider AreaLabor Intensive Capital IntensiveSmall Fixed Investment Large InvestmentsIndependent Management Divorce between ownership and managementProprietorship and Partnership Joint Stock CompanyUnorganised Labor Unionized LaborLimited Scope for expansion Economies of scale and Great scope for expansion
Relationship between Small and Large Units • Competitive • Complementary • Initiative • Servicing • Jobbing • Merchandising • AncillarisationROLE OF SMALL BUSINESS IN NATIONAL ECONOMY • Employment Generation • Low Initial Capital Investment : Optimization of capital • Balanced Regional Development • Mobilization of local resources • Equitable Distribution of Income • Promotes Inter-Sectoral Linkages • Export Promotion • Consumer Surplus • Social Advantage • Share in Industrial Production • Development of EntrepreneurshipPROBLEMS OF SMALL BUSINESS • Paucity of Finance, raw material • Under Utilization of capacity • Poor project planning • Poor availability of power and other infrastructure • Obsolete Technology • Marketing Problems • Poor Managerial and Organizational Skills • High Incidence of Sickness • Weak bargaining power • Unable to invest in R & DRationale of Small Business • The Employment Argument: SSI are labor intensive • The Equality Argument: Large scale industries results in concentration of economic power in few hands • The Latent Resources Argument : Helps in tapping latent resources - Entrepreneurship • The Decentralization Argument: Regional dispersal of industries so as to achieve balanced regional development. • The Allocation Efficiency Argument: Make use of local resources and cater to local needs. Uses factors more efficiently
SSI as Seedbed for Entrepreneurship(OBJECTIVES/ADVANTAGES) • Create more self employment opportunities • Usually based on local resources • Can be located anywhere • Give quick return – shorter gestation period • Less pollution and disruption • Lead to equitable distribution of income and wealth • Avoid problems of unplanned urbanisation • Require simple technology and low managerial skills • Better utilization of local resources and skills • Helps to maintain traditional skills and handicrafts • Assist large and medium industries by acting as ancillaries
Micro, Small and Medium EnterprisesMicro, small and medium enterprises (MSME) sector has been recognised as an engineof growth all over the world. The sector is characterised by low investmentrequirement, operational flexibility, location wise mobility, and import substitution. InIndia, the Micro, Small and Medium Enterprises Development (MSMED) Act,2006 is the first single comprehensive legislation covering all the three segments. Inaccordance with the Act, these enterprises are classified in two:- (i) Manufacturing enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and regulation) Act, 1951. These are defined in terms of investment in plant and machinery; (ii) Serviceenterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.Registration of Small Scale Industries(SSIs)SSI RegistrationSmall Scale should seek registration with the Director of Industries of the concerned StateGovernment.The main purpose of Registration is to maintain statistics and maintain a roll ofsuch units for the purposes of providing incentives and support services.Registration of an existing or proposed small scale enterprise is voluntary and notcompulsory. It has no statutory basis. But, registration is beneficial for the enterpriseitself because it makes the unit eligible for availing the benefits given by the Central orState Governments for the promotion of SSIs. Some of the incentives so obtained bythem relate to credit guarantee scheme; priority sector lending; capital subsidy;reduced customs duty; ISO-9000 certification reimbursement; power tariff subsidies;exemptions under tax laws; etc.The State Directorate or Commissioner of Industries or District Industries Centres(DICs) are the concerned authorities for registration of small scale units. Thisregistration is both location specific and product specific. Like in certain State capitalsand metropolitan cities, it is granted to only those units which are located in thedesignated industrial areas/estates.A small scale unit is generally subjected to two types of registration. Initially, aprovisional registration is granted for the proposed enterprise. It is termed provisionalbecause the enterprise is yet to come into existence. It is granted for a specified periodof time during which the unit is expected to be setup.A Provisional Registration Certificate (PRC) enables the unit to obtain :- (i) term loansand working capital from financial institutions, banks under priority sector lending; (ii)facilities for accommodation, land and other approvals; (iii) no objection certificates
(NOCs) and clearances from regulatory bodies such as pollution control board, labourregulations, etc.Once the unit has commenced commercial production, it is granted permanentregistration. It is a life time registration given after physical inspection of the enterpriseand scrutiny of certain documents. Some of the formalities required to be completed forseeking permanent registration are :- Clearance from the municipal corporation State pollution control board clearance Sanction from the electricity board Ownership/tenancy rights of the premises where unit is located Copy of partnership deed/Memorandum of articles of association in case of a private limited company Sale bill of product manufactured Sale bill of each end product Purchase bill of each raw material Purchase bill of machinery installed BIS/QC certificate if applicable An affidavit giving status of the unit, machinery installed, power requirement, etc.The registration certificate so issued by the concerned authority is seen as a proof ofthe unit being a small scale unit. It enables the unit to get several concessions like :- Income tax exemption and Sales tax exemption as per the State Government policy. Incentives and concessions in power tariff, etc. Price and purchase preference for goods produced. Availability of raw material depending on existing policy.Though, provisional registration is not compulsory for getting a permanent registration.But, a provisional certificate enables the unit to apply to the various departments andagencies for assistance in setting up of the enterprise.Such a registration procedures is generally uniform across the States. However, theremay be some modifications done by individual States. For example, certain States mayhave a SIDO registration scheme and a State registration scheme. But, whatever bethe registration scheme, the main purpose is to maintain statistics and a roll of suchunits for providing incentives as well as to create nodal centres at the Centre, State andDistrict levels to promote SSIs. It gives recognition to the industrial unit and helps ingenerating a database for policy planning.A small scale unit may also become liable for de-registration, if it crosses theinvestment limits; starts manufacturing any new item or items that require an industriallicense or other kind of statutory license; or does not satisfy the condition of beingowned, controlled or being a subsidiary of any other industrial undertaking.
Procedure for Registration • A unit can apply for PRC for any item that does not require industrial license, which means items listed in Schedule-III and items not listed in Schedule-I or Schedule-II of the licencing Exemption Notification. Units employing less than 50/100 workers with/without power can apply for registration even for those items included in Schedule-II. • Unit applies for PRC in prescribed application form. No field enquiry is done and PRC is issued. • PRC is valid for five years. If the entrepreneur is unable to set up the unit in this period, he can apply afresh at the end of five years period. • Once the unit commences production, it has to apply for permanent registration on the prescribed form.The following form basis of evaluation: • The unit has obtained all necessary clearances whether statutory or administrative. e.g. drug license under drug control order, NOC from Pollution Control Board, if required etc. • Unit does not violate any locational restrictions in force, at the time of evaluation. • Value of plant and machinery is within prescribed limits. • Unit is not owned, controlled or subsidiary of any other industrial undertaking as per notification.De-RegistrationA Small Scale Unit can violate the regulations in the following ways which will make it liablefor de-registration: • It crosses the investment limits. It starts manufacturing any new item or items that require an industrial licenseor other kind of statutory license. • It does not satisfy the condition of being owned, controlled or being asubsidiary of any other industrial undertaking.
Elements of Success and Failure Many business persons prefer to blame the economy, or the bank, or competition, orgovernment regulation rather than admit their poor management created the failure. Studiesindicate the following are often times the cause of failure. Poor Financial Planning / Lack of adequate records. Poor Location. Poor coordination between functions. Absence Management / Nepotism. Government Taxes / Regulation. Failure to adjust to changing conditions. Poorly planned diversification / Uncontrolled growth. Poor Credit Controls. High Financing Costs / Lack of Capital Competition / Domination of Big Business. Labor Disputes.The Business PlanVenture capitalists view hundreds of business plans every year. The business plan must thereforeconvince the venture capitalist that the company and the management team have the ability toachieve the goals of the company within the specified time.The business plan should explain the nature of the company’s business, what it wants to achieveand how it is going to do it. The company’s management should prepare the plan and they shouldset challenging but achievable goals.The length of the business plan depends on the particular circumstances but, as a general rule, itshould be no longer than 25-30 pages. It is important to use plain English, especially if you areexplaining technical details. Aim the business plan at non-specialists, emphasising its financialviability.Avoid jargon and general position statements.Essential areas to cover in your business planExecutive SummaryThis is the most important section and is often best written last. It summarises your business planand is placed at the front of the document. It is vital to give this summary significant thought andtime, as it may well determine the amount of consideration the venture capital investor will give toyour detailed proposal.It should be clearly written and powerfully persuasive, yet balance "sales talk" with realism in orderto be convincing. It should be limited to no more than two pages and include the key elements ofthe business plan.1. Background on the companyProvide a summary of the fundamental nature of the company and its activities, a brief history ofthe company and an outline of the company’s objectives.2. The product or service
Explain the companys product or service. This is especially important if the product or service istechnically orientated. A non-specialist must be able to understand the plan. Emphasise the product or services competitive edge or unique selling point. Describe the stage of development of the product or service (seed, early stage, expansion). Is there an opportunity to develop a second-generation product in due course? Is the product or service vulnerable to technological redundancy? If relevant, explain what legal protection you have on the product, such as patents attained, pending or required. Assess the impact of legal protection on the marketability of the product.3. Market analysisThe entrepreneur needs to convince the venture capital firm that there is a real commercialopportunity for the business and its products and services. Provide the reader a combination ofclear description and analysis, including a realistic "SWOT" (strengths, weaknesses, opportunitiesand threats) analysis. Define your market and explain in what industry sector your company operates. What is the size of the whole market? What are the prospects for this market? How developed is the market as a whole, i.e. developing, growing, mature, declining? How does your company fit within this market? Who are your competitors? For what proportion of the market do they account? What is their strategic positioning? What are their strengths and weaknesses? What are the barriers to new entrants? Describe the distribution channels. Who are your customers? How many are there? What is their value to the company now? Comment on the price sensitivity of the market. Explain the historic problems faced by the business and its products or services in the market. Have these problems been overcome, and if so, how? Address the current issues, concerns and risks affecting your business and the industry in which it operates. What are your projections for the company and the market? Assess future potential problems and how they will be tackled, minimised or avoided.4. MarketingHaving defined the relevant market and its opportunities, it is necessary to address how theprospective business will exploit these opportunities. Outline your sales and distribution strategy. What is your planned sales force? What are your strategies for different markets? What distribution channels are you planning to use and how do these compare with your competitors? Identify overseas market access issues and how these will be resolved. What is your pricing strategy? How does this compare with your competitors? What are your advertising, public relations and promotion plans?5. The management teamDemonstrate that the company has the quality of management to be able to turn the business planinto reality. The senior management team ideally should be experienced in complementary areas, such as management strategy, finance and marketing, and their roles should be specified. The special abilities each member brings to the venture should be explained. A concise curriculum vitae should be included for each team member, highlighting the individual’s previous track record in running, or being involved with, successful businesses. Identify the current and potential skills gaps and explain how you aim to fill them. Venture capital firms will sometimes assist in locating experienced managers where an important post is unfilled - provided they are convinced about the other aspects of your plan. List your advisers and board members. Include an organisation chart.6. Financial projectionsThe following should be considered in the financial aspect to your business plan: Realistically assess sales, costs (both fixed and variable), cash flow and working capital.
Produce a profit and loss statement and balance sheet. Ensure these are easy to update and adjust. Assess your present and prospective future margins in detail, bearing in mind the potential impact of competition. Explain the research undertaken to support these assumptions. Demonstrate the companys growth prospects over, for example, a three to five year period. • What are the costs associated with the business? What are the sale prices or fee charging structures? What are your budgets for each area of your companys activities? Present different scenarios for the financial projections of sales, costs and cash flow for both the short and long term. Ask "what if?" questions to ensure that key factors and their impact on the financings required are carefully and realistically assessed. For example, what if sales decline by 20%, or supplier costs increase by 30%, or both? How does this impact on the profit and cash flow projections? If it is envisioned that more than one round of financing will be required (often the case with technology based businesses in particular), identify the likely timing and any associated progress "milestones" or goals which need to be achieved. Keep the plan feasible. Avoid being overly optimistic. Highlight challenges and show how they will be met.Relevant historical financial performance should also be presented. The company’s historicalachievements can help give meaning, context and credibility to future projections.7. Amount and use of finance required and exit opportunitiesState how much finance is required by your business and from what sources (i.e. management,venture capital, banks and others) and explain the purpose for which it will be applied.Consider how the venture capital investors will exit the investment and make a return. Possible exitstrategies for the investors may include floating the company on a stock exchange or selling thecompany to a trade buyer.Investment ProcessThe investment process begins with the venture capitalist conducting an initial review ofthe proposal to determine if it fits with the firms investment criteria. If so, a meeting willbe arranged with the entrepreneur/management team to discuss the business plan.Preliminary ScreeningThe initial meeting provides an opportunity for the venture capitalist to meet with theentrepreneur and key members of the management team to review the business plan andconduct initial due diligence on the project. It is an important time for the managementteam to demonstrate their understanding of their business and ability to achieve thestrategies outlined in the plan. The venture capitalist will look carefully at the teamsfunctional skills and backgrounds.Negotiating InvestmentThis involves an agreement between the venture capitalist and management of the termsof the term sheet, often called memorandum of understanding (MoU). The venturecapitalist will then proceed to study the viability of the market to estimate its potential.Often they use market forecasts which have been independently prepared by industryexperts who specialise in estimating the size and growth rates of markets and marketsegments.The venture capitalist also studies the industry carefully to obtain information aboutcompetitors, entry barriers, potential to exploit substantial niches, product life cycles, anddistribution channels. The due diligence may continue with reports from other
consultants.Approvals and Investment CompletedThe process involves due diligence and disclosure of all relevant business information.Final terms can then be negotiated and an investment proposal is typically submitted tothe venture capital fund’s board of directors. If approved, legal documents are prepared.The investment process can take up to two months, and sometimes longer. It is importanttherefore not to expect a speedy response. It is advisable to plan the business financialneeds early on to allow appropriate time to secure the required funding. Project Appraisal MethodsDevelopment projects impose a series of costs and benefits on recipient communities or countries.Those costs and benefits can be social, environmental, or economic in nature, but may often involve allthree. Public investment typically occurs through the selection, design and implementation of specificprojects to achieve the goals of policy.Why are some project proposals accepted and rejected, and how?What are the considerations in appraisal other than the economic rate of return?How are questions of environmental impact, welfare distribution and risk taken into account?In addition to being financially viable, a development project cannot usually be considered acceptableunless it is economically, technically and institutionally sound. It should be the least-cost feasiblesolution to the problem being solved and should expect to produce net economic and/or social benefits.For example, irrigation projects may facilitate the growing of cash crops in one locality, but cause watershortages, and hence economic, social and environmental pressures in another.Appraisal is the analysis of a proposed project to determine its merit and acceptability in accordancewith established criteria. This is the final step before a project is agreed for financing. It checks that theproject is feasible against the situation on the ground, that the objectives set remain appropriate andthat costs are reasonable.Technical Appraisal• Whether pre-requisites for the success of project considered?• Good choices with regard to location, size, process, machines etc.Economic Appraisal• Social cost -benefit analysis• Direct economic benefits and costs in terms of shadow prices
• Impact of project on distribution of income in society• Impact on level of savings and investments in society• Impact on fulfillment of national goals :- (1) Self sufficiency (2) Employment and (3) Social orderEcological Appraisal Impact of project on quality of :- Air, Water, Noise, Vegetation, Human life Major projects ,such as power plants, leather processing cause environmental damage Likely damage & the cost of restorationFinancial Appraisal• Whether the project is financially viable?o Servicing debto Meeting return expectationsTECHNICAL APPRAISALClearly, every project must be technically feasible. Technical Appraisal provides a comprehensive review of alltechnical aspects of the project such as rendering judgment on merits of technical proposals and operatingcosts. Here is a checklist that can be used: Is the technology proven or tested? If not, has it ever been successful elsewhere and can that success be replicated in current context and conditions? Does the technology/ process/ equipment technically fit with the facility’s existing technology/ process/ equipment & machinery? If not, what aspects of the technology / process do not fit and what measures is the implementing agency planning to take in this regard? List of equipments and machinery to be installed with cost and specifications of the equipment. Equipment capacity & whether it is as per requirement? List of recommended equipment suppliers.SOCIAL APPRAISALA social appraisal reviews the project design and the process of project identificationthroughto implementation and monitoring, from a social perspective. Particular attention ispaid to thelikely impact of the project on different stakeholders, their opportunities forparticipation andthe project’s contribution to poverty reduction.Stakeholder analysis and participationBased on the distinction of primary, secondary and key stakeholders1, stakeholder analysisreviews the following: Who comprise the different stakeholders?
What are their interests? How will they be affected by the proposed project? What are the project priorities between the different groups? What is their capacity to participate in the project?Stakeholders have different abilities to influence the outcome of a project. Often target beneficiariesare in a relatively weak position to influence the outcome of a project (at A) whereas much of thecontrol lies in the hands of secondary and key stakeholders (at B). The former may be frustrated bya lack of access to information or be placed in a weak social position due to traditional hierarchies. Incontrast the latter may have the time, money, organisational capacity or political power necessary toinfluence the project; however, if they are not interested in the project, they could pose a risk to theproject’s success by withholding support. Thus recommendations from the social appraisal may beto include additional project activities to ensure influential stakeholders support a project andto enable important yet weak stakeholders to become more influential.ECONOMIC & FINANCIAL APPRAISAL: COST BENEFIT ANALYSIS & IRRThis includes an analysis of economic soundness of the project and the quantification and valuation of costsand benefits to ensure financial viability.Social Cost Benefit AnalysisCost Benefit Analysis (CBA) is used for determining the attractiveness of a proposed investment in terms of thewelfare of society as a whole. By presenting social benefits and costs in a monetary format, CBA not onlyfacilitates choices between alternative investment options but also gives an idea of the project worth. Thetechnique is principally used with regard to public sector investments.CBA differs from financial appraisal which views an investment solely from the perspective of individualparticipants, focusing on private benefits and costs and using market prices. In contrast, CBA adopts a muchbroader approach, considering both monetary and non-monetary benefits and costs, and uses prices that moreaccurately reflect economic, environmental and social values. The divergence between private and social costsand benefits arises for three reasons:• Not all costs and benefits fall on the immediate group of individual participants; some may have wider impacts(known as externalities)• Not all costs and benefits have market prices• Not all market prices reflect the true costs and benefits to society.ENVIRONMENTAL APPRAISAL (ENVIRONMENTAL IMPACT ASSESSEMENT)Environmental Assessment (EA) is supposed to provide the project analyst with a good quantification of thebiophysical and social impacts from developments. Environmental Assessment generally refers to the broadersystem of environmental analysis, including project-specific Environmental Impact Assessment (EIA). Mostcountries have an EIA policy and supporting legislation. Traditionally, EIA was designed to operate at the projectlevel; that is to identify impacts and mitigation measures for an individual project. In the past several yearshowever, the EIA process has gradually been extended to sectoral levels, strategic reviews of policy, and evenat a global level. This section will briefly discuss focus on project EIA.
Project ManagementProject management is distinguished from production management primarily by thenonrepetitive nature of the work; a project is usually a onetime effort. Althoughsimilar work may have been done previously, or may be done in the future. It is notusually repeated in the identical manner such as cars or TV sets being manufacturedon a production line. The management of projects more complicated than themanagement of a production line due to the following characteristics, generallytypical of all projects to a greater or lesser degree. 1. The duration of a project lasts weeks, months, or even years. During such a long period, many changes may occur, most of which are difficult to predict. Such changes may have a significant impact on project costs technology, and resources. The longer the duration of the project, uncertain are the execution times and costs. 2. A project is complex in nature, involving many interrelated activities and participants from both within the organization and outside it (e.g., suppliers, subcontractors). 3. Delays in completion time may be very costly. Penalties for delays may amount to thousands of dollars per day. Completing projects late may result in lost opportunities and ill will as well. 4. Project activities are sequential. Some activities cannot start until others are completed. 5. Projects are typically a unique undertaking, something that has not been encountered previously. PERT and CPMThere are some formal tools to aid project management. Two of the best known toolsthat fill this need are PERT (Program Evaluation Review Technique)andCPM (Critical Path Method).Definitions Used in PERT and CPMIn order to explain the purpose, structure and operation of PERT and CPM, it ishelpful to define the following terms: Activity: An activity is an effort that requires resources and takes a certain amount of time for completion. Examples of activities are: studying for an examination, designing a part, connecting bridge girders, or training an employee. Critical activity: A critical activity is an activity that, if even slightly delayed, will hold up the scheduled completion date of the entire project.
Path: A path is a series of adjacent activities leading from one event to another. Critical path: A critical path is the sequence of critical activities that forms a continuous path between the start of a project and its completion. Event: An event is a specific accomplishment at a recognizable point in time; a milestone, a checkpoint; for example, passing a course at a university, submission of engineering drafts, completion of a span on a bridge, or the arrival of a new machine. Events do not have a time duration per se. To reach an event, all the activities that precede it must be completed. An event can be viewed as a goal attained, while the activities leading to it can be viewed as the means of achieving it. Network: A network is a logical and chronological set of activities and events, graphically illustrating relationships among the various activities and events of the project. Project: A project is a collection of activities and events with a definable beginning and a definable end (the goal). For example: getting a college degree, patenting an invention, building a bridge, or installing new machinery.The Major Differences and Similarities between PERT and CPMPERT and CPM are very similar in their approach; however, two distinctions areusually made. The first relates to the way in which activity duration are estimated. InPERT, three estimates are used to form a weighted average of the expectedcompletion time, based on a probability distribution of completion times. Therefore,PERT is considered a probabilistic tool. In CPM, there is only one estimate ofduration; that is, CPM is a deterministic tool. The second difference is that CPMallows an explicit estimate of costs in addition to time. Thus, while PERT is basicallya tool for planning and control of time, CPM can be used to control both the time andthe cost of the project. Extensions of both PERT and CPM allow the user to manageother resources in addition to time and money, to trade off resources, to analyzedifferent types of schedules, and to balance the use of resources.The Purpose of PERT/CPMDue to the complex nature of most projects, it is very difficult to completely innate thedelays and the cost overruns. However, with the appropriate management systems forplanning, organizing, and controlling, it is possible reduce them to a reasonable level.
The problem is that the cost of implementing and executing such systems can exceedtheir benefits because of the large amount of monitoring and reporting that is required.The major purpose of PERT and CPM is to objectively identify these criticalactivities. Further, these techniques can tell us how close the remaining activities areto becoming critical. (This available delay is called slack or float.).The Advantages of PERT and CPM Detailed planning: The use of PERT and CPM forces management to plan in detail and to define what must be done to accomplish objectives on time. Commitments and communications: Management is forced to plan and make commitments regarding execution times and completion dates. The tools also provide for better communication among the various departments in an organization and between suppliers and the client. Efficient monitoring and control: The number of critical activities in a network (especially in a large one) is only a small portion of the total activities. Identification of the critical activities enables the use of an efficient monitoring system (mainly record-keeping and reports) concentrating only on the critical activities. Identifying potential problem areas: The critical activities are also more likely to become problem areas. Once identified, contingency plans may be devised. Proper use of resources: Employing PERT or CPM enables management to use resources more wisely by examination of the overall plan. Resources can he transferred to bottleneck or trouble areas from other activities. Rescheduling: The tools enable management to follow up and correct deviations from schedule as soon as they are detected, thus minimizing delays. Government contracts: Several government agencies require the submission of a PERT or CPM plan with bids. Easily understood: CPM and PERT can be easily understood because they provide a method for visualizing an entire project. Therefore management can explain the tools to supervisors and employees in such a way that the chances of implementation are increased.
Adaptable to computers: PERT and CPM are easily adaptable to computeruse. Large projects can be planned by computers in seconds is even capable ofdiagramming the networks.Tools for decision making: PERT and CPM allow management to check theeffectiveness and efficiency of alternative ways of executing projects byexamining possible trade-offs among resources (usually time and cost).Assess probability of completion (in PERT only): The probabilities ofsuccessfully meeting deadlines, finishing early, or finishing late can be assessedby the use of PERT.Cost-time trade-offs (in CPM only): CPM enables management to evaluatetrade-offs between the cost of executing a job in a normal way or expeditingactivities (called crashing) at a higher cost so as to finish earlier.