Industrial Mgt and Engineering economy.pdf

Chapter 1
Basic Management Concepts and
Industrial Organization
• Introduction to management;
• Functions of management;
• Organizational structure;
• Basics of productivity.
1

Introduction to management
v Management is the process of getting things
done through the efforts of other people in
order to achieve the predetermined objectives
of organization.
• Management may also be defined as:
“The process by which execution of given purpose
put into operation and supervise”.
2

Cont’d…
• Another statement: Management may be
defined as “A technique by which the purpose
and objectives of particular human group are
determined, defined, clarified and completed”
Complete definition of management:
üManagement is a distinct process consisting of
planning, organizing, staffing, leading and
controlling utilizing both in each science and art
a n d fo l l ow e d i n o r d e r to a cco m p l i s h
predetermined objectives of the organization.
3

Function of Management
ØThere are those who view management as a
function rather than a process.
ØDunn, Stephens and Kelly contend that
“Management is a role which includes a set of
duties, responsibilities, and relationships-involved
in work organizations”.
ØThese duties and responsibilities constitute the
function a manager performs.
ØThe duties and responsibilities a manager
performs are quite different from those
performed by managerial employees.
4

Necessity of Management
üManagement is an essential activity of all
organizational level (Low, middle, and upper level)
• Upper Management Needs Conceptual Skills.
• Middle Management Needs Human Relations Skills.
• Low Management Needs Technical Skills.
üManagement applies to:
(i) Small and large Organizations.
(ii) Profit and non profit Organization.
(iii) Manufacturing Organization.
(iv) Service rendering Organization.
5

Levels of Management
1. Top management
ü Is the ultimate source of authority and it lays down goals,
policies and plans for the enterprise.
ü Consists of a company consists of owners/shareholders, Board
of Directors, its Chairman, Managing Director, or the Chief
Executive, or the General Manager or Executive Committee
having key officers.
2. Middle management
ü The job of middle management is to implement the policies and
plans framed by the top management.
ü Consists of a company consists of heads of functional
departments viz. Purchase Manager, Production Manager,
Marketing Manager, Financial controller, etc. and Divisional and
Sectional Officers working under these Functional Heads.
3. Lower level or operative management of a company consists of
Superintendents, Foremen, Supervisors, etc.
6

In order to achieve predetermined objectives of an organization
Management Entity
Management is a distinct process consisting of
Planning Organizing Staffing Leading Controlling
Applied to
Efforts of a group of people to utilize effective available recourses
Man Money Material Method Machine
7

Classification of management
There are five functions of management
§ Planning,
§ Organizing,
§ Staffing,
§ Leading, and
§ Controlling.
üThe functions of managers provide a useful
structure for organizing management knowledge.
8

(1) Planning
üPlanning involves selecting missions and objectives
and the action to achieve them it requires decision
making, that choosing future courses of action from
among alternatives.
There are five types of planning:
1. Missions and objectives.
2. Strategies and polices.
3. Procedures and rules.
4. Programs.
5. Budgets.
9

(2) Organizing
ØOrganizing is the part of managing that involves
establishing an intentional structure of roles for
people to fill in an organization.
• The purpose of an organization structure is to
creating an environment helpful for human
performance.
• It is then management tools and not an end.
• Many problems arises in making structures fit
situations.
10

(3) Staffing
ØStaffing involves filling and keeping filled, the
positions in the organization.
ØThis is done by identifying the work force
requirement inventorying the people available
and recruiting, selecting, placing, promoting,
appraising, planning the careers, compensating
and training.
11

4. Leading/Directing
üIs the function of leading the employees to
perform efficiently, and contribute their optimum
to the achievement of organizational objectives.
• Leading or directing is a way of:
ØSupervision
ØMotivation
ØLeadership and
ØCommunication the concerned organization/
Industry
12

(5) Controlling
ØControlling is measuring and correcting individuals
and organizational performance.
• It involves measuring performance against goals and
plans, showing where the deviations from standards
exit and helping to correct them.
• In short controlling facilitates the accomplishment of
plans.
• Controlling activity generally relate to the
measurement of achievement.
• Some means of controlling like the budget for
expenses, inspection, record of labors-hours lost, are
generally familiar.
• Each shows whether plans are working out.
13

ORGANIZING
• Organizations are experimenting with different
approaches to organizational structure and design.
• Organizational structure can play an important role
in an organization’s success.
• The process of Organizing—the second
management functions—is how an organization’s
structure is created.
The nature of organization structure
• Managers are seeking structural designs that will
best support and allow employees to effectively and
efficiently do their work.
• Organizing is the process of creating an
organization’s structure.
14

Cont’d…
üOrganization structure is the formal pattern of
interactions and coordination designed by
management to link the tasks of individuals and
groups in achieving organizational goals.
üAn organizational structure is the formal
framework by which job tasks are divided,
grouped, and coordinated.
üThis formal pattern designed by management is
to be distinguished from the informal pattern of
interactions that simply emerges within an
organization.
15

Cont’d…
üOrganization structure consists primarily of four
elements:
a. Job design
b. Departmentalization
c. Vertical coordination
d. Horizontal coordination
üOrganization design is the process of developing
an organization structure.
ØOrganizational design is the process of
developing or changing an organization’s
structure.
16

Cont’d…
üIt involves decisions about six key elements:
§ work specialization,
§ departmentalization,
§ chain of command,
§ span of control,
§ centralization/decentralization, and
§ formalization.
ØWe need to take a closer look at each of these
structural elements.
17

Cont’d…
• The organization chart is a line diagram that depicts
the broad outlines of an organization’s structure.
• While varying in detail from one organization to
another, typically organization charts show the
major positions or departments in the organization,
the way positions are grouped together, reporting
relationships for lower to higher levels, official
channels for communications, and possibly the titles
associated with major positions in the organization.
18

Facts about organizational chart
1. The organization chart provides a visual map of the
chain of command, the unbroken line of authority
that ultimately links each individual with the top
organizational position thorough a managerial
position at each successive layer in between.
2. Nearly all organizations having just a few members
have an organization chart.
üResponsibility is the obligation or expectation to
perform and carry out duties and achieve goals
related to a position.
19

Cont’d…
üAuthority is the right inherent in a managerial
position to tell people what to do and to expect
them to do it, right to make decisions and carry out
actions to achieve organizational goals.
üWhile part of a manager’s work may be delegated,
the manager remains accountable for results.
üAccountability is the requirement of being able to
answer for significant deviations from duties or
expected results.
üThe fact that managers remain accountable for
delegated work may cause them to resist delegation.
20

Cont’d…
Ø Delegation is assignment of part of manager’s work to others
along with responsibility and authority.
1. In addition to issues of accountability, managers may resist
delegation for a number of reasons.
a. Managers may fear if subordinates fail.
b. Managers may think they lack time to train subordinates.
c. Managers may want to hold on to their power.
d. Managers may enjoy doing the tasks subordinates could
do.
e. Managers may feel threatened by subordinates.
f. Managers may not know how to delegate.
2. Subordinates may resist delegation because of fear of failure or
of risk taking.
3. Failure to delegate may have serious negative consequences for
a manger’s career.
21

Building Blocks of Organizing
1. Job design
Job design is an essential part of organizational
structure.
It is the specification of task activities, usually repeated
on a regular basis, associated with each particular
job.
a. Task activities need to be grouped in reasonably
logical ways for each job.
b. The way the jobs are configured influences
employee motivation.
2. Work specialization is the degree to which the work
necessary to achieve organizational goals is broken
down into various jobs.
22

In Work specialization the tasks in an organization
are divided into separate jobs. Another term for
this is division of labor.
1. Work specialization was seen as a way to make
the most efficient use of workers’ skills because
workers would be placed in jobs according to
their skills and paid accordingly.
23

2. Other advantages of work specialization included
improvement in employees’ skills at performing a
task, more efficient employee training, and
encouragement of special inventions and machinery
to perform work tasks.
3. Work specialization was viewed as a source of
unending productivity improvements. And it was— up
to a certain point.
4. The human diseconomies from work specialization
included boredom, fatigue, stress, lowered
productivity, poor quality of work, increased
absenteeism, and higher job turnover.
24

Raw materials Completed
Capital equipment Production Products
Production tooling Process
Energy Scrape
Labor
Production Process
Production
ØProduction is the application of tools and a
processing medium to the transformation of raw
materials into finished goods for sale.
25

26
ØDifferences of production process will be based on
- product (goods or service)
- technology
ØProduction Vs Manufacturing- it is only different on
the output
ØClearly manufacturing systems should not be
classified in terms of the above, as there will be
enormous types
Introduction…Cont’d

§ In modern context manufacturing involves
making products from raw material by using
various processes, by making use of hand
tools, machinery or even computers.
ØIt is therefore a study of the processes
required to make parts and to assemble them
in machines.
Introduction…Cont’d
27

Manufacturing Process
External Disturbances
INPUT
S
A Manufacturing Process
is a complex arrangement
of physical elements
characterized by measurable
parameters
Internal Disturbances
Materia
l
Social-Political
Environment
Knowledge
Demand
Energy
OUTPUTS
Customer
Physical
Elements
Machine
Tools
Tools
Mat Handl.
Equ.
People
Measurable
Parameters
e.g., Production
Rate
Percent on
Time Delivery
Manufacturing
Lead Time
Defects per
Million
Products
Service
Knowledge
Return
28

Recall the Value Adding Process
Value Adding
(Transformation)
Process
Product
Service
Workforce
Knowledge
Capital
Material
Inputs
Outputs
29

PRODUCTIVITY
ØProductivity is a relationship between the output
(product/service) and input (resources consumed in
providing them) of a business system.
ØThe ratio of aggregate output to the aggregate input
is called productivity.
Productivity = output/Input
ØFor survival of any organization, this productivity
ratio must be at least 1.
ØIf it is more than 1, the organization is in a
comfortable position.
30

Productivity
Ø Applied in an enterprise, a sector of economic activity
or the economy as a whole, productivity may be
defined as an output and input relation.
Ø The term productivity can be used to asses or measure
the extent to which a certain output can be extracted
from a given input.
31

Productivity…Cont’d
ØProductivity: Productivity is the ratio of
output to some or all of the resources
used to produce the output.
Types of productivity:
1. Labor productivity: units produced / hours
worked
2. Capital productivity: output / capital input
3. Material productivity: output /material input
32

IMPORTANCE OF PRODUCTIVITY
Ø Benefits derived from higher productivity are as
follows:
1. It helps to cut down cost per unit and thereby
improve the profits.
2. Gains from productivity can be transferred to the
consumers in form of lower priced Products or
better quality products.
3. These gains can also be shared with workers or
employees by paying them at higher rate.
4. A more productive entrepreneur can have better
chances to exploit expert opportunities.
33

Cont’d…
5. It would generate more employment opportunity.
6. Overall productivity reflects the efficiency of
production system.
7. More output is produced with same or less input.
8. The same output is produced with lesser input.
9. More output is produced with more input.
10. The proportional increase in output being more
than the proportional increase in input.
34

PRODUCTIVITY MEASUREMENT
• Productivity may be measured either on
aggregate basis or on individual basis, which are
called total and partial measure.
Total productivity Index/measure = Total
output/Total input
= Total production of goods and services
Labour + material+ capital + Energy +
management .
35

Cont’d….
Labour productivity Index/Measure = Output in unit
Man hours worked
Management productivity Index/Measure = Output
Total cost of management
Machine productivity Index/Measure = Total output
Machine hours worked
36

FACTORS AFFECTING PRODUCTIVITY
Ø All the factors which are related to input and output
components of a production process are likely to affect
productivity.
Ø These factors can be divided into 2 main categories,
namely:
Category 1
Ø Primary factors are effort and working capacity of an
individual.
• Organization factors are related to the design and
transformation process required to produce some item,
the nature of training and other skill imported to workers
to perform certain operations in a production process,
control and various other incentives.
• Conventions and traditions of the organization e.g.
activities of labor unions, medical facilities, worker and
executive understanding etc. 37

Cont’d…
Category II
• Factors related to output: research and development
techniques, improvement in technology and efficient sales
strategy of the organization will lead to improvement in
output.
• Efficient use of input resources , better stores control ,
production control policy , maintenance of machines etc
will minimize the cost of production.
Ø The factors listed in category I and II can be further divided
into 4 major classes viz.
• Technological
• Managerial
• Labor, and
• External factors
38

Cont’d…
• The technological factors can increase the
output per unit of input substantially. They can
be defined in terms of technology employed,
tools and raw material used.
• The labor factors are characterized by the degree
of skills of the works force, health, and attitude
towards management, training and discipline.
39

Tools and techniques used to
improve productivity
n Following tools and techniques are used to
improve productivity of the organization by
optimum utilization of resources.
1. Method Study.
2. Time Study (Work Measurement).
3. Motion Economy.
4. Financial and Non Financial Incentives.
5. Value Analysis.
6. Production, Planning and Control.
7. Inventory Control.
8. Job Evaluation.
9. Material Handling Analysis.
10.Ergonomics (Human Engineering).
11.System Analysis.
12.Operations Research Techniques.
40

UNIT 2
Forecasting
• Meaning and use of forecasting
• Forecasting techniques
42

• If you are asked to determine how many units of tires
will be produced in May, how do you estimate it?
• easy or difficult question?
• The marketing people said 20,000, but the production
manager doesn’t agree with the marketing people’s
prediction.
• How could you determine a better estimate? There are
several ways to get a better answer.
• One is to simply guess. Ask a person who has long
experience in the production department.
• As he said, in May the number of automobiles sold is
very low, due to this reason, 20,000tires is too much.
Forecasting
43

Forecasting
• Every organization invariably engages in annual
planning exercise.
• The heads of various functional areas such as
marketing, production, materials and finance
take part in this exercise with specific objectives.
• The marketing function provides data on sales
that the organization should target in coming
year.
• This is primarily achieved through forecasting.
44

• A forecast = some definite method of predicting future
events
• In to day’s market driven production system, forecasts are
more important than ever.
• The survival of a manufacturing enterprise depends on its
ability to assess the market trend with reasonable accuracy
several years a head.
• Forecasting is the art and science of Predicting the future
• Forecasting is one input and to all types of business
planning and control.
• Marketing uses for planning -products, promotion and
pricing
• Finance uses forecasting as an input for financial planning.
• Forecasting is an input for operation decisions on process
design, capacity planning and inventory.
Forecasting
45

The Forecasting System
• Identify the problem
– Forecasts provide information to make better
decisions  impact of decision?  relevant or not
– One-time or on a regular basis? short term, long
term
– Examples: sales, income, expenses, energy, prices, …
46

Understand the problem ….cont’d
• The underlying process: process that creates
demand  gain insight
– Problem characteristics
• time frame
• level of detail
• accuracy needed
• number of items to forecast
48

• Data: examining data can provide much insight of;
– Company records
– Commercial records
– Government records
– Analyze and check data!!
• causal factors: advertising, rebates, long waiting time, poor
quality, …
ØForecast goal
• A good forecasting system will react to actual
• changes but ignore chance variations à check what is going
on !!!
Understand the problem ….cont’d
49

• In this section we will discus three classes of
forecasting methods:
1. Qualitative methods which is composed of judgmental or
opinion of experts.
ü In simplest term using expert’s opinion to get a forecast such
as asking the experienced production operator.
2. Time series methods: use the past sales to try to determine
the future.
ü Statistical techniques that use historical demand data to
predict future demand
3. Causal methods/ Regression methods : tries to relate the
variables being forecast to something else.
ü Relating the automobile sales to tires
Classification of Forecasting
50

Forecasting Methods
The above classes of forecasting can be broadly divide in
to two categories:
1. Qualitative forecast methods
– Rely on managerial Judgment and they don’t use specific
models
– Thus different individual can use the same qualitative
methods and arrive at different forecasts.
2. Quantitative forecast methods
This techniques include the time series and causal method of
forecasting
– based on mathematical formulas
– Useful when there is a past data or when past data are
reliable to predict of the future
51

Forecasting techniques can depend on:
• Time frame
– Indicates how far into the future is forecast.
• Short- to mid-range forecast
– typically encompasses the immediate future
– daily up to two years
• Long-range forecast
• usually encompasses a period of time longer than two
years
• Demand behavior
– Trend: a gradual, long-term up or down movement of demand
– Random variations: movements in demand that do not follow
a pattern
– Cycle: an up-and-down repetitive movement in demand
– Seasonal pattern: an up-and-down repetitive movement in
demand occurring periodically
52

1. Qualitative Methods
Ø Management, marketing, purchasing, and engineering
and other relevant personnel are sources for internal
qualitative forecasts.
Ø The two common techniques are:
1. Delphi method
– involves soliciting forecasts about technological
advances from experts
2. Market survey
– Both consume time and costly, but the only
forecasting method for new product .
– Useful when there is a lack of data or when past
data are not reliable to predict of the future.
53

Market survey
• Several steps:
–developing a questionnaire
–carrying out the survey
–results should be tabulated and analyzed,
and interpreted
54

DEMAND FORECASTING
• Demand forecast is an estimate of sales in monetary
or physical units for a specified future period under a
proposed business plan or program or under
assumed set of economic and other environmental
forces, planning premises outside the business
organization for which the forecast estimate is made.
• Demand forecasting also helps evaluating the
performance of the sales department.
• Thus, demand forecasting is a necessary and effective
tool in the hands of management of an enterprise to
have finished goods of right quality and quantity at
right time with minimum cost.
55

STEPS IN FORECASTING
üThe following are the main steps in demand
forecasting;
ØDetermine the objective of forecast,
ØSelect the period over which the forecast is to
be made,
ØSelect the technique to be used for
forecasting,
ØCollect the information to be used,
ØMake the forecast.
56

SALES FORECASTING
• Sales forecast is an estimate based on some past
information, the prevailing situation and prospect of
future.
• It is based on an effective system and is valid only to some
specified period.
• The following are some main components of a sales
forecasting system:
(i) Market Research Operations to get the relevant and
reliable information about the trends in the market
(ii) A data processing and analyzing system to estimate and
evaluate the sales performance in the various markets.
• Proper co-ordination of steps (i) and (ii) and then to place
the findings before the top management for making final
decisions.
57

WHY FORECAST?
• Since forecasting activity typically precedes a
planning process one can identify specific
reasons for the use of forecasting in organizations.
• Organizations face a different set of issues while
they engage in planning and in each of these,
forecasting plays an important role as a tool for
planning process.
58

Cont’d…
• The key areas of application of forecasting are
summarized below:
üDynamic and complex environment
üShort term fluctuation in production
üBetter material management
üRationalized man-power decisions
üBasis for planning and scheduling
üStrategic decisions
59

Elements of Forecasting
• Forecasting consists basically of analysis of the
following elements;
Internal factors:
• Past
• Present
• Proposed or future
External Factors:
• Controllable: (a) Past (b) Present (c) Future
• Non controllable: (a) Past (b) Present (c) Future
60

Forecasting Models
1. Extrapolative models: They make use of past
data and essentially prepare future estimates by
some methods of extrapolating the past data.
Example 1, The demand for soft drinks in a city or a
locality could be estimated as 110 percent of the
average sales during the last three months.
Example 2, The sale of new garments during the
festive season could be estimated to be a
percentage of the festive season sales during the
previous year.
61

Cont’d…
2. Casual models: It analyses data from the point view of
cause-effect relationship.
• For instance, to the process of estimating the demand for
the new houses, the model will identify the factors that
could influence the demand for the new houses and
establish the relationship between these factors.
• The factors, may include real estate prices, housing
finance options, disposable income of families, and cost of
construction and befits derived from tax laws.
3. Subjective judgments models: Another set of models
consist of subjective judgment using qualitative data.
• In some cases, it could be based on quantitative and
qualitative data.
62

Cont’d…
• Forecasting methods involve construction of
suitable mathematical relationship to describe
the appropriate demand pattern.
FORECASTING TECHNIQUE:
1. Weighted moving averages
2. Casual forecasting model
3. Linear regression analysis
4. Multiple regression analysis
63

1. Weighted Moving Average
• Equal weights are assigned to all periods in the
computation of simple moving average.
• The weighted moving average assigns more weight
to some demand values usually more recent ones.
• Weights are assigned to most recent data.
A. Naive forecast: demand in current period is used
as next period’s forecast
B. Simple moving average
• Uses average demand for a fixed sequence of
periods.
• Stable demand with no pronounced
behavioral patterns.
64

A. Naïve Approach
Example: Forecast the order for the month of November by Naïve approach.
Solution: Forecast order for the month of November,
(F)Nov = 90 units
B. Simple Moving Average
n = number of periods taken to evaluate the moving average
Dt or Di = Actual demand in that period.
65

Unit 3.
Manufacturing Operations and Plant Design
Ø Manufacturing Operations
Ø Basics of Plant Layout;
Ø Study of Plant Layout;
Ø Design of Industrial Plant
Ø Ergonomics and Industrial Safety
69

Classification of Industries
1. Primary industries – cultivate and exploit
natural resources
– Examples: agriculture, mining
2. Secondary industries – convert output of
primary industries into products
– Examples: manufacturing, power generation,
construction
3. Tertiary industries – service sector
– Examples: banking, education, government, legal
services, retail trade, transportation
70

Manufacturing Industries
ISIC Code
• Food, beverages, tobacco 31
• Textiles, apparel, leather and fur products 32
• Wood and wood products, cork
33
• Paper, printing, publishing, bookbinding 34
• Chemicals, coal, petroleum, & their products 35
• Ceramics, glass, mineral products 36
• Basic metals, e.g., steel, aluminum 37
• Fabricated products, e.g., cars, machines, etc. 38
• Other products, e.g., jewelry, toys 39
71

More Industry Classifications
• Process industries, e.g., chemicals, petroleum, basic
metals, foods and beverages, power generation
• Discrete product (and part) industries, e.g, cars, aircraft,
appliances, machinery, and their component parts
72

Process Industries and
Discrete Manufacturing
Industries
73

Manufacturing Industry
• Transformation Operations
– Machine Processing
– Assembly
• Adding value*
• Other Operations
Material handling
Inspection and testing
Coordination and control
Transformation
Process
Raw
Material
Part or
Product
Power
Tools
Machine
s
Labour
Scrap or
Waste
74

Classification of
manufacturing
processes
75

Assembly Operations
• Joining processes
– Welding
– Brazing and soldering
– Adhesive bonding
• Mechanical assembly
– Threaded fasteners (e.g., bolts and nuts, screws)
– Rivets
– Interference fits (e.g., press fitting, shrink fits)
– Other
76

Material Handling
• Material transport
– Vehicles, e.g., forklift trucks, AGVs, monorails
– Conveyors
– Hoists and cranes
• Storage systems
• Unitizing equipment
• Automatic identification and data capture
– Bar codes
– RFID
– Other AIDC
77

Inspection and Testing
Inspection – conformance to design
specifications
– Inspection for variables - measuring
– Inspection of attributes – gauging
Testing – observing the product (or part,
material, subassembly) during operation
78

Production Facilities and Layout
• Facilities organised in the most efficient way to
serve the particular mission of the plant and
depends on:
– Types of products manufactured
– Production quantity
– Product variety
79

Production Quantity (Q)
• Number of units of a given part or product
produced annually by the plant
• Three quantity ranges:
1. Low production – 1 to 100 units
2. Medium production – 100 to 10,000 units
3. High production – 10,000 to millions of units
80

Product Variety (P)
• Number of different product or part designs or
types
• ‘Hard’ product variety – products differ greatly
– Few common components in an assembly
• ‘Soft’ product variety – small differences between
products
– Many common components in an assembly
81

Product Variety (P) vs.
Production Quantity (Q)
P
Q
82

Low Production Quantity (Qlow)
Job shop – makes low quantities of specialized and
customized products
• Products are typically complex (e.g., specialized
machinery, prototypes, space capsules)
• Equipment is general purpose
• Plant layouts:
– Fixed position
– Process layout
83

Medium Production Quantities (Qmed)
1. Batch production – A batch of a given product is
produced, and then the facility is changed over
to produce another product
– Changeover takes time – setup time
– Typical layout – process layout
– Hard product variety
2. Cellular manufacturing – A mixture of products is
made without significant changeover time
between products
– Typical layout – cellular layout
– Soft product variety
86

High Production (Qhigh)
1. Quantity production – Equipment is dedicated to
the manufacture of one product
– Standard machines tooled for high production (e.g.,
stamping presses, molding machines)
– Typical layout – process layout
2. Flow line production – Multiple workstations
arranged in sequence
– Product requires multiple processing or assembly
steps
– Product layout is most common
88

Manufacturing Capability
– Technological processing capability - the available
set of manufacturing processes
– Physical size and weight of product
– Production capacity (plant capacity) - production
quantity that can be made in a given time
91

Lean Production
Operating the factory with the minimum possible
resources and yet maximizing the amount of work
accomplished
• Utilisation of Resources - workers, equipment, time,
space, materials
• Minimising time
• Maximising quality (accuracy)
• Minimising cost
• Doing more with less, and doing it better
92

Programs Associated with
Lean Production
• Just-in-time delivery of parts
• Worker involvement
• Continuous improvement
• Reduced setup times
• Stop the process when something is wrong
• Error prevention
• Total productive maintenance
93

CLASSIFICATION OF LAYOUT PROBLEMS
A layout problem might arise because of:
§ A change in the design of product,
§ The addition or deletion of a product from a company’s
product line,
§ A significant increase or decrease in the demand for a
product,
§ Changes in the design of process,
§ Replacement of one or more pieces of equipment,
95

CONT’D
§ Adoption of new safety standards,
§ Organizational changes,
§ A decision to build a new plant, or
§ G r a d ua l c h a n g e s o v e r t i m e d e v e l o p i n g
bottlenecks in production, crowded conditions,
delays, idle time, backtracking, poor
housekeeping, excessive temporary storage
space, obstacles to materials flow, failure to
meet schedule etc. 96

CONT’D
Layout
Design
Schedule
Design
Product
Design
Process
Design
Communication links among product, process, schedule and layout design
97

In addition, there may also exist a number of constraints on the solution:
§ Local, state, and federal governmental restrictions on allowable air and
noise pollution level,
§ Standards concerning aisle widths, ventilation, temperature, lighting etc
§ Building geometry,
§ Building site and building construction in an existing building,
§ Building site can restrict the shape of the building, and consequently, and
§ Cost of relocating the existing facilities should be weighed with the
advantages derived from the relocation.
CONT’D
98

Steps to consider in designing a plant layout:
1.Procure the basic data
• The basic data to be obtained must be related to
products, materials, manufacturing process, existing
machines, production schedule, existing material
storage and handling equipment, existing plant
services, existing building and existing layout.
PLANT LAYOUT PROCEDURE
99

2. Analyze the product and production process
3. Make or Buy parts decision
4. Plan the material flow pattern
5. Consider general material handling plan
6. Calculate equipment requirement
7. Plan individual work stations
8. Select specific material handling equipment
9. Coordinate groups of related operations
CONT’D
100

10.Construct flow diagram for production centers
11.Plan service and auxiliary activities
12.Determine the space requirements
13.Allocate activity area and plot plan
14.Consider building types
15.Construct master layout
CONT’D
101

16.Seek opinions and suggestions
17.Evaluate adjust and select the best layout
18.Check final layout
19.Obtain official approval
20.Installation of the layout
21.Follow-up the implementation of layout
CONT’D
102

1. Select equipment on the basis of product design and expected
volume of production
2. Collect layout data: machine data, machine load charts and
templates of equipment
3. Develop process chart
4. Develop an overall flow plan of operations for processing and
material handling
5. Select best suited type of building
6. Develop a tentative plot plan
LAYOUT OF A NEW PLANT
103

7. Layout template or models of individual product machines
according to flow-plan of operations
8. Layout templates and space for a service activities: materials
handling, receiving and shipping, inspection, storage, maintenance,
building services, offices and employees facilities
9. Develop building specifications to house the layout, and modify
floor plan considering building limitation
10. Make a detailed layout drawing, plot plan drawing, and a layout
model (if required)
CONT’D
104

11. Make a flow-process chart and flow-diagram to verify the
attainment of the objectives of an efficient layout
12. Seek opinions and suggestions on these layout drawings and
charts from specialist in various fields, and make
modification if necessary
13. Seek management approval on final layout drawing
14. Construct plant and install equipments
15. Make a test run and adjust layout where required
CONT’D
105

• Layout changes are necessary due to various
reasons including expansion, for adopting
technological improvements, and changes in
production method.
REVISING AND IMPROVING EXISTING LAYOUT
106

Technological improvement
• Influence the operating industrial plant,
1. Increasing mechanization
2. Developments in fuel and energy
3. Developments in processes
4. Developments in materials
5. Improvements in product design
6. Developments in scientific management
CONT’D
107

1. Non qualified or un-exprienced personnel when
assigned with the task of layout
2. When layout revisions is delegated to various
department head and foremen, each department
makes whatever revisions it feels necessary.
3. A poor site for a particular plant may mean the
inaccessibility to the street and rail lines, illogical
arrangement of shipping and receiving facilities …
REASONS FOR INEFFICIENT LAYOUT
108

4. When layout has no provision for future expansion
5. Due to poor judgment or inadequate forecast of
future sales
6. The use of a building unsuited to the layout
requirement also accounts for high production costs
7. Inefficient plant maintenance practices
8. When management fails to adopt farsighted
equipment replacement programmes
CONT’D
109

1. Expansion of capacity
2. Shrinkage in output
3. Change in product design
4. Replacement of equipment
5. Poor working environment
6. To reduce material handling
7. Frequent accidents
REASONS FOR REDESIGN OF LAYOUT
110

8. Delay in process and idle time
9. Relocation of department
10. Backtracking and bottlenecks in material flow
11. Poor lighting, ventilating, heating, housekeeping
facilities in the layout.
CONT’D
111

In general…
• The proper location of essential facilities such as
lockers, washrooms, toilets and medical service in
reference to the work areas and the provision of
sufficient amount of space for the will tend to
prevent waste of time in their use.
CONT’D
113

114
Engineering Ergonomics
114

What is Ergonomics?
115
Common Definition

What is Ergonomics?
117
Ergonomics is concerned with the interaction between human and
technology
Ergonomics integrates knowledge delivered from the human science
to match systems, environments, jobs, and products to the physical
and mental abilities and limitation of people.
Ergonomics, also known as human engineering or human factors
engineering, the science of designing machines, products, and
systems to maximize the safety, comfort, and efficiency of the people
who use them.
Ergonomists draw on the principles of industrial engineering,
psychology, anthropometry (the science of human measurement),
and biomechanics (the study of muscular activity) to adapt the design
of products and workplaces to people’s sizes and shapes and their
physical strengths and limitations.
Ergonomists also consider the speed with which humans react and
how they process information, and their capacities for dealing with
psychological factors, such as stress or isolation.

Ergonomic
118
• Ergonomist view people and the objects they use as
one unit, and ergonomic design blends the best
abilities of people and machines.
• Humans are not as strong as machines, nor can they
calculate as quickly and accurately as computers.
• Unlike machines, humans need to sleep, and they are
subject to illness, accidents, or making mistakes when
working without adequate rest.
• But machines are also limited—cars cannot repair
themselves, computers do not speak or hear as well
as people do, and machines cannot adapt to
unexpected situations as well as humans.
• An ergonomically designed system provides optimum
performance because it takes advantage of the
strengths and weaknesses of both its human and
machine components.

Definition: Ergonomic
119
IEA (International Ergonomics Association)
”the scientific discipline concerned with the
understanding of the interactions among human and
other elements of a system, and the profession that
applies theory, principles, data and methods to design
in order to optimize human well-being and overall
system performance”

Origin of Ergonomics
120
• The name ergonomics officially proposed at a 1949
meeting of the British Admiralty (July 12), by Prof.
Hugh Murrell.
• The name 'Ergonomics' officially accepted in 1950.
• The name Ergonomics was derived from the Greek
words:
Ergon/ergos - work;
Nomikos/nomos - natural laws - control and orderly
assignment.

A Hierarchy of goals in ergonomics
121
• To generate tolerable working conditions that do not
pose known dangers to human life or health.
• To generate acceptable conditions
• To generate optimal conditions which are so well
adapted to human characteristics, capabilities and
desires that physical, mental and social well-being is
achieved

122
Anatomy
Orthopedics
Physiology
Medicine
Psychology
Sociology
Anthropometry
Biomechanics
Work physiology
Industrial hygiene
Management
Labor relations
Industrial Engineering
Bio-engineering
Systems engineering
Safety engineering
Military engineering
Computer Aided Design
Origins, developments and application of ergonomics

Typical losses from failure to apply ergonomic
123
1. Lower production output
2. Increased lost time
3. Higher medical & material cost
4. Increased absenteeism
5. Low quality work
6. Injuries, strains
7. Increased probability of accidents & errors

Areas of involvement for industrial ergonomic
124
1. Physical ergonomic
2. Information ergonomic
3. Design of work space and work method
4. Product design
5. Macroergonomics: job performance,
motivation job & worker

Determining the costs
125
1. Personnel:
• Outside consultant
• Internal personnel
• Employee downtime
2. Equipments and material
3. Reduced productivity and sales
4. Overhead

Determining the benefits
126
1. Personnel-related benefits
• Increased output per worker: work station
design, equipment redesign, software redesign
• Reduced errors
• Reduced accidents, injuries and illness
• Reduced training time
• Reduced skill requirements
• Reduced maintenance time
• Reduced absenteeism
• Reduced turnover

Determining the benefits
127
2. Equipments and material
• Reduced scrap,
• Reduced equipment,
• Reduced production parts and materials,
• Reduced stocking and storage of parts,
• Reduced maintenance tools and materials,
• Reduced equipment damage

History of Ergonomics
128
• The name ergonomics officially proposed at a 1949 meeting
of the British Admiralty, by Prof. Hugh Murrell.
• The name 'Ergonomics' officially accepted in 1950.
• The Ergonomic Society was formed in 1952 with people from
psychology, biology, physiology, and design in UK.
• The Human Factors Society was formed in 1957 in US. Now
evolve as Human Factor and Ergonomics Society (HFES).

History of Ergonomics…
129
• In Europe  started with industrial
application
– Focus on well being of workers and manufacturing
productivity
– Ergonomics
• In US  developed from military problems
(Korean War – around 1950s)
– Enhance the system performance
– Human Factors Engineering

2000-
2010?
1990s
1980s
1970s
1960s
Timeline of Ergonomics
130
1950s
Military Ergonomics
Industrial Ergonomics
Consumer Product Ergonomics
HCI and Software Ergonomics
Cognitive and Macro Ergonomics
Eco and Pleasure Ergonomics?

The cost of BAD ERGONOMICS
131
POOR WORKER
SATISFACTION
LESS EFFICIENCY,
PRODUCTIVITY
MOSTLY INCREASE IN ACCIDENT RATE,
BAD QUALITY  COST OF QUALITY

The cost of BAD ERGONOMICS
132
• One day’s absence cost at least 2 – 3 times
one day payment (Oxenburgh, 1991)
• Total cost of work related accidents and illness
in Industrial Country is 5-10% of all industrial
company trading profit (UK Health & Safety
Executive, 1995)

Economic Nature of Ergonomics
133
Optimum use of human energy Higher performances
Regulation of Rest and
Recovery
Higher productivity
Elimination of Fatigue Better quality of product
Hygienic aspect of ergonomics
Elimination of undue illness
and absteeism

The Twelve Simplified Principles of Ergonomics
Providing background on the field of ergonomics, itemized in
twelve different principles.
Many of principles appear simple, but one should not
underestimate the power of a few fundamental ideas applied
systematically.
It is much more important to learn the underlying principles
rather than the details of current prescriptions for specific
problems.
By learning the principles you will understand how to
evaluate changes in technology and new products that will
come to the market.
The principles will help you to evaluate any task, whether at
home, in the office environment, or in general industry.
The principles will remains the same, even when
advancements in knowledge are made in the field of
ergonomics.
134

The Twelve Simplified Principles of Ergonomics
1. Work in neutral posture
2. Reduce excessive force
3. Keep everything in easy reach
4. Work at proper heights
5. Reduce excessive motion
6. Minimize fatigue and static load
7. Minimize pressure points
8. Provide clearance
9. Move, exercise, and stretch
10. Maintain a comfortable environment
11. Make display and controls understandable
12. Improve work organization
135

136
At the end of the storm
There is a golden sky

Chapter 4
Materials Management
137

Contents
• Inventory and the Flow of Materials
• Supply and Demand Patterns
• Objectives of Inventory Management
• Inventory Costs
• Economic Order Quantity (EOQ)
138

What is inventory?
• Inventories are those materials and supplies
carried on hand by a business or institution
either for sale or to provide inputs or supplies
to the production process.
• Inventory management is responsible for
planning and controlling inventory from the
raw material stage until it reaches the
consumer.
139

Classifying Inventories
• One way of classifying inventories used often
is related to the flow of materials into,
through, and out of a manufacturing
organization.
• Raw materials , they include purchased
materials, component parts, and
subassemblies.
• Work in process (WIP): Raw materials that
have entered the manufacturing process and
are being worked on or are waiting to be
worked on.
140

Supply and Demand Patterns
ØIn batch or lot manufacturing the basic purpose of
inventories is to decouple supply and demand.
• The purpose of inventories is thus to serve as a
buffer:-
vBetween customer demand and finished goods.
vBetween finished goods and component
availability.
vBetween requirements for an operation and the
output from the preceding operation.
vBetween parts and materials to begin production
and the suppliers of materials. 141

The role of inventory
ØA quantity of commodity in the control of an
enterprise, held for some time to satisfy
some future demand for manufacturing:-
• raw material,
• purchased items,
• semi-finished and finished products,
• spare parts, and supplies inventory is buffer
between supply and demand.
142

…Cont’d
ØOn this basis inventories can be classified
according to the function they perform.
i) Anticipation Inventory: These inventories
are built up in advance of a peak selling
season, a promotion program, vacation
shutdown, or possibly the threat of a strike.
Ø They are built up to help level production
and to reduce the costs of changing
production rates.
143

…Cont’d
ii) Fluctuation Inventory: Inventory is held to
cover random unpredictable fluctuations in
supply and demand or lead time.
ØIf demand or lead time is greater than
forecast, then a stockout will occur.
ØSafety stock is carried to protect against the
possibility of a stockout.
ØIts purpose is to prevent disruptions in
manufacturing or deliveries to customers.
144

…Cont’d
iii) Lot Size Inventory: Items that are
purchased or manufactured in quantities
greater than needed immediately create lot
size inventories.
ØItems will be ordered in lots or batches to get
quantity discounts, to reduce shipping,
clerical, and setup costs and in cases where
it is impossible to make or purchase items at
the same rate they will be used or sold.
145

…Cont’d
iv) Transportation Inventory: These
inventories exist because of the time required
to move stock from one location to another
such as from a plant to a distribution center
or a customer.
ØThey are sometimes referred to as pipeline
or movement inventories.
146

…Cont’d
v) Hedge Inventory: Some products such as
minerals and commodities (e.g., grains or
animal products) are traded on a worldwide
market.
ØThe price for these products fluctuates
according to world supply and demand.
ØIf buyers expect that prices will rise, they can
purchase hedge inventory when prices are
low.
147

Objectives of Inventory Management
1. Maximum customer service
2. Low-cost plant operation,
ØInventories allow operations with different
rates of production to be operated separately
and thus more economically.
• In the case of production planning for seasonal
products the demand varies non uniformly
throughout the year.
• One strategy was to level production and build
anticipation inventory for sale in the peak
periods. 148

…Cont’d
ØInventories permit manufacturing to run
longer production runs, which result in the
following:
• Lower setup costs per item
• An increase in production capacity
ØInventories allow manufacturing to purchase
in larger quantities, which results in lower
ordering costs per unit and quantity discounts.
149

3. Minimum inventory investment
• Customer service: The lower the inventory,
the higher the likelihood of a stockout and the
lower the level of customer service.
• The higher the inventory level, the higher
customer service will be.
• Costs associated with changing production
levels: Excess equipment capacity, overtime,
hiring, training, and layoff costs will all be
higher if production must fluctuate with
demand.
150

…cont’d
• Cost of placing orders: Lower inventories can be
achieved by ordering less more often, but this
practice results in higher annual ordering costs.
• Transportation costs: Goods moved in small
quantities cost more to move per unit than those
moved in large quantities.
• However, moving large lots of goods implies
higher inventory.
• If inventory is carried, there has to be a benefit
that exceeds the costs of carrying that inventory.
151

Inventory Costs
• Costs relevant to inventory mgt decisions are:-
• Item cost/Purchase cost: The price paid for a
purchased item consists of the cost of the item and
any other direct costs associated in getting the item
into the plant.
• Purchasing cost: per-item cost paid to the supplier.
• Let c be the unit cost and Q the numbers purchased
(lot size).In the linear case cQ.
• Carrying costs: These costs include all expenses
incurred by the firm because of the volume of
inventory carried. They can be broken down into three
categories: frequently calculated as a % I of
purchasing cost: h = ic can go up to 25-40 percent.152

Ordering costs
• These are costs associated with the placing of
an order either with the factory or a supplier.
• The cost of placing an order does not depend
upon the quantity ordered, however, the annual
cost of ordering depends upon the number of
orders placed in a year.
• Cost of preparing and monitoring the order,
each time an order is incurred.
• It is a fixed cost A (independent of the lot size
ordered, also called fixed cost). Has $/year unit.
• Total cost for purchasing or producing a lot is
A + cQ
153

…Cont’d
• Stock out costs:- If demand during the lead
time exceeds forecast, then we can expect a
stockout.
• Potentially a stockout can be expensive
because of back-order costs, lost sales, and
possibly lost customers.
• Capacity-related costs:- When output levels
must be changed, costs can be incurred for
overtime, hiring, training, extra shifts, and
layoff.
154

Measures of effectiveness
• Inventory = service entity
• Trade-off analysis between benefits and
costs of carrying inventory.
• The modeling approach optimizes the
inventory system minimum average total cost
per unit time.
• The managerial approach multi-item systems
• Months of supply
• Annual inventory turnover
• Inventory turnover 155

Inventory policies
Three important factors:
• What to order? – variety decision
• When to order? – timing decision
• How much to order? – quantity decision
Also other factors:-
ØPeriodic review policy
ØContinuous review policy
156

Inventory Models
Ø Single period inventory models
• Assumes the planning horizon is a single period
and decision are made a single time
Ø Multi period inventory models
• Consider multiple period and decision
Ø Depending on the nature of demand
– Deterministic
– Probabilistic/Stochastic
• Inventory under risk (the distribution is known)
• Inventory under uncertainty (the distribution is not
know, but mean and variance are known) 158

Inventory Models
• How much to order– Order quantity Q
• When to order—Reorder level r
• The time difference between placing an
order and receiving an order is called Lead
Time.
• The reorder level is the demand required for
the lead time; also called reorder demand.
159

Deterministic demand
• The annual demand remains the same
• The other information such as;
üItem cost (purchasing cost)
üHolding/carrying cost
üOrdering cost and others are also remain
the same.
160

Quantity decisions
• Static lot sizing models
– uniform (constant) demand over the planning
horizon
• Economic order quantity (EOQ)
• Economic production quantity with extensions
• Quantity discounts
• Resource-constrained multiple-item models
• Multi-item ordering
– Dynamic lot sizing models
– changing demand over the planning horizon
161

Economic order quantity (EOQ)
• Introduced by1915 Harris / Wilson
– there is a single inventory system
– demand is uniform and deterministic and
amounts to D units per time unit
– no shortages are allowed
– there is no order lead time
– all the quantity ordered arrives at the same
time (infinite replenishment rate)
162

Model-1 Single Item
• Single Item
• Continuous demand
• Instantaneous replenishment (lead time = 0)
• Annual Demand = Demand/year
• Let Q is the ordering quantity to be order
every day, the graph will be:
164

§ Cambridge Chowder Co. consumes D = 60,000 cases of
crackers per year. The crackers cost c = $4 per case,
and each order incurs a delivery cost of K = $200.
Money spent on crackers has an alternative investment
with annual interest of 24%.
• Demand: D = 60,000 cases per year
• Fixed ordering cost: K = $200 per order
• Variable ordering cost: c = $4 per case
• Holding cost: h = $0.96 per case per year
• Opportunity cost: alternative investment with 24% annual
interest
• holding 1 case for 1 year costs 4*24%= $0.96 = h
171

Project Management and
Resource Allocation
Chapter Five
173

Why we need to know about Project
• “Any Project Managers, Project Management
team members, Program Managers or
Executives must Know how Project behaves”
• Understanding about the Project is a
foundation knowledge for managing it.
174

What is Project?
• A project is a temporary (which has a
beginning and an end) endeavor undertaken
to create a unique (Distinct) product,
service, or result.
*Definition according to PMI*
175

Where do we need Project ?
• Projects are undertaken:
at all levels of the organization and they can involve a single
person or many thousands.
• Their duration ranges:
few weeks to several years.
• Projects can involve:
one or many organizational units, such as joint ventures and
partnerships
176

Characteristics of a Project ?
• Temporary:
– Definite beginning and End
– Duration of either few weeks or several years
– Ends when project objectives are met, cannot be met or no longer
needed.
• Unique
– Different from other products and services. (unique deliverables)
– Never done before
• Progressive Elaboration (iterative process) begins as a concept….
– Gradual development of the detailed characteristics of the product
or service
177

Projects and Project Management
Proposed in Project
Charter
Specified in Project
Scope
Designed
Programmed Installed at user site What the user wanted!
1-178

Project Attributes
Ø A project:
vHas a unique purpose
vIs temporary
vIs developed using progressive elaboration
vRequires resources, often from various areas
vShould have a primary customer or sponsor
üThe project sponsor usually provides the direction and Funding for the project
vInvolves uncertainty
179

§ Computer related hardware and software projects
• Include networking, infrastructure, and software
design and development projects
• Computer software projects include system software
projects,
• programming software projects, and
• application software projects.
• New Product Development
• Construction
Types of Projects
1-180

Project Life Cycle
What is Successful Project ?
190

Project Life Cycle
More on Project Phases
ØIn early phases of a project life cycle:
vResource needs are usually lowest
vThe level of uncertainty (risk) is highest
vProject stakeholders have the greatest opportunity to influence the project
ØIn middle phases of a project life cycle:
vThe certainty of completing a project improves
vMore resources are needed
ØThe final phase of a project life cycle focuses on:
vEnsuring that project requirements were met
vThe sponsor approves completion of the project
191

Evaluation
Identification
Preparation
Appraisal/
financing
Implementation
The World Bank model Project life cycle
192

Wideman's corporate business, facility/product and
project life spans compared
193

PMI Standard Committee's sample generic project life span
194

Kapur's information system project life span
195

Project Cost and Staffing Level
Across the Project Life Cycle
196

Project will be successful if…
• Purposeful (Objective)
Well defined set of desired end result, which is measurable.
Note: This quality of objective will enable to mark the project complete.
• Have Life cycle
Progress from an idea, through planning and execution, until they
are complete.
Have definite beginning and ending
• Have interdependencies: Have defined sequence.
• Progressive Elaboration
Developing in steps and continuing by increments. Project entities are
described in broad terms at the start of the project but detailed as project
progress. Initially this may look failure prone as the details are not detailed, but
will eventually
197

What is Operation
• A n o p e r a t i o n i s a w o r k
performed repetitively and is an
on-going process.
• It shares some characteristics with
project , like it is performed by people
198

Project VS Operation
• Similarities
• Both are performed by people
• Both have deliverables
• Both have limited resources
• Both are Planned, Executed and Controlled (need to be
managed)
• Differences:
• Project is temporary in nature , whereas an operation is
ongoing
• Projects have temporary teams , whereas operations have
permanent teams (relatively)
• Each project is unique in nature, whereas operation steps
are identical
199

Project VS Operation
Projects
• To attain its objectives and terminate
• Create own character, organization, and goals
• Catalyst for change
• Unique product or services
• Heterogeneous teams
• Start and end date
Examples
• Producing a News letter
• Writing and publishing a book
• Implementing a LAN
• Hiring a sales man
• Arrange for a conference
• Opening for a new shop
• Producing the annual report
Operations
• To sustain the business
• Semi permanent charter, organization,
and goals
• Maintain status quo
• Standard product or services
• Homogeneous teams
• Ongoing
Examples
• Responding to customers requests
• Writing a letter to a Prospect
• Hooking up a Printer to a computer
• Meeting with an employee
• Attending a conference
• Opening the shop
• Writing a progress update memo
200

Project and Production
qIdea
qDesign
qPlan
qConcrete entity
– Factory
– Building
– Highway
– Prototype
– Products
– Services
201

qProject
– Automobile factory
– Build a house
– Construct a hospital
– Conceive new
product
– Develop prototype
qProduction
– Produce
automobiles
– Operate household
– Treat patients
– Manufacture
– Manufacture
multiples
202

How is the Project Initiated
v A Market Demand & Organizational Need
v A Customer Request
v A Technological Advancement
v A Legal Requirement
v Ecological Impacts
v Social need
203

Project and Strategy
• Projects are a means of organizing activities that
cannot be addressed within the organization’s
normal operational limits.
• Projects are therefore often utilized as a means of
achieving an organization’s strategic plan, whether
the project team is employed by the organization
or is a contracted service provider.
204

Project Management
• Project management is: the application of
knowledge, skills, tools and techniques to
project activities to meet project
requirements.
• The discipline of project management is
about providing the tools and techniques
that enable the project team (not just the
project manager) to organize their work to
meet these constraints
205

Why Project Management?
• It consists all type of management in one
package
• It requires a minimum of Five area expertise
• Since project is UNIQUE in nature, it requires
unique management
• It is a management of Project constraint
206

What is managed in Project
• Performance, Cost, and Time Project Targets
(According to other Versions)
Decode
Target
Budget limit
Required Performance
Due date
Performance
Time / Schedule
Cost
207

How Do We Accomplish Project
Management?
It can be accomplished through the
use of the processes of initiating, planning,
executing, monitoring and controlling,
and closing.
208

Who is Responsible for Project
Management
• Project Manager is an individual Responsible/
Accountable for Managing the Project
• Project Management can be performed by Individual
or Team .
However,
• Project must be done in Team
209

Competence required for Project
Management
• The Project Management Body of knowledge
• Application area Knowledge, Standards and
Regulations
• Project Environment Knowledge
• General Management Knowledge and skills
• Soft skill and human relations skill
210

Project and Program Management
• A Program is: a group of related projects managed in a
coordinated way to obtain benefits and control which is not
available from managing them individually.
Programs may include elements of related work outside of the
s c o p e o f t h e d i s c r e t e p r o j e c t s i n t h e p r o g ra m .
• Program may include elements of ongoing operations, as well
as projects.
211

Project Portfolio and Project
Management
• Project portfolio management
refers to the selection and support of
projects or program investments.
These investments in projects and
programs are guided by organization’s
strategic plan and available resources.
* The projects or programs in the portfolio
may not necessarily be interdependent
or directly related.
212

Projects Programs Portfolios
Scope
Projects have defined
objectives. Scope is
progressively elaborated
throughout the life cycle
Have a larger scope and
provide more significant
benefits
Portfolios have a
business scope that
changes with the
strategic goals of the org
Change
Project managers expect
change and implement
processes to keep
change managed and
Controlled
The program manager
must expect change
from inside and outside
the program and be
prepared to manage it
Portfolio managers
continually monitor
changes in the broad
environment
Planning
Project manages
progressively elaborate
high level information
into detailed plans
throughout the project
life cycle
Program managers
develop the overall
program plan and create
high level plans to guide
detailed planning at the
end of the component
level
Portfolio manages create
and maintain necessary
processes and
communication relative
to the aggregate portfolio
35
213

Projects Programs Portfolios
Management
Success
Project managers
manage the project team
to meet the project
objectives
Success is measured by
product and project
quality , timelines ,
budget compliance, and
degree of customer
satisfaction
Program managers
manage the program staff
and the project managers
; they provide vision and
overall leadership
Success is measured by
the degree to which the
program satisfies the
needs and benefits for
which it was undertaken
Portfolio managers may
manage or coordinate
portfolio management
staff
Success is measured in
terms of aggregate
performance of portfolio
components
Monitoring
Project managers monitor
and control the work of
producing the products ,
services , results that the
project was undertaken to
produce
Program managers
monitor the progress of
program components to
ensure the overall goals ,
schedules, budget&
benefits of the program
will be met
Portfolio managers
monitor aggregate
performance and value
indicators
Program
Project Portfolio
214

v Completing a project charter and getting signatures on it.
Project Life Cycle
Project Initiation
Ø Initiating a project includes recognizing and starting a new project or
project phase.
Ø Some organizations use a pre-initiation phase, while others include
items such as developing a business case as part of the initiation.
Ø The main goal is to formally select and start off projects.
Ø Key outputs include:
v Assigning the project manager.
v Identifying key stakeholders.
v Completing a business case.
215

Project Initiation Documents
Ø Every organization has its own variations
of what documents are required to initiate
a project.
Ø It’s important to identify the project need,
stakeholders, and main goals.
216

ØThe main purpose of project planning is to guide
execution
ØEvery knowledge area includes planning information
ØKey outputs include:
vA team contract
vA project scope statement
vA work breakdown structure (WBS)
vA project schedule, in the form of a Gantt chart with all dependencies
and resources entered
vA list of prioritized risks (part of a risk register)
Project Planning
217

ØUsually takes the most time and resources to perform
project execution
ØProject managers must use their leadership skills to
handle the many challenges that occur during project
execution
ØMany project sponsors and customers focus on
deliverables related to providing the products, services,
or
results desired from the project
ØA milestone report can help focus on completing
major
milestones
Project Executing
218

ØInvolves measuring progress toward project objectives,
monitoring deviation from the plan, and taking correction
actions
ØAffects all other process groups and occurs during all
phases of the project life cycle
ØOutputs include performance reports, requested changes,
and updates to various plans
Project Monitoring and Controlling
219

ØInvolves gaining stakeholder and customer acceptance of
the final products and services
ØEven if projects are not completed, they should be closed
out to learn from the past
ØOutputs include project archives and lessons learned, part
of organizational process assets
ØMost projects also include a final report and presentation to
the sponsor/senior management
Project Closing
220

Project Integration Processes
Integration Management
Time Management
Scope Management
Cost Management
Quality Management
HR Management
Risk Management
Procurement
Management
Communication
Management
Project Integration
221

Work Breakdown Structures (WBS) and
Risk Assessment
ØThe WBS assists project leaders, participants, and
stakeholders in the development of a clear vision of
the end products or outcomes to be produced by
the project.
ØA deliverables-oriented grouping of project
elements that organizes and defines the total work
scope of the project.
ØIt provides the framework for all deliverables
throughout the project life cycle.
ØEach descending level represents an increasingly
detailed definition of the project work.
222

Scope
(definition)
Project Management Processes
(Initiation)
Initiation
Cost
(estimates, …)
WBS
Time
(activity diagrams, …)
Human Resources
(Labour and professional matrix, …)
• Also to consider: Quality, Risk, Communication,
Procurement, Integration (knowledge areas)
Project Charter
Project Management Plan
Project Scope
Statement
223

Possible levels in a WBS
Project
Sub-projects
Deliverables
Sub-deliverables
Work packages
Work units
224

Design:
The WBS provides a graphical representation or textual outline of the project
scope.
Some of the main roles the WBS plays in supporting clarity for project definition
are that it:
Decomposes: the overall project scope into clearly defined deliverables.
Defines: the scope of the project in terms that the stakeholders can
understand.
Provides: a structure for organizing information regarding the project’s
progress, status, and performance.
Supports: tracking of risks to assist the project manager in identifying and
implementing necessary responses. 225

Levels:
The depth of the WBS is dependent upon the size and complexity of
the project and the level of detail needed to plan and manage it.
The 100% Rule:
This rule states that the WBS includes 100% of the work defined by
the project scope and captures all work deliverables to be
completed, including project management.
The rule applies to all levels within the hierarchy.
226

WBS for Software development Project
227

Purpose of a WBS
• An instrument for tracking costs and work
performance.
• Provides a coordinating framework for the
various parts of a project.
• Defines authority and responsibilities for the
details of the project.
• Provides the capacity to sum or “roll up” the
cost of each project phase.
• Identifies “work packages.”
228

Purpose of a WBS CONT’D
§ It helps prevent work from slipping through the
cracks.
§ It provides the project team members with an
understanding of where their pieces fit into the
overall project management plan.
§ It facilitates communication and cooperation
among team members.
§ It helps prevent changes.
§ It provides a basis for estimating staff, cost, and
time.
§ It gets team buy-in and builds the team.
§ It helps people get their minds around the
project.
229

1. It helps prevent work from slipping through the
cracks.
2. It provides the project team members with an
understanding of where their pieces fit into the
overall project management plan.
3. It facilitates communication and cooperation among
team members.
4. It helps prevent changes.
5. It provides a basis for estimating staff, cost, and
time.
6. It gets team buy-in and builds the team.
7. It helps people get their minds around the project.
230

Identifying Work Packages
• Identify major project work deliverables/systems. Then the
sub-deliverables necessary to accomplish the larger
deliverables are defined.
• The process is repeated until the sub-deliverable detail is small
enough to be manageable and where one person is responsible.
This lowest deliverable usually consists of several work
packages.
• Work packages within a deliverable are grouped by type of
work: foundation, framing, finish; hardware, programming,
testing, etc.
• Also referred to as cost accounts, work packages facilitate a
system for monitoring project progress by work completed, cost
and responsibility.
231

Most commonly, the project title goes at the top of the WBS.
1. The first level is normally the same as the project life cycle.
2. The following levels break the project into smaller pieces.
3. This is a top – down effort to decompose the deliverables and
4. the work required to produce them.
5. The complete scope of the project (product, project, and
management efforts) are included.
6. Note that each work package consists of nouns (things) rather than
actions.
232

233
NETWORK TECHNIQUES
PERT CPM
-Program Evaluation and
Review Technique
- developed by the US
Navy with Booz
Hamilton Lockheed
- on the Polaris
Missile/Submarine
program 1958
Critical Path Method
Developed by El Dupont
for Chemical Plant
Shutdown Project- about
same time as PERT
üBoth use same calculations, almost similar
üMain difference is probabilistic and deterministic in time estimation
üGantt Chart also used in scheduling

234
• Graphical portrayal of activities and event
• Shows dependency relationships between
tasks/activities in a project.
• Clearly shows tasks that must precede (precedence)
or follow (succeeding) other tasks in a logical manner.
• Clear representation of plan – a powerful tool for
planning and controlling project.
NETWORK SCHEDULING

235
DEFINITION OF TERMS IN A NETWORK DIAGRAM
• Activity: any portions of project (tasks) which required
by project, uses up resource and consumes
time – may involve labor, paper work,
contractual negotiations, machinery operations
Activity on Arrow (AOA) showed as arrow, AON
– Activity on Node
• Event: beginning or ending points of one or more
activities, instantaneous point in time, also
called ‘nodes’
• Network: Combination of all project activities and the events
ACTIVITY
PRECEEDING SUCCESSOR
EVENT

236
Emphasis on Logic in Network Construction
• Construction of network should be based on logical or
technical dependencies among activities
• Example - before activity ‘Approve Drawing’ can be
started the activity ‘Prepare Drawing’ must be
completed
• Common error – build network on the basis of time logic
(a feeling for proper sequence ) see example below
WRONG !!!
CORRECT ü

237
Example 1- A simple network
Consider the list of four activities for making a simple product:
Activity Description Immediate
predecessors
A Buy Plastic Body -
B Design Component -
C Make Component B
D Assemble product A,C
Immediate predecessors for a particular activity are the activities
that, when completed, enable the start of the activity in question.

238
Sequence of activities
• Can start work on activities A and B anytime, since
neither of these activities depends upon the
completion of prior activities.
• Activity C cannot be started until activity B has been
completed
• Activity D cannot be started until both activities A and
C have been completed.
• The graphical representation (next slide) is referred to
as the PERT/CPM network

239
Network of Four Activities
1 3 4
2
A
B C
D
Arcs indicate project activities
Nodes correspond to the beginning
and ending of activities

240
Example 2
Develop the network for a project with following activities and
immediate predecessors:
Activity Immediate
predecessors
A -
B -
C B
D A, C
E C
F C
G D,E,F
Try to do for the first five (A,B,C,D,E) activities

241
Network of first five activities
1 3 4
2
A
B
C
D
5
E
We need to introduce
a dummy activity

242
•Note how the network correctly identifies D, E, and F as the
immediate predecessors for activity G.
•Dummy activities is used to identify precedence relationships
correctly and to eliminate possible confusion of two or more activities
having the same starting and ending nodes
•Dummy activities have no resources (time, labor, machinery, etc) –
purpose is to PRESERVE LOGIC of the network
Network of Seven Activities
1 3 4
2
A
B
C
D
5
E
7
6
F
G
dummy

243
EXAMPLES OF THE USE OF DUMMYACTIVITY
Dummy
RIGHT ü
1
1
2
Activity c not
required for e
a
b
c
d
e
a
b
c
d
e
WRON
G!!!
RIGHT
ü
Network concurrent activities
1 2 1
2
3
a
WRONG!!!
a
b
b
WRONG !
RIGHT ü

244
1 1
2 2
3 3
4
a d
b e
c f
a d
b
e
f
c
WRONG!!! RIGHT!!!
a precedes d.
a and b precede e,
b and c precede f (a does not precede f)

Project Crashing
■Project duration can be reduced by assigning
more resources to project activities.
■However, doing this increases project cost.
■Decision is based on analysis of trade-off
between time and cost.
■Project crashing is a method for shortening
project duration by reducing one or more critical
activities to a time less than normal activity time.
245

The Project Network
Number Activity Predecessor Duration
1 Design house and obtain
financing
-- 12 months
2 Lay foundation 1 8 months
3 Order and receive materials 1 4 months
4 Build house 2,3 12 months
5 Select paint 2, 3 4 months
6 Select carper 5 4 months
7 Finish work 4, 6 4 months
246

Project Crashing and Time-Cost Trade-Off
Example Problem
The project network for building a house
247

Normal activity and crash data for the network
Example Problem
248

Example Problem
Time-cost relationship for crashing activity 1
Crash cost & crash time
have a linear relationship
$2000
$400/
5
Total Crash Cost
week
Total Crash Time weeks
 
249

Network with normal activity times and weekly crashing costs
Example Problem
250

Revised network with activity 1
crashed
Example Problem
As activities are crashed, the critical path may change
and several paths may become critical.
251

QM for Windows Output
252

QM for Windows
253

General Relationship of Time and Cost
■Project crashing costs and indirect costs have an inverse
relationship.
■Crashing costs are highest when the project is
shortened.
■Indirect costs increase as the project duration increases.
■The optimal project time is at the minimum point on
the total cost curve.
254

General Relationship of Time and Cost
The time-cost trade-off
255

10-256
Gantt Charts
ü Establish a time-phased network
ü Can be used as a tracking tool
Benefits of Gantt charts
1. Easy to create and comprehend
2. Identify the schedule baseline network
3. Allow for updating and control
4. Identify resource needs

10-257
Create a Gantt chart based on the
activities listed in the table.
Task Time Pred
A 8 --
B 5 A
C 8 A
D 4 B,C
E 5 D

10-258
Crashing
The process of accelerating a project
Principal methods for crashing
ØImproving existing resources’ productivity
ØChanging work methods
ØIncreasing the quantity of resources

10-259
Managerial Considerations
• Determine activity fixed and variable costs
• The crash point is the fully expedited activity
• Optimize time-cost tradeoffs
• Shorten activities on the critical path
• Cease crashing when
– the target completion time is reached
– the crashing cost exceeds the penalty cost

10-260
What is the lowest cost to complete this project in 52 weeks?
Times are in weeks and costs in dollars. Plot the AON & AOA
networks and the GANTT chart.
Activity Pred Normal
Time
Min
Time
Normal
Cost
Crash
Cost
A -- 14 9 500 1500
B A 5 2 1000 1600
C A 10 8 2000 2900
D B, C 8 5 1000 2500
E D 6 6 1600 1600
F D 9 6 1500 3000
G E, F 7 4 600 1800
H G 15 11 1600 3600

10-261
Activity on Arrow Networks
üActivities represented by arrows
üWidely used in construction
üEvent nodes easy to flag
üForward and backward pass logic similar to AON
ü Two activities may not begin and end at common
nodes
üDummy activities may be required

10-262
1. Use AOA to sketch the network that represents the project
as described in the table.
2. Calculate early and late event times for all activities.
Activity Time Pred Activity Time Pred
A 4 -- F 15 E
B 2 A G 4 E
C 10 A H 7 D,F,G
D 3 B I 11 H
E 15 B,C

10-263
Activity on Arrow Network
A H
F
D
E
C
B I
G

10-264
Controversies in the Use of Networks
vNetworks can be too complex
vPoor network construction creates problems
vNetworks may be used inappropriately
vWhen employing subcontractors
– The master network must be available to them
– All sub-networks must use common methods
vPositive bias exists in PERT networks

Preliminaries
• STELLAR access: to be announced
• AS1 Survey due by tonight 12 pm
• TP1 and AS2 are out
267

AS 2: Student Presentation
268

Preliminaries
• STELLAR access: to be announced
• AS1 Survey due by tonight 12 pm
• TP1 and AS2 are out
• Pictures will be taken before you leave
• Who we are
• Don’t memorize course content. Understand it.
269

Outline
ØSession Objective & Context
§ Project Financing
§ Owner
§ Project
§ Contractor
§ Additional Issues
§ Financial Evaluation
§ Time value of money
§ Present value
§ Rates
§ Interest Formulas
§ NPV
§ IRR & payback period
§ Missing factors 270

Session Objective
• The role of project financing
• Mechanisms for project financing
• Measures of project profitability
271

Project Management Phase
FEASIBILITY
DESIGN
PLANNING
CLOSEOUT
DEVELOPMENT OPERATIONS
Financing &
Evaluation
Ris
k
272

Context: Feasibility Phases
– Project Concept
– Land Purchase & Sale Review
– Evaluation (scope, size, etc.)
– Constraint survey
• Site constraints
• Cost models
• Site infrastructural issues
• Permit requirements
– Summary Report
– Decision to proceed
– Regulatory process (obtain permits, etc)
– Design Phase 273

Lecture 2 - References
More details on:
– Hendrickson PM for Construction on-line textbook
• Chapter 7
274

Outline
üSession Objective & Context
ØProject Financing
§ Owner
§ Project
§ Contractor
§ Present value
§ Rates
§ NPV

Financing – Gross Cashflows
years 1 2 3 4 5 6 7 8 9 10
OWNER
investment ($10,000,000) ($20,000,000)
operation incomes $2,000,000 $4,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000
owner cashflow $0 ($10,000,000) ($20,000,000) $2,000,000 $4,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000
owner cum cashflow $0 ($10,000,000) ($30,000,000) ($28,000,000) ($24,000,000) ($18,000,000) ($12,000,000) ($6,000,000) $0 $6,000,000
CONTRACTOR
costs ($4,000,000) ($7,000,000) ($14,000,000) $0 $0 $0 $0 $0 $0 $0
revenues $0 $10,000,000 $20,000,000 $0 $0 $0 $0 $0 $0 $0
contractor cashflow ($4,000,000) $3,000,000 $6,000,000 $0 $0 $0 $0 $0 $0 $0
contractor cum cashflow
($4,000,000) ($1,000,000) $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000
Owner investment = contractor revenue
276

years 1 2 3 4 5 6 7 8 9 10
OWNER
investment ($10,000,000) ($20,000,000)
owner cashflow $0 ($10,000,000) ($20,000,000) $2,000,000 $4,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000
CONTRACTOR
costs ($4,000,000) ($7,000,000) ($14,000,000) $0 $0 $0 $0 $0 $0 $0
revenues $0 $10,000,000 $20,000,000 $0 $0 $0 $0 $0 $0 $0
($4,000,000) ($1,000,000) $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000
Design/Preliminary
Construction
277

years 1 2 3 4 5 6 7 8 9 10
OWNER
investment ($10,000,000) ($20,000,000)
owner cashflow $0 ($10,000,000) ($20,000,000) $2,000,000 $4,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000
CONTRACTOR
costs ($4,000,000) ($7,000,000) ($14,000,000) $0 $0 $0 $0 $0 $0 $0
revenues $0 $10,000,000 $20,000,000 $0 $0 $0 $0 $0 $0 $0
($4,000,000) ($1,000,000) $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000
• Early expenditu
• Takes time to g
Design/Preliminary
Construction
278

Critical Role of Financing
• Makes projects possible
• Has major impact on
– Riskiness of construction
– Claims
– Prices offered by contractors (e.g., high bid price for late
payment)
• Difficulty of Financing is a major driver towards
alternate delivery methods (e.g., Build-Operate-
Transfer)
280

How Does Owner Finance a Project?
• Public
• Private
• “Project” financing
281

Outline
ØProject Financing
ØOwner
§ Project
§ Contractor
§ Present value
§ Rates
§ NPV

Public Financing
• Sources of funds
– General purpose or special-purpose bonds
– Tax revenues
– Capital grants subsidies
– International subsidized loans
• Social benefits important justification
– Benefits to region, quality of life, unemployment relief, etc.
• Important consideration: exemption from taxes
• Public owners face restrictions (e.g. bonding caps)
– Major motivation for public/private partnerships
• MARR (Minimum Attractive Rate of Return) much lower (e.g.
8-10%), often standardized
283

Private Financing
• Major mechanisms
– Equity
• Invest corporate equity and retained earnings
• Offering equity shares
– Stock Issuance (e.g. in capital markets)
• Must entice investors with sufficiently high rate of return
• May be too limited to support the full investment
• May be strategically wrong (e.g., source of money, ownership)
– Debt
• Borrow money
• Bonds
• Because higher costs and risks, require higher returns
• MARR varies per firm, often high (e.g. 20%)
284

Private Owners w/Collateral Facility
Distinct Financing Periods
• Short-term construction loan
– Bridge Debt
• Risky (and hence expensive!)
• Borrowed so owner can pay for construction (cost)
• Long-term mortgage
– Senior Debt
• Typically facility is collateral
• Pays for operations and Construction financing debts
• Typically much lower interest
• Loans often negotiated as a package
time
construction
w/o tangible
operation
w/ tangible
285

Outline
ØProject Financing
§ Owner
ØProject
§ Contractor
§ Present value
§ Rates
§ NPV

“Project” Financing
• Investment is paid back from the project profit rather than the
general assets or creditworthiness of the project owners
• For larger projects due to fixed cost to establish
– Small projects not much benefit
• Investment in project through special purpose corporations
– Often joint venture between several parties
• Need capacity for independent operation
• Benefits
– Off balance sheet (liabilities do not belong to parent)
– Limits risk
– External investors: reduced agency cost (direct investment in project)
• Drawback
– Tensions among stakeholders
287

Outline
ØProject Financing
§ Owner
§ Project
ØContractor
§ Present value
§ Rates
§ NPV

Contractor Financing I
• Payment schedule
– Break out payments into components
• Advance payment
• Periodic/monthly progress payment (itemized breakdown
structure)
• Milestone payments
– Often some compromise between contractor and owner
– Architect certifies progress
– Agreed-upon payments
• retention on payments (usually, about 10%)
– Often must cover deficit during construction
– Can be many months before payment received 289

S-curve Work
Man-hours
months
290

S-curve Cost
0
1
2
3
4
5
6
7
8
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Working days
$K
0
10
20
30
40
50
60
70
80
90
100
Cumulative
costs
$K
Daily cost
Cum. costs
291

Contractor Financing II
• Owner keeps an eye out for
– Front-end loaded bids (discounting)
– Unbalanced bids
293

Contractor Financing II
• Owner keeps an eye out for
– Front-end loaded bids (discounting)
– Unbalanced bids
• Contractors frequently borrow from
– Banks (Need to demonstrate low risk)
• Interaction with owners
– Some owners may assist in funding
• Help secure lower-priced loan for contractor
– Sometimes assist owners in funding!
• Big construction company, small municipality
• BOT
294

• Agreed upon in contract
– Often structure proposed by owner
– Should be checked by owner (fair-cost estimate)
– Often based on “Masterformat” Cost Breakdown Structure
(Owner standard CBS)
• Certified by third party (Architect/engineer)
Contractor Financing III
295

Outline
ØProject Financing
§ Owner
§ Project
§ Contractor
ØAdditional Issues
§ Present value
§ Rates
§ NPV

Latent Credit
• Many people forced to serve as lenders to owner
due to delays in payments
– Designers
– Contractors
– Consultants
– CM
– Suppliers
• Implications
– Good in the short-term
– Major concern on long run effects
297

Role of Taxes
• Tax deductions for
– Depreciation - Link
• the process of recognizing the using up of an asset
through wear and obsolescence and of subtracting
capital expenses from the revenues that the asset
generates over time in computing taxable income
– Others
298

Outline
üProject Financing
§ Owner
§ Project
§ Contractor
ØFinancial Evaluation
§ Present value
§ Rates
§ NPV

Develop or Not Develop
• Is any individual project worthwhile?
• Given a list of feasible projects, which one is the best?
• How does each project rank compared to the others
on the list?
300

Project Evaluation Example:
• Project A
• Construction=3 years
• Cost = $1M/year
• Sale Value=$4M
• Total Cost?
• Profit?
• Project B
• Construction=6 years
• Cost=$1M/year
• Sale Value=$8.5M
• Total Cost?
• Profit?
301

Quantitative Method
• Profitability
– Create value for the company
302

Quantitative Method
• Profitability
– Create value for the company
• Opportunity Cost
– Time Value of Money
• A dollar today is worth more than a dollar tomorrow
– Investment relative to best-case scenario
• E.g. Project A - 8% profit, Project B - 10% profit
304

Money Is Not Everything
• Social Benefits
– Hospital
– School
– Highway built into a remote village
• Intangible Benefits (E.g, operating and competitive
necessity)
– New warehouse
– New cafeteria
305

Outline
üProject Financing
§ Owner
§ Project
§ Contractor
§ Additional issues
ØFinancial Evaluation
ØTime value of money
§ Present value
§ Rates
§ NPV

Basic Compounding
• Suppose we invest $x in a bank offering interest rate i
• If interest is compounded annually, asset will be
worth
– $x(1+i) after 1 year
– $x(1+i)2 after 2 years
– $x(1+i)3 after 3 years ….
– $x(1+i)n after n years
$x
0 1 $x(1+i) 2 $x(1+i) n $x(1+i)
…
307

Time Value of Money
• If we assume
– That money can always be invested in the bank (or some
other reliable source) now to gain a return with interest
later
– That as rational actors, we never make an investment
which we know to offer less money than we could get in
the bank
• Then
– Money in the present can be thought as of “equal worth”
to a larger amount of money in the future
– Money in the future can be thought of as having an equal
worth to a lesser “present value” of money
308

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Industrial Mgt and Engineering economy.pdf