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![48 | P a g e
When the cash flows of different years are uncorrelated, then the cash flow in the year “t” is
independent of the cash flow in the year “t-n”. Whereas, if the cash flows of different years are
perfectly correlated, then the cash flows in each period will be alike.
The formula to compute the Net Present Value and the standard deviation under both the
cases is given below:
Uncorrelated Cash Flows
NPV = n
∑t=1 [Ct / (1+i)t
] – I
∂ (NPV) = n
∑t=1 [∂t
2
/ (1+i)2t
]1/2
Correlated Cash Flows
NPV = n
∑t=1 [Ct / (1+i)t
] – I
∂(NPV) = n
∑t=1[ ∂t/ (1+t)t
]
Where, Ct = Expected cash flow of the year “t”. ∂t= standard deviation of cash flow for the year
“t”. i = risk free rate. I = initial investment.
Black Scholes Model: The Black-Scholes Model is the options pricing model developed by
Fischer Black, Myron Scholes, and Robert Merton, wherein the formula is used to calculate the
theoretical price of the European call and put option based on five determinants: Stock price,
strike price, volatility, expiration date and the risk-free interest rate.
The formula to calculate the price of the call options is:
C = SN(d1) – N(d2)Ke-rt
d1= [ln (S/K) + (r+∂2
/2)t]/ ∂√t
d2= d1- ∂√t. Where, C = Call Premium. S = Current Stock Price. t = time until expiration. K =
Option strike price. r = Risk-free Rate. N = Normal distribution. e = exponential. ∂ = Standard
Deviation. ln = log.
The formula given above is divided into two parts, the first part, i.e. SN(d1), represents the
expected benefits of purchasing the underlying asset. It shows the change in the call premium
due to the change in the price of an underlying asset. The second part, Viz. N(d2)Ke-rt shows the
current value of the exercise price that needs to be paid when the option is exercised. The
difference between these helps to determine the option’s price.
Before the application of the above formula, the assumptions associated with the Black Scholes
model must be understood clearly. These assumptions are:
• The options are only European, that can be exercised only at the date of expiration.
• No dividends are paid throughout the life of the options. • There are no commissions.
• There is an efficient market, which means the market movements cannot be predicted.
• The risk-free rate and the volatility of change in the price of the underlying asset are known
and constant. • The returns on the underlying asset are normally distributed.](https://image.slidesharecdn.com/projectmanagementfortechnologies-mgt410-200402020914/75/Project-management-for-technologies-MGT410-48-2048.jpg)
Uploaded bySaqib Imran
Project management for technologies MGT410
This document provides an overview of project management concepts and processes. It defines project management as applying knowledge, skills, and techniques to meet project requirements through five process groups: initiating, planning, executing, monitoring and controlling, and closing. The document then discusses the characteristics of projects, components of project management like business cases and cash flows, the project life cycle, and the role of the project manager in planning, controlling, and leading a project team.
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Project management for technologies MGT410
- 1. 1 | Pa g e Project Management for Technologies - MGT410 Written & Composed BY ENGINEER SAQIB IMRAN WhatsApp & Contact No: 0341-7549889 Email: Saqibimran43@gmail.com Student of B.TECH(Civil) at Sarhad University of Science & Information Technology Peshawer.
- 2. 2 | Pa g e INTRODUCTION TO PROJECT MANAGEMENT Project management is the application of knowledge, skills, tools, and techniques to project activities to meet the project requirements. Project management is accomplished through the appropriate application and integration of the 47 logically grouped project management processes, which are categorized into fie Process Groups. These five Process Groups are: • Initiating, • Planning, • Executing, • Monitoring and Controlling, and • Closing. Managing a project typically includes, but is not limited to: • Identifying requirements; • Addressing the various needs, concerns, and expectations of the stakeholders in planning and executing the project; • Setting up, maintaining, and carrying out communications among stakeholders that are active, effective, and collaborative in nature; • Managing stakeholders towards meeting project requirements and creating project deliverables; • Balancing the competing project constraints, which include, but are not limited to: • Scope, • Quality, • Schedule, • Budget, • Resources, and • Risks. What is Management? Management is the process of getting things done, effectively and efficiently, with and through other people. Management of an organization is the process of establishing objectives and goals of the organization periodically, designing the work system and the organization structure, and maintaining an environment in which individuals, working together in groups, accomplish their aims and objectives and goals of the organization effectively and efficiently Efficiency refers to getting the most output from the least amount of inputs. Because managers deal with scarce inputs—including resources such as people, money, and equipment—they’re concerned with the efficient use of those resources. It’s often referred to as “doing things right”—that is, not wasting resources. It’s not enough, however, just to be efficient. Management is also concerned with being effective, completing activities so that organizational goals are attained. Effectiveness is often described as “doing the right things”—that is, doing those work activities that will help the organization reach its goals. PROJECT: A project is unique in the sense that it is not a routine operation, but a specific set of activities designed to accomplish a singular goal. A project is undertaken to achieve planned objectives, which could be defined in terms of outputs, outcomes or benefits. A project is usually considered to be a success if it achieves the objectives according to their acceptance criteria, within an agreed timescale and budget. Concepts of Project Management PROJECT MANAGEMENT CONCEPT: Project Management is set of principles, methods and techniques for effective planning of objective-oriented work, to establish a basis for effective scheduling, controlling and planning in management of various steps of the projects. Project management emerged because of the growing demand for complex, complicated, customized goods and services and expansion of human knowledge. It depends on combination of production/distribution and finally allows a number of disciplines to contribute to the development of goods and services.
- 3. 3 | Pa g e In other words, it provides an organization with powerful tools that improve the organization's ability to plan, organize, implement and control its activities and the ways it uses its people and resources. CHARACTERISTICS OF PROJECT 1. Fixed duration: It is the main feature of project that it has a specific start date and end date. If we increase the time of completing of any project, cost of project will increase. So, it is necessary to fix the time for completing any project. The start is the time when the project is initiated and its concept is developed. The end is reached when all objectives of the project have been met. 2. Cross-functional: A project engages people from different seniority and departments that work together for period of project. For example, to develop sales software, people from marketing and sales departments should work closely with the IT department. 3. Uniqueness: Every project is unique. Like project of school building is different from factory building. Location, design & there are different resources & workers. 4. Uncertainty: Parts of project are unique, which brings uncertainty. Project manager is not 100% sure how this is going to work out. For example, the owners might keep changing their minds about the components and functionalities. 5. Communication: One of the features of project is that it involves clear communication all the way through it. The smartest way of dealing with this is to put communication strategy in place at the start and stick to it. 6. Results: All projects are made for getting some result. Projects are always completed and there is a specific result after completion. OR Six Characteristics of a Project: 1. A project is typically for a customer. 2. The project is temporary in nature. It typically has a defined start and a defined end-point. 3. The project will have a unique set of requirements that need to be delivered within the boundaries of this project. 4. A project can typically be more of a once off endeavor, rather than something that’s happening all the time in a repeated fashion. 5. A project is not ‘business as usual’, which is more akin to a process. 6. A project can very often be cross-functional, or indeed cross-organization. Main Components of Project Management. i. Business Case: Business case captures reasoning for initiating project. It is presented in well- structured written document or may be in short verbal argument or presentation. ii. Organization: Organization is essential to ensuring stay on track and is able to focus on real priorities. If there is proper roadmap to completion, filled with goals & timelines than there will be greater chance of success, which is possible by organizing project. iii. Plan: This component demands to make sure that plan of project is clearly stated and written in detail, so everyone involved in the project can understand it. iv. Controlling: Controlling ensures not only that project objectives are met, but also that corrective action can be taken in case of a sudden problem. In this component, performance reporting and risk monitoring and control are the core.
- 4. 4 | Pa g e v. Risks: Another component of project management refers to identifying any potential risks. Risk identification allows avoiding miss-steps & reducing probability of project failure. It involves developing plan that determines actions to take in case of emergency. vi. Flexibility: Flexibility allows responding to any changes occurring in the project and developing solutions to move project to the right direction. So project management should be flexible to follow other components of project management. Project Management Process. 1. DIRECTING THE PROJECT (DP): This process aimed at management team representing the sponsor, users and suppliers of product. The DP process covers the steps to be taken by this team throughout project from start-up to project closure and has four major steps: • preparation of Project Plan and Business Case. • approving project. • checking project feasibility. • ensuring controlled close of project. 2. STARTING THE PROJECT (SP): This stage defines justification for project, which will be used to ensure project stays on track. It also states what project is intended to achieve, how that will be achieved and scope of work. 3. PLANNING THE PROJECT (PP): It is deciding what to do, when to do & how to do. Planning is necessary to ensure proper utilization of human & non-human resources. It involves defining goal & determining most effective course of action to reach that goal. It involves: • developing scope statement. • estimating time and cost. • developing schedule. • developing budget. • risk planning. 4. CONTROLLING THE PROJECT (CP): The controlling is useful for ensuring all functions of organization are in place & operating effectively. It involves establishing standards and monitoring output of employees to ensure employee’s performance meets those standards. It covers: • ensuring that work is authorized. • ensuring work is done. • ensuring that products meet quality criteria. • reporting on progress to Project Manager. 5. MANAGING THE STAGE BOUNDARY (SB): The objectives of this process are to: • check all work is finished. • plan next stage. • update Project Plan. • update Business Case. • update risk assessment. • obtain Project Board approval to move into the next stage. 6. CLOSING THE PROJECT (CP): Once all project requirements are achieved, it is time to hand over the system and closeout the project. It covers to request Project Board permission to close project at its natural end or early close decided by Project Board. In this evaluation, achievements & mistakes made by project team will be identified & necessary steps will be taken to avoid them in future projects. Benefits of Project Management. i. Better efficiency: Efficient management can provide roadmap that can be easily followed & may lead to completion resulting in greater productivity that will last for long time. ii. Improved customer satisfaction: Management of project enables the client/manager relationship to flourish. When any project is complete on time and within budget, the client will be satisfied, which will increase the chances of getting more projects.
- 5. 5 | Pa g e iii. Better flexibility: The biggest benefit of managing the project is ultimate flexibility. It allows mapping out strategies about project to get completed. iv. Increase in quality: With enhanced effectiveness, there will considerable increase in quality of the executed project. v. Increased risk assessment: Efficient management of projects helps in assessing the risks and warns in time, even before starting any project. vi. Increased productivity: Increase in quality & management will automatically lead to greater productivity. Role of a Project Manager ROLE OF PROJECT MANAGER Role of project manager should be outline in project contract along with purpose of project. Following shows some desirable project manager roles: • Ability to plan, monitor and control the project. • Ability to achieve project objectives within targets. • make project goals and use skills and expertise. • work well under pressure. • identify customer's expectations. • check feasibility of achieving any mentioned timescale for project. • add new risks to Daily Log. OR A project manager is a person who has the overall responsibility for the successful initiation, planning, design, execution, monitoring, controlling and closure of a project. Construction, petrochemical, architecture, information technology and many different industries that produce products and services use this job title. The project manager must have a combination of skills including an ability to ask penetrating questions, detect unstated assumptions and resolve conflicts, as well as more general management skills. Key among a project manager's duties is the recognition that risk directly impacts the likelihood of success and that this risk must be both formally and informally measured throughout the lifetime of a project. Risks arise from uncertainty, and the successful project manager is the one who focuses on this as their primary concern. Most of the issues that impact a project result in one way or another from risk. A good project manager can lessen risk significantly, often by adhering to a policy of open communication, ensuring every significant participant has an opportunity to express opinions and concerns. A project manager is a person who is responsible for making decisions, both large and small. The project manager should make sure they control risk and minimize uncertainty. Every decision the project manager makes must directly benefit their project. Project managers use project management software, such as Microsoft Project, to organize their tasks and workforce. These software packages allow project managers to produce reports and charts in a few minutes, compared with the several hours it can take if they do it by hand. Roles and Responsibilities: The role of the project manager encompasses many activities including: • Planning and Defining Scope • Activity Planning and Sequencing. •Resource Planning. • Developing Schedules. • Time Estimating. • Cost Estimating. • Developing a Budget. • Documentation. • Creating Charts and Schedules. • Risk Analysis. • Managing Risks and Issues. • Monitoring and Reporting Progress. • Team Leadership. • Strategic Influencing. •
- 6. 6 | Pa g e Business Partnering. • Working with Vendors. • Scalability, Interoperability and Portability Analysis. • Controlling Quality. • Benefits Realization. Finally, senior management must give a project manager support and authority if he or she is going to be successful. BUSINESS CASE BUSINESS CASE: A business case captures the reasoning for initiating a project or task. It is often presented in well-structured written document but may also sometimes come in the form of short verbal argument or presentation. It describes benefits, costs and impact, plus calculation of financial case. A well-managed business case explores all feasible approaches & enables owners to select option that best serves the organization. CONTENTS OF BUSINESS CASE i. Executive summary: The executive summary highlights key points in business case. These include important benefits and return on investment. ii. Alternatives: A business case analyzes the alternatives to proposed project. All business cases involve at least two alternatives: doing or not doing project. iii. Benefits: Benefits provide increased revenue, reduced costs and strategic advantage. iv. Costs: It includes equipment that is needed & its maintenance, labor & its training and operation along with overhead costs. v. Financial analysis: Financial analysis compares benefits and analyzes the value of project. It may include cash flow statement, ROI, NPV, IRR and payback period. vi. Constraints: Constraints are schedule, resource and budget, technical and other limitations that may impact success of project. vii. Market analysis: Market analysis examines changes in business environment that impact the success of project such as technological innovations & shifts in customer needs viii. Sensitivity analysis: Sensitivity analysis evaluates probability that project can be implemented successfully & risks involved & deciding for undertaking or not undertaking project. ix. Project description: Project description should provide enough information so that people who approve business case can decide whether project is feasible & of importance or not. x. Implementation plan: Don't neglect implementation plan. The rest of business case is meaningless if the project cannot be implemented successfully. xi. Recommendations: It summarizes main points of business case and offer suggestions on how to proceed with project. INVESTMENT APPRAISAL It is an evaluation of attractiveness of investment proposal by using methods such as average rate of return, internal rate of return, net present value or payback period. Investment appraisal is an essential part of budgeting & applicable to areas even where returns may not be easily quantifiable.
- 7. 7 | Pa g e The purpose of appraisal is to assess the feasibility of project and value it generates. In context of business case, primary objective of investment appraisal is to find value of benefits so that costs are justified. There are many factors that can form part of an appraisal. These include: • Financial. • Legal. • Environmental. • Social. • Operational. • Risk. CASH FLOWS When beginning budgeting analysis, it is important to determine project's cash flows. It involves movement of funds in and out of project. This information can be tracked on weekly, monthly or quarterly basis to identify where business is currently from financial standpoint and where it will be in future. Cash flow can be: Positive cash flow: The cash coming into business like sales, accounts receivable etc Negative cash flow: The cash going out of project and is greater than positive cash flow PURPOSE: • To determine project's rate of return or value such as net present value. • To determine problems with business's liquidity. • To evaluate quality of income generated. • To evaluate risks within financial product. ACTIVITY ANALYSIS Activity analysis is process of studying activities in project to understand all features of project. It helps to gather data, write specifications & develop estimates for activities. In addition, it helps to assign tasks correctly and identify potential problems that could disrupt progress. Activity analysis determines: • activities that are executed. • number of workers who perform the activities. • time they spend on activities. • consumed resources. • data that reflects performance of activities. • value of activities to organization. STEPS: • Identify cost objects & divide them into groups that use similar processes. • Identify activities performed for each process. • Identify factors that influence total cost of activities. • Identify resources that activities consume. • Record the results of activity analysis manually. PROJECT LIFE CYCLE Project life-cycle divides the project into number of phases or stages and these phases in turn can be further sub-divided into input, process & output format. The Project Management Life Cycle comprises of five phases: 1. CONCEPTUAL PHASE: First phase starts the project by establishing need or opportunity for product, facility or service. It includes preliminary evaluation of an idea. Most important in this phase is analysis of risk and impact on time, cost and performance standards together with potential impact on company resources. 2. INITIATION: Initiation is starting point of project. This stage defines the justification for the project, which will be used to ensure project stays on track. It also states what the project is intended to achieve, how that will be achieved and scope of the work. 3. PLANNING: It includes details about how project work will be carried out, how it will be monitored & controlled, how communication will be facilitated & information about costs and timescales. Once project plan is derived, project schedule is developed. Depending on budget & schedule, resources are then allocated to project.
- 8. 8 | Pa g e 4. IMPLEMENTATION OR EXECUTION: During implementation phase, project plan is put into motion and work of the project is performed. It involves building the deliverables and controlling project delivery, scope, costs, quality, risks and issues. After all paperwork is done, project management executes the project in order to achieve objectives. In this phase, each member of team carries out its own assignments within given deadline for each activity. 5. PROJECT CLOSURE: Once all project requirements are achieved, it is time to hand over the implemented system and closeout the project. If project deliveries are according to planning criteria defined by client, the project will be accepted & paid by client. In this evaluation, achievements and mistakes made by project team will be identified and necessary steps will be taken to avoid them in future projects. TYPES OF PROJECTS 1. CONSTRUCTION PROJECT: This category consists of those projects which begin because of some need. These projects have risks & problems of organization. They also require huge capital investment & exact management of progress, finance & quality. 2. MANUFACTURING PROJECT: Manufacturing projects aim to produce equipment, machinery or other item. Product might be for single customer or can be generated & funded from company for design & development of product planned for manufacture & sale. These projects are usually conducted in factory or other best home-based environment, where company can be able to work out on product. 3. MANAGEMENT PROJECT: These are the projects that occur when companies develop and introduce new system, launch campaign, trade, feasibility or other study report; re-structure organization or any operation that involves management & co-ordination of activities to produce end result. Effective project management is important for these projects as they are for large projects. PROJECT MANAGEMENT AND RELATED INDUSTRIES. Project management is discipline that can be applied to all industries because they rely on quality, time to build and keep its customer base. When project management is applied to industries, its tools & techniques can ensure that quality standards are met and time is efficient. This will be achieved through techniques of planning, scheduling, risk management, quality management and lessons learned. Industry utilizes machines, tools & labor to produce goods. Raw materials are processed into finished goods on large scale to sell to wholesalers. Wholesalers sell finished product to retailers, who in turn sell them to consumer for profit. For this whole procedure, project management can be highly effective. BENEFITS OF PROJECT MANAGEMENT IN INDUSTRY Report from Economist Intelligence Unit was conducted in 2010 and outlined benefits of project management to industry. It included feedback received from 251 senior executives in industry from around the world. Result of this survey found:
- 9. 9 | Pa g e • Industrial projects are more likely to be on time & budget when project managers report directly to senior executives. • Efficient project management give teams more flexibility and increasing the possibility of success. • Industries with project management identify importance of risk management. This tool enables the teams to manage risks and reduce errors. FEASIBILITY STUDY It is an analysis of ability to complete a project successfully and taking into account legal, economic, technological, scheduling & other factors. It allows manager to investigate negative & positive outcomes before investing time & money. It ensures that project is legally & technically feasible & economically reasonable. PURPOSE OR BENEFITS: Feasibility study is always beneficial to project and it gives clear picture of idea. Below are some of the reasons/benefits to conduct feasibility study: • Identifies new opportunities. • Identifies reasons for not to proceed. • Provides quality information. • Provides documentation about the project. • Helps in securing funding. • Helps to attract investment. CONSIDERATIONS IN FEASIBILITY STUDY. There will always be unique strategies and challenges for every project. However, feasibility study should assume these major considerations: • Identify key activities and their purpose. • Set objective to test as many variables as possible. • Know the equipment at hand and what material is needed. • Ensure method of recording and documenting every activity. • Review and divide activities to see issues that may not be considered. • Be flexible in design. CONTENTS AND FORMAT AND PRESENTATION OF FEASIBILITY STUDY. CONTENTS OF FEASIBILITY STUDY 1. Summary: It state objective of study and project and should contain terms of reference and limit within which it has been conducted. 2. Executive Summary: It is brief summary of report within least pages so that it can be quickly understood by senior executive. 3. Outline: Outline involves description of project including list and quality of product or service, general business model, technical processes, size, location and kind of inputs etc. 4. Overview of Alternatives: Alternatives should be studied for solving problems, merits & demerits of alternatives and compare major possible alternatives using criteria. 5. Conclusion: This section is the review of individual conclusions. It must study conflicting conclusions and reach final conclusion which proves that is the best choice. 6. Recommendation: The final section of report states recommendation. It should contain the most important conclusions & finally state recommendation categorically. FORMAT OF FEASIBILITY STUDY 1. Project: It includes brief description of what project will do and where project meets specified requirements of organization. 2. Technical Feasibility: It outlines technical options to be used for the technical solution satisfying requirements and limitation of project.
- 10. 10 | Pa g e 3. Social Feasibility: Social feasibility includes consideration of whether proposed project will be acceptable to people, its effect on users and how to ensure user co-operation. 4. Economic Feasibility: It comprises detail of costs that will be acquired by organization and direct economic benefits and indirect benefits like better management & customer service. 5. Market Research: It includes all sources of information, conclusions from research, customer base together with evidence of customer need & how to compete similar products. 6. Alternative Solution: It comprises at least two alternatives, differences between these options and proposed project, justify choice for project and reasons for rejecting other options. PROJECT SELECTION CRITERIA AND CONSIDERATIONS. PROJECT SELECTION: Project Selection is process to review each project idea and select project with highest priority. Projects are still just suggestions at this stage, so selection is made based on only brief descriptions of project. Selection of projects is based on: i. Benefits: It is measure of positive outcomes of project. These are often described as reasons why to undertake project. The types of benefits of projects include: • Biodiversity, • Economic, • Social and cultural. • Commitments made as part of national, regional or international agreements. ii. Feasibility: It is the measure of possibility of success of project i.e. achieving its objectives. Projects vary greatly in difficulty & risk. By considering feasibility, it means easiest projects with greatest benefits are given priority. PROJECT SELECTION CONSIDERATIONS: A project selection criterion is an input to project initiation process. According to the Guide to PMBOK, selection criterion is concerned with what the project will produce and how it will benefit the company. Some of major considerations include: i. Production Considerations: It includes method of implementation, time and cost of power requirements, required safety of project and limitation of outside consultants. ii. Marketing Considerations: Marketing considerations includes number of users, market share & ability to control quality of information, customer acceptance & enhanced image of company. iii. Financial Considerations: These considerations comprise costs, impact on cash-flow, payback period, NPV and IRR, investment required, cost of implementation and level of financial risk. iv. Personnel Considerations: Skills and training requirements, availability of personnel, impact on working conditions, ergonomics, health and safety considerations and effect on internal communication are the major considerations in this category. v. Administration and other Considerations: These considerations include compliance with national and international standards, reaction from shareholders, cost of maintenance contract, disaster recovery planning, cost of upgrading with new technology and Customer service. PROJECT MODEL It is representation of relevant features of decision with which project are to be concerned. It represents decision area by structuring & formalizing information about decision and presents reality in simplified form. Major criteria for project selection model include:
- 11. 11 | Pa g e i. Realism: Model should reflect reality of manager’s decision. It should take into account the realities of firm’s limitations, capital, human resources, technology etc. ii. Capability: Model should be difficult enough to deal with multiple time periods & suggest various situations both internal and external to the project. iii. Flexibility: It should have ability to easily modify to changes in firm’s environment like laws, new technology or change in goals of organization etc. iv. Ease of Use: Should be suitable, not take long time to execute & easy to use & understand. v. Cost: Data gathering & modeling costs should be low relative to cost of project. vi. Easy Computerization: Must be easy and convenient to gather, store and control data in model and to gather and store information in computer database. TYPES OF PROJECT SELECTION MODELS 1. NON-NUMERIC MODEL: Of two basic types of models, non-numeric models are older & simpler. This model does not use numbers as inputs and have few sub-types to consider: i. THE SACRED COW: In this case project is suggested by senior official in organization. Project is initiated with simple observation & follows an undeveloped idea, development of market, design & approval of record & information or some other project requiring an investment of firm’s resources. ii. THE OPERATING NECESSITY: If the project is required in order to keep system operating and if system saves estimated cost of project than the cost will be examined to make sure they are kept as low as possible with project success but the project will be funded. iii. THE COMPETITIVE NECESSITY: Although planning process is complicated, decision to undertake project is based on need to maintain company's competitive position in market. Firm may spend all of its project investment on competitive position for better results. iv. THE PRODUCT LINE EXTENSION: In this case, project will be judged to examine whether it is according to firm's existing product line or fills gap or strengthens weak link or extends line in new desirable direction. Decision makers can make decisions without requiring too much analysis about impact on project performance if new product is added to line. V. COMPARATIVE BENEFIT MODEL: In this, it is assumed that an organization has many projects to consider. Senior management will select projects that will most benefit to firm. Management then examines all projects with positive recommendations and made selection that best fits organization's aims and its budget. 2. NUMERIC MODEL: Numeric model is usually focused and quantifies project in terms of time to repay investment. Majority of firms using project evaluation & selection uses these models for acceptability of projects. This model is classified into two heads: i. PROFITABILITY: In this, it checks only single criteria i.e. financial appraisal. These are as follow: Payback period: It is time taken to gain return equal to original investment. The ratio of these quantities is number of years required for project to repay its initial investment. The criteria for this technique suggest that if calculated payback period is less than maximum value acceptable to company, than proposal is accepted.
- 12. 12 | Pa g e Internal Rate of Return (IRR): IRR refers to the interest rate that investor will receive on investment. It is defined as that interest rate which equates the sum of present value of cash inflows with the sum of cash outflows for project. Net Present value (NPV): Also referred to as discounted cash flow, determines the net present value of all cash flows, discounting them by required rate of return. Project is acceptable if sum of NPV’s of all estimated cash flows over the life of project is positive. Return on Investment (ROI) or Average rate of return (ARR): It is used to evaluate efficiency of an investment or to compare efficiency of different investments. ROI measures amount of return on an investment relative to investment’s cost. The result of ROI is expressed as percentage or ratio. Profitability Index: Also known as benefit-cost ratio, PI is net present value of all future expected cash flows divided by initial cash investment. If this ratio is greater than 1, project can be accepted. ii. SCORING MODEL: To overcome some disadvantages of profitability models, particularly their focus on single criteria, a number of selection models that use multiple criteria to evaluate project have been developed. The scoring model basically lists desirable factors on project selection along with columns for Selected and Not Selected. The scoring models are as follows: UN-WEIGHTED 0-1 FACTOR MODEL: In this, set of relevant factors is selected by management & listed in printed form. One or more raters score the project on each factor, depending on it qualifies for individual criterion or not. These raters are chosen by senior managers. UN-WEIGHTED FACTOR SCORING MODEL: The disadvantage of un-weighted 0-1 factor model helps to evaluate another model that is un-weighted factor scoring model. These models assume that all criteria are of equal importance. It uses separate numeric scale to represent degree to which criteria is satisfied. WEIGHTED FACTOR SCORING MODEL: When numeric weights the relative importance of each individual factor are added, we have weighted factor scoring model. These models allow that some criteria are more important than others. Advantages of Scoring Model • Allow multiple criteria to be used. • Allow easy sensitivity analysis. • Relatively simple and easy to understand. • Direct reflection of managerial policy. • Trade-offs readily observable. Disadvantages of Scoring Model • Output is strictly measure. • Scores do not represent value associated with project. • Do not clearly indicate whether or not the project should be supported • These are linear and elements of such models assumed independent • Due to simplicity, it is easy to introduce large number of criteria RATION ANALYSIS It is process of representing relationship of items & group of items in financial statement. Ratio analysis is used to determine company’s financial performance as compared to other companies, its efficiency and other production matters.
- 13. 13 | Pa g e In PM, it is measure of efficiency of project and how well project managers are controlling resources. It can represent following three methods: PURE OR SIMPLE RATIO: It is expressed by simple division of one number by another. Like, if the current assets are Rs. 200000 and current responsibilities are Rs. 100000, the ratio of current assets to current liabilities will be 2:1. RATE RATIO: In this type, it is calculated how many times asset is in comparison to another asset. For example, if firm’s sales during the year are Rs. 200000 and its defaulter at the end of year are Rs. 40000, its Ratio is 200000/40000 = 5 times. It shows that the sales are 5 times in comparison to defaulter. PERCENTAGE: In this type, the relation between two assets is expressed in percentage. For example, if firm’s capital is Rs.1000000 and its profit is Rs.200000, than the ratio of profit in term of percentage is (200000 1000000⁄ ) × 100 = 20%. IMPORTANCE OF RATIO ANALYSIS • Helps in evaluating firm’s performance. • Helps in determining financial position of firm. • Helps in budgeting and forecasting. • Simplifies the financial statement. • Helpful in determining operating efficiency. PROJECT BUDGETING Project budgeting involves combining estimated costs of activities to establish total cost for measuring project performance. The Project Manager should assign all costs to activities including cost of internal & external human resources, equipment, travel, materials & supplies. Project budgeting involves following steps: i. RESOURCE REQUIREMENTS: It involves determining resources (people, equipment, services and material) and quantities of those resources required to complete the project. ii. BUDGET ESTIMATE: Once all requirements are documented, next step is to determine costs of each resource which will result in design of project budget. Budget estimate is process to estimate costs that project will spend to get or use resources. iii. BUDGET DEVELOPMENT: It involves putting all together, including information from organization about cost recovery, shared costs, taxes and regulations or restrictions. This step also includes creation of document that defines budget authority and control method i.e. project budget management plan. iv. BUDGET APPROVAL: The final step is to get approval. The completed project budget should be reviewed by project team and representative from the finance department. EVALUATION OF CONSTRAINTS To evaluate the constraints or limitations that hinder any project, there are three types of constraints which are discussed below: i. PROJECT CONSTRAINTS: Project constraints may influence management of project. These constraints typically fall into several categories. The three most significant project constraints sometimes known as triple constraint or project management triangle are: Scope: Scope involves specific goals, deliverables & tasks that define boundaries of project. These are elements that when completed, make up the end deliverable.
- 14. 14 | Pa g e Schedule: It specifies timeline according to which project will be delivered, including final deadline for completion. Time required to produce deliverable will be directly related to scope along with cost. Cost: Cost involves financial limitation to project and overall limit for total cost. It is estimation of amount of money that will be required to complete project. ii. CORPORATE INTERNAL CONSTRAINTS Company itself can impose constraints on project. Policy and strategy are usually relating, which may impose constraints on project. They cause problems such as limitations on execution of project. These include: Financial: Project may be based on financial feasibility study as payback period, return on investment, net present value and internal rate of return & cost-benefit analysis. Marketing: The company may wish to expand its products and enter new markets. It may implement new technology for company to operate in new market. Industrial Relations: Industrial conflict is often caused by conflict on pay and working conditions. The project manager may control these conditions. Training: Project may become the training ground for new workers, in which learning curve will be costly to project. Exports: Company may be obtaining exports to enter new markets or take advantage of export incentives. iii. CORPORATE EXTERNAL CONSTRAINTS External constraints are factors outside the business that may open or close possibilities in achieving targets. These constraints affect decision making like laws, regulations and environment etc. Some of these constraints include: • Laws and regulations. • Limited number of contractors. • Logistic constraints like availability of transportation. • Market forces, supply and demand curve. • Environmental issues. • Political unrest. EVALUATIONS OF ALTERNATIVES AND OPTIONS. It is process of breaking down complex project into its component parts before identifying different & more effective methods of achieving desired result. It should start with check list to structure process. This can be achieved through work breakdown structure, project constraints or project objectives. GATHER INFORMATION: Without latest information on technical and market issues, analysis will be self-limiting. Information is condition for effective decision-making. It may be found in: • Periodical Books. • Technical reports. • Department specifications. • Market research. • Internet. • Stakeholders. CLOSEOUT REPORTS: Closeout reports from previous projects offer valuable source of historical information. It is important for company to learn from its previous experience not only mistakes but also right decisions, together with recommendations for future projects. Size of company will influence how & where information will be available.
- 15. 15 | Pa g e COST-BENEFIT ANALYSIS: A cost-benefit analysis is performed to establish financial feasibility of project. Cost-benefit analysis is generally based on following principles: Pareto improvement criterion The basic concept is to express costs and benefits in money terms. If financial benefits exceed costs, then project passes the test. This criterion is expressed as project should make some people better without making anyone worse. Hicks-Kaldor test: It states that gains should exceed losses. This framework will enable people who gain to balance people that lose. Such as, if financial benefits of project exceed the costs, project will satisfy Hicks-Kaldor test. Willingness-to-pay test: It is simply to determine how much clients are prepared to pay. Economists model this test by using some techniques. These techniques will form relationship between supply, demand and prices. These include: • Supply and demand curve. • Monopolies and Oligopolies. • Product elasticity. PROJECT ESTIMATING AND COSTING; For effective planning & controlling, accurate estimating is essential. Estimating is an important part of project management process, which should be based on past experience together with market and standards. The quality & accuracy of estimate can be improved when more detailed and accurate information becomes available. The quality and accuracy of estimate is based on: • Time, • Techniques, • Information, • Experience of estimator. Costing may be defined as detailed estimate based on complete bill of quantities. It includes processes required to ensure that project is completed within approved budget. Costing requires the following items to be complete: • Design and calculations, • Scope of work, • Bill of quantities (BOQ), • Detailed planning, • Prices from contractors and suppliers, • Man hours and labor costs. TYPES OF COSTS 1. Variable Costs (VC): Costs which depend on output produced. For example, more production of cars will require more raw materials such as metal. This is variable cost. 2. Fixed Costs (FC): These costs don’t vary with changing output. Even if output changes or don’t produce anything, fixed costs remains the same. 3. Sunk Costs: These are costs that have been incurred & cannot be recouped. Like, money spends on advertising to enter industry; can never claim these costs back. 4. Direct cost: Direct costs are those costs that can be identified with an activity or project. These costs can be budgeted, monitored & controlled effectively. 5. Indirect cost: Indirect costs, also called overheads are those which cannot be directly linked to an activity or project, but are required to keep the project operational. 6. Opportunity cost: It is next best alternative foregone. It is difference between chosen investment & one that essentially passed up. Say you invest in stock & it returns 2% over year. In placing money, you gave up opportunity of another investment say, risk-free government bond yielding 6%. In this, opportunity costs are 4% (6% - 2%).
- 16. 16 | Pa g e 7. Life cycle cost: It is sum of all recurring and one-time (non-recurring) costs over full life span or specified period of goods, services, structures or system. It includes purchase price, installation cost, operating costs, maintenance and upgrade costs etc. DETERMINING METHODOLOGY/TECHNIQUES. It includes estimating techniques which can be used to calculate project's limit with reasonable accuracy. These techniques can vary greatly from one company to another, consider the following: JOBBING: It is the process of including all operations that execute an activity or task. Once activity has started, jobbing enables to provide cost estimate for all WBS activities, measure percentage complete or remaining duration and calculate profit or loss. Jobbing is condition for CPM planning and control. At tender stage, there may not be sufficient time or need to produce an estimate with jobbing. But on award of contract, jobbing must be carried out. FACTORING: Also called component ratio, can be used when historical data from previous projects indicates that an item of project can be expressed as percentage of known or calculated cost. Once costs are established, ratios can be calculated quickly. These ratios should be confirmed with time as performance data becomes available. INFLATION: Project costs will change with time due to effect of inflation on economy. If current project is similar to previous project, the economic figures from previous project can be used as basis for current estimate. One of the problems with this method is that different supplies tend to rise at different rates. This can be resolved by dividing project into its component costs, then applying escalation factor to each. UNIT RATE AND ESTIMATING FORMAT. UNIT RATE: This technique estimates project's cost from an empirically developed book of rates. Unit rate is commonly used estimating technique & form basis of most estimates. Unit rates work well in controlled environment. However, many projects by their location & scope may involve other considerations, like: • It is appropriate for contractor with record within limited geographical area • As contract increase in size, data base sample will tend to decrease in number • Costs are influenced by locations, travelling distances and condition of roads • Weather conditions can be forecast but it may be very difficult • Water supply, power supply, public transport etc. are available or not ESTIMATING FORMAT: Estimate is collection of information from different sources. The challenge here is to present on one logical document. Many estimating formats can be used in which some of examples include: • The WBS activities can be divided into CPM activities • Can be sub-divided into different type of cost like labor, material or machinery • The costs can be sub-divided into different estimating methods PROJECT PLANNING AND CONTROL TECHNIQUES. PROJECT PLANNING STEPS
- 17. 17 | Pa g e 1. Project Charter: It is document which officially approves project. It should outline purpose of project, beneficial changes & key objectives together with means of achieving them. 2. Feasibility Study: It offers structured approach for identifying stakeholders and evaluates their needs together with investigating options and alternatives. 3. Scope Management: It defines what project includes & what is not included to meet objectives. It would be developed into list of drawings, BOQ and specifications. 4. Work Breakdown Structure (WBS): It is used to sub-divide scope of work into suitable work packages which can be estimated, planned, assigned & controlled. 5. Organization Breakdown Structure (OBS): OBS links WBS work packages to company, department or person who is responsible for performing work. 6. Critical Path Method (CPM): It is used to present activities in logical sequence. Activity durations & dates are estimated, while availability of personnel and resources are assumed. 7. Bar chart: It is one of best & most commonly used means of communicating information. It enables participants to easily work through sequencing. 8. Procurement Schedule: Its function is to supply all items to meet project schedule. However, long term items need to be identified early so they can be ordered & bar chart can be revised. 9. Resource Histogram: Resources required to complete work are forecast & compared with resource availability. Resources need to contain both project & company requirements. PROJECT CONTROL CYCLE: The project control cycle is presented as sequence of steps to guide the project for successful completion. It includes following steps: 1. Baseline Plan: The baseline plan is starting point for project control. The project control cycle monitors project performance & compares it against baseline plan. 2. Work Authorization: Project manager is responsible for authorizing work. Issuing of instructions to appointed contractors & other parties starts the execution phase. 3. Expedite: Once instructions, orders and contracts have been issued, project expediting takes place to make instructions happen. It involves functioning to confirm that orders have been received, materials have procured & work has started as planned. 4. Tracking and Monitoring: It involves recording the progress and current status of all activities. The accuracy of data has direct impact on accuracy of all reports like project status, trends and forecast. 5. Change Control: The change control ensures that all changes to scope of work are captured and approved before being included in baseline plan. Change control is also concerned with factors which create these changes. 6. Evaluation and Forecasting: The project's performance is analyzed by comparing actual progress against planned progress within CPM model & trends to forecast project's position in future. 7. Decision-Making: The decision-making function is to collect information & decide on corrective action. It involves collect information, define project objectives, develop options and alternatives etc.
- 18. 18 | Pa g e 8. Revise Baseline Plan: If there are any changes within the project, baseline plan must be revised to describe scope of work & include any corrective action. By saving old baseline plan, the review of changes can be documented. RISK ASSESSMENT & RISK MANAGEMENT APPROACH. RISK ASSESSMENT: It is concerned with identifying, analyzing and responding to uncertainty throughout project lifecycle. It includes maximizing positive outputs and minimizing cost. Risk assessment is the determination of quantitative or qualitative value of risk related to any project or activity. RISK MANAGEMENT APPROACH: The risk management approach determines processes, techniques, tools, team roles and responsibilities for specific project risk. It describes how risk assessment will be structured and performed on project. It includes: 1. RISK IDENTIFICATION: Risk identification is most important part of risk management approach. The process of risk identification should not be one time. It should be systematic process to ensure nothing important is ignored. Techniques to identify risk include: Historical records Surveys Flow charts Judgment System analysis 2. RISK QUANTIFICATION: The next step is to quantify the possibility of risk and impact on project. Risk quantification is mainly concerned with determining what areas of risk deserve more response. Following techniques can be used for risk quantification: Probability/Impact Matrix: This matrix plots the probability of risk against impact on project. They are quantified as high, medium or low and give matrix of nine possibilities. PERT: Program Evaluation and Review Technique was originally developed as a risk management tool to plan & control the risks. It uses three time probabilities: • to = Optimistic time. • tm = Most likely time. • tp = Pessimistic time. 3. RISK RESPONSE: It defines ways to deal with risk and improve chances to control before they occur. The levels of risk should be compared against criteria and then ranked to management priorities. There is range of responses which can be developed: • Eliminate risk. • Mitigate risk. • Deflect risk. • Accept risk. First response is eliminating risk completely, if failing than at least mitigate it. For remaining risk, the options are to deflect it and/or accept it in contract. 4. RISK MANAGEMENT PLAN: The risk management plan documents the outputs from previous sections i.e. identify, quantify, respond & assign responsibility for implementation. Next section which is risk control, implements risk management plan & makes it working. 5. RISK CONTROL: Risk control implements risk management plan to make it happen. It needs to be communicated to all participants and there should be appropriate training and practice. Training should not only ensure that risk management plan is understood but also develop risk management culture and attitude.
- 19. 19 | Pa g e WORK BREAKDOWN STRUCTURE WBS is an important project tool for dividing complex projects to simpler and manageable tasks. In WBS, larger tasks are broken down to manageable elements in graphical display known as tree diagram format for providing common framework for project planning, monitoring & communication. WBS is not restricted to specific field but it can be used for any type of project. PURPOSE OF WBS: WBS in project is needed for: • Accurate and readable project organization. • Accurate assignment of responsibilities. • Indicates project target. • Helps to estimate cost, time and risk. • Illustrate project scope. BENEFITS OF WBS Definable: Can be described and easily understood by project participants Manageable: Specific responsibility and authority can be assigned to responsible Estimate-able: Costs required to complete the project can be estimated Integrate-able: Integrates an activity with other project elements Measurable: Measures the progress i.e. start & completion dates & target Adaptable: Sufficiently flexible so addition can be easily accommodated ORGANIZATION BREAKDOWN STRUCTURE The OBS defines the organizational relationships and is used as framework for assigning responsibilities. It is used in complex projects and in combination with WBS. It allows organizational resources to be planned in systematic manner. OBS is structured from most responsible department and then by performing departments at lower levels. Once OBS is created, Responsibility Assignment Matrix can be created, giving full accounting of tasks & responsible party. OBS is helpful in: • Work Breakdown Structures. • Visual reference of resources. • Viewing costs by resource. • Viewing responsibilities by resource. PROCEDURE: An OBS is created much in the same manner as Work Breakdown Structure: • Identify organizational structure and draw it. • Once the structure has been filled, identify all team members and assign each team member position in structure. • If there are extra positions that have not been filled, fill them and if there are additional resources, assign those resources COST BREAKDOWN STRUCTURE. To summarize costs within project, CBS is needed. The CBS classifies the costs within project breakdown structure. It supports efficient cost planning, controlling and introduction of measures to reduce costs. Once costs have been assigned to tasks, it is possible to monitor actual cost and earned cost on task. CBS allow both companies and consumers to identify reasons for variations in cost. PROCEDURE; CBS is a four-step process: • Establish cost structure i.e. gather all information to understand elements involved and costs of those elements. • Check that elements are consistent i.e. price comparisons and try to figure out reasons for variance. • Negotiations based on findings.
- 20. 20 | Pa g e • Analyses and management of factors that impact cost variation. METHODS OF SUBDIVISION 1. CODING SYSTEM: Coding system is used to help planning of all kinds of project. It assigns specific code for each activity within project. In practical, it is used to structure the project, cost description, WBS & OBS elements and establish their relationships. It involves using multi-digit or alphanumeric group of characters. Each character or group of characters has particular meaning and significance. 2. NUMBERING SYSTEM: The numbering system is used for tracking expenses associated with each activity. It identifies all major tasks and related sub-tasks by specific number to keep their relationship. A numbering system can be based on WBS, OBS, date or any other logical order. It is used to organize & gather project documents to find documents over the life of project. CRITICAL PATH MODEL (CPM). Critical path is the longest path in network diagram or shortest time possible to complete project. This method was first introduced in 1950s as a joint venture between Remington Rand Corporation and DuPont Corporation. CPM is the arrangement of activities from start to end of project. Initial critical path method was used for managing plant maintenance projects, while the original method was developed for construction work. In CPM, critical activities of project are identified. These activities have direct impact on the completion date of project. ADVANTAGES: • The activities and their outcomes can be shown. • Identify time to complete the tasks and overall project. • Tracking of critical activities. • Flexible and powerful management planning technique. DISADVANTAGES: • Can be complicated for larger projects. • Does not handle the scheduling of personnel or allocation of resources. • Critical path is not always clear and needs to be calculated carefully. • Estimating activity completion times can be difficult. LOGICAL RELATIONSHIP OF ACTIVITIES AND DURATION. Logical Relationship is dependency between two activities or between project schedule activity & overall project schedule. It determines start & finish date of task relative to other activities. In two activities, one is successor & other is predecessor. Predecessor Activity: It is the activity that determines when the next activity can begin. Successor Activity: It is activity that follows next activity, as determined by logical relationship. There are four logical relationships between activities: Finish-to-Start (FS): In this successor activity cannot start until predecessor activity has finished. Start-to-Start (SS); In this, successor activity cannot start until predecessor activity has started. Finish-to-Finish (FF); In this successor activity cannot finish until predecessor activity has finished. Start-to-Finish (SF): In this successor activity cannot finish until predecessor activity has started. NETWORK DIAGRAMS AND BAR CHARTS.
- 21. 21 | Pa g e NETWORK DIAGRAM; Network diagram is graphical representation of project activities and tasks between these activities. This graphical view of activities express critical path required to examine & adjust schedules. It is used in project management planning for understanding work flows. They can be created manually but also available in project tools such as Microsoft Project. Data required for network diagram includes: • Project Scope Statement. • Work Breakdown Structure (WBS). • Historical Project Information. • WBS Dictionary. • Resource Calendars. There are two types of network diagrams: ACTIVITY ON ARROW: The arrow diagram shows required order of tasks in project or process, best schedule for project and resource problems and their solutions. The arrow diagram calculates the critical path of project. It is path of critical steps where delays will affect timing of entire project & addition of resources can speed up project. PROCEDURE Drawing the Network: • List all necessary tasks in the project. • Determine correct sequence of tasks. • Draw network diagram of tasks. • Between each two tasks, draw circles for events. • Label all activities in sequence with event numbers in circles. Scheduling: • Determine time that each task should require & write on each task’s arrow. • Determine critical path i.e. longest path from beginning to end of the project. • Calculate earliest and latest times each task can start and finish. • Calculate slack times for each task and for entire project. ACTIVITY ON NODE: AON is graphical representation, which shows inter-relation among various activities. An AON diagram can be used for visual representation of an entire project or can be used for any smaller section of project to represent beginning and end. For easy diagram, it may be most effective to include only critical activities. It consists of rectangles known as nodes and project activities are shown in these boxes which are connected to each other to show relations. AON uses four types of dependencies: • Finish to Start (FS). • Finish to Finish (FF). • Start to Start (SS). • Start to Finish (SF). BAR CHART: Bar chart is a two dimensional chart. The x-axis shows project timeline and y-axis of chart is list of specific activities that must be achieved to complete project. Most bar charts show pattern of bars that begin in upper left and proceed to bottom right of chart. There are many methods that can be used to create bar chart. Bar charts are used in all industries for easy & quick visual representation of network scheduling details in CPM. Bar chart is beneficial to determine: Various activities: • Time when each activity begins and ends. • Duration that each activity takes. • Overlap between activities. ADVANTAGES OF BAR CHART: • Very Graphical. • Easy to understand. • Most widely used. DISADVANTAGES OF BAR CHART: • Difficult to Update. • Difficult to find Critical Path. • Difficult to setup and maintain large project. STEPS: • Analyze project and specify basic method.
- 22. 22 | Pa g e • Break the project into number of activities. • Estimate the time required to perform each activity. • Place the activities in sequence of time. PROCUREMENT CYCLE AND SCHEDULE. PROCUREMENT SCHEDULE: The procurement schedule put together the project schedule with items to obtain lead time and warehousing stock control. The procurement schedule should be considered after network diagram and schedule bar chart but before resource histograms & cash flow statements. The value of procured goods and services may increase, so procurement function has greater influence on project success. PROCUREMENT CYCLE: Procurement process can be presented as cycle which outlines series of steps. There may be addition between steps & steps may be carried out in different order. 1. PROCUREMENT PLANNING: Procurement planning is process of identifying what products and services are needed to procure. These can be obtained from outside the organization or can be made by organization when resources & expertise are available. It involves: • What to procure? • How much to procure? • When to procure? • How to procure? 2. PROCUREMENT LIST: Procurement list is developed from project's scope of work. It should give all necessary details such as manufacturer, model, specification, type, rating etc. 3. PROCUREMENT SCHEDULE; The procurement schedule put together the project schedule with items. The procurement schedule should be considered after network diagram and schedule bar chart but before resource histograms & cash flow statements. 4. INVITATION TO TENDER: Collect bids for suppliers which contain all information they need to quote. 5. TENDER NEGOTIATION: Examine tenders & negotiate with suppliers for best conditions and prices. 6. TRANSPORT: Consider the different methods of transport. 7. RECEIVING; Check goods against delivery note, delivery note against order and quality. 8. WAREHOUSING: Store delivered items, which may require special handling & safe storage. 9. ACCOUNTS; The accounts should check budget, purchase order, statement and delivery note before making payments. PROCUREMENT METHODS- JUST-IN-TIME (JIT) AND DELAY-FOR-TIME (DFT), AND LEAD TIME MANAGEMENT. Procurements Methods: Generally speaking, there are six procurement methods. These are: 1. OPEN TENDERING: Open tendering is common for competitive bidding. It allows companies to bid in an open competition. The open tendering method encourages effective competition with an importance on value for money. There are also disadvantages of this kind of procurement including: • Complex requirements are usually not suited for this method. • It takes lot of time to complete. • Complications in defining exact needs of requirement. 2. RESTRICTED TENDERING: Restricted tendering includes limit on the request for tenders. Like open tendering, restricted tendering is considered competitive procurement method; however, competition is limited to certain number of firms either because only few firms are qualified to
- 23. 23 | Pa g e fulfill specific type of requirement or certain conditions that demand limited number of firms in order to reduce time or cost. 3. REQUEST FOR PROPOSAL: The Request for Proposal is used when suppliers, contractors or services providers are expected to propose specific solution to fulfill specific requirement. Firms are required to submit technical and financial proposals in two separate envelopes. Technical proposal is evaluated first and ranked according to established criteria than financial proposals that are indicated in RFP are opened & evaluated. 4. TWO STAGE TENDERING: Two-stage tendering is similar to RFP because technical & financial proposals are submitted separately but one before other rather than at the same time. Bidders can also support in defining technical requirement & scope of work in this method. 5. REQUEST FOR QUOTATION: The request for quotations is used for small value procurements of readily available goods, construction works or service procurements. This method does not require preparation of tender documents. Procuring body determines which contractors, suppliers or service providers to request quotations. 6. SINGLE SOURCE PROCUREMENT: Procurement from only one source is referred to as sole- source procurement or single-source procurement. This is clearly non-competitive procurement method & used only under special situation such as for emergency situations, when only one firm or individual is qualified, total cost is within the limit, for additional work etc. JUST -IN-TIME (JIT): JIT eliminates need for buyer-middle man which cause delays, resulting from procurement process. JIT is designed to put general purpose items at workstations as they are needed. It is an automated ordering system designed to allow user to place an order. It provides information on supplier's quality & delivery of products. JIT system has eliminated storage requirements, reduced waste, removed buyer as middle man and realized annual savings. With automated system supplies can be delivered quickly & supplier paid within week of receipt. LEAD TIME MANAGEMENT; Lead Time is time defined by supplier that exceed from time customer desire, until that desire is satisfied. In project management, lead time is time that takes to complete task or set of tasks and save time by starting activity before its predecessor completion. Lead time management is great way to improve productivity, increase output & make more efficient operations. It tries to decrease overall time from beginning to the end. This management focuses on three primary areas: 1. NEW PRODUCT DEVELOPMENT: It makes use of cross-functional teams to minimize time required to take product from conception to market. It involves key decision-makers from each functional area at the beginning of development process. 2. OPERATIONS: It minimizes complexity, update processes & decreases time. In operations, it speeds up workflows & decision-making throughout organization. 3. DELIVERY AND LOGISTICS: Eliminating unnecessary work and speeding up decision-making can decrease the time required to fill orders and increase assurance of response. MERITS OF LEAD TIME MANAGEMENT: • decrease time to perform activities throughout project. • eliminate activities that do not add value. • speed up decision processes.
- 24. 24 | Pa g e BREAKEVEN ANALYSIS. Break-even analysis is a technique widely used by production management and management accountants. It is based on categorizing production costs between those which are "variable" and those that are "fixed". Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point"). A break-even analysis is a key part of any good business plan. It can also be helpful even before you decide to write a business plan, when you're trying to figure out if an idea is worth pursuing. Long after your company is up and running, it can remain helpful as a way to figure out the best pricing structure for your products. a) Performing a Break-Even Analysis: Fixed Costs Fixed costs are ones like rent and administrative payroll that don't change much from month to month, regardless of how many units you sell. SCORE lists many common fixed costs. b) Performing a Break-Even Analysis: Variable Costs Variable costs are ones like inventory, shipping and sales commissions that rise or fall with your sales volume. As with fixed costs, talk to trade associations, vendors and even other business owners in your field to come up with the most accurate estimate. c) Performing a Break-Even Analysis: Pricing This is the trickiest of your three pieces of data, since you're able to choose exactly where to set your prices. Start by looking at your competition, and how they price their products. You can also do informal focus groups to see what people might be willing to pay for your wares or services. THE BREAK-EVEN CHART: In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines: In the diagram above, the line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made Illustration 2 shows a break-even chart. As sales increase, the profit line passes through the zero or break-even line at the break-even point.
- 25. 25 | Pa g e Illustration 2: Break-even chart: The illustration shows that the company needs to sell approximately 1,222 units in order to cross the breakeven line. This is a classic business chart that helps you consider your bottom line financial realities. BENEFITS: The following are the benefits out of break-even analysis: Make or buy decision: The C-V-P analysis assists in making a choice between two courses of action to make versus to buy. If the variable cost is less than the price that has to be paid to an outside supplier, it may be better to manufacture than to buy. Production planning; The C-V-P analysis helps in planning the production of items giving maximum contribution towards profit and fixed costs. Cost control: As a cost control device, the C-V-P analysis can be used to detect insidious upward creep of costs that might otherwise go unnoticed. Financial structure: Break-even analysis provides an understanding of the behavior of profits in relation to output. This understanding is significant in planning the financial structure of a company. Conditions of uncertainty: When some reasonable basis for subjective extrapolation is
- 26. 26 | Pa g e available, the breakeven analysis provides the financial management with information helpful in its decision making activities. LIMITATIONS: The following limitations of break-even analysis have to be kept in mind while making use of this tool: 1. Many costs and their components do not fall into neatly compartmentalized fixed or variable cost categories as they possess the characteristics of both types. 2. If company sells several products, the financial manager has to prepare and evaluate a number of profit-graphs covering integrated segments of independent activities. 3. A break-even chart represents a short-run static relationship of costs and output and become obsolete very quickly. 4. The relations indicated in the break-even chart do not help for all levels of operations. Costs tend to be higher than shown on the static break-even chart when the plant’s operation approaches 100 percent of its capacity. 5. The frequent changes happening in the selling price of the product affect the reliability of the break-even analysis. The cost of securing funds to expand is disregarded in break-even chart. 6. In spite of the above mentioned limitations, the breakeven analysis has high place in financial management. PAST PAPERS PROJECT MANAGEMENT AND CONSTRUCTION MANAGEMENT Construction Management is defined as the management activities that are over and above the normal architectural and engineering services conducted during the pre-design, design and construction phases of a project that contribute to the control of cost and time. • In Project Management, Consultant and Contractor have no official contract between them while in Construction Management Contractor has direct contract with Consultant. • Under PM, Owner selects the Contractor, while under CM; Consultant has greater responsibility for selecting Contractor. • Under PM, Consultant has responsibility only for design. On the other hand, in CM Consultant assumes responsibility for design & also for work. • The project management manage project from inception to completion, while construction management is involved just in construction phase. The main difference between these two is the level of authority. The construction management directly oversees the day-to-day construction activities, while the project management might supervise the construction management. The project management has more authority and responsibility than a construction management typically does because leads and motivates a team of managers or workers. PROJECT PLANNING AND PROJECT SCHEDULING PROJECT PLANNING: Project planning is a discipline for stating how to complete a project within a certain timeframe, usually with defined stages and resources. One view of project planning divides the activity into: • Setting objectives (these should be measurable). • Identifying deliverables. • Planning the schedule. • Making supporting plans.
- 27. 27 | Pa g e PROJECT SCHEDULING: The project schedule is the tool that communicates what work needs to be performed, which resources of the organization will perform the work and timeframes in which that work needs to be performed. Without a full and complete schedule, the project manager will be unable to communicate the complete effort, in terms of cost and resources, necessary to deliver the project DIFFERENCE: Although the terms project planning and project scheduling are two entirely different pieces of structure of the task. Furthermore: • Project planning defines manner in which project will be managed and guided while project scheduling is series of tasks & associated dates for completion. • Scheduling makes large project more manageable with resources while planning ensures team members know their role & project will be completed. • Scheduling helps to establish & maintain expectations b/w stakeholders & customers. On other hand planning ensures expectations b/w team members. PROJECT AND PROGRAM • Project is well-defined with Project Charter that tells scope and objectives for project while the program tends to have greater levels of uncertainty. • Project is group of people forming team working towards common goal. On the other hand, program is collection of projects forming interconnected goals. • Project team works towards achieving certain outputs, while program team works towards delivering outcomes. • Project risk is relatively easy to identify and manage. While, program risk is more complex and potentially it impacts organization. RETURN ON INVESTMENT AND PAYBACK PERIOD Payback period is one of the most common ways to evaluate value of project. ROI calculates benefits of project to highlight level of returns. ROI calculate percentage or ratio of gains to cost while payback period tells how much time it takes for an investment to pay. The calculation in payback period is larger than that of ROI. INSPECTION Inspection refers to one of most critical processes that surrounds successful execution and completion of project. Inspection is act in which project management team takes effort to review project in detail to determine whether or not project meets certain requirements for completion. BENEFITS OF INSPECTION: • Verifies product specifications. • Confirms quantity verification. • Reduces overall quality risks and cost. • Closed supervision. • Increase cooperation of worker and inspector. PROCESS 1. INSPECTION PLANNING: Management identifies number of inspections, their cost & estimated project savings from implementing these inspections. During this stage, estimator uses planning tool along with historical and industrial data to estimate net savings. Using this data, management can be able for decision to use inspections or not.
- 28. 28 | Pa g e 2. EXECUTION: It provides inspection tools that facilitate execution of inspections by teams, organizations and locations supporting their project. These inspection tools should computerize inspection data for later monitoring, tracking and measurement of inspections results. 3. MONITORING: Management evaluates temporary inspection process and results. If it is not feasible then team may expose that partial or full re-inspection is needed. This stage also provides early identification of defect and need for improvement to inspection materials, team and process execution. 4. TRACKING: In this step, individual inspection results are collected and combined into total inspection for tracking project savings against the savings estimate. It also includes ongoing analysis of defect & data collected during inspections, which are used for future improvements. 5. MEASUREMENT: To measure the effectiveness of inspections, data collected from each phase is compared to quality plan. It includes evaluation of defect removal by inspections, defect removal by testing and other means of defect removal. It is also means to review progress toward defect removal goal in quality plan. REENGINEERING PROJECT AND RESEARCH PROJECT Reengineering is the redesign of processes and projects along with associated systems and organizational structures to achieve improvement in performance by enhancing quality, financial performance, improving customer satisfaction etc. It is examination and change of five components of project: • Strategy. • Process. • Technology. • Organization. • Culture. Research project is careful & detailed study into specific issue regarding project using scientific methods. This is best accomplished by turning issue into question with target of research to answer that question. The general aims of research are: • Observe. • Describe. • Calculate. • Determination of Causes. • Explain. QUALITIES OF PROJECT MANAGER 1. Communication skills: One of single most important quality of first-rate project manager is excellent communication skills. Written & oral communications are backbone of successful projects. Project managers should communicate clearly, quickly & frequently. 2. Budgeting skills: Project manager establish & manage budgets & therefore need knowledge of finance & accounting principles. Especially ability to perform cost estimates for project. Different methods are available to determine project costs. They range from estimating individual activities to estimating project’s cost in one portion. 3. Conflict management skills: It involves solving problems. For these problems grip the scope and objectives of projects, identify the roles and responsibilities of others, use project management tools to stay on track and become an effective member of project team. 4. Negotiation and Influencing skills: Effective problem solving requires negotiation & influencing skills. Negotiation on project is necessary in almost every area of project. It might involve one-to-one negotiation or with team. Influencing requires an understanding of the formal and informal structure of all the organizations involved in project. 5. Leadership skills: Leaders & managers are not same, but project manager must exhibit qualities of both during different times on project. It includes set priority, delegate, motivate &
- 29. 29 | Pa g e develop project team and coach them to get high level of performance. Successful project manager knows how to motivate team and keep teams working effectively. 6. Team Building and Motivating skills: Teams are often formed with workers from different parts of organization. So some components of team-building may involve project manager. While motivation is another important role project manager fulfills during course of project. Manager will motivate members in various stages of team development to fully functional. CONCEPTUAL PHASE It starts project by establishing need or opportunity for product, facility or service. Most important in this phase is analysis of risk and resulting impact on time, cost and performance together with possible impact on company resources. The conceptual phase also includes feasibility of effort. The feasibility of proceeding with project is investigated and on acceptance than moves to next phase. Conceptual phase can be sub-divided into following sub-phases: • Concept (should we carry out feasibility study). • Design (plan feasibility study, select team). • Implement (perform feasibility study). • Commission (closeout feasibility study and present the report). Conceptual phase involves rough assessment of project including reasons of project beneficial and its rough cost estimates. Projects that require too large investment are inappropriate or too expensive for an organization, should be ignored at this stage. The main activities in this stage include: • Develop Business Case. • Undertake Feasibility Study. • Establish Project Charter. • Appoint Project Team. • Set up Project Office. • Perform Review. TYPES OF RISK 1. SCOPE RISK: To minimize scope risks deliverables, objectives, project charter and scope needs to be clearly defined. It can be managed with efficient planning by defining project clearly, managing changes in scope, identifying factors & proper responses. 2. SCHEDULING RISK: There are number of reasons why project not proceed in way it is scheduled. These include unexpected delays, natural factors and errors in estimation. To minimize these risks, there are few methods and tools such as Work Breakdown Structure and Gantt charts to help in well-organized scheduling. 3. RESOURCE RISK: This risk mainly arises from resources and personnel related issues. A project might involve number of employees and it is essential to manage them. Another source of this risk includes lack of availability of funds. Estimating project costs accurately, assigning suitable budget to meet these costs, not placing unnecessary expectations on staff and avoiding delays are all factors that help in minimizing resource risk. 4. TECHNOLOGY RISK: Technology plays critical role in many projects. Technology risks include delays arising out of software & hardware defects, human errors like incorrect data processing or failure of service or product. Protecting information resources like operational & financial data, customer data etc. can help in avoiding technology risk. STRENGTHS, WEAKNESS, OPPORTUNITIES AND THREATS (SWOT) The term SWOT is made up of four words, Strengths, Weaknesses, Opportunities and Threats. The first two variables are internal to an organization whereas last two are external. SWOT
- 30. 30 | Pa g e analysis is planning method used to evaluate strengths, weaknesses, opportunities and threats involved in project or business. SWOT analysis can be carried out for product, place, industry or person. It includes: SWOT Analysis 1 - Strengths and Weaknesses: First half of SWOT analysis is Strengths and Weaknesses analysis. This is look inside at current activities, capabilities, and shortcomings of organization. It is one of the most important parts of strategic planning process. Strengths & Weaknesses analysis is where usually find greatest number of major strategic issues. At minimum where the organization is large enough, the top three levels of management at least should be involved in a very open, honest and participative process to identify the real strengths and weaknesses of the organization. There are more technical and disciplined methods of identifying strengths and weaknesses, which may be too time-consuming for planning team to employ. SWOT Analysis 2 - Opportunities and Threats: This part of SWOT analysis is carried out by viewing things from other side of window. In first half, planning team were trying to identify the really big strategic issues inside the enterprise. Now they must turn their focus outside, to the trends and events external to the organization, which are mostly beyond their control. Having engaged the executives from at least top three management levels to describe the strengths and weaknesses of the organization, the same group should then also be asked to carry out the External Appraisal of Opportunities and Threats ROLE IN CORPORATE PLANNING For the development of strategies and plans to enable organization to achieve its objectives, the organization uses systematic process, known as corporate planning. Since SWOT analysis provides proper look at business’s situation and evaluate its strengths, weaknesses, opportunities and threats in detailed manner, it plays an important role in process of corporate planning. Here are the reasons: 1. STRENGTHS: Business will be able to discover advantages it has in marketplace. These advantages play an important role in business’s operation & planning. 2. WEAKNESSES: Business gains understanding of weakness & come with effective solutions in plan. Hence contribute towards corporate planning by finding out its weakness. 3. OPPORTUNITIES: Identifying opportunities is an important part of developing any strategies which would help business to improve & grow. SWOT reviews opportunities, which is then used to create roadmap during corporate planning. 4. THREATS: Analyzing threats helps to protect business against threats. SWOT will allow business to identify possible factors that could threaten or obstruct growth and success so they can be better contract with such threats. RETURN ON INVESTMENT AND INTERNAL RATE OF RETURN INTERNAL RATE OF RETURN (IRR): IRR refers to the interest rate that investor will receive on investment. It is defined as that interest rate which equates the sum of present value of cash inflows with the sum of cash outflows for project.
- 31. 31 | Pa g e RETURN ON INVESTMENT (ROI): It is used to evaluate efficiency of an investment or to compare efficiency of different investments. ROI measures amount of return on an investment relative to investment’s cost. The result of ROI is expressed as percentage or ratio. DIFFERENCE: Both measures are used to determine efficiency of an investment in project. • IRR allows evaluating how investment will perform without considering effects of additional costs. While ROI take costs into consideration and can be useful b/w projects to evaluate which project most justify the cost. • ROI is actual return of project whereas IRR is expected return of project. • ROI is simple finance metric for investments whereas IRR is more complex metric as it takes increase in investment value and also timing of cash flow. • ROI only makes use of two operations (division and subtraction), whereas the IRR uses more complex mathematical formula and algorithms. PROJECT PLANNING AND PROJECT MANAGEMENT • The project planning describes plan generally with less attention to detail. On the other hand, project management is described with every possible detail. • The project plan deals with what part of project is while project management deals with how that part of the project will be done. • The project plan gives the vision to complete project successfully while the project management defines and develops system to be used to complete the project successfully. • For larger projects, project plan and project management plan are different but for smaller projects they can be merged. Difference Between NPV and ROI The Net Present Value (or NPV) is an investment term that represents the difference between the present (and/or discounted) value of cash flow in the future and the present value of the investment and any cash flow that may accumulate in the future. Basically, it represents the net result of a multiyear investment (expressed in USD). The Return on Investment (or the ROI) is an equation that measures the efficiency of an investment. Basically, it’s the quotient of the difference between the gain from an investment and the cost of investment, and the cost of investment: (Gain from an Investment-Cost of the Investment)/Cost of the Investment. Differences Between Future Value and Present Value “Present value” is also known as “present discounted value” or “discounted value.” It is defined as the value on a given date of a payment or series of payments made at other times. “Future value” is defined as “the value of an asset at a specific date.” In other words, “future value” is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. The calculation of present values is extremely important for businesses because it allows investors to compare the cash flows at different times. The calculation of future values gives you the estimate on how much you will gain based on the interest rates.
- 32. 32 | Pa g e Difference Between Cash Flow and Net Income 1. Net income or profit is the money that remains with a company after deducting all the expenses. Cash flow is the money that flows in and out of a company for its various activities. 2. When comparing the two, cash flow is a bit hard to manipulate under the GAAP. 3. Cash flow is generally looked upon for determining a company’s value, problems regarding top liquidity and for evaluating the income attained by accrual accounting. It also determines the risk involved with a company. 4. The net income shows how profitable the company has been during a period. Net income is also used to calculate the share amount. 5. The cash flow statement is data that shows the source of money and where it has been spent. In the net income statement, the actual income – whether loss or gain – for a specific period, is mentioned. How would you identify the project risk? There are many different techniques that can be used to identify project risks, including the following: • Checklists. • Lessons Learned. • Subject Matter Experts. • Documentation Review. • SWOT Analysis. • Brainstorming. • Delphi Technique. • Assumptions Analysis. • Influence Diagrams. Checklists: This should be the starting point. You should have a checklist of common risks to your organization or type of project. If not, maybe it’s time to develop one, even if just for your own future use. The checklist will allow you to quickly realize which risks are the most important and in which circumstances they apply. We have a checklist which can be a good starting point, but it is better to have a more specific one. Lessons Learned: Only once have I encountered an organization that maintains a lessons learned database, but it is an amazing tool for them. It’s a highly visible record of problems encountered, mistakes made, and what the project manager should do differently in future projects. When you’re starting a new project and you spend a few minutes reading that, how can your project go wrong? Subject Matter Experts: There is essentially no substitute to having experts who know the subject matter advising you of the risks involved with the work. Often they are in other departments but their advice is second-to-none. If you have access to a subject matter expert, you must use them. If you have subject matter experts available but far removed from you, it is imperative that you get their input if you can. Documentation Review: Many project risks can be identified by reviewing the project’s technical details, backgrounds on the project team, and other data. This can involve researching previous, similar projects or even projects carried out by other organizations. For example, if you were attempting to land a rocket on a landing pad it might be advantageous to look into the results of others who have attempted this maneuver. Particularly when there are unusual and/or unique aspects to the project, this can bring out some major risks that weren’t considered before. I mean, maybe your project doesn’t involve
- 33. 33 | Pa g e something as unique as landing a rocket on a landing pad, but you probably do have some unusual aspects that could or should be investigated for its potential to go wrong. SWOT Analysis: A Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis will assist in drawing out the risks inherent in the project. The SWOT analysis is a 4-quadrant box that allows you to see the project from the perspective of the competitive environment with other industry players. In particular, the “Weaknesses” and “Threats” quadrants can help you to focus on the weak links where potential project derailments lie dormantly in wait of their moment. Brainstorming: Brainstorming focuses on quantity over quality. You write everything down, and then come back later to narrow down the list. There are no wrong answers, only low priority items that get crossed off later. This technique separates the generation of ideas from the analysis. You would be surprised how many are missed when you attempt to combine these two steps. Delphi Technique: The Delphi Technique is a way to develop a consensus among knowledgeable participants. It involves querying the group anonymously, then sharing all of the answers anonymously with the whole group. Upon seeing the opinions of the others, they are allowed to revise their original opinions. After several rounds a consensus should emerge. Assumptions Analysis: Every project contains certain underlying assumptions upon which its business case is built. Identifying these assumptions, and analyzing their reliability, can result in the identification of new risks. Influence Diagrams: Drawing out a simple decision network for the major turning points within a project can yield the important risks. Risk Management on Small Projects: You might wonder about the value of risk registers on small projects, and I don’t disagree. They require a minimum project size. But I believe that risk management always presents roughly the same value relative to the project value. If project managers on large megaprojects spend time on risk management, then the same value must be present if a proportionately smaller time is spent on smaller projects. Megaprojects actually have entire teams dedicated to risk management. The Project Management Institute certifies Risk Management Professionals (PMI-RMP) for these jobs. One could also produce a risk register for a certain type of project (rather than an individual one) since most companies have a significant amount of overlap in their projects. Q. What can be done to reduce the impact of risk? 5 Ways to Manage Risk: Let’s face it, however confident you are that your project will be a success, there is always a chance that something might go wrong. The things that might go wrong are called project risks, and a wise project manager identifies them early at the beginning of the project so that he or she can do something about them. Of course, risk management is an ongoing activity, so you should carry on identifying and recording new risks as they come up. Creating a list of risks is a good starting point, but it isn’t enough in itself. You also need an action plan per risk in order to be able to manage them effectively. There are 5 main ways to manage risk: acceptance, avoidance, transference, mitigation or
- 34. 34 | Pa g e exploitation. Here’s a detailed look at each of them. 1. Accept The Risk: Accepting the risk means that while you have identified it and logged it in your risk management software, you take no action. You simply accept that it might happen and decide to deal with it if it does. This is a good strategy to use for very small risks – risks that won’t have much of an impact on your project if they happen and could be easily dealt with if or when they arise. It could take a lot of time to put together an alternative risk management strategy or take action to deal with the risk, so it’s often a better use of your resources to do nothing for small risks. 2. Avoid The Risk: You can also change your plans completely to avoid the risk. This is a good strategy for when a risk has a potentially large impact on your project. For example, if January is when your company Finance team is busy doing the corporate accounts, putting them all through a training course in January to learn a new process isn’t going to be a great idea. There’s a risk that the accounts wouldn’t get done. It’s more likely, though, that there’s a big risk to their ability to use the new process, since they will all be too busy in January to attend the training or to take it in even if they do go along to the workshops. Instead, it would be better to avoid January for training completely. Change the project plan and schedule the training for February when the bulk of the accounting work is over. 3. Transfer The Risk: Transference is a risk management strategy that isn’t used very often and tends to be more common in projects where there are several parties. Essentially, you transfer the impact and management of the risk to someone else. For example, if you have a third party contracted to write your software code, you could transfer the risk that there will be errors in the code over to them. They will then be responsible for managing this risk, perhaps through additional training. Normally transference arrangements are written up into project contracts. Insurance is another good example. If you are transporting equipment as part of your project and the van is in an accident, the insurance company will be liable for providing new equipment to replace any that was damaged. The project team acknowledges that the accident might happen, but they won’t be responsible for dealing with sourcing replacement kit, moving it to the right location or paying for it as that is now the responsibility of the insurance company. 4. Mitigate The Risk: Mitigating against a risk is probably the most commonly mitigation of risk used risk management technique. It’s also the easiest to understand and the easiest to implement. What mitigation means is that you limit the impact of a risk, so that if it does occur, the problem it creates is smaller and easier to fix. For example, if you are launching a new washing machine and the Sales team then have to demonstrate it to customers, there is a risk that the Sales team don’t understand the product and can’t give good demonstrations. As a result, they will make fewer sales and there will be less revenue for the company. A mitigation strategy for this situation would be to provide good training to the Sales team. There could still be a chance that some team members don’t understand the product, or they miss the training session, or they just aren’t experts in washing machines and never will be, but the impact of the risk will be far reduced as the majority of the team will be able to demonstrate the new machine effectively.
- 35. 35 | Pa g e You can mitigate against the impact, like in this example, and you can also mitigate against the likelihood of it happening. Sometimes the actions will be broadly the same; sometimes you’ll have to have some tasks to reduce the chance that the risk happens and some separate tasks to make the impact of the risk smaller if it happens. 5. Exploit The Risk: Acceptance, avoidance, transference and mitigation are great to use when the risk has a negative impact on the project. But what if the risk has a positive impact? For example, the risk that the new washing machines are so popular that we don’t have enough Sales staff to do the demonstrations? That’s a positive risk – something that would have a benefit to the project and the company if it happened. In those cases, we want to maximize the chance that the risk happens, not stop it from happening or transfer the benefit to someone else! Exploitation is the risk management strategy to use in these situations. Look for ways to make the risk happen or for ways to increase the impact if it does. We could train a few junior Sales admin people to also give washing machine demonstrations and do lots of extra marketing, so that the chance that there is lots of interest in the new machine is increased, and there are people to do the demos if needed. These are the 5 risk management strategies that you can use to manage risk on your project. You’ll probably find yourself using a combination of techniques, choosing the strategies that best suit the risks on your project and the skills of your team. However, you decide to approach risk, make sure that you log the action plan in your risk log and keep it up to date with the latest progress towards managing your risks. What's project evaluation? “Project evaluation is a systematic and objective assessment of an ongoing or completed project. The aim is to determine the relevance and level of achievement of project objectives, development effectiveness, efficiency, impact, and sustainability.” OR The project analysis process uses systematic analysis to gather data and reveal the effectiveness and efficiency of your management. There are three main elements (types) of analysis for any project: Pre-project evaluation: Before you can start a project, you have to evaluate the visibility of that project. Ongoing evaluation: Its crucial to monitor and evaluate the project while in progress to make sure its meeting the planned expectations. Post-project evaluation: When the project is finished, take time to evaluate what worked and what didn’t work to learn from your mistakes. Project evaluation process Planning: First comes the planning, which involves identifying the stakeholders and knowing what it is they want. Implementation: While running your project, you’re also monitoring and evaluating it. Completion: Take the data you collected over the evaluation and see what went right and what went wrong, and change what you can to fix those wrongs. Reporting & Dissemination: Evaluation data needs to be shared to do the best.
- 36. 36 | Pa g e Q. What is the role of activity sequencing (logic) in project management? Discuss similarities and differences between Gantt chart and Network diagram. Sequence Activities: Sequence activities is the process of identifying and documenting relationships among the project activities. In the project management, the key benefit of this type of process is that it defines the logical sequence of work to obtain the greatest efficiency given all project constraints. In the project management process groups and knowledge area mapping the sequence activities fall under the planning process group and project time management knowledge areas. The project schedule development uses the outputs from the processes to define activities, sequence activities, estimate activity resources, and estimate activity durations in combination with the scheduling tool to produce the schedule model. In the sequence activities data flow diagram, every activity and milestone except the first and last should be connected to at least one predecessor with a finish-to-start logical relationship and at least one successor with the finish-to-start or finish-to-finish logical relationship. Sequencing can be performed by using project management software or by using manual or automated techniques. Moreover, the schedule management plan identifies the scheduling method and tool to be used for the project, which will guide how the activities may be sequenced. This term is defined in the 5th edition of the PMBOK. Difference between Gantt Chart and Network Diagram Gantt Charts Network Diagrams Definition Gantt charts provide a standard format for showing project schedule information by listing project activities and their corresponding start and finish dates in a calendar like format A network diagram is a schematic display of the logical relationships among, or sequencing of, project activities. Tasks Visual representation of duration of tasks Visual representation of dependencies between tasks Depicts Time overlap between task Tasks that can be done in parallel Slack time Visually shows slack time Shows slack time by using rectangles filled by data. Category Bar chart Flow chart Why is it necessary to carry out feasibility study before implementing a project? Feasibility Study: As the name implies, a feasibility analysis is used to determine the viability of an idea, such as ensuring a project is legally and technically feasible as well as economically justifiable. It tells us whether a project is worth the investment—in some cases, a project may
- 37. 37 | Pa g e not be doable. There can be many reasons for this, including requiring too many resources, which not only prevents those resources from performing other tasks but also may cost more than an organization would earn back by taking on a project that isn’t profitable. A well-designed study should offer a historical background of the business or project, such as a description of the product or service, accounting statements, details of operations and management, marketing research and policies, financial data, legal requirements, and tax obligations. Generally, such studies precede technical development and project implementation. Five Areas of Project Feasibility: A feasibility analysis evaluates the project’s potential for success; therefore, perceived objectivity is an essential factor in the credibility of the study for potential investors and lending institutions. There are five types of feasibility study—separate areas that a feasibility study examines, described below. Technical Feasibility: This assessment focuses on the technical resources available to the organization. It helps organizations determine whether the technical resources meet capacity and whether the technical team is capable of converting the ideas into working systems. Technical feasibility also involves evaluation of the hardware, software, and other technical requirements of the proposed system. As an exaggerated example, an organization wouldn’t want to try to put Star Trek’s transporters in their building—currently, this project is not technically feasible. Economic Feasibility: This assessment typically involves a cost/ benefits analysis of the project, helping organizations determine the viability, cost, and benefits associated with a project before financial resources are allocated. It also serves as an independent project assessment and enhances project credibility—helping decision-makers determine the positive economic benefits to the organization that the proposed project will provide. Legal Feasibility: This assessment investigates whether any aspect of the proposed project conflicts with legal requirements like zoning laws, data protection acts or social media laws. Let’s say an organization wants to construct a new office building in a specific location. A feasibility study might reveal the organization’s ideal location isn’t zoned for that type of business. That organization has just saved considerable time and effort by learning that their project was not feasible right from the beginning. Operational Feasibility: This assessment involves undertaking a study to analyze and determine whether—and how well—the organization’s needs can be met by completing the project. Operational feasibility studies also examine how a project plan satisfies the requirements identified in the requirements analysis phase of system development. Scheduling Feasibility: This assessment is the most important for project success; after all, a project will fail if not completed on time. In scheduling feasibility, an organization estimates how much time the project will take to complete. When these areas have all been examined, the feasibility analysis helps identify any constraints the proposed project may face, including: Internal Project Constraints: Technical, Technology, Budget, Resource, etc. Internal Corporate Constraints: Financial, Marketing, Export, etc. External Constraints: Logistics, Environment, Laws, and Regulations, etc.
- 38. 38 | Pa g e Benefits of Conducting a Feasibility Study: The importance of a feasibility study is based on organizational desire to “get it right” before committing resources, time, or budget. A feasibility study might uncover new ideas that could completely change a project’s scope. It’s best to make these determinations in advance, rather than to jump in and to learn that the project won’t work. Conducting a feasibility study is always beneficial to the project as it gives you and other stakeholders a clear picture of the proposed project. Below are some key benefits of conducting a feasibility study: • Improves project teams’ focus. • Identifies new opportunities. • Provides valuable information for a “go/no-go” decision. • Narrows the business alternatives. • Identifies a valid reason to undertake the project. • Enhances the success rate by evaluating multiple parameters. • Aids decision-making on the project. • Identifies reasons not to proceed. OR 7 Steps for a Feasibility Study: Jennifer said to follow these steps when conducting a feasibility study: 1. Conduct a preliminary analysis. 2. Prepare a projected income statement. 3. Conduct a market survey, or perform market research. 4. Plan business organization and operations. 5. Prepare an opening day balance sheet. 6. Review and analyze all data. 7. Make a go/no-go decision. Best Practices for a Feasibility Study: Use templates/tools/surveys, or any data and technology that gives you leverage. • Involve the appropriate stakeholders to get their feedback. • Use market research to further your data collection. • Do your homework and ask questions to make sure your data is solid. Distinctive features of a typical project Characteristic Features of a Project: The characteristic features of a project are as follows: 1. Objectives: A project has a fixed set of objectives. Once the objectives have been achieved, the project ceases to exist. 2. Life Span: A project cannot continue endlessly. It has to come to an end. What represents the end would normally be spell out in the set of objectives. 3. Single entity: A project is one entity and is normally entrusted to one responsibility center while the participants in the project arc many. 4. Team-work: A project calls for team-work. The team again is constituted of members belonging to different disciplines, organizations and even countries. 5. Life-cycle: A project has a life cycle reflected by growth, maturity and decay. It has naturally a learning component. 6. Uniqueness: No two projects are exactly similar even if Die plants are exactly identical or are merely duplicated. The location, the infra-structure, the agencies and the people make each project unique. 7. Change: A project sees many changes throughout its life while some of these changes may not have any major impact; then- can be some changes which will change the entire character of course of the project. 8. Successive principle: What is going to happen during the life cycle of a project is not fully known at any stage. The details get finalized successively with the passage of time. More is
- 39. 39 | Pa g e known about a project when it enters the construction phase than what was known say, during the detailed engineering phase. 9. Made to order: A project is always made to the order of its customer. The customer stipulates various requirements and puts constraints within which the project must be executed. 10. Unity in diversity: A project is a complex set of thousands of varieties. The varieties are in terms of technology, equipment and materials, machinery and people, work culture and ethics. But they remain inter-related and unless this is so, they either do not belong to the project or will never allow the project to be completed. 11. High level of sub-contracting: A high percentage of the work in a project is done through contractors. The more the complexity of the project, the more will be the extent of contracting. Normally around 80% of the work in a project is done through sub-contractors. 12. Risk and uncertainty: Every project has risk and uncertainty associated with it. The degree of risk and uncertainty will depend on how a project has passed through its various life-cycle phases. An ill-defined project will have extremely high degree of risk and uncertainly Risk and uncertainty are not part and parcel of only R and h projects—there simply cannot be a project without any risk and uncertainty. Advantages of project management Project management is a powerful business tool that can deliver many advantages to businesses of all sizes. It gives you repeatable processes, guidelines and techniques to help you manage the people and the work involved in your projects. It can increase your chances of success and help you deliver projects consistently, efficiently, on time and budget. Benefits of project management: The main advantage of project management is that is helps you to manage your projects effectively, enabling you to resolve problems more quickly. It takes time and money to manage a project, however following good practices can help you: • improve your chances of achieving the desired result. • gain a fresh perspective on your project, and how it fits with your business strategy. • priorities your business’ resources and ensure their efficient use. • set the scope, schedule and budget accurately from the start. • stay on schedule and keep costs and resources to budget. • improve productivity and quality of work. • encourage consistent communications amongst staff, suppliers and clients. • satisfy the various needs of the project’s stakeholders. • mitigate risks of a project failing. • increase customer satisfaction. • gain a competitive advantage and boost your bottom line. • From lost time to inconsistency, not having a process to manage your projects can result in lost time, wasted money and poor performance. Find out more about the benefits of following a project management method. Definition of 'Risk Management' Definition: In the world of finance, risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk. Description: When an entity makes an investment decision, it exposes itself to a number of
- 40. 40 | Pa g e financial risks. The quantum of such risks depends on the type of financial instrument. These financial risks might be in the form of high inflation, volatility in capital markets, recession, bankruptcy, etc. So, in order to minimize and control the exposure of investment to such risks, fund managers and investors practice risk management. Not giving due importance to risk management while making investment decisions might wreak havoc on investment in times of financial turmoil in an economy. Different levels of risk come attached with different categories of asset classes. For example, a fixed deposit is considered a less risky investment. On the other hand, investment in equity is considered a risky venture. While practicing risk management, equity investors and fund managers tend to diversify their portfolio so as to minimize the exposure to risk. Define Project Constraints? Project constraints affect the success or failure of a project directly. Project managers must be very cautious about monitoring and controlling project constraints throughout the project. There are seven common project constraints. These project constraints are as following. 1: Cost: Cost is very important project constraint. At the beginning of the project, project sponsor will be stating his or her expectations from the project. And also, he or she can come with a project cost constraint. For instance, he can say that "You need to complete this project with a one-million-dollar budget". From this point onward, this one-million-dollar budget will be your project constraint, and you have to complete the project under this budget. 2: Scope: Project scope defines what needs to be completed in a project, therefore it is a very important project constraint as well. For instance, if you are working in a software vendor, development of an e-commerce website can be a project scope. And, if the scope is "development of an end-to-end operating e-commerce retail website" this is an example of project scope constraint. 3: Quality: Quality comes with cost. If there will be strict quality requirements in a project, this will affect the cost project constraint directly. For instance, if you are working in a construction project, the customer might expect the building to be resistant against 8.0 Richter earth quake. Construction of a more resistant building will cost higher for sure. And if more quality is a project constraint, you should be aligned with this constraint in the project. 4: Customer Satisfaction: Customer satisfaction is a key factor for a sustainable and long- running business in the market. All companies do business for their customers in the end. Because, they are the source of money and if you cannot satisfy your customers, you will not be able to stand against competition during time. Therefore, customer satisfaction is a crucial project constraint. 5: Risk: Risks can be either positive or negative in a project. Project managers must enhance the opportunities of positive risks and reduce the threats of negative risks in a project. For instance, if there is a risk of losing a project team member, you should prepare a handover document for the activities of that team member is doing in the project. And if he leaves the project, or company, or in other words, if the risk occurs, you can use the handover documents to assign
- 41. 41 | Pa g e tasks to a new team member and reduce the impact of this risk. Risk is a very critical project constraint in project management. 6: Resources: Many project managers think that only project team members are considered as project resources. However, tools, equipment, or material that will be used during the project are all project resources, and project constraints respectively. For instance, cement, bulldozer, or a scheduling software that will be used during the project are all project resources and project constraints respectively. 7: Time: Time is money! When starting a project, there will be deadlines that will be proposed by the project sponsor. For instance, project sponsor might state that "I want this project to be completed till end of next year". This will be your time constraint in the project Now, let's see how project constraints affect each other. Effect of One Project Constraint on Another One: Generally, there is a trade-off between these project constraints. This means, if you improve positive aspects of a project constraint, this will bring a negative aspect on one of the other project constraints. For example, in order to reduce the delivery duration of the project, or in order to deliver project earlier than scheduled time, you need to put extra resources to deliver the same amount of work in a shorter time. This means increasing cost or if you won’t put extra resources, you need to reduce your scope to deliver less work in a shorter timescale. What is Procurement Cycle? Define its 10 steps. The Procurement Cycle can be defined as the cyclical process of key steps when procuring goods or services for the organization. This interactive tool is strategically developed to guide and enlighten the members of the company through the procurement process with links to relevant knowledge to support each and every step through the procurement journey. Step 1: Need Recognition: The requisitioning department must identify its need on strong rationale and should be able to justify. The requirement can be fulfilled either from internal or external sources. The material or services may be one that needs to be reordered, or it may be a new item or being revised after lapse of longer period than required for reordering. Step 2: Specifying Material: Selection of the right product and vendor are critical for the company. Some industries have standards to help determine specification with prequalified vendor list. Any way, it never means to close the door for new comers. It is always important to be in touch with new vendors, products and technologies. The Company may specify the necessary product by using identifiers and technical points. Step 3: Locating Source: The business needs to determine all possible sources to obtain the product. The company might have an approved vendor list. If not, the business will need to search for a supplier using various resources through market visit, internet, sales representatives, directories etc. The company needs to qualify the suppliers on predetermined criterion before enlisting them and awarding a contract. Step 4: Negotiation (Price, Terms): The Procurement department will investigate all relevant information to determine the best price and terms for the organization. Negotiations are considered as the very basic job of a procurement manager after sourcing. Good negotiations
- 42. 42 | Pa g e do not always end up with the cheapest cost but acquiring he best cost of ownership of required quality on or before time. Step 5: Contract Document: The purchase order or contract is used to buy materials and specifically defines the price, specification, terms and conditions of the product or service. It also covers additional obligations, if applicable on one or both the parties such as late deliveries or late payments etc. Step 6: Expediting: Expedition of the purchase order addresses the timeliness of the service or materials ordered. It becomes especially important to avoid delays through appropriate correspondence and finalize handover/takeover processes between two parties. The issues mostly relate which payment dates, delivery times and work completion according to specifications and schedule. Step 7: Receiving of Material Services: The acknowledgement of receiving of material and services against order or contract is vital before it qualify to proceed to payment. Procurement needs to ensure cent percent compliance of all agreed terms & conditions before accepting delivered material or services. Step 8: Receipt and Inspection of Purchases: Once the vendor has delivered the product, the company needs to accept or reject upon receipt. Acceptance of the items obligates the company to pay while rejection entails replacement by vendor or cancellation or order. Step 9: Invoice Approval and Payment: Three documents must match when a vendor requests payment, the invoice itself, the delivery challan and good receiving note. The numeric agreement of all these documents authenticate completion of transaction from both; the ordering company and vendor. In case of any discrepancy; it must be resolved before the recipient clear the bill. Usually, payment is made in the form of cash, cheque, bank transfers, letter of credit or any other types of electronic transfers. Step 10: Record Maintenance: The company must maintain proper records of all transactions which take place in procuring material and services for the organization. These include purchase records, purchase requisition to which reference purchases were made, the working paper including comparative statement and approvals from approving authorities. Records also need to ensure compliance with organizational polices & procedures. Theory of Constraints All processes are susceptible to constraints; the theory of constraints (TOC) postulates that "the chain is only as strong as its weakest link." Because systems are interdependent, it makes sense that an entire set of processes within an operational paradigm can be made vulnerable to failure by a single process that is struggling. TOC assumes that throughput, operational expense, and inventory are the three central inputs in a given system. TOC relies on the assumption that there is always room for improvement in these inputs–after all, if there was nothing preventing the system from achieving higher throughput, throughput would be infinite.
- 43. 43 | Pa g e This means that any time organizations encounter substantial internal or external constraints, it is the role of management to create a strategy to circumvent them. Since throughput is never infinite, this is an ongoing process. Internal Constraints: At the organizational level, internal control objectives concern the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations. With this in mind, we can summarize internal constraints as anyone or any combination of the following: Equipment: The way equipment is used limits the ability of the system to produce more salable goods/services. People: Lack of skilled people limits the system; mental models also cause negative behaviors that become constraints. Policy: A written or unwritten policy prevents the system from making more goods/services. The list of potential internal constraints is long: employees may not have the proper skills to use specific types of equipment, policy may organize the processes in an imperfect manner, equipment may depreciate faster than expected, employees may be absent or inefficient, policy may limit resource allocation to inventory and warehousing, etc. Internal constraints are a constant concern for the managers who must try to minimize them by continually optimizing the system. For example, if employees lack specific skills, management may want to refine its hiring policies. External Constraints: In their attempts to maximize existing profits, business managers must consider both the short- and long-term implications of decisions made within the firm and the various external constraints that could limit the firm's ability to achieve its organizational goals. These constraints can be organized into three categories: Scarcity, Contracts, Legalities. The first external constraint, resource scarcity, refers to the limited availability of essential inputs (including skilled labor), key raw materials, energy, specialized machinery and equipment, warehouse space, and other resources. Moreover, managers often face constraints on plant capacity that are exacerbated by limited investment funds available for expansion or modernization. Contractual obligations also constrain managerial decisions. Labor contracts, for example, may constrain managers' flexibility in worker scheduling and work assignments. Labor contracts may also restrict the number of workers employed at any time, thereby establishing a floor for minimum labor costs. Finally, laws and regulations have to be observed. Legal restrictions can constrain production and marketing decisions. Examples of laws and regulations that limit managerial flexibility include: minimum wage, health and safety standards, fuel efficiency requirements, anti- pollution regulations, and fair pricing and marketing practices. What is the difference between a Project Manager and a Functional Manager? There are several differences: • Functional managers manage people while project managers manage processes without having any formal authority over people
- 44. 44 | Pa g e • Functional managers usually manage budgets and resources while project managers don’t manage their own resources but instead they work with the resources managed by the functional managers • Functional managers are part of the management team of the organization while most project managers despite their job title are ordinary employees and not real managers. • Functional managers have direct reports, project managers usually don’t. As such FMs can hire and fire employees, do performance reviews, raise salaries, award bonuses, promote or demote people. PMs don’t have the power to do these things. • FMs are responsible for the work of their direct reports in all circumstances even when the employees are working on projects, PMs on the other hand are responsible for the so called operational aspects of a project which usually don’t involve the actual work performed • FMs usually come from the same line of work as their direct reports while PMs don’t necessarily have the same technical background as their project team members. Since many project teams are cross functional it would be simply impossible for the PM be an expert in all the fields relevant to the project • In some industries such as IT is is possible to start you career as an entry level PM , while FMs are always senior positions that require some work experience before acceding to such a role • Project management is starting to be seen as same sort of profession in its own right meaning that a PM is a professional in the field of project management. Functional management on the other hand is not a profession as the FM remains a professional in his own line of work but once appointed as a functional manager he works less as an individual contributor and focuses more on coordination and leadership. Capital Budgeting Techniques: The Capital Budgeting Techniques are employed to evaluate the viability of long-term investments. The capital budgeting decisions are one of the critical financial decisions that relate to the selection of investment proposal or the course of action that will yield benefits in the future over the lifetime of the project. Since the capital budgeting is related to the long-term investments whose returns will be fetched in the future, certain traditional and modern capital budgeting techniques are employed by the firm to judge the feasibility of these projects. The traditional method relies on the non-discounting criteria that do not consider the time value of money, whereas the modern method includes the discounting criteria where the time value of money is taken into the consideration. Capital Budgeting Techniques Methods Traditional methods: The traditional methods comprise of the following evaluation techniques: 1. Payback Period Method. 2. Average Rate of Return or Accounting Rate of Return Method. Modern Methods: The modern methods comprise of the following evaluation techniques: 1. Net Present Value Method. 2. Internal Rate of Return. 3. Modified Internal Rate of Return. 4. Profitability Index The common thing about both these methods (Traditional and Modern) is that these are based on the cash inflows and the outflows of the project.
- 45. 45 | Pa g e Payback Period: The Payback Period helps to determine the length of time required to recover the initial cash outlay in the project. Simply, it is the method used to calculate the time required to earn back the cost incurred in the investments through the successive cash inflows. The formula to calculate it: Payback Period = Initial Outlay/Cash Inflows Accept-Reject Criteria: The projects with the lesser payback are preferred. Merits of Payback Period: • It is very simple to calculate and easy to understand. • This method is helpful to analyze risk, i.e. to determine how long the investments will be at risk. • It is beneficial for the industries where the investments become obsolete very quickly. • It measures the liquidity of the projects. Demerits of Payback Period: • The major drawback of this method is that it ignores the Time Value of Money. • It does not take into consideration the cash flows that occur after the payback period. • It does not show the liquidity position of the company, but only tells the ability of a project to return the initial outlay. • It does not measure the profitability of the entire project since it only focuses on the time required to recover the initial investment cost. • This method does not consider the life-span of investment, what if the life of an asset gets over very much before the initial investment cost is realized. Thus, the payback period is the simplest method to assess the risk associated with the investment and the time required to get the initial outlay recovered. Average Rate of Return: The Average Rate of Return or ARR, measures the profitability of the investments on the basis of the information taken from the financial statements rather than the cash flows. It is also called as Accounting Rate of Return The formula for calculating the average rate of return is: Average Rate of Return = Average Income / Average Investment over the life of the project Where, Average Income = Average of post-tax operating profit Average Investment = (Book value of investment in the beginning + book value of investments at the end) / 2 Accept-Reject Criteria: The projects having the rate of return higher than the minimum desired returns are accepted. Merits of Average Rate of Return: • It is very simple to calculate and easy to understand • The measures the profitability of the entire project since it considers the cash flows throughout the life of the project. • It is based on the accounting information which is readily available and easily understood by the businessmen. Demerits of Average Rate of Return: • It is based on the accounting information and not on the actual cash flows since the cash flow approach is considered superior to the accounting approach. • It does not take into consideration, the Time Value of Money. • It is inadequate to differentiate between the projects on the basis of amounts required for the investment, in case the proposals have the same rate of return. • Thus, this is the only method that uses the firm’s financial data to assess the profitability of the project undertaken and do not rely on the future cash flows.
- 46. 46 | Pa g e Net Present Value: The Net Present Value or NPV is a discounting technique of capital budgeting wherein the profitability of investment is measured through the difference between the cash inflows generated out of the cash outflows or the investments made in the project. The formula to calculate the Net Present value is: Net present value = n∑t=1 Ct / (1+r) t – C0 Where, Ct = cash inflow at the end of year t. n = life of the project. r = discount rate or the cost of capital. Co = cash outflow. Accept – Reject Criteria: If the NPV is positive, the project is accepted. Merits of Net Present Value: • It takes into consideration the Time Value of Money. • It measures the profitability of the entire project by considering the profits throughout its life. • It is easy to alter the discount rate, by just changing the value of the denominator. • This method is particularly suitable for the mutually exclusive projects. • It is consistent with the objective of maximizing the net wealth of the company. Demerits of Net Present Value: • The forecasting of cash flows is difficult because of several uncertainties involved in the operations of the firm. • It is difficult to compute the discount rate precisely. And this is one of the crucial factors in the computation of net present value as with the change in the discount factor the NPV results also changes. • Another problem is that it is an absolute measure, it accepts or rejects the projects only on the basis of its higher value irrespective of the cost of initial outlay. • Thus, to compute the Net Present value, a firm should determine the cash inflows and the outflows along with the discount rate or a rate of return that firm desires during the lifetime of the project. Internal Rate of Return: The Internal Rate of Return or IRR is a rate that makes the net present value of any project equal to zero. In other words, the interest rate that equates the present value of cash inflow with the present value of cash outflow of any project is called as Internal Rate of Return. Unlike the Net present value method where we assume that the discount rate is known, in the case of Internal rate of return method, we put the value of NPV zero and then find out the discount rate that satisfies this condition. The formula to calculate IRR is: CFo = n∑t=1 Ct / (1+r)t Where, CFo = Investment. Ct = Cash flow at the end of year t. r = internal rate of return. n = life of the project. Accept- Reject criteria: If the project’s internal rate of return is greater than the firm’s cost of capital, accept the proposal. Merits of Internal Rate of Return: • IRR takes into account the Time Value of Money. • It considers the cash flows over the entire life of the project. • IRR is consistent with the goal of wealth maximization. • While computing the NPV the discount rate taken is normally the cost of capital, but in the case of IRR, there is no need for the cost of capital because the rate of return generated by the project itself is used to evaluate the efficiency of the project. Thus, the rate is internal to the project. Demerits of Internal Rate of Return: • It is quite difficult and involves tedious calculations. • IRR produces multiple discount rates, which might be confusing.
- 47. 47 | Pa g e • While evaluating the mutually exclusive proposals, the project having the highest value is chosen over the other that may not be necessarily the most profitable or be in line with the objectives of the firm of wealth maximization. • It is assumed that the cash flows are reinvested at an internal rate of return. • The internal rate of return is usually the rate of return that a project earns. It is often called as the yield on investment, the marginal efficiency of capital, the marginal productivity of capital, rate of return and time adjusted rate of return. Profitability Index: The Profitability Index measures the present value of returns derived from per rupee invested. It shows the relationship between the benefits and cost of the project and therefore, it is also called as, Benefit-Cost Ratio. The profitability Index helps in giving ranks to the projects on the basis of its value, the higher the value the top rank the project gets. Therefore, this method helps in the Capital Rationing. The formula to calculate the Profitability Index is: PI = Present value of future cash inflows/ Present value of cash outflows Accept-Reject Criteria: The project is accepted when the value of PI exceeds 1. If the value is equal to 1, then the firm is indifferent towards the project and in case the value is less than 1 the proposal is rejected. Merits of Profitability Index: • It takes into consideration, the Time Value of Money. • The profits are considered throughout the life of the project. • This method helps in giving the ranks to the projects. • It helps in assessing the risk involved in cash inflows through the cost of capital. • It also helps in assessing the increase or decrease in the firm’s value due to the investments. Demerits of profitability Index: • Unlike the NPV, the Profitability Index may sometimes do not offer the correct decision with respect to the mutually exclusive projects. • The cost of capital is must to compute this ratio. • It is a modernized version of Net Present Value that shows the present value of future cash inflows over the present value of cash outlay. Whereas the NPV shows the difference between the present value of future cash inflows and the present value of cash outlay. Also, the NPV is an absolute measure, whereas the Profitability Index is a relative measure. Hillier Model: According to the Hillier model, the risk associated with the project can be assessed through the standard deviation of expected cash flows. In other words, determining the viability of the project through calculating the deviations in the cash flows from the mean of expected cash flows. Thus, Hillier model asserts that the computation of standard deviations of several ranges of cash flows enables a firm to determine the uncertainty involved in the future projects. This model was proposed by F.S. Hillier and according to him, the expected Net Present Value and the standard deviation of the Net present value of the project can be determined through analytical derivations. Under this model, there are two cases of analysis: • When there is no correlation among the cash flows • When there is a perfect correlation among the cash flows.
- 48. 48 | Pa g e When the cash flows of different years are uncorrelated, then the cash flow in the year “t” is independent of the cash flow in the year “t-n”. Whereas, if the cash flows of different years are perfectly correlated, then the cash flows in each period will be alike. The formula to compute the Net Present Value and the standard deviation under both the cases is given below: Uncorrelated Cash Flows NPV = n ∑t=1 [Ct / (1+i)t ] – I ∂ (NPV) = n ∑t=1 [∂t 2 / (1+i)2t ]1/2 Correlated Cash Flows NPV = n ∑t=1 [Ct / (1+i)t ] – I ∂(NPV) = n ∑t=1[ ∂t/ (1+t)t ] Where, Ct = Expected cash flow of the year “t”. ∂t= standard deviation of cash flow for the year “t”. i = risk free rate. I = initial investment. Black Scholes Model: The Black-Scholes Model is the options pricing model developed by Fischer Black, Myron Scholes, and Robert Merton, wherein the formula is used to calculate the theoretical price of the European call and put option based on five determinants: Stock price, strike price, volatility, expiration date and the risk-free interest rate. The formula to calculate the price of the call options is: C = SN(d1) – N(d2)Ke-rt d1= [ln (S/K) + (r+∂2 /2)t]/ ∂√t d2= d1- ∂√t. Where, C = Call Premium. S = Current Stock Price. t = time until expiration. K = Option strike price. r = Risk-free Rate. N = Normal distribution. e = exponential. ∂ = Standard Deviation. ln = log. The formula given above is divided into two parts, the first part, i.e. SN(d1), represents the expected benefits of purchasing the underlying asset. It shows the change in the call premium due to the change in the price of an underlying asset. The second part, Viz. N(d2)Ke-rt shows the current value of the exercise price that needs to be paid when the option is exercised. The difference between these helps to determine the option’s price. Before the application of the above formula, the assumptions associated with the Black Scholes model must be understood clearly. These assumptions are: • The options are only European, that can be exercised only at the date of expiration. • No dividends are paid throughout the life of the options. • There are no commissions. • There is an efficient market, which means the market movements cannot be predicted. • The risk-free rate and the volatility of change in the price of the underlying asset are known and constant. • The returns on the underlying asset are normally distributed.
- 49. 49 | Pa g e The formula for calculating the option price is quite complex, but the investors need not have to go through the lengthy calculations and can use the Black-Scholes option calculator, which is easily available online. Proactive and Reactive management Proactive management is, as mentioned before, the methodology of leadership where the manager runs the company proactively. They look for new opportunities for the business, create safeguards against potential problems, and plan for decisions to be made far ahead down the line. A proactive leader tends to be beneficial to whatever business they’re running, and this especially holds true in the case of entrepreneurship. Starting a business can be very hard unless you’re proactive. A good proactive manager is capable of: Foresight. Planning ahead for any potential problems for the business. If you’re a startup, for example, with a runway of a year. The proactive manager starts looking for new investors and funding 6 months in, not 11. Opportunism. There’s always an unlikely partnership, a new way to create value or make more money right around the corner – and it’s going to stay there unless the manager is proactive enough to seek them out. Risk Management. A proactive manager asks themselves – is there a chance for this decision to backfire within the foreseeable future? If so, the manager puts in safeguards that would help in case everything goes bad. Reactive management is the polar opposite, and usually a follow-up, of proactive management. When a proactive leader gets swarmed enough with problems long enough, they turn reactive. Reactive management is an approach to management when the company leadership cannot or does not plan ahead for potential problems. As a consequence of that, a reactive manager is always busy with putting all the fires to look for any sort of external opportunities – they just react to whatever might happen, as they happen. While a good reactive leader has the skills and personality to fix the problems and get everything back on track real fast, they tend to always be a step behind a proactive manager, who already had a contingency plan for the situation. Project manager and Line manager A project manager is a person who has the overall responsibility for the successful initiation, planning, design, execution, monitoring, controlling and closure of a project. Construction, petrochemical, architecture, information technology and many different industries that produce products and services use this job title. A line manager has a relatively simple role: His or her organization only has to do the same thing tomorrow as it is already doing today – hopefully slightly better and more efficient. Briefly describe project selection criteria and considerations. 1.Business Priority: Selection of projects is based on the need or priority of the business. Project leaders need to understand that the tail can’t wag the dog. Often, people package their ideas into a project and fuel it as an organizational priority. Scanning of the external and internal environment will give first-hand insight on what is the organizational priority, NOW?
- 50. 50 | Pa g e Go for it. Well, that may put you out of your comfort zone, competency or expertise, but remember that’s what the organization needs. Project Selection and implementation of Lean Six Sigma is easy and at the same time should be handled delicately by keeping all the above aspects in mind otherwise it might turn into a big disaster. An effective diagnostic study is required before selecting projects and with the undivided involvement of the top management are pre-requisites for project selection. 2.Customer impact: Ask yourself “will the results of the project bring any difference in the life of the customer? Will it improve the perception of the customers about the quality of your product or services?” Quite often this answer to this question is yes. Unfortunately, it’s motherhood in apple pie question. So insist on quantifying the impact. If you can pin a number to the impact, then go ahead. And if you’re not able to do so, then there’s no point in wasting your time on the project. Consider Voice of the Customer in your organization as a starting point. Why don’t you start with complaints and alleviate customer pain? Thus Customer Impact is Number 2 in the countdown. 3. Availability of Resources: I don’t know if this has to do with the culture. Most organizations, if not all, end up with a laundry list of projects because everything seems to be Business or Customer priority. Even the biggest and richest of the organizations have limited resources. Either resource is depleted, busy elsewhere or simply not committed to deliver. The best person is often leading many projects, making everything he/she does venerable to failure. Project selection is about de-selection and not selected. Ruthlessly put ideas into a parking list for which right resources are not available; and if it is so important that it has to be executed now, then pull the right resource into this project rather than sharing. While I have largely kept this point around manpower, it equally applies to money & time. I say with conviction that organizations that ensure that the leader of the Lean Six Sigma project is a dedicated resource, either full time or handling only one project even if it means he is part time on it are surely successful. 4. Apt Time: There is always a perfect timing to initiate a project. Relevance is contextual. By apt timing, I mean both the time to commence, and the closure as per plan. An important project has to close on time. It has to be first of all, planned to close on time. It has to be scoped to close on time. 5. Savings potential: Any project implemented is implemented with an intention to gain any kind of tangible or say monetary benefits. But along with monetary benefits, there are other benefits like customer satisfaction, increased efficiency, total company involvement; increases workspace and much more. While it is absolutely apt to select projects which have savings to the organization, it is misleading to make saving potential a primal purpose of projects. I have seen many times, project leaders come up with simple ideas or improvements with a huge saving potential to the organization, but virtually no complexity involved. Such projects hardly qualify for Black Belt projects. They best serve as Just Do It project. Giving undue importance to saving potential in project selection also sends the wrong message across the organization. That is why I not really excited about having this as a top item in the countdown.
- 51. 51 | Pa g e 6. Availability of Data: Is data readily available for the project? If not, can it be easily gathered? While most project leaders and sponsors know that rarely will all the data needed for a project is waiting around to be analyzed. But they use the availability of data criteria to select projects because the unreasonable expenditure of time, resources and effort can be avoided. Yes, data is needed for analysis. But making it a criterion reduces the scope Continuous Improvement deployment. Improvement projects are expected to venture into unchartered territories of the process and present root cause and opportunities. Getting people to measure something that is not being reported till now, in it is a feat. Having vanilla project can hardly be a criterion for project selection. 7. Probability of Success: Not all the projects will be successful in any company. Hence, while selecting the project, most project leaders consider the contingencies which might come up and use that as a yardstick to select the project. Sponsors want their project leaders to be successful equally as projects leaders’ desire success. Well, sounds like a good approach. But doesn’t this approach make it very orthodox? Unlike other implementation projects in technology, improvement projects are bound to have ups and downs; and it is quite natural that not all projects achieve their goals. That is what continuous improvement is all about.