Professional Documents
Culture Documents
Preface
Conceptualization of a project and then realistic planning for its completion are crucial for
success of the project. As time and cost are most common features for any project so it is always
important to implement projects timely and cost effectively manner.
A comprehensive document is needed for project management for managers and policy makers.
This book will fits the bills in this era when cost of projects and their timely implementation
have become more significant and essential as never before keeping in view the growing
completion both from within the country and by multi-nationals. Once the viability and timeframe of the project is established, a project cannot bear much deviation in implementation.
(Kumar Saurabh)
Updated Syllabus
Course Objective:
The objective of the course is to make the students familiar with the planning, analysis,
selection, implementation and review the capital expenditure investments with special
reference to infrastructure projects. The aim is to acquaint the student with the application of
mathematical and statistical tools for analyzing managerial problems in order to arrive at a
decision w.r.t. the capital expenditures. They shall be exposed to fundamental optimization
procedures and techniques, which are used in Project Management.
Course Contents:
Text:
Chandra P., Projects: Planning, Analysis, Financing, Implementation & Review, 4 th Ed. Tata
McGraw-Hill Publishing
References:
Meredith J.R. & Mantel S.J., Jr., Project Management: A Managerial Approach, 4 th Ed. John
Wiley & Sons
Machiraju H.R., Introduction to Project Finance: An Analytical Perspective, Vikas Publishing
House Pvt. Ltd.
Patel B.M., Project Management: Strategic Financial Planning Examination & Control, Vikas
Publishing House Pvt. Ltd.
Finnerty J. D, Project Financing: Asset-Based Financial Engineering, Wiley
Newbold C.R., Project Management in the Fast Lane: Applying Theory & Constraints, St. Lucie
Press
Diwan P., Project Management, Deep & Deep Publications
Anthony R.N. & Govindrajan V, Management Control Systems. Tata McGraw -Hill
Desai V., Project Management, Himalaya Publishing House
Thakur D., Project Formulation & Implementation, Deep & Deep Publications
Dayal R., Zachariah P. & Rajpal K., Project management, Mittal Publications
Goel B., Project Management: A Development Perspective, Deep & Deep Publications
INDEX
Page no.
Planning of Projects
50
Project Implementation
159
184
Project Examination
199
216
Chapter-1
Planning of Projects
S. No.
Content
Page no.
1.
Project
2.
Project Management
13
3.
18
4.
22
5.
28
6.
39
Planning of Projects
Project management is a professional discipline combining systems, techniques and people to
achieve a business objective within defined parameters of time, budget and quality. It employs
creative problem solving processes designed to recognize and solve problems as they arise, and
also to proactively anticipate and avert potentially detrimental situations. It is based on ethical
and honest behavior using best practice techniques.
An important aspect of project management is the building and maintaining of effective
relationships with all those involved in the project through a participative and open
communication process.
Project management is developed out of attempts of some sections of mankind to destroy all
others to protect themselves from the onslaught of others. It is one of the fields of study that has
developed by the armies all over the world. If ancient projects such as construction of the great
China Wall, building of Egyptian Pyramids which are all magnificent projects by any definition,
modern project management is said to have started with Manhattan Project, which was
undertaken in the US during the second world war, to develop the atomic bomb.
Project management is a term thats often bandied about today. It first became popular in the
early 1960s, driven by businesses which realized that there were benefits to be gained from
organizing work into separate, definable units and from co-coordinating different kinds of skills
across departments and professions. One of the first major uses of project management was to
handle the US space programmed, and governments, military organizations, and the corporate
world have all since adopted the discipline.
Although the term is now universally familiar, not very many people fully understand exactly
what project management involves. We tend to think of it as common sense, and that anyone can
manage anything by being calm and well-organized. These are qualities that a project manager
definitely needs, but other things are essential too. Project management is, in fact, a structured
way of working and recording events that can bring order and coherence to any set of tasks with
a predetermined goal. This action list sketches the outlines of that structure.
Project
Organizations perform work and work generally involves either operations or projects, although
the two may overlap on each other. The characteristics of operations and projects are:
Both are performed by people.
Both have constrained by limited resources.
Both need to be planned, executed, and controlled.
Projects are often implemented as a means of achieving an organizations strategic plan.
Operations and projects differ primarily in that as operations are ongoing and repetitive while
projects are temporary and unique. A project can thus be defined in terms of its distinctive
characteristic as a project is a temporary endeavor undertaken to create a unique product or
7
service. Where temporary means that every project has a definite beginning and a definite end
and unique means that the product or service is different in some distinguishing way from all
other products or services. For many organizations, projects are a means to respond to those
requests that cannot be addressed within the organizations normal operational limits.
Projects are undertaken at all levels of the organization. They may involve a single person or
many thousands. Their duration ranges from a few weeks to more than five years. Projects may
involve a single unit of one organization or may cross organizational boundaries, as in joint
ventures and partnering. Projects are critical to the realization of the performing organizations
business strategy because projects are a means by which strategy is implemented. A project may
be anything like:
Developing a new product or service
Effecting a change in structure, staffing, or style of an organization
Designing a new transportation vehicle
Developing or acquiring a new or modified information system
Constructing a building or facility
Building a water system for a community in a developing country
Running a campaign for political office
Implementing a new business procedure or process
Project management means managing a project. But what does that project means, and why did
project management become a separate branch of study. First study what the project means, a
project is a temporary process, which has a clearly defined start and end time, a set of tasks, and
a budget, that is developed to accomplish a well-defined goal or objective.
A project is initiated by a person or group who realizes that a specific problem needs resolution.
When the problem is defined, an initial concept is developed around potential solutions. Once the
project concept is defined, then a complete project plan can be developed. It is the execution of a
well developed project plan which then leads to project success.
A project is a specific, finite task to be accomplished. Whether large or small scale or whether
long or short run is not particularly relevant.
A project is synthesizing predetermined amounts of the resources of an organization in designing
and executing its strategies that will assist the organization in designing and executing strategies.
A commercial project involves the following key considerations:
(i). What is the cost of monetary project?
(ii). What is the time required?
(iii). What are the capabilities that it provides to the organization?
(iv). Whether it will fit into the strategies of the organization?
Temporary Project
Temporary means that every project has a definite beginning and a definite end. The end is
reached when the projects objectives have been achieved, or when it becomes clear that the
project objectives will not or cannot be met, or the need for the project no longer exists and the
project is terminated. Temporary does not necessarily mean short in duration; many projects last
for several years. In every case, however, the duration of a project is finite; projects are not
ongoing efforts. In addition, temporary does not generally apply to the product or service created
by the project. Projects may often have intended and unintended social, economic, and
environmental impacts that far outlast the projects themselves. Most projects are undertaken to
create a lasting result. For example, a project to erect a national monument will create a result
expected to last centuries. A series of projects and/or complementary projects in parallel may be
required to achieve a strategic objective.
The objectives of projects and operations are fundamentally different. The objective of a project
is to attain the objective and close the project. The objective of an ongoing non projectized
operation is normally to sustain the business. Projects are fundamentally different because the
project ceases when its declared objectives have been attained, while non project undertakings
adopt a new set of objectives and continue to work.
The temporary nature of projects may apply to other aspects of the endeavor as well:
The opportunity or market window is usually temporarymost projects have a limited time
frame in which to produce their product or service.
The project team, as a team, seldom outlives the projectmost projects are performed by a team
created for the sole purpose of performing the project, and the team is disbanded when the
project is complete.
A project is considered to be a temporary process because once the end goal is achieved, the
project is complete. For this reason, the end point of a project needs to be defined at the very
beginning of the project to ensure successful completion. The reason why some projects never
end is because no one ever defined what constitutes completion of a project.
The basic questions for defining success criteria are:
Why are we doing this project?
What do we hope to change?
How will we measure success?
Criteria for project success are quantifiable and measurable, and are expressed in terms of
business value.
Well-Defined Goals - Projects require well-defined goals to determine project completion.
Without well-defined goals and objectives, a project lacks purpose.
Project Constraints - All projects have constraints and these need to be defined from the onset.
Projects have resource limits in terms of people, money, time, and equipment. While these may
be adjusted, they are considered fixed resources by the project manager. These constraints form
the basis for planning the project.
Various other definitions of a Project:
A project is a complex of non-routine activities that must be completed with a set amount of
resources and within a set interval.
-Clifford Gray
A project is a specific activity which uses resources to gain benefits; it has a specific starting
point and ending point intended to accomplish a specific objective. It is measurable both in its
major costs and returns.
- J. Price Gittinger
A Project is a temporary endeavor undertaken to create a unique product or service.
-Project Management Institute
A project is a group of unique, inter-related activities (elements of work performed) that are
planned and executed in a sequence to create a unique product or service, within a specified time
frame, budget and clients specifications.
A project is a unique set of coordinated activities, with definite starting and finishing points,
under taken by an individual or organization to meet specific objectives within the defined
schedule, cost and performance parameters.
Examples of some projects:
1. Construction of a Dam for better irrigation facilities
2. Construction of National Highway
3. Conducting Afro-Asian Games
Nature and Distinctive Characteristics of Projects
Nature:
1. Projects differ from stereotyped business activities and they are unique.
2. Each project is different in itself.
3. Projects are not homogeneous however similar they may be.
4. Two projects cannot be compared.
5. To perform unique tasks, organizations adopt project approach.
Characteristics
1. Unique Activities: The projects are generally unique and do not repeat. However, there
can be some variability in design, completion period, etc. For example, Ship Building is
an unique project.
2. Specific Goals: Project undertakes different tasks to attain different specific goals. Every
project is goal-oriented.
3. Sequence of activities: A project follows particular sequence to deliver the end product.
4. Specified Time: All projects will have a specified time for completion i.e. both starting
and ending points.
5. Inter-related Activities: Most of the projects will have technically inter-related
activities viz. input-output-input-output (e.g. Hotel, Hospital, etc.).
Distinctive Characteristics:
Specific and clear objectives as to time, budget, quality, etc.
Temporary establishment
10
Insurmountable funds.
Time-bound
Entangled with collaborating groups
Focus on risk and uncertainty
The above properties determine the concept of project management, which is considered
as the task of directing unique and novel undertakings.
11
INFLUENCED BY
2. Cost
3. Resources
DEPENDS UPON
PROJECT
Success of a Project
Dynamic System
(Project) in
Equilibrium.
MANAGERS ABILITY
TO KEEP
RESOURCE
ALLOCATION
COST
Scope Triangle
Project
Characteristics
Time Span
Risk Level
Complexity
Level
Technology
Probability
Problems
3 to 9 months
Low
3 months
less
Very Low
High
Medium
Low
Very Low
Break Through
Contemporary
Best
Practical
10% (Low)
No Risk
or
12
A project includes all activities to complete a given job. A program is defined as an ongoing
operation indefinitely. It has a great scope and has longer duration than a project. A project is a
part of program, which can be put into the business as quickly as possible. It is a Group of
Projects managed in a co-coordinated way to obtain benefits not available from managing them
individually.
All projects do not involve the same level of managerial skills, costs, technology, or complexity.
The projects can be grouped by taking the degree of uncertainty and system complexity or scope.
Degree of uncertainty ranges from low to high. It is subdivided as Low-tech, medium-tech, hightech, and super-tech. based on system complexity a project and array project. Assembly projects
have low complexity whereas Array projects have high complexity.
(Degree of Uncertainty)
Super-Tech
High-Tech
New shrinkwrappedsoftware
Medium-Tech
Low-Tech
Advanced radar
Construction
Auto repair
Projects
Assembly Projects
System Project
Array Project
13
14
15
With increasing competition in market nature of the market changes continuously. Technological
changes are taking place rapidly and values and behavior of consumers are virtually in a state of
flux.
Organization reputation
If failure in completing the project on time is likely to damage the reputation of organization
substantially, a project management should be seriously considered. An organizations financial
position may be seriously damaged if penalties entail failure to deliver on time.
Implementing a new computerized baking system
PM Includes
1. Developing a Project Plan (Project Goals, How they will be accomplished)
2. Specifying how goals will be accomplished
3. Specifying what resources are needed
4. Relating budgets & time for completion
PM disciplines are:
1. Finance [Financial Statements, Cost of the Project, etc.]
2. Personnel [Selecting Skilled Personnel, Project Manager, Project Team, etc.]
3. Purchases & Logistics
4. R& D [New Product Development & Quality Assurance]
5. Marketing [Marketing Project Idea to Sponsors]
6. Operations [Managing Activities/Operations]
16
Project Manager should exercise judicious control over resources (money, manpower,
machinery, facilities, materials, technology & information) allocated to project by various
functional departments.
Benefits of Project Management
Major Benefits:
1. Provides techniques for trade-off between conflicting goals & enterprise priorities.
2. Better control of project.
3. Better co-ordination.
4. Reduces developmental time
5. Lowers cost
6. High order results.
Other Benefits:
1. Clear description of work.
2. Identification of responsibilities & assignments for specific tasks. & activities
3. Tracking of functional responsibilities.
5. Easy specification of time limits for task completion.
6. Problems are exposed in advance.
7. Improved skills for future planning.
8. Objectives which cannot be met or exceeded can be identified easily.
9. Measurement of accomplishment against plans is enabled.
17
18
Each project phase normally includes a set of defined deliverables designed to establish the
desired level of management control. The majority of these items are related to the primary phase
deliverable, and the phases typically take their names from these items: requirements, design,
build, test, startup, turnover, and others, as appropriate.
The project life cycle serves to define the beginning and the end of a project. For example, when
an organization identifies an opportunity to which it would like to respond, it will often authorize
a needs assessment and/or a feasibility study to decide if it should undertake a project. The
project life-cycle definition will determine whether the feasibility study is treated as the first
project phase or as a separate, standalone project.
The project life-cycle definition will also determine which transitional actions at the beginning
and the end of the project are included and which are not. In this manner, the project life-cycle
definition can be used to link the project to the ongoing operations of the performing
organization.
The phase sequence defined by most project life cycles generally involves some form of
technology transfer or handoff such as requirements to design, construction to operations, or
design to manufacturing. Deliverables from the preceding phase are usually approved before
work starts on the next phase. However, a subsequent phase is sometimes begun prior to
approval of the previous phase deliverables when the risks involved are deemed acceptable. This
practice of overlapping phases is often called fast tracking.
Project life cycles generally define:
_ What technical work should be done in each phase (e.g., is the work of the architect part of the
definition phase or part of the execution phase?).
_ Who should be involved in each phase (e.g., implementers who need to be involved with
requirements and design).
Project life-cycle descriptions may be very general or very detailed. Highly detailed descriptions
may have numerous forms, charts, and checklists to provide structure and consistency. Such
detailed approaches are often called project management methodologies.
Most project life-cycle descriptions share a number of common characteristics:
_ Cost and staffing levels are low at the start, higher toward the end, and drop rapidly as the
project draws to a conclusion.
_ The probability of successfully completing the project is lowest, and hence risk and uncertainty
are highest, at the start of the project. The probability of successful completion generally gets
progressively higher as the project continues.
_ The ability of the stakeholders to influence the final characteristics of the projects product and
the final cost of the project is highest at the start and gets progressively lower as the project
continues. A major contributor to this phenomenon is that the cost of changes and error
correction generally increases as the project continues.
Care should be taken to distinguish the project life cycle from the product life cycle. For
example, a project undertaken to bring a new desktop computer to market is but one phase or
stage of the product life cycle.
19
Although many project life cycles have similar phase names with similar deliverables required,
few are identical. Most have four or five phases, but some have nine or more. Even within a
single application area, there can be significant variations
one organizations software development life cycle may have a single design phase while
anothers has separate phases for functional and detail design.
Subprojects within projects may also have distinct project life cycles. For example, an
architectural firm hired to design a new office building is first involved in the owners definition
phase when doing the design, and in the owners implementation phase when supporting the
construction effort. The architects design project, however, will have its own series of phases
from conceptual development through definition and implementation to closure. The architect
may even treat designing the facility and supporting the construction as separate projects with
their own distinct phases.
Project life cycle can be divided into phases. These phases correspond with changes in the level
of activity or effort put into the project and uncertainty regarding the final outcome of the
project.
Phase I: Conception & Selection
Phase II: Planning & Scheduling
Phase III: Implementation, Monitoring & Control
Phase IV: Evaluation & Termination
The level of activity, in any project, starts at a low level and then rises slowly. In conception &
selection phase, before it is decided whether or not something is a worthwhile idea or which of
the several alternative ideas should be proceeded with, the activity is naturally low and is
confined to conducting feasibility studies, estimating revenues and costs, etc. In this phase
amount spent is also low, as the number of employees working on it.
The functions to be performed by the project manager or the team working on the project are:1. Identifying a need for a project
2. Establishing goals to be achieved by the project
3. Estimating the amount that the firm will have to commit for the project.
20
4. Presenting the project idea or various alternative ideas to the management and get their
approval.
Once selection of project and its approval by the management are through, the project enters in
the second phase. This next phase is actual implementation phase. Planning includes deciding on
what are the activities to be undertaken for implementing the project, while scheduling is fixing
timing frames for the activities. The level of activity and also the project cost rise sharply in
during this phase.
The functions to be carried out in this phase are:
1. Set-up a technical team to decide on how the project can be implemented.
2. Plan for the requirements of resources
3. Prepare a schedule keeping in view the completion date.
The next phase is the actual implementation of the project, and monitoring and controlling the
implementation. The project cost reaches its peak during this stage, as also the level of activity.
The project manager is highly concerned about the costs and does not bother much about the
schedule at the beginning. Concentration on the performance also continues. The major functions
that are to be carried out in this phase are:
21
1. Procurement of material
2. Tools building & testing
3. Support system development
4. Producing the aimed system
5. Evaluating the standard of performance
6. Modifying the performance to suit the requirement of client
Towards the end of this phase the focus of the project manager generally changes to meeting the
schedule than cost or performance.
Final phase is to evaluate what has been done, and hand it over to either the client or the in-house
operational staff. This marks the end of the project management. In this phase activity level
decline steeply and reach to zero. Following are the functions that are carried out in this stage
are:1. Training to operational staff
2. Transfer of material
3. Transfer of responsibilities
4. Releasing surplus resources
5. Releasing the project staff for next assignment
22
Risk in Projects
Risk is inherent in all projects. In project management terms, risk refers to an uncertain event
or condition that has a cause and, that if it occurs, has a positive or negative effect on a projects
objectives, and a consequence on project cost, schedule or quality. For example: the cause of a
risk may be requiring a classroom with networked computers for the learners in a skills
development project. The risk event is that Internet connection is delayed and the classroom is
not available for the anticipated start date. This affects the objective of offering computer literacy
23
training to underemployed adults, with the consequence to rent another facility or delay project
activities.
Naturally, it is preferable to maximize the probability and consequences of positive events and
minimize the probability and consequences of events adverse to the project objectives. A risk
response plan can help the project. It identifies the risks that might affect the project, determines
their effect on the project and includes agreed-upon responses for each risk.
The Risk Management Strategy
Identifying Risks:
The first step in creating a risk response plan is to identify risks which might affect the project.
The project manager, key staff and project partners should brainstorm referring to the project
charter, calendar of activities schedule and budget to identify potential risks. Those involved in
the project can often identify risks on the basis of experience. Published information resources
are also available that identify risks for many application areas.
Common sources of risk in community learning initiatives include:
Technical risks such as unproven technology
Project management risks such as a poor allocation of time or resources
Organizational risks such as resource conflicts with other activities
External risks such as changing priorities in partner organizations
Developing Risk Response Strategies:
One cannot prepare for or mitigate all possible risks, but risks with high probability and high
impact are likely to merit immediate action. The effectiveness of planning determines whether
risk increases or decreases for the projects objectives. Several risk response strategies are
available:
Avoidance changing the project plan to eliminate the risk or protect the objectives from its
impact. An example of avoidance is using a familiar technology instead of an innovative one.
Transference shifting the management and consequence of the risk to a third party. Risk
transfer almost always involves payment of a premium to the party taking on the risk. An
example of transference is using a fixed price contract for a consultants services.
Mitigation reducing the probability and/or consequences of an adverse risk event to an
acceptable threshold. Taking early action is more effective than trying to repair the consequences
after it has occurred. An example of mitigation is seeking additional project partners to increase
the financial resources of the project.
Acceptance deciding not to change the project plan to deal with a risk.
Passive acceptance requires no action. Active acceptance may include developing contingency
plans for action should the risk occur. An example of active acceptance is creating a list of
eligible instructors that can be called upon if last minute replacements are needed for your
project.
Since not all risks will be evident at the outset of the project, periodic risk reviews should be
scheduled at project team meetings. Risks that do occur should be documented, along with their
responses. The lessons learned may be useful to others or on future projects.
Project Constraints and Success
All projects have constraints and these need to be identified at the beginning of the project.
Projects have resource limits in terms of people, money, time and equipment. Constraints may be
adjusted up or down as the project dictates but they are considered fixed resources by a project
24
manager. These constraints form the basis for managing the project and are discussed throughout
this methodology.
Well defined goals will ensure a successful project. The basic criteria for defining project
success can be found by answering, "Why are we doing this project?". Criteria for project
success are quantifiable, measurable, and expressed in terms of business value metrics. They
include:
Customer.
Project (containing a purpose or an objective).
Scope.
Deliverables.
Start and End Dates.
Sponsor.
Identified Resources.
Project Manager.
Components to Project Success:
There are three main component questions that need to be answered to ensure the success of
projects. They are:
1. Does the product/system meet the predefined business needs and goals? This includes business
objectives of cost reduction, increased revenues, better customer service, improved productivity,
etc.
2. Does the completed project match the requirements document?
3. Was the project completed as defined by scope, on time, and on budget?
Project Phases All projects are unique and take on a different form that presents many degrees of
uncertainty. Managing these projects dictate that organizations divide them into manageable
pieces called project phases. Collectively these phases are known as the project life cycle. The
project life cycle methodology is divided into five project phases that are listed below:
1. Initiation - This phase defines and organizes the project. Project justification is outlined in this
phase.
2. Planning - In this phase, a workable project plan is developed that will accomplish the project.
3. Execution - Coordinating and allocating resources and people take place in this phase.
4. Control - Throughout all phases of the project, objectives are monitored and measurements of
project progress are computed. If variances are discovered, corrective actions are initiated to
overcome the problems. Open communication among all project team members is needed in all
phases of the project for success, but in this phase it is imperative.
5. Closeout - This phase formalizes acceptance of the project or product with the customer and
documents lessons learned.
Iterative Process: Project management is an iterative process where the beginning of one phase
often overlaps the ending of another phase. In some instances, phases may be repeated
throughout the life cycle of the project. Phases may be performed sequentially or simultaneously.
For example, planning, execution and control may all be performed in parallel as changes are
made to the project baseline.
25
Included in the project phases are nine knowledge areas. The knowledge areas are integrated in
all phases throughout the project. These tools enable the Project Manger to ensure all projects are
conducted in the most organized, efficient manner. They are:
1. Integration Management - Includes the processes required to ensure that various elements of
the project are properly coordinated.
2. Scope Management - Includes the processes required to ensure that the project includes all the
work required, without additional and unnecessary work, to complete the project successfully.
3. Time Management - Includes the processes required to ensure timely completion of the
project.
4. Cost Management - Includes the processes required to ensure that the project is completed
within the approved budget.
5. Quality Management - Includes the process required to ensure that the project will satisfy the
needs for which it was undertaken.
6. Human Resource Management - Includes the processes required to make the most effective
use of people involved in the project.
7. Communications Management - Includes the processes required to ensure timely and
appropriate generation, collection, dissemination, storage, and ultimate disposition of project
information.
8. Risk Management - Is the systematic process of identifying, analyzing, and responding to the
project task.
9. Procurement Management - Includes the processes required to acquire the goods and services
to attain project scope from outside the performing organization.
The relationship between the five project management phases and the nine knowledge areas are
depicted in the Figure shown below:
26
27
can be divided into divisions, in such a way that each divisions contribution to the achievement
of the strategic objectives of the organization can be identified and measured.
Extent of Central Control
Low
High
Low
Free
Formula
Need for Change
Bargaining
High
Open
Competition
Imposed
Priorities
The pattern of allocation of resources in general depends on two factors: the need for a change in
the existing patterns of allocation in the perception of the management and how centralized the
decision making process is. In addition, it also depends on whether the resources of the
organization are growing or declining and whether a change is called for in the overall resources
and their pattern of deployment. Let us now discuss how resource allocation takes place in
different situations:
(a) Growth in the Resources: When the resources are increasing it is easy to bring about a change
in their relative distribution. It can be achieved by simply directing fresh inflows to the areas
where they are required. An alternative method is to have a central pool of funds and make
allocations from the pool. When there is growth in the resources and central control is strong,
allocation is generally imposed by the center. On the other hand, it may be done by competitive
bidding by the divisions whichever division offers highest productivity will get the funds first.
If the need for change in the present pattern of allocation is not felt strongly, the allocation is
made based on a predetermined formula or on the existing pattern. If the central control is not
strong enough, then funds will be allocated by free bargaining between the divisions and the
center.
(b) Decline in the Resources: When there is a declining trend in the resources available, no
organization can allow resource allocation based on a formula or free bargaining. Allocation is
made either by centrally imposed priorities or competitive bidding. There are two interesting
techniques that are commonly followed in such circumstances. First is amalgamation of one or
more divisions. Savings in resources made by the amalgamation of two or more hitherto separate
divisions, including the surplus staff, are put into the new venture proposed. Second is to reduce
the resources of all other units a little. The total of the amount reduced is pooled and invested in
a separate unit. If the objective is to provide resources to one of the units, the newly created unit
will be eventually merged with the other unit. Otherwise, the new unit continues to be separate.
29
(c) Few changes in Resources: If the organization feels that new investments to be made do not
call for a change in the overall pattern of allocation of resources, the allocation will again be
based on either a formula or free bargaining. The formula method, generally, does not satisfy all
the divisions. Objections may be raised about the validity and also the fairness of the formula.
The other extreme of a formula is free bargaining, where the allocation to each unit is started at
zero and increased based on its requirements. In practice, many organizations follow a middle
path. The allocations are first made based on a formula and then adjustments are made to the
allocations through free bargaining.
(ii) Resource Allocation at the Department Level: If resources are allocated to different
departments of an organization based on formula, then the units have to think of the best ways to
deploy them. If allocation is based on open competition or free bargaining, units will have to be
ready with their investment plans. In small organizations where there is only one unit, there is
only one level of allocation. But, whatever may be the levels of allocation, the investment needs
of a department depend on two factors: one, whether it can identify investment opportunities
from its environment and two, whether it has the strategic abilities to take up the opportunities.
Analysis of its strategic abilities itself may often lead the unit to the identification of areas where
it can invest and where it should not. Identifying investment alternatives can be described in two
steps:1. Environment analysis
2. Strategic capabilities analysis
Environment Analysis:
Various techniques are used to analyze the various components or factors in the environment.
Pest and Porters five forces model is the best to analyze environment.
PEST Analysis:
Environment is divided into four components;
1.
2.
3.
4.
Political factors
Economic factor
Socio-cultural factor
Technological factor
Porters Model: The Porter's 5 Forces tool is a simple but powerful tool for understanding
where power lies in a business situation. This is useful, because it helps you understand both the
strength of your current competitive position, and the strength of a position you're looking to
move into.
With a clear understanding of where power lies, you can take fair advantage of a situation
of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an
important part of your planning toolkit.
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Conventionally, the tool is used to identify whether new products, services or businesses have
the potential to be profitable. However it can be very illuminating when used to understand the
balance of power in other situations too.
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depicted in the diagram is the same as added value. The organization is split into 'primary
activities' and 'support activities.'
Primary Activities
Inbound Logistics
Here goods are received from a company's suppliers. They are stored until they are needed on
the production/assembly line. Goods are moved around the organisation.
Operations
This is where goods are manufactured or assembled. Individual operations could include room
service in a hotel, packing of books/videos/games by an online retailer, or the final tune for a
new car's engine.
Outbound Logistics
The goods are now finished, and they need to be sent along the supply chain to wholesalers,
retailers or the final consumer.
Marketing and Sales
In true customer orientated fashion, at this stage the organisation prepares the offering to meet
the needs of targeted customers. This area focuses strongly upon marketing communications
and the promotions mix.
Service
This includes all areas of service such as installation, after-sales service, complaints handling,
training and so on.
Support Activities
Procurement
This function is responsible for all purchasing of goods, services and materials. The aim is to
secure the lowest possible price for purchases of the highest possible quality. They will be
responsible for outsourcing (components or operations that would normally be done in-house
are done by other organisations), and ePurchasing (using IT and web-based technologies to
achieve procurement aims).
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Technology Development
Technology is an important source of competitive advantage. Companies need to innovate to
reduce costs and to protect and sustain competitive advantage. This could include production
technology, Internet marketing activities, lean manufacturing, Customer Relationship
Management (CRM), and many other technological developments.
Human Resource Management (HRM)
Employees are an expensive and vital resource. An organisation would manage recruitment and
s election, training and development, and rewards and remuneration. The mission and objectives
of the organisation would be driving force behind the HRM strategy.
Firm Infrastructure
This activity includes and is driven by corporate or strategic planning. It includes the
Management Information System (MIS), and other mechanisms for planning and control such
as the accounting department.
The value chain system of analysis encourages the firm to take a critical look at the various
activities of it. However, it is also necessary to study how the value system of the firm has
evolved over the years and why the firm has chosen to allocate its resources in a particular
manner and not in any other manner. Analysis of past resource base is done in three ways as,
study of the changes in resource base and its deployment over the past; comparison of the
performance of the firm with performance of industry; comparison with the best practice outside
the industry.
Assessment of the balance of resources
Following are the factors which need to discuss when study that aspect:
1. Whether the activities carried out by the various business units are complementary to
each other or not (Portfolio Analysis).
2. Stock of skill is well balanced or not
3. Resources are flexible and adaptable to future needs or not.
Portfolio Analysis
The BCG matrix (aka B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston
Consulting Group analysis) is a chart that had been created by Bruce Henderson for the Boston
Consulting Group in 1970 to help corporations with analyzing their business units or product
lines. This helps the company allocate resources and is used as an analytical tool in brand
marketing, product management, strategic management, and portfolio analysis.
Cash cows are units with high market share in a slow-growing industry. These units
typically generate cash in excess of the amount of cash needed to maintain the business. They
are regarded as staid and boring, in a "mature" market, and every corporation would be
thrilled to own as many as possible. They are to be "milked" continuously with as little
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investment as possible, since such investment would be wasted in an industry with low
growth.
Dogs, or more charitably called pets, are units with low market share in a mature, slowgrowing industry. These units typically "break even", generating barely enough cash to
maintain the business's market share. Though owning a break-even unit provides the social
benefit of providing jobs and possible synergies that assist other business units, from an
accounting point of view such a unit is worthless, not generating cash for the company. They
depress a profitable company's return on assets ratio, used by many investors to judge how
well a company is being managed. Dogs, it is thought, should be sold off.
Question marks (also known as problem child) are growing rapidly and thus consume
large amounts of cash, but because they have low market shares they do not generate much
cash. The result is large net cash consumption. A question mark has the potential to gain
market share and become a star, and eventually a cash cow when the market growth slows. If
the question mark does not succeed in becoming the market leader, then after perhaps years
of cash consumption it will degenerate into a dog when the market growth declines. Question
marks must be analyzed carefully in order to determine whether they are worth the
investment required to grow market share.
Stars are units with a high market share in a fast-growing industry. The hope is
that stars become the next cash cows. Sustaining the business unit's market leadership may
require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader.
When growth slows, stars become cash cows if they have been able to maintain their
category leadership, or they move from brief stardom to dogdom.
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Flexibility Analysis
The resources available with the organization should be flexible enough to enable it to modify its
strategy in the face of any uncertainty.
Now we know how to analyze the activities, resources, environment, etc. which provide firms
with an idea of their areas of strength, and activities in which they can make investment.
However, it is not necessary that investment opportunities be identifies only through the methods
described in earlier sections. The idea that an investment opportunity is present in a given
situation may occur to an entrepreneur in any of the following ways as well:
1. Study of the inputs and outputs of various industries- if the input used by the industries in
any area are being transported from long distances, they can be produced locally.
2. Import substitution- Items that are now being imported, if the level of consumption is
high enough, can be produced in domestic market. Similarly, items that are in use in other
countries, but not known in the domestic market can also be produced locally.
3. Reports of studies conducted by intuitions- Financial institutions carry out studies on
various industries. Such studies also help in identifying opportunities.
4. Revival of sick industries- There are many other methods in which one can get ideas or
opportunities. Their number is limited only by the creativity of person wanting the
opportunity. It is only the person with a creative mind that can identify opportunity or
mould a situation into a opportunity for himself.
B. Generation of Project ideas
This is possible through creativity, which is the ability to combine, or synthesize the available
information and experience to generate new project ideas. The two types of creativity are:
Individual Creativity and Group Creativity.
Individual Creativity:
1. Attribute Listing (Listing of attributes attached to the final products and
designing the products based on these attributes).
2. Checklist (Checklist of questions to be prepared and trying to find solutions to
the same).
3. Black Box (Available and required inputs as well as desired outputs are listed and
an attempt is made to envision how the outputs are possible from the inputs).
4. Directed Dreaming (The problem solver tries to go to sleep while thinking of the
problems, with the hope that the subconscious will through up a solution).
Group Creativity:
1. Brainstorming (A group sitting together and go on generating solutions to the
problems on hand, welcoming improvement of ideas and synthesizing two or
more ideas).
2. Delphi (Estimates are called from a panel of experts, who are not allowed to meet
and discuss or debate each others opinions. Individual experts are asked to give
their opinions independently. A panel of coordinators reconciles after second
round of opinions and consensus).
3. Nominal Group Technique (It is a structured technique administered by a
coordinator based on the 5 steps: Silent idea generation, Round-robin
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Project Identification
The key feature of this activity is recognizing that identifying candidate projects is something
that an organization should do on a regular basis, not just once each year. Further, when
examining projects for approval, it is vital to also examine the resource capacities and
capabilities available for assignment. It is futile to assign a major new project requiring extensive
discovery of business requirements if no business analysts are available.
Project Identification precedes Project Initiation.
Process Description
Project Identification is a repeatable process for documenting, validating, ranking and approving
candidate projects within an organization.
Process Purpose
Due to the changing financial conditions within the total organization, it is necessary to establish
a stable process for approving projects for initiation. This process will
Validate the business reason for each candidate project.
Provide the base information for more informed financial commitments to projects.
Establish a more objective ranking of candidate projects.
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37
Rank Candidate Projects When requested, all Candidate Projects that are in the
repository should be objectively ranked in order of significance. The ranking criteria
should include
1. Target due dates
2. Impact on the total business
3. Impact on the technology architecture
4. Impact on other applications
5. Project size, cost and duration
6. Project risk
It will be helpful to rank projects against each of these criteria separately and then
compile a single ranking that weights each of these criteria against each other. This
ranking process is typically used to feed quarterly budget decisions but may be requested
at any time.
Evaluate Resources An updated Skills Inventory should be maintained for all corporate
(Business Unit and Information Technology Department) resources that are available for
project assignment.
Additionally, an inventory of available contract resources should also be captured. The
purpose of this Skills Inventory is to understand the true capabilities and capacities of
these resources.
Determine Resource Needs By evaluating the Skills Inventory and the Candidate
Project repository, this process will identify anticipated requirements for quantities and
capabilities of future resources. This information will provide
1. The identification of critical training needs
2. A basis for employment opportunities
3. Criteria for contract personal
This process should be reviewed on a regular basis by Resource Managers within the
organization and can be used for staff career counseling.
Approve Project
1. Select Project Based on the information provided by the ranking process, the
Core Process Owners of the business will authorize a specific project for
initiation. This project should now be removed as a Candidate Project.
2. Assign Resources Even though a project has been selected, it does not become an
active project until resources are approved and deployed against it. It is critical
to remember that when resources are assigned from the Skills Inventory, this
deployment has a proportionate impact on the resources availability. The
organization must be very careful to not over-commit limited resources in an
attempt to look more productive.
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39
are ready to pay money for their logos on the uniform of the cricketers. Money can be generated
through the advertising hoardings on the ground boundary. There is no doubt that
commercialization and glamour will draw more and more cricket spectators to the stadium to
watch their favorite cricketers in action as well as beautiful girls or cheer leaders.
CONCLUSION: After going through all these aspects we can conclude that building a cricket
stadium outside the megacity will be beneficial project not to the cricket lovers only but as a
profit making business also.
PROJECT DEVELOPMENT PROCESS
From conceptualization to implementation the stages in the development of construction project
(here cricket stadium) fall into broadly consistent patterns but time and degree of emphasis each
project takes on its own a unique character.
An idea of a project passes through six phases before it become a reality:
- Conceptualization
- Engineering and design
- Procurement
- Construction
- Commissioning
- Operation and maintenance
PROJECT MANAGEMENT ORGANIZATION
Generally, project management is distinguished from the general management of corporations by
the mission-oriented nature of a project. A project organization will generally be terminated
when the mission is accomplished. According to the Project Management Institute, the discipline
of project management can be defined as follows:
Project management is the art of directing and coordinating human and material resources
throughout the life of a project by using modern management techniques to achieve
predetermined objectives of scope, cost, time, quality and participation satisfaction.
By contrast, the general management of business and industrial corporations assumes a broader
outlook with greater continuity of operations. Nevertheless, there are sufficient similarities as
well as differences between the two so that modern management techniques developed for
general management may be adapted for project management.
The basic ingredients for a project management framework may be represented schematically in
Figure -1. A working knowledge of general management and familiarity with the special
knowledge domain related to the project are indispensable.
Supporting disciplines such as computer science and decision science may also play an important
role. The representation in Figure -1 reflects only the sources from which the project
management framework evolves.
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41
4. Project cost management to identify needed resources and maintain budget control.
5. Project quality management to ensure functional requirements are met.
6. Project human resource management to development and effectively employ project
personnel.
7. Project communications management to ensure effective internal and external
communications.
8. Project risk management to analyze and mitigate potential risks.
9. Project procurement management to obtain necessary resources from external sources.
PROJECT PLANNING AND CONTROL
Planning is the basic function of the management. Planning is concerned with how and when to
achieve the predetermined objectives. Planning sets all other functions of management viz.
organizing, staffing, directing, motivating, coordinating etc. The main objectives of planning are
listed below:
i. Analysis
ii. Anticipation
iii. Scheduling resources
iv. Co-ordination and control
v. Production of data
All effectively managed projects involve the preparation of the project plan. This is the
Fundamental document that spells out what is to be achieved, how it is to be achieved, and what
resources will be necessary. In Projects and Trends in the 1990s and the 21st Century, author
Jolyon Hallows says, "The basic project document is the project plan. The project lives and
breathes and changes as the project progresses or fails." The basic components of the project,
according to Hallows, are laid out in the figure below.
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"With the plan as a road map, telling us how to get from one point to another," says Hallows, " a
good project manager recognizes from the outset that a project plan is far more than an academic
exercise or tool for appeasing upper management. It is the blueprint for the entire scope of the
project, a vital document which is referred to frequently, often updated on-the-fly, and something
without which the project manager cannot proceed."
CONTROL OF PROGRESS ON SITE
Without control planning loses much of its value. It must be applied continuously to update the
plans and to enable reconsideration of the workload in the light of what has already taken place.
Control involves comparing the actual achievement with the plans. If a programme is to be really
effective as a control document, it must represent time and quantity of work carried out.
Progress can be recorded on planning charts that clearly indicate what is happening and where
corrective action needs to be taken. Weekly and monthly meetings are invaluable in helping to
control progress. The action necessary for correcting underproduction will be considered and the
best solution will then be incorporated into the programme for the next period.
PROJECT WORK BREAKDOWN work within each phase to identify the events or tasks, and
their associated subtasks. Define everything that needs to be done; this is called the work
breakdown structure.
The Work Breakdown Structure (WBS)
The WBS has become synonymous with a task list. The simplest form of WBS is the outline,
although it can also appear as a tree diagram or other chart. Sticking with the outline, the WBS
lists each task, each associated subtask, milestones, and deliverables. The WBS can be used to
plot assignments and schedules and to maintain focus on the budget.
COSTING ACTIVITY
Cost estimating is one of the most important steps in project management. A cost estimate
establishes the base line of the project cost at different stages of development of the project. A
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cost estimate at a given stage of project development represents a prediction provided by the cost
engineer or estimator on the basis of available data. According to the American Association of
Cost Engineers, cost engineering is defined as that area of engineering practice where
engineering judgment and experience are utilized in the application of scientific principles and
techniques to the problem of cost estimation, cost control and profitability.
The costs of a constructed facility to the owner include both the initial capital cost and the
subsequent operation and maintenance costs. Each of these major cost categories consists of a
number of cost components.
The capital cost for a construction project includes the expenses related to the initial
establishment of the facility:
Land acquisition, including assembly, holding and improvement
Planning and feasibility studies
Architectural and engineering design
Construction, including materials, equipment and labor
Field supervision of construction
Construction financing
Insurance and taxes during construction
Owner's general office overhead
Equipment and furnishings not included in construction
Inspection and testing
The operation and maintenance cost in subsequent years over the project life cycle includes the
following expenses:
Land rent, if applicable
Operating staff
Labor and material for maintenance and repairs
Periodic renovations
Insurance and taxes
Financing costs
Utilities
Owner's other expenses
COST OF PROJECT:
Capacity of spectators = 80000
Time limit =16 months
Average cost of ticket =Rs.100
Per year matches = 4
Assuming One match average spectators = 60000
Earning from match tickets = Rs.100 x 60000 =Rs. 6000000
Per year earning through matches = Rs.6000000 x 4 = Rs.24000000
In 5 years earning through matches = Rs.24000000 x 5 = Rs. 120000000
Say the built up area for the stadium = 20000 Sqm
Cost of construction per Sqm = Rs.6000
Therefore, Total cost of construction = 20000 x Rs. 6000 =Rs.120000000
This cost will be covered in 5 years exactly.
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(Note: Other income from the broadcasting rights to the TV channels, hoarding advertising, fees
from sponsors etc.will be different than this ticket income.)
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screen menu, reading an existing datafile, or typing data directly to the program with identifiers
for the type of information being provided.
With an activity-on-branch network, dummy activities may be introduced for the purposes of
providing unique activity designations and maintaining the correct sequence of activities. A
dummy activity is assumed to have no time duration and can be graphically represented by a
dashed line in a network. Several cases in which dummy activities are useful are illustrated in
Fig. 10-1. In Fig. 10-1(a), the elimination of activity C would mean that both activities B and D
would be identified as being between nodes 1 and 3. However, if a dummy activity X is
introduced, as shown in part (b) of the figure, the unique designations for activity B (node 1 to 2)
and D (node 1 to 3) will be preserved. Furthermore, if the problem in part (a) is changed so that
activity E cannot start until both C and D are completed but that F can start after D alone is
completed, the order in the new sequence can be indicated by the addition of a dummy activity
Y, as shown in part (c). In general, dummy activities may be necessary to meet the requirements
of specific computer scheduling algorithms, but it is important to limit the number of such
dummy link insertions to the extent possible.
Many computer scheduling systems support only one network representation, either activity-onbranch or acitivity-on-node. A good project manager is familiar with either representation.
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CONCLUSION:
This cricket stadium will be profitable for all the parties say sponsors, spectators, cricket
association etc.
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Chapter-1
Planning of Projects
End Chapter quizzes
1. Which of the following statement is true?
a. A project is an ad hoc activity of the firm.
b. A project should be viewed as the main activity of the firm.
c. A project should be viewed as something that contributes to the ability of the
organization
d. A project is a thing which contributes to the ability of the project manager.
e. None of these
2. Which of the following is a correct sequence of life cycle of a project?
a. Planning, Selection, Scheduling, Termination
b. Selection, Implementation, Scheduling, Monitoring, Termination
c. Planning, Implementation, Control, Evaluation
d. Selection, Scheduling, Implementation, Evaluation, Control
e. Planning, Implementation, Scheduling, Termination
3. Which of the following factors call for the project management?
a. Interdependencies among the activities undertaken by various departments.
b. Sharing of resources.
c. Size of task involved.
d. Both (a) and (b) above.
e. All of (a), (b) and (c) above
4. During which stage of the life cycle of a project is the level of activity highest?
a. Conception and selection.
b. Planning and scheduling.
c. Implementation, monitoring and control.
d. Evaluation.
e. Termination.
5. In which of the following situations an industry is considered to have low entry barriers?
a. When economies of scale are high
b. When wide access to channels of distribution is required
c. When there is low level of product differentiation
d. When investment outlay required is huge
e. When the buyers of the products are few
6. Which of the following might be the reasons for the failure of projects?
a. Lack of proper planning
b. Inefficiency of line manager
c. Bad choice of technology
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d.
Both (a) and (b) above
e. All of (a), (b) and (c) above.
7. Which of the following is not considered while analyzing the business environment as per
PEST Model?
a. Foreign trade regulations
b. Disposable income levels
c. Levels of education
d. Human resource management of the firm
e. Rates of obsolescence.
8. In which of the following situations an industry is considered to have low entry barriers?
a. When economies of scale are high.
b. When wide access to channels of distribution is required.
c. When there is low level of product differentiation.
d. When investment outlay required is huge.
e. When the buyers of the products are few.
9. When there is a declining trend in the resources available, the resources allocation should be
a. Strictly based on a formula
b. Made on existing pattern
c. Allocated by free bargaining between the divisions and the center
d. Made either by imposed priorities by the center or competitive bidding
e. None of the above.
10. According to Micheal Porters Model the competitive position of a firm depends upon apart
from other factors,
a. Foreign trade regulations.
b. Monopolies legislations.
c. Money supply.
d. Bargaining power of buyers.
e. inflation.
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Chapter-2
Content
Page no.
Project Design
51
62
Technical Analysis
82
85
Financial Analysis
95
112
Project Appraisal
117
Appraisal Criteria
119
141
10
Project Financing
143
11
149
12
150
13
153
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This may not be so obvious during the construction phase but after the physical completion of
the project it is important that a decision is made on who or how the project will be managed as
the sustainability of the project normally hinges on this.
The technical design of the project
Who will do the design? Who will check the design? What are the restrictions by the funding
agencies?
The equipment suppliers and labor
There has to be a process in specifying and purchasing the equipment and services.
Does the recipient need to provide any materials or labor? Are there any restrictions by the
funding agency?
Budgeting
Given the limited resources it is necessary that a budget on the available resources is developed
to guide their allocation.
The logistics of getting the equipment to the project site
What are the necessary arrangements (e.g., shipping)? Where will the equipment be stored? Will
there be a need to test the equipment when received?
Ownership of the project
It is important that the owners of the equipment are made known to the respective stakeholders.
This will avoid the recipients using the equipment as they please.
Land issues
Obtaining land for project sites, to gain access to project sites, cutting of trees, etc are just some
of the land related issues that have to be dealt with care. Ignoring the rights of landowners may
cause problems later on during the operation of the project.
User Education
It may not be possible to educate the users of the system in detail. However, it is imperative that
the users understand the limitations of the system, when is power available, etc. Many failures
are due to the abuse of the system by the users.
Core concepts underlying the logical framework are summarized as follows:
The logical framework presents the key elements of a development intervention and their
interrelationships. The intervention is usually termed a project or a program.
The framework clearly identifies the impacts or objectives the project or program will achieve.
It also allocates measurable and/or tangible performance targets to them.
The framework also clearly identifies the inputs and outputs the project or program will deliver
to enable achievement of the proposed objectives.
Thus, the framework presents a cause and effect matrix where inputs lead to outputs and
outputs lead to immediate objectives, which in turn lead to longer-term objectives.
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This cause-effect sequence is drawn substantially from the cause-effect analysis and related
objectives tree described in the previous section. The alternatives analysis facilitates the choice
of the cause-effect strand(s) that will make up the project intervention.
Making the cause-effect relationships between the basic elements of the projects design more
explicit adds confidence that the project is realistic, implementable, monitorable, and capable of
delivering the set objectives.
Key Elements of a Logical Framework
There is a clear distinction between the logical framework process and the logical framework
matrix. The process refers to the steps involved in planning and designing the project. These
steps invariably include a situation analysis, stakeholder analysis, cause-effect analysis,
objectives analysis, and alternatives analysis culminating in the design of the project. The matrix,
which summarizes the final design of the project, usually comprises 16 frames organized under 4
major headings.
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The Design Summary provides information on the basic building blocks of the project and
presents them as a cause-effect chain drawn from a preceding cause-effect analysis. The inputs
are expected to result in the outputs, which in turn are expected to achieve the immediate
objective (sometimes called the purpose) of the project which contributes to the longer term
objectives (sometimes called the goals of the project.)
Some logical frameworks include the category of Activities. This refers to the detailed and
chronological tasks, which will use inputs and deliver outputs.
If the logical framework is to be used as a detailed planning and implementation guide, the
inclusion of Activities is necessary. If the logical framework is used to reflect a succinct logical
presentation of the critical elements of a project or program, the inclusion of Activities is not
essential.
The Verifiable Performance Targets tie down performance requirements for each element of
the project design. These are specific tangible and/or quantifiable measures of achievement for
each level in the design summary. These indicators are important in both monitoring and
assessing success.
The Monitoring Mechanisms are the sources and/or methods, which will be used to collect data
for monitoring performance at each level of the cause- effect chain in the design summary. These
must be specified because they often require resources and commitment from the project
implementors.
The Assumptions and Risks identify other conditions, which are external to the project but are
needed to ensure that one level indeed causes the next level of performance to happen. Thus,
given the level of inputs, outputs will be produced assuming project staff have the required
technical skills (assumptions) -and outputs will give us the expected impacts - assuming no
major natural disaster takes place (risks).
Designing a Project using the Logical Framework
Identifying the Projects Purpose and Goals
The Design Summary comprises four basic levels of a cause-effect chain. At the top are the
project goals (the long-term objectives of the project). While these provide the umbrella logic
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and rationale for the project, they will only come on stream over the long term and are influenced
by many variables in the interim.
The project purpose (the immediate objective of the project) is the key anchor of the project
design. This is the level of achievement that the project must deliver. This objective should
become evident by the end of the project implementation period. A projects scope and outputs
will be designed around this objective to specifically ensure that it is achieved by the end of the
project. It is therefore advisable to have only one immediate objective for the project.
Therefore, the starting point for preparing the logical framework must always be the immediate
project objective or purpose In other words, we must first identify the central problem (or
opportunity) and the immediate desired impact as precisely as possible. We must also specify the
verifiable performance targets that we expect the project to deliver by the time it is complete.
These should normally be predictable.
Thus, we begin with the design summary column, specifically the frame pertaining to the
project purpose (i.e. the immediate objective). The related frames under the performance targets
and the monitoring mechanisms are also completed in parallel. This is essential because the
performance target/s forces the project designer to specify the immediate project objective and
hence the expected immediate impact of the project. This must be done in tangible, measurable,
and monitorable terms, ensuring that the designer also becomes clearly aware of what he or she
wants the project to deliver. Note that there is only one immediate objective specified for the
project.
The next step is to clarify the project goals (longer-term objectives) sought by the project.
These are usually subsector or sector goals, but sometimes national goals are specified.
Examples of goals include increased productivity, increased incomes, poverty reduction, and
employment creation. In specifying the goals the cause-effect linkage between the purpose and
the goal must be realistic.
Design Summary Performance Targets Monitoring Mechanisms Assumptions & Risks
The project purpose and project goals are written differently.
(a) While there may be more than one long-term objective or goal, there is usually only one main
and primary immediate objective for each project. If there are to be more than one, this implies
there are a number of subprojects under the umbrella of a more generalized project. This issue
will be dealt with in the discussion on outputs and the implications of having more than one
immediate project objective.
(b) While the immediate project objective is always tied down with a tangible and/or measurable
performance target, this is not always necessary for the longer term objectives because the longer
term objectives:
are expected at a much wider scope (e.g., the sector);
will accrue at a much later date (perhaps 5-10 years down stream); and
will be influenced by many factors other than this project.
Thus, establishing very specific long-term targets to be achieved by this project is not always
realistic.
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supply system. They are usually physical deliverables necessary for achieving envisaged
impacts.
(b) Service-type Outputs: These are outputs which may or may not accompany infrastructure
support. They include services such as health care, agriculture extension programs, and research
into new products or systems of operation.
(c) Policy-type Outputs: The policy and legal framework within a sector is critical to the
effective and efficient functioning of that sector. The infrastructure or strengthened services
provided by the project may often be ineffectual at delivering envisaged impacts unless
supporting changes are made in sector policy.
Accordingly, a project may assume the responsibility for adjusting the policy or legal framework
through the introduction of new policies or the strengthening of the legal framework to support
delivery of sector impacts.
(d) Institutional Strengthening-type Outputs: These types of outputs can range from institutional
diagnostic studies to the revision of operating strategies, the introduction of new operating
systems, the upgrading of operating standards, the enhancement of staff skills, etc. Such
strengthening is often necessary not just for the effective delivery of infrastructure and service
outputs described above, but also for sustaining their functioning long after project completion.
In a typical project, the infrastructure, services, policy, and institutional strengthening outputs
must complement each other.
Returning to the transportation example, there appear to be various possible options to reducing
traffic congestion. The road infrastructure option (which involves a widening of the main
arterials) is assessed as the least effective option to reducing congestion by the alternatives
analysis, and is therefore not included as an output. Road infrastructure can be a large
expenditure item; the level of finance available is an important criterion for eliminating the
infrastructure option. Ensuring effective maintenance of vehicles is logistically unrealistic. Thus,
the viable options considered are: (i) improving the signal system; (ii) automating traffic
monitoring; (iii) a new policy on vehicle restriction; (iv) improved enforcement; and (v) staff
training.
When outputs are described in a design summary their performance targets and monitoring
mechanisms should also be identified.
In summary, the projects objective provides a rationale and purpose, (why the project is being
done). The projects outputs describe the physical and/or tangible deliverables, which will
occupy all of the energies of the project implementors over a stated period. While the project
outputs are the most visible component of project design, they should never become the primary
preoccupation of the project. This must always remain the projects intended objectives. Thus,
even during implementation, project staff have to continually remind themselves of the reason
for the project and verify whether the envisaged linkage between the projects outputs and its
objectives remain valid.
Inputs generally fall within four main categories:
consultants to plan and support implementation included in this are costs associated with
required surveys, detailed design and technical advice;
equipment and software plus related staff training;
civil works; and
local salaries and project management.
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Further subcategories of inputs can be developed as required. In the logical framework coverage
of costs is only provided in a summarized manner. Detailed cost tables are available separately.
Similarly, the logical framework need not cover any information on activities.
Detailed activity and implementation charts (GANTT charts or PERT/CPM drawings) are
available with project documentation. The most important purpose of the logical framework is to
summarize the key elements of the projects design rather than present self-contained and
comprehensive project information.
Assumptions
Having determined the inputs, outputs, purpose, and goals of the project, one has in fact
specified the hypotheses for the success of the project. All hypotheses have assumptions and
risks. The task now is to define the specific assumptions and risks underlying the proposed
project design.
Assumptions are factors, which are outside the control of the project but which nevertheless
influence the cause-effect relationships integral to project design.
The achievement of the projects purpose will indeed result in the achievement of its goals if
certain external factors/conditions exist. These are the assumptions.
From another point of view they are the projects risks. If these conditions, which are usually not
within the control of the project, are not present, the projects objectives may be difficult to
achieve.
The concept of assumptions applies at all levels of the project design summary. The achievement
of the projects outputs will result in the achievement of its purpose only if the external
assumptions prevail. Similarly, the project inputs will translate into the projects outputs only if
certain other conditions exist.
Such external factors may range from the level and timeliness of rainfall needed for crop
production to the political support required to pursue and implement a policy reform program.
Typical areas in which assumptions influence the outcomes of projects include:
market conditions/prices
macroeconomic policies/conditions
political and social conditions
sector policies and conditions
environmental conditions
private sector capability
government administrative capability
community/NGO support
counterpart funding.
Assumptions can also be written as risk statements. For example, a new seed variety distributed
by a project (output) will result in increased crop production (immediate impact) on the
assumption that the monsoon rain will be timely and adequate.
If this assumption is worded as a risk it would be formulated as follows:
If monsoon rain does not come on time and in adequate quantities, then crop production will not
increase as expected.
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When looking at assumptions as risks we must always consider both facets of the risk: its
probability (if) as well as the seriousness of its consequence (then) if it occurs. Only risks and
assumptions, which may adversely influence the project, need to be considered.
Options for dealing with Assumptions
Do nothing: This is certainly one option. It is probably the best option if none of the assumptions
and risks are serious enough to endanger the achievement of the projects objectives.
Change the project design: Sometimes the easiest way of dealing with an assumption or risk is to
go back to the project design and add outputs and/or inputs to address the assumption or risk. For
instance, the important hypothesis that inputs will result in outputs assumes the capability of the
executing agency to use the inputs efficiently and effectively. If the agency does not have full
capability to do so, it would be wise to add an institutional capacity building component to the
project to address this risk.
Add a new project: This sometimes becomes necessary. For instance, an assumption in achieving
increased rice production is that sufficient rain will fall.
If the seasonal fluctuation seems too high, it may be necessary to initiate a parallel program to
provide for additional water resources as a contingency resource to bridge short periods of
drought.
Abandon the project: Sometimes, when the risk is too great and the preventive or contingency
measures too expensive or difficult to undertake, the wisest course of action is to abandon the
project.
Verifiable Performance Indicators: The Link between Project Design and Project
Implementation
Using Performance Indicators to Specify Performance
Verifiable performance indicators (VPIs) are measures used to establish the accomplishment of
inputs, outputs, purpose, and goal(s) of a project. VPIs indicate in specific, measurable, and/or
tangible (and therefore monitorable) terms the performance to be achieved at each level in
project design. In effect, they clarify the minimum achievement requirement for inputs to cause
the outputs and for the outputs to cause the envisaged impacts.
VPIs should also be used to specify and monitor the risks/assumptions and the extent to which
these hold true or change during project implementation.
When identifying and specifying VPIs remember: if we can measure it, we can manage it. Thus,
in defining VPIs for a project, designers are forced to clarify what various objective-type
statements used to describe the outputs and impacts of the project mean. VPIs help to remove
vague and imprecise statements about what can be expected from our project interventions.
VPIs should measure results, not just processes, and if possible they should identify these results
in terms of all of the following dimensions:
the expected quantities to be achieved;
the expected quality standards to be achieved;
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the time period over which the quantitative and qualitative achievements will occur; and
the location/area of achievement.
Thus, each indicator must specify a target in terms of quantity, quality, time, and location (if
relevant).
For the indicator to measure change it must have a baseline as a reference point. This is usually
current performance of the entity and/or of a comparator at the beginning of a project.
Performance during project implementation is measured against the target, taking into account
the baseline as well as expected improvements above it.
Keep the number of indicators to the minimum. Use only those performance indicators that are
needed to determine whether the objective is accomplished.
Performance indicators should always be developed at the same time as the specification of the
project design summary, viz, the projects goals, purpose, outputs, and inputs. The performance
indicators and related targets test the realism of the projects design at each level.
Goal(s)
Performance indicators at this level are the long-term impacts expected from the project, and in
this sense they are not project specific. Rather, at this level they are program, subsector, or sector
objectives to which this particular and several other projects will contribute.
Ensure that the projects goals and related performance indicators or targets are realistic. The
project should have reasonable potential in contributing to the achievement of its goals, though
this may be only in the longer term.
Purpose
Performance indicators and related project targets at this level are most crucial and can
sometimes be difficult to determine. They are the performance targets for which the project takes
full accountability to deliver. They are the performance measures by which the project will be
judged a success or failure.
The purpose or end-of-project impact defines the projects immediate impact on beneficiaries or
institutions and related changes in the behavior of project beneficiaries and institutional
functioning.
In the transportation example, the immediate purpose or objective of the project must be:
reduced traffic congestion. Thus the performance indicator and related target is specified as:
average traffic speed on major arterial roads is increased from 12 km/hr in 1998 to 25 km/hr in
2003.
The purpose should be stated as simply as possible to ensure its feasible achievement and ease of
monitoring. This is not to say that we should simplify the objective so that it can be easily
achieved. The achievement of the purpose depends on the successful achievement of the various
outputs. Thus the outputs will be defined in relation to the purpose level objective and related
indicators.
Outputs
The outputs are usually the easiest to specify in terms of performance indicators and targets,
because outputs are the tangible goods and services to be delivered by the project. All outputs
have to be accomplished by the end of the projects implementation period.
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Inputs
These are the resources available for project implementation. Inputs are usually money (budget);
equipment; technology; and human resource expertise. Performance indicators and targets may
be altered after they have been established. Adjustments are possible and sometimes advisable
during implementation to accommodate changes in the circumstances of the project. Changes
may also be necessary due to deficiencies in data availability on the performance indicator.
Therefore, indicators and targets should be periodically re-examined and refined if necessary to
provide the most up-to-date measure of the projects performance.
Using Performance Indicators to Manage, Monitor and Evaluate Performance
VPIs provide a basis for monitoring and evaluating the project. To serve this function,
performance indicators must be integrated into the management information system of the
project and/or of the institution or executing agency.
The monitoring mechanisms are the data sources and reporting systems that will be used to
verify the status of each indicator. They will show what is accomplished with respect to inputs,
outputs, purpose, and goals of the project.
The monitoring mechanisms and the information system will provide the evidence that the
objectives have been achieved.
The indicator and the monitoring mechanism must be determined together to ensure that the
monitoring mechanisms and information systems are practical and cost-effective.
In determining the monitoring mechanism for a particular performance indicator it is necessary
to consider the following:
Is the data available from normal sources?
How reliable is the data?
Is the data available on a timely basis?
If special data has to be collected, what will it cost?
Definitions of performance indicators should be realistic, practical, and precise. The data
collection effort should be cost-effective in meeting the needs of various decision-makers.
Moreover, the need for data collection, using existing sources of information, has to be matched
by the capability of the various agencies that would generate and report the information. Also,
those who use it for decision-making should assess the need, comprehensiveness, and value of
data. If an indicator cannot be verified, then another indicator should be found.
Monitoring Assumptions
Monitoring assumptions is critical to project success. The environment is continually influencing
the cause-effect hypotheses on which the project is built. Project implementors must ensure that
such hypotheses continue to remain valid.
Monitoring should be built into the projects performance monitoring and management system.
The projects performance indicators should be regularly monitored, and the assumptions on
which they are built should be frequently checked and verified.
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B. Market Research with Secondary Data: Secondary data can be obtained from two basic types
of sources: internal and external.
Internal: The past record of an organization offer substantial information. The information
relating to the trends in sales of organization can be used to get an idea about the market
condition. Primary information collected earlier for some other purpose may also sometimes
prove to be useful.
External: Data can be obtained from external sources also, as:
Market Research organizations like MARG (Market Analysis and Research Group),
CMIE (Center for Monitoring Indian Economy) offer adequate data in their standard or
customized reports.
Trade associations like FICCI (Federation of Indian Chambers of Commerce and
Industry) and other industry associations provide lot of data related to the industry.
Government Research Organizations like CSO (Central Statistical Organization), RBI
and Central Govt. publish a lot of data on economy.
Advantages of Secondary Data:
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In time series analysis, it is assumed that there is a multiplicative relationship between these four
components.
Symbolically,
Y=T+ + +
Where Y denotes the result of the four elements; T = Trend; S = Seasonal component; C =
Cyclical components; I = Irregular component
In the multiplicative model it is assumed that the four components are due to different causes but
they are not necessarily independent and they can affect one another. Another approach is to treat
each observation of a time series as the sum of these four components. Symbolically
Y = T + S+ C+ I
The additive model assumes that all the components of the time series are independent of one
another.
1) Secular Trend or Long - Term movement or simply Trend
2) Seasonal Variation
3) Cyclical Variations
4) Irregular or erratic or random movements (fluctuations)
Secular Trend:
It is a long term movement in Time series. The general tendency of the time series is to increase
or decrease or stagnate during a long period of time is called the secular trend or simply trend.
Methods of Measuring Trend:
Trend is measured by the following mathematical methods.
1. Graphical method
2. Method of Semi-averages
3. Method of moving averages
4. Method of Least Squares
Graphical Method:
This is the easiest and simplest method of measuring trend. In this method, given data must be
plotted on the graph, taking time on the horizontal axis and values on the vertical axis. Draw a
smooth curve which will show the direction of the trend. While fitting a trend line the following
important points should be noted to get a perfect trend line.
(i) The curve should be smooth.
(ii) As far as possible there must be equal number of points above and below the trend line.
(iii) The sum of the squares of the vertical deviations from the trend should be as small as
possible.
(iv)If there are cycles, equal number of cycles should be above or below the trend line.
(v) In case of cyclical data, the area of the cycles above and below should be nearly equal.
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Example:
Fit a trend line to the following data by graphical method.
Year
1996 1997 1998 1999 2000 2001 2002
Sales (in Rs 000) 60
72
75
65
80
85
95
Solution:
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Example:
Draw a trend line by the method of semi-averages.
Year
1991 1992 1993 1994 1995 1996
Sales Rs in (1000) 60 75 81 110 106 117
Solution:
Divide the two parts by taking 3 values in each part.
Merits:
1. It is simple and easy to calculate
2. By this method every one getting same trend line.
3. Since the line can be extended in both ways, we can find the later and earlier estimates.
Demerits:
1. This method assumes the presence of linear trend to the values of time series which may not
exist.
2. The trend values and the predicted values obtained by this method are not very reliable.
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2. Leave the first year value, and find the total of next four-year and place it between the 3rd and
4th year.
3. Continue this process until the last value is taken.
4. Next, compute the total of the first two four year totals and place it against the 3rd year in the
fourth column.
5. Leave the first four years total and find the total of the next two four years totals and place it
against the fourth year.
6. This process is continued till the last two four years total is taken into account.
7. Divide this total by 8 (Since it is the total of 8 years) and put it in the fifth column.
These are the trend values.
Example: The production of Tea in India is given as follows. Calculate the Four-yearly moving
averages
Year
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Production (tones) 464 515 518 467 502
540 557
571 586 612
Solution:
Merits:
1. The method is simple to understand and easy to adopt as compared to other methods.
2. Method is flexible as mere addition of more figures to the data will not change the entire
calculation. That will produce only some more trend values.
3. Regular cyclical variations can be completely eliminated by a period of moving average equal
to the period of cycles.
4. It is particularly effective if the trend of a series is very irregular.
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Demerits:
1. It cannot be used for forecasting or predicting future trend, which is the main objective of
trend analysis.
2. The choice of the period of moving average is sometimes subjective.
3. Moving averages are generally affected by extreme values of items.
4. It cannot eliminate irregular variations completely.
Method of Least Square:
This method is widely used. It plays an important role in finding the trend values of economic
and business time series. It helps for forecasting and predicting the future values. The trend line
by this method is called the line of best fit.
The equation of the trend line is y = a + bx, where the constants a and b are to be estimated so as
to minimize the sum of the squares of the difference between the given values of y and the
estimate values of y by using the equation. The constants can be obtained by solving two normal
equations.
y = na + bx . (1)
xy = ax + bx2 (2)
Here x represent time point and y are observed values. n is the number of pair- values.
When odd numbers of years are given
Step 1: Writing given years in column 1 and the corresponding sales or production etc in column
2.
Step 2: Write in column 3 start with 0, 1, 2 .. against column 1 and denote it as X
Step 3: Take the middle value of X as A
Step 4: Find the deviations u = X - A and write in column 4
Step 5: Find u2 values and write in column 5.
Step 6: Column 6 gives the product uy
Now the normal equations become
y = na + bu
where u = X-A
uy = au + bu2
Since u = 0, From above equation
a = y/n
uy = bu2
b =y/u2
y = a + bu = a + b (X - A)
Example:
Fit a straight line trend by the method of least squares for the following data.
Year
1983 1984 1985 1986 1987 1988
Sales (Rs. in lakhs) 3
8
7
9
11 14
Also estimate the sales for the year 1991
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Solution:
u = (X-A)/(1/ 2)
= 2 (X -2.5) = 2XThe straight line equation is
y = a + bX = a + bu
The normal equations are
y = na .(1)
uy = bu2 (2)
From (1) 52 = 6a
a = 52/6
= 8.67
From (2) 66 = 70 b
b = 66/70
= 0.94
The fitted straight line equation is
y = a+bu
y = 8.67+0.94(2X-5)
y = 8.67 + 1.88X - 4.7
y = 3.97 + 1.88X
The trend values are
Put X = 0, y = 3.97 X = 1, y = 5.85
X = 2, y = 7.73
X = 3, y = 9.61
X = 4, y = 11.49
X = 5, y = 13.37
The estimated sale for the year 1991 is; put X = x 1983
= 1991 1983 = 8
y = 3.97 + 1.88 8
= 19.01 lakhs
The following graph will show clearly the trend line.
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Merits:
1. Since it is a mathematical method, it is not subjective so it eliminates personal bias of the
investigator.
2. By this method we can estimate the future values. As well as intermediate values of the time
series.
3. By this method we can find all the trend values.
Demerits:
1. It is a difficult method. Addition of new observations makes recalculations.
2. Assumption of straight line may sometimes be misleading since economics and business time
series are not linear.
3. It ignores cyclical, seasonal and irregular fluctuations.
4. The trend can estimate only for immediate future and not for distant future.
Seasonal Variations:
Seasonal Variations are fluctuations within a year during the season. The factors that cause
seasonal variation are
i) Climate and weather condition.
ii) Customs and traditional habits.
Measurement of seasonal variation:
The following are some of the methods more popularly used for measuring the seasonal
variations.
1. Method of simple averages.
2. Ratio to trend method.
3. Ratio to moving average method.
4. Link relative method
Method of simple averages
The steps for calculations:
i) Arrange the data season wise
ii) Compute the average for each season.
iii) Calculate the grand average, which is the average of seasonal averages.
iv) Obtain the seasonal indices by expressing each season as percentage of Grand average
The total of these indices would be 100n where n is the number of seasons in the year.
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Example :
Find the seasonal variations by simple average method for the data given below.
Solution:
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The study of cyclical variation is extremely useful in framing suitable policies for stabilizing the
level of business activities. Businessmen can take timely steps in maintaining business during
booms and depression.
Irregular variation:
Irregular variations are also called erratic. These variations are not regular and which do not
repeat in a definite pattern. These variations are caused by war, earthquakes, strikes flood,
revolution etc. This variation is short-term one, but it affects all the components of series. There
are no statistical techniques for measuring or isolating erratic fluctuation. Therefore the residual
that remains after eliminating systematic components is taken as representing irregular
variations.
1. Simple Moving Average (SMA)
In this model, a simple average of a pre-determined number of past periods is used as
the forecast for the next period. The average of past period is intended to even out (or
smoothen) the random changes. The time periods over which the averages should be
calculated depends on the magnitude of variation. It is a time period using data points
averaged and weighted equally.
t
SMAt+1 = ----- Ai
where,
i =t+1-n
SMAt+1 = SMA at end of time period t or forecast for time t
n = No. of periods included
Ai = Actual demand in time t
2. Weighted Moving Average (WMA)
Averaged points are weighted by giving more weightage to most recent data.
t
WMAt+1 = CiAi
where
i =1
WMAt+1 = WMA at end of time period t or forecast for time t
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Ci = % weightages given
Ai = Actual demand in time t
0 Ct 1 and Ct = 1, t = 1 to n
3. Exponential Smoothing (ES): In this, recent data points are weighted more, with weights
declining exponentially as data becomes older. In this method, a series of weights that decay
exponentially by (1-), where = the smoothing coefficient, are assigned to past data. As the data
gets older, demand for most recent period is weighted most heavily and weights placed on
successively older periods decrease exponentially.
First Order ES:
Ft+1 = Dt + (1-) Ft,
Where,
= Time period
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income. Cause and Effect models enable us to predict variables not only using factors
that impact on other factors. These are accurate but need more data.
Regression Models:
(i) Simple Regression Model
Regression between two variables (a dependent variable Y and an independent
variable X) is given by the following equation:
Y = a +bX,
nXY - XY
_
_
b = and a = Y b X
nX2 (X)2
n = Number of values
a and b are Regression constants, where a is the Y intercept and b is the Slope of the
Regression Equation.
(ii) Multiple Regression Method: When there are more than one independent
variables (factors) that affect a dependent variable, Multiple Regressions is applied.
The model is expressed as:
Y is the expected demand, which is given by:
Y = B0 + B1X1 + B2X2 + .BnXn.
Where, B0 = Y-Intercept
B1,B2, .Bn = Parameters representing weightages of different factorX1, X2,
.Xn = Independent factors.
Multiple regression is more flexible than Simple Regression, as it can accommodate any
number of independent factors; but it is more complex and requires to be solved with
computer.
Example:
X 2 3
Y 7 9
4
10
5
14
6
15
Solution
We have now to set up a worksheet to get the values of the terms shown earlier. Worksheet for
Computing Correlation
X
Y
XY
X2
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2
3
4
5
6
7
9
10
14
15
14
4
27
9
40
16
70
25
90
36
X = 20 Y
XY
X2 =90
Substituting these values in the normal equations given above
55 = 5a + 20b (i)
241 = 20a + 90b (ii)
Solving these we get,
a = 2.6
b = 2.1
Therefore, the regression equation of Y on X is
Y = 2.6 + 2.IX
Alternative Approach
We can use an alternative approach, which involves the use of two formulae-one to calculate the
Y-intercept and the other to calculate the slope. The formula for calculating the slope is
b
In order to apply the above formula, we should know the values of X and Y in addition to those
XY
X2
X =X /n =20/5 =4
Y = Y /n
Calculating the value of b from above equation, we get
b = 2.1
The formula for calculating the Y-intercept of the line is
a Y bX
where a is Y-intercept. Applying this formula to calculate the Y-intercept, we get
a = 2.6
Hence, the regression equation is Y = 2.6 + 2.1X (same as was obtained earlier by applying the
normal equations). On the basis of this regression, we can find the value of Y for any value of X.
Suppose that we have to ascertain the value of Y where X is 14. Applying this value of X = 14 in
the above equation,
We are now clear as to how the regression line is obtained. The question is how to check the
accuracy of our results. One method is to draw a scatter diagram with original data pertaining to
X and Y series and then to fit a straight line. This graph will give a visual idea about the
suitability of the straight line fitted. A more refined and, therefore, better approach is based on
the mathematical properties of a line fitted by the method of least squares. This means that the
positive and the negative errors (i.e. differences between the original data points and the
77
calculated points) must be equal so that when all individual errors are added together, the result
is zero.
X
2
Y
7
Yc
Y-Yc
-1.0
= 15.2
-0.2
Total 0
Here, the calculated value of Y is shown as Yc. We find that the sum of positive errors Y - Yc, is
equal to 1.2. The same is true for negative errors. Thus, the sum of the column Y- Yc, comes to
zero. This means problem solved is correct.
Regression Coefficients
So far our discussion on regression analysis related to finding the regression of Y on X. It is just
possible that we may think of X as dependent variable and Y as an independent one. In that case,
we may have to use X = a + bY as an estimating equation. Then, the normal equations will be
X = na +b Y
XY = aY + Y2
X, Y, XY, Y2 and n. Once these values are known,
we may enter them in the two normal equations. The equations then can be solved in the same
manner as in the case of regression of Y on X.
i. Regression equation of Y on X
Y- Y r(sy /sx )(X- X )
The term r(sy /sx
XY
X2
ii. Regression equation of X on Y
X- X r(sx /sy )(Y- Y )
The term r(sy /sx
XY / Y2
It may be noted that the square root of the product of two regression coefficients is the value of
the coefficient of correlation.
We may write
bxy or r(sx /sy
xy y2
byx or r(sx /sy
xy/x 2
r bxy *b yx )^0.5
Another point to note is that x and y are the deviations in X and Y series from their arithmetic
means.
Example:
X
Y
2
7
3
9
4
10
5
14
6
15
x =X- X
-2
-1
0
1
2
x2
4
1
0
1
4
y =Y- Y
-4
-2
-1
3
4
y2
16
4
1
9
16
xy
8
2
0
3
8
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20
55
x = 0
y2 = 46
xy = 21
X =20/5 = 4
Y =55/5 = 11
Regression equation of X on Y:
X -X =r(s x /s y )(Y- Y )
On putting the values, we get
Y = 2.6 + 2.1X
Also,
r bxy *b yx)^0.5
xy y 2 )*( xy/x2 ))^0.5
= ((21/46)*(21/10))^0.5
= (0.9587)^0.5
= 0.98
Regression equation of X on Y is
X- X r(s x /s y )(Y -Y )
or X = 40 + 0.5 (10/9) (Y - 45)
or X = 40 + 0.556 (Y - 45)
or X = 40 + 0.556Y- 25.02
or X = 14.98 + 056Y
In order to estimate the value of Y for X = 48, we have to use the regression equation of Y on X
Y = 27 + 0.45X
when X= 48
or Y= 27 + 21.6
or Y = 48.6
Chain Ratio Method:
When the demand of a product is influenced by a chain of factors, the chain ratio is
useful. The first step in the method is to identify all the factors and their inter linkages
quantitatively. In the second step, the ultimate impact on the demand estimate for the
product can be determined. (eg. Demand for Gymnasium)
End Use Method:
The demand for products in industries such as auto components, industrial chemicals,
machine tools, etc. depends on the demand condition of the industries which use these
products. In such cases, the demand will have to be estimated basing on the demand
conditions in the user industry and the market share targeted. First the production of each
of the user industries should be determined. Then the no. of units of the products
consumed per each unit produced by the user industries can be estimated, which gives the
total demand for the product. The proportion of the total demand expected to be captured
gives the demand projection for the firm.
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Econometric Method:
The demand for many products like steel, cement, power, etc., depends on the general
economic activity. To forecast the demand in such industries, a model consisting of all
the major economic factors should be developed. The impact of the variables can be
found out using multiple regression as already studied above, which is given below:
Y = B0 + B1X1 + B2X2 + .BnXn.
Y= Demand to be estimated
Where, B0 = Y-Intercept
B1,B2, .Bn = Parameters representing weightages of different factor
X1, X2, .Xn = Independent factors.
Consumption Level Method: Mostly, the demand for the consumer goods, depend on the
income levels of the consumers and the change in prices. The impact of these factors can be
studied under two different methods as follows:-
(Q2 Q1)/[(Q1+Q2)/2]
(I2 I1)/[(I1+I2)/2]
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Change in demand
(Q2 Q1)/[(Q1+Q2)/2]
IED = --------------------------- = -------------------------------Change in Price
(P2 P1)/[(P1+P2)/2]
Where, Q2 = Demand after change
Q1 = Demand before change
P2 = Price after change
P1 = Price before change
C. Qualitative Models:
When quantitative estimation is not possible, Qualitative Models, which involve estimating the
demand subjectively, are used. These methods are quick and simple, but the element of
subjectivity, which is their principle defect, should be kept in view while using them. The
following three models are very popular among the qualitative methods:(i) Field Sales Force Method
In this method, the salesmen of the company are asked to estimate the potential sales in their
territory of jurisdiction. All the forecasts from various territories are pooled and combined
demand for the firm is obtained. This method is fast and accurate as the sales men know better
about the future sales prospects. The disadvantages may be over estimates or under estimates due
to more incentives
(ii) Delphi Method
In this method, estimates are called from a group or a panel of experts in the field, but the group
is not allowed to meet, discuss, and debate each others opinions. Individual experts are asked to
give their estimates independently, to avoid one group influencing the other. A panel of cocoordinators carries out the job of reconciling the views of all of them. First the co-coordinator
solicits the opinion from all the experts. Then, those whose opinions are well off the average are
asked to explain the rationales of their position. A second round of questionnaire is sent to them.
When a reasonable consensus is arrived at, the co-ordinates sums up the outcome of the exercise
and calculates the demand.
(iii) Jury of Executive Opinion Method
This is a variation from Delphi Method wherein a group of managers are advised to sit together
and arrive at a forecast. This method is quick, takes view points of all people, and is more
interesting to managers rather than trend projection method. Its weaknesses are that the managers
may be biased, and sometimes it is very difficult to arrive at a consensus quickly.
81
Technical Analysis
In technical analysis we study the technical aspects of setting up project. Selection of technology
and how to move on the acquisition of technology, purchasing the materials and equipments,
selecting the site and layout of facilities on the site and finally consider about the pollution and
effluent disposal is part of technical analysis.
Technological decisions are generally irreversible
Requires a big outlay of investment
Competitiveness of company can also be get affected
Project Procurement Management
Project Procurement Planning
This document details the manner in which other procurement processes will be managed i. e.,
starting from the solicitation planning till the contract closing. Project procurement planning is
the process of discovering the needs of the project that can be satisfied by acquiring products and
services from firms external to the project organization. The request for the products has to go
through a procurement process, starting from the solicitation planning to contract closure.
The primary objective of a procurement planning process is to decide and plan for acquiring all
products and services from vendors single or multiple vendors. Some of the inputs required to
prepare the procurement plan are:
1.
2.
3.
4.
5.
6.
Statement of scope
Description of product or services
Procurement of resources
Market conditions
Make or buy analysis
Expert judgment
Procurement of resources
It gives a description of resources needed to procure the products and services from the market as
per the specifications given in the product or service description document.
Market Conditions
Planning for procuring goods and services from vendors, the project or purchase manager should
be aware of the products or services available in the market. Macro economic factors like
inflation rate and government regulations influence procurement plans. Along with these factors
82
there are certain other factors also which should be keep in mind while planning procurement
such as quality management, cash flow statement, risk management, staffing, initial ordering
costs and the work breakdown structure.
Make or Buy Analyses
Once we have required information about the product and market conditions then we need to
decide whether to source these products from within the organization or from outside vendors. If
organization has free machine time and infrastructure that can satisfy the need of project in a cost
effective manner, then it is better to make the product from within the organization than to
source from external vendors. But if the costs, the infrastructure and other resources are not
appropriate, then it is better to buy it from external vendor.
Expert Judgment
Expert judgment is used to analyze and judge the inputs of the procurement process. It is
provided by a single individual or a group of individuals who are experts in specific fields.
Selection of Appropriate type of contract
There are following major type of contracts1.
2.
3.
4.
5.
Work Statement
It is detailed description of the product or services to be procured for the vendor to decide on his
potential to serve the project organization with the product or services that matches their
expectations. The details vary depending on the nature of the product or service to be procured,
or the requirements of the project organization and type of contract to be administered.
Solicitation Planning
Solicitation planning is the process of developing the documents that are needed to support
solicitation. It involves preparation of the procurement management plan, the statement of work,
standard forms and expert evaluation that forms the procurement documents and criteria for
judging the vendor.
Procurement Document
83
That document I used to invite proposals from eligible vendors. Ideal procurement document
should be a balanced by two factors i.e., on the one hand, it should be rigid in seeking responses
that are corresponding and comparable but on the other hand, it should be flexible to encourage
suggestions from the vendor so as to enhance ways of satisfying the need.
Vendor Judgment
This involves evaluating various proposals received from different prospective vendors, by rating
them. There are following factors to evaluate vendors:
1.
2.
3.
4.
5.
6.
Solicitation
It is a process of obtaining quotations, bids, offers or proposals from all prospective vendors.
Vendor Selection
Vendor selection is a process of receiving quotations or proposals from prospective vendors and
evaluating these proposals to choose the right vendor. The tools and techniques used for
selecting a vendor are as follows:
1.
2.
3.
4.
Contract negotiation
Weighing system
Screening System
Developing independent estimates
Contract Administration
It is the process of making sure that the vendors performance satisfies the project needs
mentioned in the contract. If the project is so large that it requires multiple vendors to satisfy
needs, then the major area of concentration should be on handling the interfaces among the
multiple vendors.
Vendor Payments
Vendor should ensure timely and periodic submission of bills to the contract administrator for
payments for the completed work for as agreed in the contract. Billing document should contain
all supporting statement as mentioned in the contract.
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Contract Closing
It is a process involving verification of the product along with the updating all project documents
with the final results and storing all project information for future retrieval.
85
merits and demerits of sites can also be compared easily. Since both tangible and intangible costs
need to be considered for a selection of a site, dimensional analysis is used.
When starting a new factory, plant location decisions are very important because they have direct
bearing on factors like, financial, employment and distribution patterns. In the long run,
relocation of plant may even benefit the organization. But, the relocation of the plant involves
stoppage of production, and also cost for shifting the facilities to a new location. In addition to
these things, it will introduce some inconvenience in the normal functioning of the business.
Hence, at the time of starting any industry, one should generate several alternate sites for
locating the plant. After a critical analysis, the best site is to be selected for commissioning the
plant. Location of warehouses and other facilities are also having direct bearing on the
operational performance of organizations. The existing firms will seek new locations in order to
expand the capacity or to place the existing facilities. When the demand for product increases, it
will give rise to following decisions:
_ Whether to expand the existing capacity and facilities.
_ Whether to look for new locations for additional facilities.
_ Whether to close down existing facilities to take advantage of some new locations.
II. In Case of Location Choice for Existing Organization
In this case a manufacturing plant has to fit into a multi-plant operations strategy. That is,
additional plant location in the same premises and elsewhere under following circumstances:
1. Plant manufacturing distinct products.
2. Manufacturing plant supplying to specific market area.
3. Plant divided on the basis of the process or stages in manufacturing.
4. Plants emphasizing flexibility.
The different operations strategies under the above circumstances could be:
1. Plants manufacturing distinct products: Each plant services the entire market area for the
organization. This strategy is necessary where the needs of technological and resource inputs are
specialized or distinctively different for the different product-lines.
For example, a high quality precision product-line should not be located along with other
product-line requiring little emphasis on precision. It may not be proper to have too many
contradictions such as sophisticated and old equipment, highly skilled and semi-skilled
personnel, delicates processes and those that could permit rough handlings, all under one roof
and one set of managers. Such a setting leads to much confusion regarding the required emphasis
and the management policies.
Product specialization may be necessary in a highly competitive market. It may be necessary to
exploit the special resources of a particular geographical area. The more decentralized these pairs
are in terms of the management and in terms of their physical location, the better would be the
planning and control and the utilization of the resources.
2. Manufacturing plants supplying to a specific market area: Here, each plant manufactures
almost all of the companys products. This type of strategy is useful where market proximity
consideration dominates the resources and technology considerations. This strategy requires
great deal of coordination from the corporate office. An extreme example of this strategy is that
of soft drinks bottling plants.
3. Plants divided on the basis of the process or stages in manufacturing: Each production
process or stage of manufacturing may require distinctively different equipment capabilities,
labor skills, technologies, and managerial policies and emphasis. Since the products of one plant
feed into the other plant, this strategy requires much centralized coordination of the
86
manufacturing activities from the corporate office that are expected to understand the various
technological aspects of all the plants.
4. Plants emphasizing flexibility: This requires much coordination between plants to meet the
changing needs and at the same time ensure efficient use of the facilities and resources.
Frequent changes in the long-term strategy in order to improve be efficiently temporarily, are not
healthy for the organization. In any facility location problem the central question is: Is this a
location at which the company can remain competitive for a long time?
For an established organization in order to add on to the capacity, following are the ways:
(a) Expansion of the facilities at the existing site: This is acceptable when it does not violate the
basic business and managerial outlines, i.e., philosophies, purposes, strategies and capabilities.
For example, expansion should not compromise quality, delivery, or customer service.
(b) Relocation of the facilities (closing down the existing ones): This is a drastic step which can
be called as Uprooting and Transplanting. Unless there are very compelling reasons, relocation
is not done. The reasons will be either bringing radical changes in technology, resource
availability or other destabilization.
All these factors are applicable to service organizations, whose objectives, priorities and
strategies may differ from those of hardcore manufacturing organizations.
III. In Case of Global Location
Because of globalization, multinational corporations are setting up their organizations in India
and Indian companies are extending their operations in other countries. In case of global
locations there is scope for virtual proximity and virtual factory.
VIRTUAL PROXIMITY
With the advance in telecommunications technology, a firm can be in virtual proximity to its
customers. For a software services firm much of its logistics is through the information/
communication pathway. Many firms use the communications highway for conducting a large
portion of their business transactions. Logistics is certainly an important factor in deciding on a
locationwhether in the home country or abroad. Markets have to be reached. Customers have
to be contacted. Hence, a market presence in the country of the customers is quite necessary.
VIRTUAL FACTORY
Many firms based in USA and UK in the service sector and in the manufacturing sector often out
sources part of their business processes to foreign locations such as India. Thus, instead of ones
own operations, a firm could use its business associates operations facilities. The Indian BPO
firm is a foreign-based companys virtual service factory. So a location could be ones own or
ones business associates. The location decision need not always necessarily pertain to own
operations.
87
Location conditions are complex and each comprises a different Characteristic of a tangible (i.e.
Freight rates, production costs) and non-tangible (i.e. reliability, Frequency security, quality)
nature.
Location conditions are hard to measure. Tangible cost based factors such as wages and products
costs can be quantified precisely into what makes locations better to compare. On the other hand
non-tangible features, which refer to such characteristics as reliability, availability and security,
can only be measured along an ordinal or even nominal scale. Other non-tangible features like
the percentage of employees that are unionized can be measured as well. To sum this up nontangible features are very important for business location decisions. It is appropriate to divide the
factors, which influence the plant location or facility location on the basis of the nature of the
organization as
1. General locational factors, which include controllable and uncontrollable factors for all type
of organizations.
2. Specific locational factors specifically required for manufacturing and service organizations.
Location factors can be further divided into two categories:
Dominant factors are those derived from competitive priorities (cost, quality, time, and
flexibility) and have a particularly strong impact on sales or costs. Secondary factors also are
important, but management may downplay or even ignore some of them if other factors are more
important.
General Locational Factors
Following are the general factors required for location of plant in case of all types of
organisations.
CONTROLLABLE FACTORS
1. Proximity to markets
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Labor and wages
6. External economies
7. Capital
UNCONTROLLABLE FACTORS
8. Government policy
9. Climate conditions
10. Supporting industries and services
11. Community and labour attitudes
12. Community Infrastructure
CONTROLLABLE FACTORS
1. Proximity to markets: Every company is expected to serve its customers by providing goods
and services at the time needed and at reasonable price organizations may choose to locate
facilities close to the market or away from the market depending upon the product. When the
buyers for the product are concentrated, it is advisable to locate the facilities close to the market.
Locating nearer to the market is preferred if
88
89
facilities, and as well to increase their markets for selling their products and have access to a
much wider range of business services.
Location economies of scale in the manufacturing sector have evolved over time and have
mainly increased competition due to production facilities and lower production costs as a result
of lower transportation and logistical costs. This led to manufacturing districts where many
companies of related industries are located more or less in the same area. As large corporations
have realized that inventories and warehouses have become a major cost factor, they have tried
reducing inventory costs by launching Just in Time production system (the so called Kanban
System). This high efficient production system was one main factor in the Japanese car industry
for being so successful. Just in time ensures to get spare parts from suppliers within just a few
hours after ordering. To fulfill these criteria corporations have to be located in the same area
increasing their market and service for large corporations.
7. Capital: By looking at capital as a location condition, it is important to distinguish the
physiology of fixed capital in buildings and equipment from financial capital. Fixed capital costs
as building and construction costs vary from region to region. But on the other hand buildings
can also be rented and existing plants can be expanded. Financial capital is highly mobile and
does not very much influence decisions. For example, large Multinational Corporations such as
Coca Cola operate in many different countries and can raise capital where interest rates are
lowest and conditions are most suitable.
Capital becomes a main factor when it comes to venture capital. In that case young, fast growing
(or not) high tech firms are concerned which usually have not many fixed assets. These firms
particularly need access to financial capital and also skilled educated employees.
UNCONTROLLABLE FACTORS
8. Government policy: The policies of the state governments and local bodies concerning labour
laws, building codes, safety, etc., are the factors that demand attention. In order to have a
balanced regional growth of industries, both central and state governments in our country offer
the package of incentives to entrepreneurs in particular locations. The incentive package may be
in the form of exemption from a safes tax and excise duties for a specific period, soft loan from
financial institutions, subsidy in electricity charges and investment subsidy. Some of these
incentives may tempt to locate the plant to avail these facilities offered.
9. Climatic conditions: The geology of the area needs to be considered together with climatic
conditions (humidity, temperature). Climates greatly influence human efficiency and behaviour.
Some industries require specific climatic conditions e.g., textile mill will require humidity.
10. Supporting industries and services: Now a day the manufacturing organization will not
make all the components and parts by itself and it subcontracts the work to vendors. So, the
source of supply of component parts will be the one of the factors that influences the location.
The various services like communications, banking services professional consultancy services
and other civil amenities services will play a vital role in selection of a location.
11. Community and labour attitudes: Community attitude towards their work and towards the
prospective industries can make or mar the industry. Community attitudes towards supporting
trade union activities are important criteria. Facility location in specific location is not desirable
even though all factors are favouring because of labour attitude towards management, which
brings very often the strikes and lockouts.
12. Community infrastructure and amenity: All manufacturing activities require access to a
community infrastructure, most notably economic overhead capital, such as roads, railways, port
90
facilities, power lines and service facilities and social overhead capital like schools, universities
and hospitals.
These factors are also needed to be considered by location decisions as infrastructure is
enormously expensive to build and for most manufacturing activities the existing stock of
infrastructure provides physical restrictions on location possibilities.
PLANT LAYOUT
Plant layout refers to the physical arrangement of production facilities. It is the configuration of
departments, work centres and equipment in the conversion process. It is a floor plan of the
physical facilities, which are used in production.
According to Moore Plant layout is a plan of an optimum arrangement of facilities including
personnel, operating equipment, storage space, material handling equipment and all other
supporting services along with the design of best structure to contain all these facilities.
Objectives of Plant Layout
The primary goal of the plant layout is to maximise the profit by arrangement of all the plant
facilities to the best advantage of total manufacturing of the product. The objectives of plant
layout are:
1. Streamline the flow of materials through the plant.
2. Facilitate the manufacturing process.
3. Maintain high turnover of in-process inventory.
4. Minimise materials handling and cost.
5. Effective utilisation of men, equipment and space.
6. Make effective utilisation of cubic space.
7. Flexibility of manufacturing operations and arrangements.
8. Provide for employee convenience, safety and comfort.
9. Minimize investment in equipment.
10. Minimize overall production time.
11. Maintain flexibility of arrangement and operation.
12. Facilitate the organizational structure.
Principles of Plant Layout
1. Principle of integration: A good layout is one that integrates men, materials, machines and
supporting services and others in order to get the optimum utilisation of resources and maximum
effectiveness.
2. Principle of minimum distance: This principle is concerned with the minimum travel (or
movement) of man and materials. The facilities should be arranged such that, the total distance
travelled by the men and materials should be minimum and as far as possible straight line
movement should be preferred.
3. Principle of cubic space utilisation: The good layout is one that utilise both horizontal and
vertical space. It is not only enough if only the floor space is utilised optimally but the third
dimension, i.e., the height is also to be utilised effectively.
4. Principle of flow: A good layout is one that makes the materials to move in forward direction
towards the completion stage, i.e., there should not be any backtracking.
5. Principle of maximum flexibility: The good layout is one that can be altered without much
cost and time, i.e., future requirements should be taken into account while designing the present
layout.
91
6. Principle of safety, security and satisfaction: A good layout is one that gives due
consideration to workers safety and satisfaction and safeguards the plant and machinery against
fire, theft, etc.
7. Principle of minimum handling: A good layout is one that reduces the material handling to
the minimum.
CLASSIFICATION OF LAYOUT
Layouts can be classified into the following five categories:
1. Process layout
2. Product layout
3. Combination layout
4. Fixed position layout
5. Group layout
Process Layout
Process layout is recommended for batch production. All machines performing similar type of
operations are grouped at one location in the process layout e.g., all lathes, milling machines, etc.
are grouped in the shop will be clustered in like groups.
Thus, in process layout the arrangement of facilities are grouped together according to their
functions. The flow paths of material through the facilities from one functional area to another
vary from product to product. Usually the paths are long and there will be possibility of
backtracking.
Process layout is normally used when the production volume is not sufficient to justify a product
layout. Typically, job shops employ process layouts due to the variety of products manufactured
and their low production volumes.
Advantages
1. In process layout machines are better utilized and fewer machines are required.
2. Flexibility of equipment and personnel is possible in process layout.
3. Lower investment on account of comparatively less number of machines and lower cost of
general purpose machines.
4. Higher utilisation of production facilities.
5. A high degree of flexibility with regards to work distribution to machineries and workers.
6. The diversity of tasks and variety of job makes the job challenging and interesting.
7. Supervisors will become highly knowledgeable about the functions under their department.
Limitations
1. Backtracking and long movements may occur in the handling of materials thus, reducing
material handling efficiency.
2. Material handling cannot be mechanized which adds to cost.
3. Process time is prolonged which reduce the inventory turnover and increases the in process
inventory.
4. Lowered productivity due to number of set-ups.
5. Throughput (time gap between in and out in the process) time is longer.
6. Space and capital are tied up by work-in-process.
Product Layout
In this type of layout, machines and auxiliary services are located according to the processing
sequence of the product. If the volume of production of one or more products is large, the
92
facilities can be arranged to achieve efficient flow of materials and lower cost per unit. Special
purpose machines are used which perform the required function quickly and reliably.
The product layout is selected when the volume of production of a product is high such that a
separate production line to manufacture it can be justified. In a strict product layout, machines
are not shared by different products. Therefore, the production volume must be sufficient to
achieve satisfactory utilization of the equipment.
Advantages
1. The flow of product will be smooth and logical in flow lines.
2. In-process inventory is less.
3. Throughput time is less.
4. Minimum material handling cost.
5. Simplified production, planning and control systems are possible.
6. Less space is occupied by work transit and for temporary storage.
7. Reduced material handling cost due to mechanised handling systems and straight flow.
8. Perfect line balancing which eliminates bottlenecks and idle capacity.
9. Manufacturing cycle is short due to uninterrupted flow of materials.
10. Small amount of work-in-process inventory.
11. Unskilled workers can learn and manage the production.
Limitations
1. A breakdown of one machine in a product line may cause stoppages of machines in the
downstream of the line.
2. A change in product design may require major alterations in the layout.
3. The line output is decided by the bottleneck machine.
4. Comparatively high investment in equipments is required.
5. Lack of flexibility- A change in product may require the facility modification.
Combination Layout
A combination of process and product layouts combines the advantages of both types of layouts.
A combination layout is possible where an item is being made in different types and sizes. Here
machinery is arranged in a process layout but the process grouping is then arranged in a sequence
to manufacture various types and sizes of products. It is to be noted that the sequence of
operations remains same with the variety of products and sizes.
Fixed Position Layout
This is also called the project type of layout. In this type of layout, the material, or major
components remain in a fixed location and tools, machinery, men and other materials are brought
to this location. This type of layout is suitable when one or a few pieces of identical heavy
products are to be manufactured and when the assembly consists of large number of heavy parts,
the cost of transportation of these parts is very high.
Advantages
The major advantages of this type of layout are:
1. Helps in job enlargement and upgrades the skills of the operators.
2. The workers identify themselves with a product in which they take interest and pride in doing
the job.
3. Greater flexibility with this type of layout.
4. Layout capital investment is lower.
Group Layout (or Cellular Layout)
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There is a trend now to bring an element of flexibility into manufacturing system as regards to
variation in batch sizes and sequence of operations. A grouping of equipment for performing a
sequence of operations on family of similar components or products has become all the
important.
Group technology (GT) is the analysis and comparisons of items to group them into families
with similar characteristics. GT can be used to develop a hybrid between pure process layout and
pure flow line (product) layout. This technique is very useful for companies that produce variety
of parts in small batches to enable them to take advantage and economics of flow line layout.
The application of group technology involves two basic steps; first step is to determine
component families or groups. The second step in applying group technology is to arrange the
plants equipment used to process a particular family of components. This represents small plants
within the plants. The group technology reduces production planning time for jobs. It reduces the
set-up time.
Thus group layout is a combination of the product layout and process layout. It combines the
advantages of both layout systems. If there are m-machines and n-components, in a group layout
(Group-Technology Layout), the m-machines and n-components will be divided into distinct
number of machine-component cells (group) such that all the components assigned to a cell are
almost processed within that cell itself. Here, the objective is to minimize the intercell
movements.
The basic aim of a group technology layout is to identify families of components that require
similar of satisfying all the requirements of the machines are grouped into cells. Each cell is
capable of satisfying all the requirements of the component family assigned to it.
The layout design process considers mostly a single objective while designing layouts. In process
layout, the objective is to minimize the total cost of materials handling. Because of the nature of
the layout, the cost of equipments will be the minimum in this type of layout. In product layout,
the cost of materials handling will be at the absolute minimum. But the cost of equipments would
not be at the minimum if the equipments are not fully utilized.
In-group technology layout, the objective is to minimize the sum of the cost of transportation and
the cost of equipments. So, this is called as multi-objective layout.
Advantages of Group Technology Layout
Group Technology layout can increase
1. Component standardization and rationalization.
2. Reliability of estimates.
3. Effective machine operation and productivity.
4. Customer service.
It can decrease the
1. Paper work and overall production time.
2. Work-in-progress and work movement.
3. Overall cost.
Limitations of Group Technology Layout
This type of layout may not be feasible for all situations. If the product mix is completely
dissimilar, then we may not have meaningful cell formation.
94
Financial Analysis
Financial analysis include 1.
2.
3.
4.
5.
6.
7.
..
Civil works:
Buildings (Factory/ Administrative)
Plant ad Machinery;
Imported:
Clearing and forwarding
Indigenous:
Foundation and Installation
Misc. Fixed Assets
Training Expenses on:
Foreign technicians
Indian technicians abroad
Preliminary & Pre-operative expenses
Provision for contingencies
95
..
-------------Total:
..
--------------
(1)
1.
Land
and
development:
Grand
Total
Rupe Total
e
equiv
alent
of
foreig
n
excha
nge
cost
(3) + (6)
(2)
(5)
(7)
(3)
(4)
(6)
Site
a.
Cost
including
conveyance charges of ___
hectares of freehold land
acquired/ proposed to be
acquired at he rate of Rs.
___ per hectare
b. Premium payable on
leasehold
land
and
conveyance charges (___
96
Miscellaneous
non-
97
factory
buildings
like
canteen, guest houses, times
offices, excise house, etc.
f. Quarters for essential
staff.
g. Silos, tanks, wells, chest
basin, cisterns, hoopers,
bines and other structures,
which are necessary, for
installation of plant and
equipment and which ma be
constructed in RCC and
such other structural civil
engineering materials.
h. Garages.
i. Cost of sewers, drainage,
etc.
j. Civil engineering works
not included above.
k. Architects fees.
3. Plant and Machinery
i. Imported:
a. FOB value.
b. Shipping freight and
insurance
[___percent of (a)]
c. Import duty.
d. Clearing,
loading,
unloading
and
transport charges to
actor site.
ii. Indigenous:
a. FOR cost
b. Sales tax (percent),
Octroi (percent) and
other taxes, if any.
98
fixed
a. Furniture
b. Office machinery and
equipment.
c. Miscellaneous
tools
and
equipment
including
erections
tools.
d. Cars,
trucks,
etc.
(___cars;___ trucks).
e. Railway siding.
f. Equipment (including
cost of installation),
cabling,
etc.,
for
distribution of power
and light for factory
and colony.
g. Equipment and piping
for
supply
and
99
treatment of water
(including cost of
installation).
h. Laboratory equipment.
i. Workshop equipment.
j. Fire
fighting
equipment.
k. Effluent
collection,
treatment and disposal
arrangement.
l. Miscellaneous fixed
assets.
7. Preliminary and capital
Isue expenses:
a. Brokerage
and
commission on capital
(___ percent of Rs.___
lakhs.)
b.Other
capital
issue
expenses
(legal,
advertisement, printing,
stationery, etc.)
c. Other
preliminary
expenses
(company
floatation and other
initial expenses).
8. Preoperative expenses:
(from ____date to date of
commencement
of
commercial production)
a. Establishment.
b.Rent, rates and taxes.
c. Travelling expenses.
d.Miscellaneous expenses.
e. Interest and commitemtn
charges on borrowings
(give
details
of
calculations).
f. Insurance
during
construction including
erection insurance.
g.Mortgage
expenses
100
Item
Considered
1.
2.
Buildings
3.
4.
imported
indigenous
Stores & Spares
Foundation
Installation
Technical know-how fees
5.
Total
Firm
Non-Firm
&
TOTAL
101
Item
Foreign
Re. Amount
Exchange (Re.
Equiv)
1.
Equity Promoters
-
Total
Fin. Inst.
Others
Public
Pref. Shares
2.
Subsidy, if any
3.
Other F.I.S.
Banks
4.
Debentures
5.
Deferred payments
7.
Internal accruals
8.
Bank borrowings
- Working capital
9.
Others
TOTAL
102
Year
+1
Year +2
Year +3
Year
+4
Year +5
Raw
Materials,
Chemicals,
Component & Consumable Stores
1)
2)
3)
4)
Total Material Costs (a)
Utilities
Power
Water
Fuel
Total Utilities
(b)
(c)
Factory Overhead
Repairs & Maint.
Light
Rent & Taxes on Factory Assets
103
Insurance
Misc Expenses
5% Contingency
Total Factory Overhead (d)
Estimate of Cost of Mfg
(a)+(b)+(c)+(d)
Provide estimates of production and sales for the first five years of operation (if more than one
product, prepare each response for each product separately)
Year
+1
Year +2
Year +3
Year
+4
Year +5
Installed Capacity
No of Working Days
No. of Shifts
Annual
Production
adjusting
stock
104
Value of Sales
Give estimates of working results for the first five years of operation
Year
+1
Cost of Production
Question IV-12 (a)
Year +2
Year +3
Year
+4
Year +5
from
Administrative Expenses
Admn Salaries
Remun to Directors
Professional Fees
Office Supplies
Insurance & Taxes
Miscellaneous
Total Adm.expenses(b)
Total Sales Expenses(c)
Royalty/Know How (d)
Total Cost of Production
(e)=(a)+(b)+(c)+(d)
Expected Sales - from Question
IV-13 (f)
Gross Profit Before Int. (g)=(f)(e)
105
Financial Expenses
Interest on TL
Interest on WCL
Guarantee Comm.
Total Fncl Expense (h)
Depreciation (i)
Operating Profit (j)=(g)+(h)+(i)
Other Income, if any (k)
Prelim Exp Written off (l)
Profit / Loss
(m)=(j)+(k)+(l)
Before
Tax
106
IV-17 Provide a cash flow statement for the company as a whole for the first five years of
operation
Year
+1
Year +2
Year +3
Year
+4
Year +5
Year
+1
Year +2
Year +3
Year
+4
Year +5
Sources of Funds
Share Issue
107
Disposition of Funds
Capital Expenditure of the Project
Other
Normal
Expenditures
Capital
Total Dispositions
108
Rs.
in
Lacs
As at March, 31
2010
201
2011
2
700.00 700.00
700. 700
00 .00
2165.0 2745.3
5
6
393
3335 3.3
.70
4
2865.0 3445.3
5
6
463
4035 3.3
.70
4
803.50 482.10
160.
70
2006
2007
2008
700.0
0 700.00
700.0
0
2009
SOURCES OF FUNDS
486.0
3 995.39
1590.
52
1186. 1695.3
03
9
2290.
52
1607. 1446.3
00
0
1124.
90
Loan Funds
Term Loan
0.0
0
109
TOTAL
(A) + (B)
950.0
0 950.00
950.0
0
103.0
0 103.00
103.0
0
2660. 2499.3
00
0
3846. 4194.6
03
9
2177.
90
4468.
42
950.00 950.00
950. 950
00 .00
103.00 103.00
103. 103
00 .00
1856.5 1535.1
0
0
105
1213 3.0
.70
0
4721.5 4980.4
5
6
568
5249 6.3
.40
4
2030.0 2030.0
0
0
203
2030 0.0
.00
0
351.82 439.77
527. 615
73 .68
1678.1 1590.2
8
3
141
1502 4.3
.27
2
APPLICATION OF FUNDS
Fixed Assets
Gross Block
Less: Depreciation
2030. 2030.0
00
0
2030.
00
87.95 175.91
263.8
6
1942. 1854.0
05
9
0.00
Investments
0.00
1766.
14
0.00
0.00
0.00
0.00
0.0
0
110
1249.9 1249.9
0
0
124
1249 9.9
.90
0
889.20 889.20
889. 889
20 .20
417.9
9
417.99 417.99
417. 417
99 .99
1114.9
868.04
1
1371
.81
100.00 200.00
300. 400
00 .00
3525.1 3872.0
3
0
475
4228 3.7
.90
9
481.77 481.77
481. 481
77 .77
3043.3 3390.2
6
4
427
3747 2.0
.13
2
4721.5 4980.4
5
6
568
5249 6.3
.40
4
Inventories
890.4 1097.6
0
0
1249.
90
Receivables
620.0
0 773.40
889.2
0
203.8
4 300.50
33.00
42.00
45.00
343.0
1 449.98
581.9
6
2090. 2663.4
25
8
3184.
05
186.2
7 322.89
481.7
7
179
6.7
0
Provisions
Preliminary Expenses
1903. 2340.6
98
0
2702.
28
Total 1 + 2 + 5 + 6
3846. 4194.6
03
9
4468.
42
111
Check
0.00
0.00
0.00
0.00
0.00
0.00
19.42
18.54
17.66
16.78
15.90
15.0
2
16.07
14.46
11.25
8.04
4.82
1.61
11.08
13.4
2
Margin of Security
% of Margin of Security
3.35
121%
4.08
6.41
128% 157%
8.75
209%
330%
0.0
0
935
%
112
Environment is that which surrounds all of us i.e. the life and non-life components. The life
components include the plants, animals and micro-organism. The non-life components consist of
the land, water, air, clouds, sunshine etc.
According to the Environmental Protection Act, 1986, Environment includes water, air, land,
and the inter-relationship which exists among water, air, land, human beings, other living
creatures, plants and micro-organisms. It also includes the interactions between the non-life
components and their interactions with the living creatures also. The study of the interrelationships between various organisms and their environment is called ecology.
Factors which induce the firms to act in a more environment- friendly manner:
113
The environmental impact assessment must identify the direct and indirect effects of a project on
the following factors: man, the fauna, the flora, the soil, water, air, the climate, the landscape, the
material assets and cultural heritage, and the interaction between these various elements.
It means the presence in the environment of any solid, liquid, or gaseous substances, in
such concentration, that may or tend to be, injurious to the environment.
According to the Air (Prevention and Control of Pollution) Act, 1981, Air Pollution
includes excessive noise also. According to Water (Prevention and Control of Pollution)
Act, 1974, pollution means contamination of water or such alteration of the physical,
chemical and biological properties of water or discharge of sewage into water, or such
harmful effluents injurious to public health, into water.
Mechanical separation
Electrostatic precipitators
Filtering (Fibrous materials)
Scrubbing
114
Tertiary Treatment (Some chemicals, detergents, pesticides etc. need this sort of chemical
treatment like oxidation, etc.)
Projects concerned
The projects may be proposed by a public or private person.
An assessment is obligatory for certain projects. These include:
dangerous industrial facilities such as oil refineries, nuclear fuel or nuclear waste
treatment facilities, integrated chemical installations;
power stations of more than 300 megawatts or nuclear power stations;
transport infrastructure such as railways, airports, motorways, inland waterways and ports
when the infrastructure exceeds certain specific thresholds;
waste and water treatment facilities;
large mining facilities (large quarries, large gas or oil rigs);
water transport or storage facilities, and dams;
installations for the intensive rearing of poultry or pigs which exceed certain specific
thresholds.
Other projects are not automatically assessed: Member States can decide to subject them to
assessment on a case-by-case basis or according to thresholds, certain criteria (for example size),
location (sensitive ecological areas in particular) and potential impact (surface affected,
duration). This particularly concerns projects in the following fields:
agriculture, forestry and aquaculture (for example agricultural irrigation projects or
intensive fish-farming);
the mining industry (underground mining, deep drillings, etc.);
industrial facilities for generating, transporting and storing electricity;
the production and processing of metals (cast iron or steel, shipyards, etc.);
the mineral industry (distillation of coal, cement production, etc.);
the chemical industry (production of pesticides, pharmaceutical products, paints, etc.);
the food industry;
textile, leather, wood, paper and rubber industries;
infrastructure projects (shopping centres, car parks, elevated and underground railways,
etc.);
tourism or leisure projects (ski-runs and ski lifts, holiday villages, theme parks, etc).
115
116
EIA is the study of environmental impact of projects. It identifies, predicts and interprets and
communicates about the impact of a project on the health and well being of humans.
Project Appraisal
The assessment of the viability of a project involving medium or long-term investments in terms
of shareholder wealth may be termed as project appraisal. In our country the all-India level
financial institutions have devised an in house policy of assessing the industrial projects to grant
financial assistance based on their commercial, technical, economic and financial viability.
The various aspects of Project Appraisal are:
1.
2.
3.
4.
5.
6.
7.
Constitution of Firm/Company
Priority/Government Policy
Institutional Policy Decisions
Acceptability of the Promoters by the Financial Institutions.
2. Market Appraisal
For appraising the market of product or services from project are being decided on the basis of
following factors:
Assessment of Potential Demand (Demand-Supply Gap).
Study on Trends of Production, Supply, Imports, Exports, Price Trends, Distribution and
Sales Promotion, Government Policies, Competition, Consumer Profile, etc.
117
Methods of Demand Forecasting viz. Trend Projection, End Use, Econometric Methods.
Problems in Demand Forecasting in Collection of Data, Methods of Forecasting and
Environmental Changes.
3. Technical Appraisal
Any project requires technical appraisal for its viability and feasibility in the region where it is
proposed to and on the basis of kind of technology required for the project. We need to consider
following points:
Location ad Site
Plant Capacity and Product-Mix
Technology and Technical Know-how
Selection and Procurement of Plant and Machinery
Civil and Structural Work
Charts and Lay-Outs
Raw Materials, Consumables and Utilities
Implementation Schedule
4. Financial Appraisal
Having estimated the profitability figures a financial analyst would be interested to find the
financial viability of a project. The financial appraisal of any project involves following step:
Cost-Benefit Analysis
Domestic Resource Cost
Effective Rate of Protection
Employment Potential
Productivity and Investment per Worker
6. Entrepreneur/Promoter Appraisal
118
Management Set-Up
Organizational Set-Up
Recruitment and Selection of Executives
Training
119
120
n
At
NPV = - I, t= 1, 2, 3, ------------n
t=1 (1 +r) t
where, At refers to cash flow at the end of year t, r = Discount rate, n = Life of the project in
number of years, and, I = Initial Investment.
The IRR Method:
The Internal Rate of Return (IRR) can be defined as the rate of return at which the sum of future
cash inflows, when discounted, is equivalent to the initial outlay or the net present value is zero.
This can be represented as:
n
At
I = ,
t= 1, 2, 3, ------------n, where r = IRR
t=1 (1 +r) t
I = Initial Investment/Outlay
This method has the following distinct advantages:
It takes into account the quantum of the cash outflows
It takes into account the total amounts of the cash inflows and the timings.
Benefit Cost Ratio (BCR)/ Profitability Index (PI):
It is the ratio of the present value of the future cash flows and the initial outlay. It is a relative
method and not an absolute method. It is useful for comparing two or more projects in terms of
their acceptability or profitability. Mathematically it is expressed as:
n
At
t=1 (1 +k) t
BCR = PI = , where, k = Discount Rate
I
In case the required rate of return exceeds IRR, the proposal would be rejected under IRR
method. Likewise, if the expected return exceeds the IRR, we would get negative NPV, hence
the project will again be rejected on the NPV basis. Hence under both the methods we would not
accept the project. Thus both the methods give us similar results so far as the appraisal criterion
for the investment in a project is concerned, except when the initial cash outlays are different and
the timings of the cash flows also differ.
Cash Flows Relating to Equity:
The equity-related cash flow stream reflects the contributions made and benefits receivable by
equity shareholders. It is divided into 3 components:
121
122
Find Net Cash Flows relating to (a) Equity, (b) Long-term Funds and (c) Total Funds.
Solution:
a. Net Cash Flows Relating to Equity Funds:
(Rs. Million)
0
(15.00)
2. Revenues
60.00
60.00
60.00
60.00
60.00
3. Operating costs
42.00
42.00
42.00
42.00
42.00
4. Depreciation
10.00
6.67
2.96
1.98
1.80
3.00
2.40
1.80
1.20
0.60
7. PBT
3.20
7.13
9.96
12.04
13.62
8. Tax
1.60
3.57
4.98
6.02
6.81
9. PAT
1.60
3.56
4.98
6.02
6.81
5.00
20.00
4.00
4.00
4.00
4.00
4.00
10.00
Years
1. Equity (Initial Invst.)
1.80
4.44
1.80
1.80
1.80
Capital
15. Repayment of W C.
123
5.00
(15.00)
11.60
10.23
9.42
8.98
8.79
(4.00)
(4.00)
(4.00)
(4.00)
6.00
(15.00)
7.60
6.23
5.42
4.98
14.79
Credits
Flows (9-10+4)
19. Terminal Cash
Flows(11+12-13-14-1516)
20. Net Cash Flow
(17+18+19)
Years
1. Fixed Asets
(30.00)
2. W.Capital Margin
(5.00)
3. Revenues
60.00
60.00
60.00
60.00
60.00
4. Operating costs
42.00
42.00
42.00
42.00
42.00
5. Depreciation
10.00
6.67
2.96
1.98
1.80
3.00
2.40
1.80
1.20
0.60
8. PBT
3.20
7.13
9.96
12.04
13.62
9. Tax
1.60
3.57
4.98
6.02
6.81
1.80
4.44
1.80
1.80
1.80
124
10. PAT
1.60
3.56
4.98
6.02
6.81
5.00
5.00
(35.00)
13.10
11.43
10.32
9.58
9.09
(35.00)
13.10
10.00
Flows(11+12)
16. Net Cash Flow
11.43
10.32
9.58
19.09
(13+14+15)
(50.00)
2. Revenues
60.00
60.00
60.00
60.00
60.00
3. Operating costs
42.00
42.00
42.00
42.00
42.00
4. Depreciation
10.00
6.67
2.96
1.98
1.80
3.00
2.40
1.80
1.20
0.60
7. PBT
3.20
7.13
9.96
12.04
13.62
8. Tax
1.60
3.57
4.98
6.02
6.81
9. PAT
1.60
3.56
4.98
6.02
6.81
Years
1. Total Funds (Investt.)
1.80
4.44
1.80
1.80
1.80
125
5.00
20.00
(50.00)
14.00
12.33
11.22
10.48
9.99
(50.00)
14.00
25.00
Flows (10+11)
15. Net Cash Flow
12.33
11.22
10.48
25.99
(12+13+14)
Risk Analysis
Risk in projects manifests itself as the variability of cash flows. But from where that risk come
from? All will be discussed in this part and will follow various methods of measuring risk. In
capital budgeting, the basic assumption is that the proposals do not involve any risk (business
risk), but it seldom happens. Decisions are made on the basis of forecasts which depend upon
events whose occurrence cannot be anticipated with absolute certainty because of economic,
social, fiscal, political and other reasons. The risk is linked with business decisions.
Risk is a situation where the possible events are known, but which of those will actually happen
is not known. However, the probability of their occurrence can be determined. We can use the
term risk to mean that though it is known how much the cash flows are likely to be, we can
express their realizability only through a probability distribution.
Risk is the variability that is likely to occur in future between the estimated and actual returns.
Risk and Uncertainty:
126
A Risk situation is one in which the probabilities of particular event occurring are known. An
Uncertainty Situation is one where these possibilities are not known.
Investment Appraisal is a methodology for calculating the expected returns based on cash flow
forecasts of many project variables, often inter-related. Risk emanates from the uncertainty
encompassing these project variables. The evaluation of risk depends upon:(i) Our ability to identify and understand the nature of uncertainty surrounding the key project
variables.
(ii) Having tools and methodology to process its risk implications on the returns of the project.
Risk is a situation where the possible events are known, but which of those will actually happen
is not known. However, the probability of their occurrence can be determined. In capital
investment decisions, we can express the realizability of cash flows only through a probability
distribution.
Types of Risks in CI Decisions:
A. Business Risk: It is the variability of the earnings due to changes in the firms normal
operating conditions. It has its origin in the impact of the changing economic
environment on the firms activities and the managements decisions on the capital
intensity of the operations. Business Risk is the variability of the EBIT and is
unconnected to the financial risk. Business Risk can be sub-divided into 2 types of risks
viz.
(i) Investment Risk: It is the variability in the earnings due to variations in inflows
and outflows of cash resulting from the capital investments made by the firm. These
variations arise due to errors in the judgment of or unexpected changes in the market
acceptance of the product or service of the firm, unforeseen technological changes
and changes in the cost structure.
(ii) Portfolio Risk: It is the measure of the variability of the earnings caused by the
diversification achieved by the firm in its operations and asset portfolio. This can be
reduced by investing in the projects or acquiring other firms which have negative
correlation with the earnings of the firm.
B. Financial Risk: It is the variability of the after tax earnings or the EPS of the firm
caused by the financial structure or more precisely, the debt content in the capital
structure. It is the impact of the efficient use of the long-term capital on the earnings of
the firm.
Measures of Risk:
127
The statistical measures of dispersion are the most useful ones to gauge the extent of variation in
the cash flows. There are basically two types of such measures:
A. General Techniques:
1. Risk Adjusted Discount Rate (RADR)
2. Certainty Equivalent Co-efficient (CEC)
B. Quantitative Techniques:
1. Range
2. Mean Absolute Deviation (MAD)
3. Variance / Standard Deviation (SD)
4. Co-efficient of Variation (COV)
5. Sensitivity Analysis (SA)
6. Simulation Analysis(SIA)
7. Scenario Analysis (SCA)
8. Decision Tree Analysis (DTA)
A. General Techniques:
1. Risk Adjusted Discount Rate (RADR)
This is based on the assumption that investors expect a high rate of return on risky projects
compared to less risky projects.
Procedure:
Determine the risk free rate (This is the rate at which future cash flows should be
discounted had there been no risk.
Find risk premium (extra return expected over normal returns)
Find NPV with composite discount rate (normal rate plus risk premium) which takes
into account both time and risk factors. A higher discount rate will be used for more
risky projects and lower discount rate for less risky projects.
n
At
NPV = ------------,
t=1,2,3,..n.
t
At = Cash flows without risk adjustment
t=1 (1+k)
k = Risk adjusted discount rate
and
This method incorporates the risk averse attitude of the investors. But the determination of
appropriate discount rate is arbitrary. It is adjusted and not the required rate of return. It results in
compounding of risk over time, since premium is added to discount rate. It assumes that
investors are averse to risk. But there are some risk seekers also.
2. Certainty Equivalent Co-efficient (CEC)
128
In this method, the estimated cash flows are reduced to conservative level by
applying a correction factor termed as CEC.
Risk-less Cash flows (Certain cash flows)
CEC = ------------------------------------------------------Risky cash flows (Uncertain cash flows)
Risk-less cash flows are which management is ready to accept if no risk is involved.
Exp. Management expects a cash flow of Rs.20,000. The project is risky, but it expects at least a
cash flow of Rs.12,000. It means CEC = 12000/20000 = 0.6. Here,
n
t At
NPV = ------------,
t=1 (1+i)t
t=1,2,3,..n.
At = Cash flows without risk adjustment
_
R = Arithmetic Mean
MAD shows the variability of the values without regard to the sign of variation.
(iii) Variance and Standard Deviation:
129
The square root of variance is called the standard deviation (SD). These are the measures of
how well the expected values or mean returns represent the distribution. The higher the SD,
lower is the utility of the mean as high SD indicates the value scattered in a greater area
around the mean.
n
Variance = Pi ( Ri R)2 ,
i=1
n
SD = [ Pi ( Ri R)2 ](-1/2)
i=1
4. Coefficient of Variation (COV):
It measures the risk borne per unit of return. That is, the amount of risk as represented by
the standard deviation for each unit of expected return. It is a relative measure and is
given by:
COV = Standard Deviation/ Mean
5. Sensitivity Analysis (SA):
In SA, the factors that are likely to change during the life of the project are first identified
and the extent of change in the NPV or other criterion is chosen for evaluation with
change in the factors. The changes are measured in percentages. SA provides information
on the extent to which the project remains viable under different situations, or, the extent
of change in the variables that will be tolerated by the project.
This answers questions like What will be NPV if sales drop to 50000 units compared to 70000 units?
What will be NPV if economic life of project is only 5 instead of 7 years?
Sometimes it provides cash flows under 3 assumptions; (i) Pessimistic; (ii) Most likely; ad (iii)
Optimistic. It explains how sensitive the cash flows are under these 3 different situations. The
larger the difference between the pessimistic and optimistic cash flows, the more risky is the
project. The limitation is that this method does not provide chances of occurrence of each of
these estimates.
Procedure:
1. Set a relationship between basic factors like quantity sold, unit price, life of
project, etc. and NPV
2. Estimate range of variation - say 5% or10%.
3. Study the effect of variation on NPV in the basic variables.
130
Example
A Ltd is planning to replace its old belt manufacturing machinery with new machinery, which
costs Rs.10 crore and A Ltd expects to dispose off its old machinery for Rs.2 crore. The new
machinery is expected to cut down manufacturing costs from Rs.80 a belt at present to Rs.40
a belt. The fixed costs are Rs.40 lakhs per year. The new machinery will have an economic life
of 10 years and depreciation will be by Straight Line method. At the end of the economic life,
the new machinery can be sold off for 10% of its acquisition cost. The selling price of the belt
is Rs.100 and the cost of capital is 12%. A Ltd feels that its expected sales (no. of belts) and
manufacturing cost per belt are likely to vary, due to changes in business environment, as
follows:-
Particulars
Pessimistic
Expected
Optimistic
4,00,000
5,00,000
7,00,000
60
40
30
Solution:
The relationship between NPV and its variables is given by:
n
[Q (P-V)-F-D] [1-T]+D
S
NPV =
---------- +
-I
t
n
t=1
(1+k)
(1+k)
Substituting values for different variables, i.e. P=Rs.100; V=Rs.40; F=Rs.40,00,000;
D=Rs.90,00,000;
T=0%;
k=12%;
I=Rs.8,00,00,000
(10,00,00,000-2,00,00,000
);
S=Rs.1,00,00,000 and n = 10 years, we get,
10 [Q (100-V)-40,00,000-90,00,000] [1-0]+90,00,000
---------------------------------------t
t=1
(1.12)
1,00,00,000
+
---- - 8,00,00,000,
(1.12) 10
Which, on simplification, will be,
NPV =
131
[Q (100-V) 40,00,000
NPV =
---------- - 7,67,80,000
t=1
(1.12) t
A. Sensitivity Analysis by varying Quantity Sold:
10
(i)
NPV =
(ii)
Pessimistic
Expected
Optimistic
4,00,000
5,00,000
7,00,000
132
NPV (Rs.crore)
3.622
7.012
13.792
(ii)
10
[5,00,000 (100-40) 40,00,000
NPV =
-------------------- - 7,67,80,000
t
t=1
(1.12)
= 2,60,00,000 PVIFA (12%,10) - 7,67,80,000
= Rs.7.012crore
(iii)
10
[5,00,000 (100-30) 40,00,000
NPV =
-------------------- - 7,67,80,000
t=1
(1.12) t
= 3,10,00,000 PVIFA (12%,10) - 7,67,80,000
= Rs.9.837 crore
NPVs at different Mfg. Costs per belt:
133
Pessimistic
Expected
Optimistic
60
40
30
1.362
7.012
9.837
Specify parameters
Select values at random (Random Number Tables)
Determine NPV corresponding to random values
Repeat for simulated NPVs
Plot frequency distribution
Interpret the results
Example
Shankar Cables Limited (SCL) is considering the risk characteristics of a project. SCL has
identified that the following factors have a bearing on the NPV of the project which are not
subject to much variation and is considered to be constant at the following levels: -
Rs.500 crore
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10%
Rs.250 crore
Rs.50 crore
40%
5 years
Rs.250 crore
The factors, which are expected to vary, and having a bearing on NPV are the Quantity
manufactured (Q), the Price per unit (P) and the Variable cost per unit (V). The
probability distribution of Q, P and V has been defined as follows:-
Value
Probability
Value
Probability
Value
Probability
240
0.10
1.0
0.30
1.0
0.50
280
0.10
1.5
0.20
1.5
0.30
320
0.20
2.0
0.10
2.0
0.20
360
0.30
2.5
0.40
400
0.20
440
0.10
Required:
a. Define the NPV model for the given project.
b. Set up a correspondence between values of exogenous variables and 2-digit random
numbers.
c. Using some two-digit random numbers from the random number table, obtain five (5)
simulated values of NPV and conclude your opinion.
Solution:
135
(a).
n
[Q (P-V)-F-D] [1-T]+D
S
---------- +
-I
t
n
t=1
(1+k)
(1+k)
Submitting the given values of parameters,
NPV =
NPV =
0.6Q (P-V)-130
=
250
- 500, t=1,2,3,n
+
(1+k)
(1+k)
(b).
Value
Prob.
Cum. Prob.
2-Digit Random
Nos.
240
280
320
360
400
440
0.1
0.1
00 to 09
0.1
0.2
10 to 19
0.2
0.4
20 to 39
0.3
0.7
40 to 69
0.2
0.9
70 to 89
0.1
1.0
90 to 99
1.0
0.3
0.3
00 to 29
1.5
0.2
0.5
30 to 49
2.0
0.1
0.6
50 to 59
2.5
0.4
1.0
60 to 99
1.0
0.5
0.5
00 to 49
1.5
0.3
0.8
50 to 79
2.0
0.2
1.0
80 to 99
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(c).
Run 1:
Random Nos.
52
06
50
Value
360
1.0
1.5
Random Nos.
37
63
28
Value
320
2.5
1.0
Random Nos.
82
57
68
Value
400
2.0
1.5
137
Random Nos.
69
02
36
Value
360
1.0
1.0
Random Nos.
98
94
90
Value
440
2.5
2.0
NPV = [0.6 x 440(2.5 2.0) 130] x PVIFA (10%, 5) + 250 x PVIF (10%, 5) - 500
= [0.6 x 440 (0.5) 130] x 3.791 + 250 x 0.621 - 500
= 7.58 + 155.25 500 = -337.17
7. Scenario Analysis (SCA):
In Sensitivity Analysis (SA), we study the changes in the criterion of merit (NPV) with
changes in one of the variables. But if two or more inter-related variables change
simultaneously at the same time, SCA helps in dealing with such scenario. In SCA,
different scenarios are generated and the desirability of the project is studied in each
scenario.
138
139
Solution:
1(i)
-Rs.2 lakhs
0.6
0.4
Rs.4 lakhs
Rs.20,000
0.20
Rs.30,000
0.25
Rs.40,000
0.10
0.30
Rs.50,000
Govt. securities
Rs.60,000
140
141
recovery factor (CRF), which is the reciprocal of PV of annuity factor, at the given
discount rate and life of the project). Based on the higher EAC, the project should be
chosen.
ECA of a project = NPV x CRF
4. Capital budget constraints:
In case of capital rationing, if the projects are independent, we can select project we
need to compare the NPVs or IRRs of all the projects and rank them in the
descending order and accept those which fall within the outlay.
A. Feasible Combinations Approach:
Under this, given the capital budget restriction and project interdependence, all the
feasible combinations are to be defied. The feasible combination with the highest NPV is to
be chosen.
B. Mathematical Programming Approach
-
LPP:
Maximize:
Xa NPVa
a=1
n
Subject to:
CFat Xa Kt,
( t= 0,1,m)
a=1
and 0 Xa 1
Where, NPVa = Net present value of project a.
Xa
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Project Financing
The assessment of the viability of a project involving medium or long-term investments in terms
of shareholder wealth may be termed as project appraisal. In our country the all India level
financial institutions have devised an in house policy of assessing the industrial projects to grant
financial assistance based on their commercial, technical, economic and financial viability.
The concept of the lead institution
Till recently, the financial institutions used to select one of them as the lead institution, which
was responsible for carrying out the appraisal of the project and subsequent legal documentation
and the disbursements. Thus, the applicant company was required to interact with this lead
institution only, although, it should keep the other institutions abreast of the latest developments
about the appraisal stages. The company was required to submit the application as per the
requirements. However after the recent increase in the number of non performing assets (NPAs)
the concept of the lead institution has been dropped by the all India financial institutions and
each institution is going ahead with its separate appraisal. Of late, the financial institutions have
slowed down their lending activities pertaining to project finance and banks have been
increasingly participating in term loans.
Every business requires a legal set up to run its business. This is the requirement of the law.
There can be many kinds of business organizations like sole proprietorship concern, partnership
firm, private limited company, public limited company and Government Company.
The Companies Act is a massive piece of legislation that governs the formation, management
and all other aspects of the companies administration. There is no aspect of the company, which
is left untouched by this piece of legislation. The Companies Act is broadly divided into the
following parts for its proper appreciation. It would always be advisable for the project managers
to get acquainted with the various aspects of the companies Act 1956. The various parts of the
act are as below:
143
145
The business has to be implemented through any one of the four forms of the organization
namely viz. sole proprietorship concern, partnership firm, limited company or Government
Company. It is advisable to run the project, unless it is in the tiny sector through the company
form of the organization, which has many, advantageous like legal entity, perpetual succession
and limited liability of the members. However, every company has to have the capital clause,
object clause, registered office clause and the limited liability clause. The other major provisions
are that this form of the setup works under the overall supervision of the Board of directors. The
Board may appoint the Managing Director for the day to day running of the business. Thus, there
may be a specific line of hierarchy within the business. There may be a case of delegation of
power on account of this hierarchy. The organization structure of the company can be well
structured as compared to the partnership and the sole proprietorship kinds of the setup.
Financing Projects
This part deals with:1. Loan Syndication
2. Islamic Finance
3. Leveraged Leases
4. Equator Principles
5. Securitization of Project Loans
6. Innovative Debt Instruments
Loan Syndication
Loan Syndication is the process of involving numerous different lenders in providing various
portions of a loan. It is mainly used in extremely large loan situations. Syndication allows any
one lender to provide a large loan while maintaining a more prudent and manageable credit
exposure because they aren't the only creditor.
It also mean a group of banks that acts jointly, on a temporary basis, to loan money in a bank
credit (syndicated credit) or to underwrite a new issue of bonds.
A combination of investment banking firms that bid on a new security issue and then sells it if
the bid is successful. The syndicate disbands when the security offering has been completed.
Syndicates are needed to spread the risk and obtain greater financial and marketing resources for
large issues.
Islamic Finance
The core and principles of Islamic banking are derived from Shari`ah rules and the larger value
system embedded in Islam. This includes discouraging forbidden activities such as gambling and
alcohol. The most widely known rule is against usury or riba, the charging of interest. Any form
of concealment, fraud, or attempt at misrepresentation violates the principles of justice and
fairness. More significant is the specific mention of promotion of clarity and public interest. The
basic guideline is captured in the ideal: avoidance of preventable ambiguity and uncertainty, and
do not consume one anothers wealth unjustly, and be aware that lawful gain should only be
through business-based on mutual consent among you, and do not destroy one another.
The first point of difference in an Islamic bank is that the object of the contract should exist,
specific and free of any ambiguity, and of course be permissible under Shariah. So, in effect, the
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bank cannot lend but make an investment. It cannot be neutral about what the borrower does
with the money. In this sense it is closer to a mutual fund; all the more so because the reward for
the borrower too is given in the same spirit, i.e. he is not a mere lender or depositor, but one who,
as it were, partners the bank in assuming possession of the asset and, therefore, gets a profit share
from it.
This form of banking is, however, of more recent origin and practiced in varying degrees even in
the explicitly Islamic societies. The most complete form of this is found in one of the least
developed economies, Sudan.
Islamic finance forms are still a relatively small niche within the world market of financial
services, although there is already a wide variety amongst them: institutions offering Islamic
financial services, full-fledged Islamic banks, and those with so-called Islamic Windows. Islamic
capital markets, and Islamic Investment Funds, Islamic insurance (life/non-life) and non-bank
financial services such as leasing/finance co; micro-finance have also grown. Mutual funds have
assets totaling $300 bn, and investment funds of about $250 bn assets. Islamic Windows hold
$200 bn, which is small compared to conventional market for funds.
Leveraged Leases
A lease in which the lessor puts up some of the money required to purchase the asset and
borrows the rest from a lender. The lender is given a senior secured interest on the asset and an
assignment of the lease and lease payments. The lessee makes payments to the lessor, who
makes payments to the lender.
Also called lease agreement wherein the lessor, by borrowing funds from a lending institution,
finances the purchase of the asset being leased.
The lessor pays the lending institution back by way of the lease payments received from the
lessee. Under the loan agreement, the lender has rights to the asset and the lease payments if the
lessor defaults.
In this type of lease, Lessor provides an equity portion (20% to 50%) of the equipment cost and
lenders provide the balance on a nonrecourse debt basis. Lessor receives tax benefits of
ownership.
Long-term lease in which Lessor borrows most of the funds to acquire the asset financed from a
third party, usually a bank or insurance co. Lessor makes an equity investment equal to, say, 20%
of equipment original cost, and borrows remaining 80% by issuing non-recourse notes to lenders,
and writes a non cancellable lease for the equipment.
Lessor makes an assignment of the lease and lease rental payments to the lender, who is entitled
to repossess the asset if the lessee happens to default. A leveraged lease is a true lease for tax
purposes, because Lessor, as owner of the asset, is entitled to all of the tax benefits of ownership,
including accelerated depreciation write-offs, deduction of Interest payments on the bank loan,
and Investment Credit if any, for purchase of the asset. Banks write leveraged leases for their
own customers through the leasing subsidiary of a bank holding company.
Equator Principles
The Equator Principles (EP) are a set of environmental and social benchmarks for managing
environmental and social issues in development project finance globally. Once adopted by banks
and other financial institutions, the Equator Principles commit the adoptees to refrain from
financing projects that fail to follow the processes defined by the Principles. The Equator
Principles were developed by private sector banks led by Citi Group, ABN Amro, Barclays and
147
WestLB and were launched in June 2003. The banks chose to model the Equator Principles on
the environmental standards of the World Bank and the social policies of International Finance
Corporation (IFC).
Sixty (60) FIs (April 2008) have adopted the Equator Principles, which have become the de facto
standard for banks and investors on how to assess major development projects around the world.
The Equator Principles represent a significant industry-wide initiative. They were drafted by the
banks in consultation with the IFC, project sponsors, project engineers, and NGOs. While they
have generally been well received, some project sponsors have said they go too far, while some
NGOs say they do not go far enough.
ANZ has adopted the Equator Principles, a set of voluntary standards designed to help banks
identify and manage social and environmental risks associated with the direct financing of large
infrastructure projects such as dams, mining and pipelines.
What are Equator Principles?
The Equator Principles were first established in association with the World Bank's
International Finance Corporation (IFC) in 2003 and since then have been adopted by
nearly 50 banks around the world, covering in excess of 85% of the global project finance
market. The Principles were updated in mid 2006 to reflect the recent revision of the
IFC's Performance Standards, on which the Principles are based.
The Equator Principles are designed to have effect primarily in countries with developing
legal frameworks. They have particular relevance to ANZ as we are a financier of
projects in emerging Asian economies.
By adopting the Equator Principles, ANZ has voluntarily committed to fund only new
projects that can be developed and operated according to sound social and environmental
standards. The Principles are now considered global best practice for ensuring applicable
project finance proposals meet these standards.
The Equator Principles state that the adopting FIs will provide loans directly to projects only
under the following circumstances:
Scope: The Principles (P) apply to projects over USD 10 mn.
P-1: Review and Categorisation of risk of projects
P-2: Social and Environmental Assessment
P-3:Applicable Social & Environmental Standards
P-4: Action Plan and Management System
P-5: Consultation and Disclosure
P-6: Grievance Mechanism
P-7: Independent Review
P-8: Covenants
P-9: Independent Monitoring and Reporting
P-10: Equator Principles adopting Financial Institution (EPFI) Reporting.
148
Higher inflation is a fact and common feature in developing countries. As the cash flows of an
investment project occur over a long period of time, a firm should usually be concerned about
the impact of inflation on the project profitability. The capital budgeting results will be biased if
the impact of inflation is not correctly factored in the analysis.
Though decision maker recognize inflation but they actually do not consider in the analysis of
capital investment. Generally cash flows are being assumed at unit costs and selling price
prevailing in year zero to remain unchanged. Argument is that as if inflation is there prices can
be increased to cover increasing costs hence the impact on the projects profitability would be
the same if they assume rate of inflation zero.
The problems with above argument are (a) inflation rate is expressed in nominal terms while it is
inappropriate and inconsistent to use a nominal rate to discount cash flows which are not
adjusted for the impact of inflation (b) selling prices and costs show different degrees of
responsiveness to inflation.
We should be consistent in treating inflation, since the discount rate is market determined, and it
is therefore stated in a nominal terms; then the cash flows should also be expressed in nominal
terms. In other words, cash flows should reflect effect of inflation, when they are discounted by
the inflation affected discount rate.
149
If the acceptance of one project is dependent on the acceptance of the other project(s), then one
project is contingent on the other. For example,
XB XD
150
151
Administrative overheads: They contain 2 components: Labor costs and other expenses.
The labor cost is included in the value added. Therefore, it is not considered. The other
expenses like rent, telephone and telegraph, etc. are treated as non-traded items.
The value added is the difference between the value of the output and the value of the inputs
mentioned above. That is, it is the surplus available for the providers of capital and labor.
2. Domestic Resource Cost (DRC):
It is the spending required in terms of the domestic currency to generate a saving of one unit of
a foreign currency, say, one US dollar.
VA at domestic prices
DRC = --------------------------------- x Exchange Rate
VA at world prices
The amount of VA for computation of DRC is estimated as follows:Domestic
International
Selling Price:
Less: Operation costs
Raw materials
Power, fuel, water
Repairs and maintenance
Admin overheads
Selling expenses
Less: Capital costs
Charge on capital employed
Depreciation
153
154
which DPR has to be presented. The DPR is generally prepared for submission to the financial
institutions.
First we study the model format for the DPR. This is followed by the format of application form
of the All India Financial Institutions.
Contents of DPR
1. General information
a. Name
b. Constitution and Sector
c. Location
d. Nature of industry and product
e. Promoters and their contribution
f. Cost of project and Means of Finance
2. Promoters details
3. Marketing and Selling Arrangements
4. Particulars of the project
a. Product mix and capacity
b. Location and site
c. Plant and Machinery
d. Raw materials
e. Utilities
5. Technical Arrangements
6. Production Process
7. Environmental Aspects
8. Schedule of Implementation
9. Cost of the project
10. Means of Finance
11. Profitability estimates
a. Assumptions
b. Projected income statement
c. Projected balance sheet
d. Projected cash flow statement
12. Appraisal based on profitability estimates
13. Economic Considerations
14. Appendices
a. Estimates of costs of production
b. Calculation of depreciation
c. Calculation of working capital and margin money for working capital
d. Repayment / Interest schedule of term loan and bank finance
e. Calculation of tax
f. Coverage ratios
g. NPV, IRR, etc.
h. Sensitivity Analysis.
155
Chapter-2
Analysis & Selection of Project
End Chapter quizzes
1. Market Structure means
(a). The arrangement of various outlets in the market
(b). The classification of the buyers into various strata
(c). The determinants of a products demand in the market
(d). The changes in the size of the market over a period of time
(e). None of the above
2. A moving average is
(a). An example of time series models
(b). An example of cause and effect models
(c). Used when the variable being studied is expected to exhibit a steady trend over time
(d). Both (a) and (c) above
(e)Both (b) and (c) above
3. Income elasticity of demand is given by
(a). The ratios of change in demand to change in income
(b). Ratio of total income to total demand
(c). Ratio of total demand to change in income
(d). Ratio of total income to change in demand
(e). None of the above
4. Which of the following methods is most suitable for forecasting the demand for power in the
country?
(a). Weighted moving average method
(b). Delphi method
(c). Simple regression method
(d). Econometric method
156
157
158
Chapter-3
Project Implementation
S. No.
1
2
3
4
5
Content
Project Organizations
Human Aspects of Project Management
Project Manager
Network Analysis
Resource Allocation and Leveling
Page no.
160
164
168
171
179
159
Project Implementation
Till now we have discussed about various project ideas that can be identified and evaluated,
leading to the selection of those projects that are most suitable to the firm. Now we discuss how
to implement a suitable project.
The first step in a projects implementation is to decide on the organizational structure for the
project.
Project Organizations
The organizational structure can be planned when we already have following information:
Identification of staff who work on the project
Identification of departments involved
The existing organizational structure
An organizational structure shows the number of people working at each level of the hierarchy
and their interrelationships. Any organizational structure will work if the people are willing to
make it work. Therefore, choosing a structure that matches with the behavioral pattern of the
employees is the key.
Concept of Organization:
An Organization is a network of structure and relationship. Commonly, the focus of the structure
is the specialization of the human elements of the group.
Characteristics of Organization:
Goal-Oriented
Collection of People
Consists of Structure (division of labor)
Consists of Technology
Has Environment
Has Feedback
Project Organization
When projects are initiated, two issues immediately arise. First, a decision must be made about
how to tie the project to the parent firm. Second, a decision must be made about how to organize
the project itself.
Project Organization consists of:
Designing a Structure
Pulling together Project Team
Establishing Authority and Responsibility relationship
Establishing Project Office
There are four major organizational forms commonly used to house the projects.
160
Advantages:
There is maximum Flexibility in the use of staffs.
Individual experts can be utilized by many projects
Specialists in the division can be grouped to share knowledge and experience-- Synergistic
solutions to technical problems
Serves as a base of technological, procedural, administrative and overall policy continuity.
Functional division contains the normal path of advancement for individuals whose Expertise is
in the functional area.
Disadvantages:
Lack of Client/Project focus. Focus on unique area of interest.
Decision delay
161
Advantages:
The PM has full line authority over the project
Project work force directly responsible to the PM
Line of communication- shortened.
Focus on project objective
High motivation
Unity of command Exists
Flexible labor force
Disadvantages:
Duplications of efforts/Inefficient use of resources
Lack of job security
162
Matrix Organization
A combination of pure project organization and functional Organization
It is a pure project organization overlaid on the functional divisions of the parent firm.
Project team is assigned from the functional departments.
The PM has overall responsibility
Advantages:
The project is the point of emphasis/ special focus
Availability of entire reservoir of technical talents in the FD
Team identity
Less anxiety about job
Rapid response to client needs
Consistency of policies/ practices/procedures of parent firm
Holistic approach/Balance of resources
Disadvantages:
Power and Authority is balanced. Doubt exists who is in charge
Division of authority and responsibility is complex
Movement of resources from project to project- may foster political infighting among the several
PMs.
Projectile is still a serious disease.
Violates the management principle of unity of command.
Product Organization
In this type of organization, a division is set-up for each product. Within each division, different
departments are set-up for each of the different functions, engineering, manufacturing,, etc. The
task of each division is to manage projects relating to that product. The biggest advantage of this
163
form is that one person, designated as the project manager this form is that one person,
designated as the project manager or program manager who exercises full control over the
project. He assigns work to all the people in the division and also does their performance
appraisal. Because there is only one person to whom the employees report, strong
communication channels develop. The reaction time of the division will also be less. With the
advent of this form of organization, long lead times of the functional organizations have become
bygones. Specialist personal can be maintained for complicated tasks and for new product
development and they need not be shared with others in the organization.
The project manager in this structure reports to either the general manager or the vice-president.
He handles all the conflicts within his division, and also coordinates, in case of necessity, with
other divisions.
Advantages
The project manager is complete authority and can be held accountable for performance.
The line of command is clear as all the employees in the division report to the project
manager only.
Communication channels are strong. Therefore low reaction time.
Flexibility in planning the project as the division need not share all its resources with
other divisions.
Coordination with other divisions is easy as the possibility of conflict is low.
Top level management gets more time for decision-making and strategy formulation.
Disadvantages
Cost of maintaining this structure is very high due to duplication of equipment, skills, etc,
in each division.
Personnel are retained in the division even after their work is complete, adding to idle
resources.
As there are no strong functional groups, technological development suffers.
Low morale of staff due to lack of career opportunities.
164
Functions of Management
Management is what managers do. Management has certain functions. Various writers have
classified management functions differently. Some of them are as listed below.
i. Henry Fayol (POCCC)
Planning
Organizing
Commanding
Coordinating
165
Controlling
ii. Luther Gullick (POSDCORB)
Planning
Organizing
Staffing
Directing
Coordinating
Reporting
Budgeting
iii. Kast and Rosenzweig (GPAOIC)
Goal Setting
Planning
Assembling resources
Organizing
Implementing
Controlling
For our purpose, the functions of management are:
i. Planning:
Predetermining future
Selection of goals
Discovering alternatives
Choosing the best alternative
Choosing future course of actions
Estimating the cost and resources etc.
ii. Organizing
Defining activities and tasks
Grouping the activities in departments
Designing a structure
Assigning activities to the position and people
Establishment of responsibility and authority
iii. Staffing
Manpower planning
Preparation of an inventory of people available
Job analysis to determine job description
Recruiting, selecting, placing developing, promoting, remunerating and
Retiring Directing (Leading)
Communicating, influencing and motivating people
Concerned with interpersonal aspect of management.
v. Controlling
Establishing standards
Measuring actual performance
Finding and analyzing deviations
Corrective actions.
166
Managerial Skills:
Managers need wide variety of skills. These skills can be categorized into:
Technical Skills: Ability to perform a specialized task or function.
Human Skills: Ability to go along and motivate people.
Conceptual skills: Ability to think and analyze and to relate the organization to environmental
forces.
Top Managers have the overall responsibility for the survival, growth and welfare of the
organizations. They should have more conceptual skills. Middle managers subordinate to top
managers. They implement and control plans and strategies developed by top managers. They
are responsible for the activities of lower level managers. It will be better to have all three skills
equally for them. Lower managers subordinate to middle managers. Operating personnel report
to them. They should possess more technical skills than other two skills.
Concept of Project Management
Project management is a system approach for efficient and effective achievement of project
objectives through assignment of total responsibility and accountability to a single project
manager from inception to completion and coordination across functional lines with proper
utilization of planning and control tools
According to Harold Kerzner: Project management is the planning, organizing, directing and
controlling of company resources to complete specific goals and objectives. Project Management
is an alternative to the traditional management models. It is planning, implementing and
controlling of complex and unique projects to achieve results within constraints in a dynamic
environment.
167
168
170
Define the Project and all of its significant activities or tasks. The Project (made up of
several tasks) should have only a single start activity and a single finish activity.
171
II.
III.
IV.
V.
VI.
Develop the relationships among the activities. Decide which activities must precede and
which must follow others.
Draw the "Network" connecting all the activities. Each Activity should have unique event
numbers. Dummy arrows are used where required to avoid giving the same numbering to
two activities.
Assign time and/or cost estimates to each activity
Compute the longest time path through the network. This is called the critical path.
Use the Network to help plan, schedule, monitor and control the project.
The Key Concept used by CPM/PERT is that a small set of activities, which make up the longest
path through the activity network control the entire project. If these "critical" activities could be
identified and assigned to responsible persons, management resources could be optimally used
by concentrating on the few activities which determine the fate of the entire project.
Non-critical activities can be replanned, rescheduled and resources for them can be reallocated
flexibly, without affecting the whole project.
Five useful questions to ask when preparing an activity network are:
Is this a Start Activity?
Is this a Finish Activity?
What Activity Precedes this?
What Activity Follows this?
What Activity is Concurrent with this?
Some activities are serially linked. The second activity can begin only after the first activity is
completed. In certain cases, the activities are concurrent, because they are independent of each
other and can start simultaneously. This is especially the case in organisations which have
supervisory resources so that work can be delegated to various departments which will be
responsible for the activities and their completion as planned.
When work is delegated like this, the need for constant feedback and co-ordination becomes an
important senior management pre-occupation.
Drawing the CPM/PERT Network
Each activity (or sub-project) in a PERT/CPM Network is represented by an arrow symbol. Each
activity is preceded and succeeded by an event, represented as a circle and numbered.
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At Event 3, we have to evaluate two predecessor activities - Activity 1-3 and Activity 2-3, both
of which are predecessor activities. Activity 1-3 gives us an Earliest Start of 3 weeks at Event 3.
However, Activity 2-3 also has to be completed before Event 3 can begin. Along this route, the
Earliest Start would be 4+0=4. The rule is to take the longer (bigger) of the two Earliest Starts.
So the Earliest Start at event 3 is 4.
Similarly, at Event 4, we find we have to evaluate two predecessor activities - Activity 2-4 and
Activity 3-4. Along Activity 2-4, the Earliest Start at Event 4 would be 10 wks, but along
Activity 3-4, the Earliest Start at Event 4 would be 11 wks. Since 11 wks is larger than 10 wks,
we select it as the Earliest Start at Event 4.We have now found the longest path through the
network. It will take 11 weeks along activities 1-2, 2-3 and 3-4. This is the Critical Path.
The Backward Pass - Latest Finish Time Rule
To make the Backward Pass, we begin at the sink or the final event and work backwards to the
first event.
At Event 3 there is only one activity, Activity 3-4 in the backward pass, and we find that the
value is 11-7 = 4 weeks. However at Event 2 we have to evaluate 2 activities, 2-3 and 2-4. We
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find that the backward pass through 2-4 gives us a value of 11-6 = 5 while 2-3 gives us 4-0 = 4.
We take the smaller value of 4 on the backward pass.
Tabulation & Analysis of Activities
We are now ready to tabulate the various events and calculate the Earliest and Latest Start and
Finish times. We are also now ready to compute the SLACK or TOTAL FLOAT, which is
defined as the difference between the Latest Start and Earliest Start.
Event
Duration(Weeks)
Earliest
Start
Earliest
Finish
Latest
Start
Latest
Finish
Total
Float
1-2
2-3
3-4
11
11
1-3
2-4
10
11
The Earliest Start is the value in the rectangle near the tail of each activity
The Earliest Finish is = Earliest Start + Duration
The Latest Finish is the value in the diamond at the head of each activity
The Latest Start is = Latest Finish - Duration
There are two important types of Float or Slack. These are Total Float and Free Float.
TOTAL FLOAT is the spare time available when all preceding activities occur at the earliest
possible times and all succeeding activities occur at the latest possible times.
Total Float = Latest Start - Earliest Start
Activities with zero Total float are on the Critical Path
FREE FLOAT is the spare time available when all preceding activities occur at the earliest
possible times and all succeeding activities occur at the earliest possible times.
When an activity has zero Total float, Free float will also be zero.
There are various other types of float (Independent, Early Free, Early Interfering, Late Free, Late
Interfering), and float can also be negative. We shall not go into these situations at present for the
sake of simplicity and be concerned only with Total Float for the time being.
Having computed the various parameters of each activity, we are now ready to go into the
scheduling phase, using a type of bar chart known as the Gantt Chart.
There are various other types of float (Independent, Early Free, Early Interfering, Late Free, Late
Interfering), and float can also be negative. We shall not go into these situations at present for the
sake of simplicity and be concerned only with Total Float for the time being. Having computed
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the various parameters of each activity, we are now ready to go into the scheduling phase, using
a type of bar chart known as the Gantt Chart.
Scheduling of Activities Using a Gantt Chart
Once the activities are laid out along a Gantt Chart (Please see chart below), the concepts of
Earliest Start & Finish, Latest Start & Finish and Float will become very obvious.
Activities 1-3 and 2-4 have total float of 1 week each, represented by the solid timeline which
begins at the latest start and ends at the latest finish. The difference is the float, which gives us
the flexibility to schedule the activity.
For example, we might send the staff on leave during that one week or give them some other
work to do. Or we may choose to start the activity slightly later than planned, knowing that we
have a weeks float in hand. We might even break the activity in the middle (if this is permitted)
for a week and divert the staff for some other work, or declare a National or Festival holiday as
required under the National and Festival Holidays Act.
These are some of the examples of the use of float to schedule an activity. Once all the activities
that can be scheduled are scheduled to the convenience of the project, normally reflecting
resource optimization measures, we can say that the project has been scheduled.
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Example
A Social Project manager is faced with a project with the following activities:
Activity-id
Activity - Description
Duration
1-2
5 Weeks
1-3
12 Weeks
3-4
5 Weeks
2-4
14 Weeks
3-5
15 Weeks
4-5
4 Weeks
Draw the arrow diagram, using the helpful numbering of the activities, which suggests
the following logic:
Unless the Social Work team lives in the village, the Mother and Child Health
Programme cannot be started due to ignorance and superstition of the villagers
The Analysis of the survey can obviously be done only after the survey is complete.
Until rural survey is done, the Rural Credit Programme cannot be started
Unless Mother and Child Programme is established, the Immunisation of Under Fives
cannot be started
- Calculate the Earliest and Latest Event Times
- Tabulate and Analyse the Activities
- Schedule the Project Using a Gantt Chart
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In Activity 1-3, the time estimates are 3,12 and 21. Using our PERT formula, we get:
The Standard Deviation (s.d.) for this activity is also calculated using
the PERT formula
We calculate the PERT event times and other details as below for each activity:
Event
to
tm
tp
te
ES
EF
LS
LF
TF
s.d.
Var.
1-3
12
21
12
12
12
3-5
15
30
16
12
28
12
28
16
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1-2
14
11
2-4
14
17
13
19
11
24
3-4
12
17
19
24
4-5
19
23
24
28
Estimating Risk
Having calculated the s.d. and the Variance, we are ready to do some risk analysis. Before that
we should be aware of two of the most important assumptions made by PERT.
The Beta distribution is appropriate for calculation of activity durations.
Activities are independent, and the time required to complete one activity has no bearing
on the completion times of its successor activities in the network. The validity of this
assumption is questionable when we consider that in practice, many activities have
dependencies.
Expected Length of a Project
PERT assumes that the expected length of a project (or a sequence of independent activities) is
simply the sum of their separate expected lengths.
Thus the summation of all the te's along the critical path gives us the length of the project.
Similarly the variance of a sum of independent activity times is equal to the sum of their
individual variances.
In our example, the sum of the variance of the activity times along the critical path, VT is found
to be equal to (9+16) = 25.
The square root VT gives us the standard deviation of the project length. Thus, ST= 5. The
higher the standard deviation, the greater the uncertainty that the project will be completed on the
due date.
Although the te's are randomly distributed, the average or expected project length Te
approximately follows a Normal Distribution.
Since we have a lot of information about a Normal Distribution, we can make several statistically
significant conclusions from these calculations.
A random variable drawn from a Normal Distribution has 0.68 probability of falling within one
standard deviation of the distribution average. Therefore, there is a 68% chance that the actual
project duration will be within one standard deviation, ST of the estimated average length of the
project, te.
In our case, the te = (12+16) = 28 weeks and the ST = 5 weeks. Assuming t e to be normally
distributed, we can state that there is a probability of 0.68 that the project will be completed
within 28 +- 5 weeks, which is to say, between 23 and 33 weeks.
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Time Period
0-5
5-10
10-15
15-20
20-25
Requirement
15
4
10
0
14
Resource Leveling
As we have already seen, the requirement of cranes is fluctuating heavily. Initially, the
requirement is as high as 15 units and falls down to zero in the time block 15-20. If project
manager keeps 15 units all through, he will have a lot of idle resource, pushing up the costs. If
the activities for which the resource is required can be rescheduled without disturbing the critical
path, a part of the costs can be saved.
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Leveling of resource requirements enhances the efficiency of usage of scarce resources. But,
when more resources than one are scarce, or expensive to hold, leveling becomes complex.
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Chapter-3
Project Implementation
End Chapter Quizzes
1.
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Chapter-4
PROJECT REVIEW AND CONTROL
S. No.
1
2
3
4
5
6
Content
Cost Estimation
Cost Budgeting
Cost Control
Time Control
Performance Evaluation
Project Control System
Page no.
185
187
189
191
192
194
184
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Historical information. Information on the cost of many categories of resources is often available
from one or more of the following sources:
Project filesone or more of the organizations involved in the project may maintain records of
previous project results that are detailed enough to aid in developing cost estimates. In some
application areas, individual team members may maintain such records.
Commercial cost-estimating databaseshistorical information is often available commercially.
Project team knowledgethe individual members of the project team may remember previous
actuals or estimates. While such recollections may be useful, they are generally far less reliable
than documented results.
Chart of accounts. A chart of accounts describes the coding structure used by the performing
organization to report financial information in its general ledger. Project cost estimates must be
assigned to the correct accounting category.
Risks. The project team considers information on risks when producing cost estimates, since
risks (either threats or opportunities) can have a significant impact on cost. The project team
considers the extent to which the effect of risk is included in the cost estimates for each activity.
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Computerized tools. Computerized tools, such as project management software spreadsheets and
simulation/statistical tools, are widely used to assist with cost estimating. Such products can
simplify the use of the tools described earlier and thereby facilitate rapid consideration of many
costing alternatives.
Other cost estimating methods. For example, vendor bid analysis.
Outputs from Cost Estimating
Cost estimates. Cost estimates are quantitative assessments of the likely costs of the resources
required to complete project activities. They may be presented in summary or in detail.
Costs must be estimated for all resources that will be charged to the project. This includes, but is
not limited to, labor, materials, supplies, and special categories such as an inflation allowance or
cost reserve.
Cost estimates are generally expressed in units of currency (dollars, euros, yen, etc.) to facilitate
comparisons both within and across projects. In some cases, the estimator may use units of
measure to estimate cost, such as staff hours or staff days, along with their cost estimates to
facilitate appropriate management control. Cost estimating generally includes considering
appropriate risk response planning, such as contingency plans.
Cost estimates may benefit from being refined during the course of the project to reflect the
additional detail available. In some application areas, there are guidelines for when such
refinements should be made and what degree of accuracy is expected. For example, The
Association for the Advancement of Cost Engineering (AACE) International has identified a
progression of five types of estimates of construction costs during engineering: order of
magnitude, conceptual, preliminary, definitive, and control.
Supporting detail. Supporting detail for the cost estimates should include:
_ A description of the scope of work estimated. This is often provided by a reference to the
WBS.
_ Documentation of the basis for the estimate; i.e., how it was developed.
_ Documentation of any assumptions made.
_ An indication of the range of possible results; for example, $10,000 $1,000 to indicate that
the item is expected to cost between $9,000 and $11,000.
The amount and type of additional details vary by application area. Retaining even rough notes
may prove valuable by providing a better understanding of how the estimate was developed.
Cost management plan. The cost management plan describes how cost variances will be
managed (e.g., different responses to major problems than to minor ones). A cost management
plan may be formal or informal, highly detailed or broadly framed, based on the needs of the
project stakeholders.
COST BUDGETING
Cost budgeting involves allocating the overall cost estimates to individual activities or work
packages to establish a cost baseline for measuring project performance. Reality may dictate that
estimates are done after budgetary approval is provided, but estimates should be done prior to
budget request wherever possible.
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Project schedule. The project schedule includes planned start and expected finish dates for the
project components to which costs will be allocated. This information is needed to assign costs to
the time period when the cost will be incurred.
Risk management plan. The risk management plan often includes cost contingency, which can be
determined on the basis of the expected accuracy of the estimate.
Tools and Techniques for Cost Budgeting
Cost budgeting tools and techniques.
Outputs from Cost Budgeting
Cost baseline. The cost baseline is a time-phased budget that will be used to measure and
monitor cost performance on the project. It is developed by summing estimated costs by period
and is usually displayed in the form of an S-curve.
Many projects, especially larger ones, may have multiple cost baselines to measure different
aspects of cost performance. For example, a spending plan or cash-flow forecast is a cost
baseline for measuring disbursements.
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COST CONTROL
Cost control is concerned with a) influencing the factors that create changes to the cost baseline
to ensure that changes are agreed upon, b) determining that the cost baseline has changed, and c)
managing the actual changes when and as they occur.
Cost control includes:
_Monitoring cost performance to detect and understand variances from plan.
_ Ensuring that all appropriate changes are recorded accurately in the cost baseline.
_ Preventing incorrect, inappropriate, or unauthorized changes from being included in the cost
baseline.
_ Informing appropriate stakeholders of authorized changes.
_ Acting to bring expected costs within acceptable limits.
Cost control includes searching out the whys of both positive and negative variances. It must
be thoroughly integrated with the other control processes (scope change control, schedule
control, quality control, and others). For example, inappropriate responses to cost variances can
cause quality or schedule problems, or produce an unacceptable level of risk later in the project.
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_ EAC = Actuals to date plus a new estimate for all remaining work. This approach is most often
used when past performance shows that the original estimating assumptions were fundamentally
flawed, or that they are no longer relevant to a change in conditions. Formula: EAC = AC +
ETC.
_ EAC = Actuals to date plus remaining budget (BAC EV). This approach is most often used
when current variances are seen as atypical and the project management team expectations are
that similar variances will not occur in the future.
Formula: EAC = AC + BAC EV.
_ EAC = Actuals to date plus the remaining project budget (BAC EV) modified by a
performance factor, often the cumulative cost performance index (CPI).
This approach is most often used when current variances are seen as typical of future variances.
Formula: EAC = (AC + (BAC EV)/CPI)this CPI is the cumulative CPI.
Each of these approaches may be the correct approach for any given project and will provide the
project management team with a signal if the EAC forecasts go beyond acceptable tolerances.
Time Control
The first step in establishing a project is to estimate how long each activity will take, from the
time it is started until the time it is finished. This duration estimate for each activity is the time
for the work to be done plus associated waiting time. Its a good practice to have the person who
will be responsible for performing a particular activity make the duration estimate for that
activity. This generates a commitment from that person and avoids bias that may be introduced
by having one person make the duration estimates for all the activity.
An activity duration estimate must be based on the quantity of resources expected to be used on
the activity. The estimate should be aggressive, yet realistic. Throughout the performance of the
project some activities will take longer than their estimated duration, others will be done in less
time than their estimated duration, and a few may conform to duration estimates exactly. Over
the life of a project that involves many activities, such delays and accelerations will tend to
cancel out one another.
In order to establish a basis from which to calculate a schedule using the duration estimates for
the activities, its necessary to select the estimated start time and required completion time for
overall project. These times define overall window or envelope, of time in which the project
must be completed. The projects required completion time is normally part of the project
objective and stated in the contract. Once the, estimated duration for each activity in the network
and an overall window of time in which the project must be completed, you have to decide
whether the activities can be done by the required completion time.
The key to effective project control is to measure actual progress and compare it to planned
progress on a timely and regular basis and to take necessary corrective action immediately. The
project control process involves regularly gathering data on project performance, comparing with
the planned performance. This process must occur regularly throughout the project.
It starts with establishing a baseline plan that shows how the project scope will be accomplished
on time and within the budget. Once this baseline plan is agreed with the customer the project
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starts. A regular reporting period should be established for comparing the actual progress with
the planned progress. Reporting may be daily, weekly, or monthly depending on the complexity
and the duration of the project. During each reporting period, two kinds of data or information
need to be collected.
1. Data on actual performance.
2. Information on any changes to the project scope, schedule or budget.
Once the updated schedule and budget have been calculated, they need to be compared with the
baseline schedule and budget and analyzed for variances to determine whether the project is
ahead or behind the time schedule. The project control process continues throughout the project.
Approaches to schedule control:
Schedule control includes four steps
1. analyzing the schedule determine which areas may be need corrective action.
2. Deciding what specific corrective actions should be taken.
3. Revising the plan to incorporate the chosen corrective actions.
4. Recalculating the schedule to evaluate the efforts of the planned corrective actions.
If the planned corrective actions do not result in an acceptable schedule these steps are repeated.
Throughout a project each time schedule is recalculated whether its after actual data or project
changes are incorporated after the corrective actions, it is necessary to analyze the newly
calculated schedule to determine whether it needs further attention. The schedule analysis should
include identifying critical path and any path of activities.
Performance Evaluation
The ultimate use of all the information obtained during the monitoring stage is to control the
progress of the ongoing activities. Control is to check whether the actual performance is up to the
mark or not and to take corrective action if necessary. Objective measurement of performance is,
therefore, the foundation for the success of a control system. If performance measurement used is
defective, the project controller will be misled by the information he receives into either taking
an unsuitable action or not taking any action at all.
There are several techniques used to measure the progress of a project. The Earned Value (EV)
technique and the Cost/Schedule Control System Criteria (C/SCSC) technique are very popular.
Earned Value Technique
A good technique for measuring the progress of a project should enable its user to measure the
progress in terms of time, cost and performance. The earned value technique contains variances
for measuring the progress in all the three. Earned value is the total budgeted cost of the project
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multiplied by the percent of work completed thus far. By comparing the actual cost incurred so
far with the budgeted cost, it can be found out whether the project is on the right track.
Spending Variance = Actual Cost Earned value of works completed
Schedule Variance = Earned value of the works completed Earned value of the works that
should have been completed by now
Total Variance
= Actual cost of works completed Earned value of the works that should
have been completed by now
Differences between the amounts of work performed arise due to various factors: changes in the
work elements previously designed to accomplish a task, changes in the methods followed to
carry out elements, changes in the tasks to be accomplished, etc. All these factors also give rise
to cost variances. Other factors such as prices of the inputs change in the mix of the inputs and
193
changes in the accounting method also cause cost variance. When such changes occur, the work
plans and budgets should be adjusted accordingly. Otherwise control of the time and cost by
comparison of the actual with the plans becomes impossible.
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indicates the quality of output. Mechanism for communicating the difference between the quality
of the output and the standard to the decision maker should be determined. The action to be taken
to counteract each and every possible deviation from the standard should be available with the
decision maker.
Concept of cybernetic control is applied frequently for tracking the system and notifying the
project manager automatically about the state of things.
Go/No-go System
Go/No-go systems are used to see if specific preconditions laid down have been met or not.
These types of controls are very popular as almost any aspect of a project is amenable to the
application of this type of control. But proper judgment should be exercised while using these
controls. Certain characteristics of the output may be required to be within clearly laid down
range of values.
The project budget and schedule are the two documents that assist greatly in exercising control.
They contain various milestones, the budget allocation for achievement of each milestone and
the time when it should be achieved. Control can be exercised on the smallest possible task,
based on the information of these two.
Post-Control System
It is comparable to post-mortem of a project. The performance in the execution of the project is
reviewed critically. The objective is to identify what went wrong and to study how to avoid such
mishaps in future projects. The orientation of post-control is towards future, in contrast to the
cybernetic and go/no-go control system.
The document has following sections:
Project Objectives: A brief description of the objectives of the project is given. The objectives
are obtained from the project proposals. Actual performance of the project depends on many
uncontrollable events assumptions regarding those events should be disclosed in this section.
Deviation Report: It contains a comprehensive report on performance of the project as compared
to schedules and budgets. Each and every deviation used to highlight there.
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Report on Project Results: This section contains explanation for all deviations. Major concern in
this section is on how rather what, as how any deviation had happened let it be positive or
negative not what deviation had happened.
Recommendation for Improvement: This is the final section of report and it contains the
recommendations on the pitfalls to be avoided, improvements to be brought about in the systems,
additional skills and equipment to be required, etc.
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Chapter-4
Project Review & Control
End Chapter Quizzes
1. Variance analysis approach is
(a). A traditional approach
(b). Incapable of looking forward i.e., it cannot predict what may happen in future
(c). Not useful for calculating the value of work done
(d). A tool which merely indicates what amount of resources were expended compared to
the budgeted resources
(e). All of the above
2. Which of the following statement/s is/are true regarding performance analysis?
a. BCWS consists of budgets for work packages actually completed.
b. ACC stands for actual cost of completion.
c. ACWP stands for actual cost of work planned.
d. BCTW comprises of total budgeted cost for the entire project.
e. All of the above
3. A critical review of the execution of the project after its completion is called
a. Cybernetic control
b. Go/No-go control
c. Post-control
d. Exception control
e. None of the above.
4. Which of the following statements is true regarding project control?
a. Cybernetic control is like steering an automobile.
b. Third order cybernetic control systems invariably contain a human element.
c. The informational inputs required for cybernetic control are quite complex.
d. The second order cybernetic controls use a single standard all the time.
e. Both (a) and (b) above.
5. Which of the following statements is false?
a. The control system should be easy to operate and maintain.
b. The cost of control should not be overriding criteria while designing the control system for a
project.
c. The control system should not be rigid to react to unforeseen changes.
d. The control system should be capable of indicating the problem areas when there is still time
for corrective action.
197
e. The actions initiated through the control system should be seen to bring about the desired
changes in performance to the desired extent.
6. Schedule Performance Index is equal to
a. Budgeted Cost for Work Completed Actual Cost of Work Performed
b. Budgeted Cost of Work Performed/Actual Cost of Work Performed
c. Budgeted Cost of Work Performed/Budgeted Cost of Work Scheduled
d. Budgeted Cost of Work Performed Budgeted Cost of Work Scheduled
e. Budgeted Cost of Work Performed Actual Cost of Work Performed
7. A certain activity has a budgeted cost of Rs.80,000 and at the time of the periodic progress
review it is estimated that 60 percent of the work has been accomplished at the cost of Rs.52,800.
Therefore cost over-run (under-run) is
a.9.1%
b.34.0%
c. (10%)
d. (9.1%)
e.10%
8. Which of the following aspects related to a project cannot be monitored by comparison of
works with the schedules?
a. Cost of the project
b. Morale of the employee
c. Completion time of the project
d. Attitude of the client
e. Both (b) and (d) above.
9. Which of the following is/are true if the budgeted cost for work performed for a project is
Rs.100 crore and the actual cost of work performed is Rs.150 crore?
a. The cost performance index is 0.67.
b. It means that the project is facing a cost overrun.
c. The cost performance index is 1.50.
d. The project is facing a time overrun.
e. Both (a) and (b) above.
10. A project gives an NPV of Rs.10 crore if held till the end of its life and it costed Rs.50 crore
to implement. It provides cash flows at the rate of Rs.15 crore per annum in the next two years
from now and an additional inflow of Rs.75 crore if abandoned at the end of two years from
now. The cost of capital is 10%.
Which of the following statements is true?
a.The project may be abandoned after two years, as the NPV on abandonment is higher than
Rs.10 crore.
b. t cannot be abandoned after two years, as the NPV on abandonment is lower than Rs.10 crore.
c. It can be abandoned after two years, as the NPV on abandonment is equal to Rs.10 crore.
d.It may or may not be abandoned after two years, as the NPV on abandonment is equal to Rs.10
crore.
e.None of the above.
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Chapter-5
Project Examination
S. No.
Content
Page no.
Evaluation of Project
200
Impact Analysis
201
Project Auditing
204
Project Termination
205
210
199
Project Examination
Evaluation of Project
Project evaluation is a process of evaluating a projects progress and performance in comparison
with its planned progress and performance or with that of identical projects. Also, project
evaluation should be supportive to all the management decisions that the project requires. So, the
manner in which a project is evaluated should make the management feel that all the relevant
data has been considered. Project evaluation is considered to be as important as the project itself.
The objective of project evaluation is to measure the degree of projects success. A survey on
industrial projects of different nature and size identified four critical parameters for measuring
the success of a project. A survey on industrial projects of different nature and size identified
four critical parameters for measuring the success of project. As2. Completion of project in a given time and budget
3. Extent to which the project is able to satisfy the client
4. Commercial success of the project and market share captured by the product delivered by
the project
5. Ability of the product to succeed if it enters a new market
Apart from measuring the success of a project, project evaluation aims at identifying the various
strengths and weaknesses of project. This will help organization to manage its future projects
better. Project evaluation helps the organization and project team to
1. Identifying problems during the early stages of project
2. Ensure clarity in performance, cost and time relationship
3. Enhance the performance of the project
4. Explore opportunities for technology advancements in future
5. Appraise the quality of project management
6. Minimize the costs of project
7. Accelerate the process of achieving results
8. Find, correct and avoid mistakes in future
9. Communicate information as desired in future
10. Check the firms interest and commitment to the project
Apart from above primary objectives project evaluation do have some secondary objectives also
like1. Understanding the importance and role of project in organization
2. Improving the way in which projects are organized and managed
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Impact Analysis
Identifying the full consequences of change is also known as Change Impact Analysis, Impact
Change Analysis and Solution Effect Analysis. When things change in your organization, do you
ever wish that someone would think things through a little better to avoid the confusion and
disruption that often follows? Or have you ever been involved in a project where, with hindsight,
a great deal of pain could have been avoided with a little more up-front preparation and
planning?
Hindsight is a wonderful thing but so, too, is Impact Analysis. This technique is a useful and
severely under-used brainstorming technique that helps you think through the full impacts of a
proposed change. As such, it is an essential part of the evaluation process for major decisions.
More than this, it gives you the ability to spot problems before they arise, so that you can
develop contingency plans to handle issues smoothly. This can make the difference between
well-controlled and seemingly-effortless project management, and an implementation that is seen
by your boss, team, clients and peers as a shambles.
Impact Analysis Checklist for Requirements Changes
Implications of the Proposed Change
Identify any existing requirements in the baseline that conflict with the proposed change.
Identify any other pending requirement changes that conflict with the proposed change.
What are the consequences of not making the change?
What are possible adverse side effects or other risks of making the proposed change?
Will the proposed change adversely affect performance requirements or other quality
attributes?
Will the change affect any system component that affects critical properties such as safety
and security, or involve a product change that triggers recertification of any kind?
Is the proposed change feasible within known technical constraints and current staff skills?
Will the proposed change place unacceptable demands on any computer resources required
for the development, test, or operating environments?
Must any tools be acquired to implement and test the change?
How will the proposed change affect the sequence, dependencies, effort, or duration of any
tasks currently in the project plan?
201
Will prototyping or other user input be required to verify the proposed change?
How much effort that has already been invested in the project will be lost if this change is
accepted?
Will the proposed change cause an increase in product unit cost, such as by increasing thirdparty product licensing fees?
Will the change affect any marketing, manufacturing, training, or customer support plans?
System Elements Affected by the Proposed Change
Identify any user interface changes, additions, or deletions required.
Identify any changes, additions, or deletions required in reports, databases, or data files.
Identify the design components that must be created, modified, or deleted.
Identify hardware components that must be added, altered, or deleted.
Identify the source code files that must be created, modified, or deleted.
Identify any changes required in build files.
Identify existing unit, integration, system, and acceptance test cases that must be modified or
deleted.
Estimate the number of new unit, integration, system, and acceptance test cases that will be
required.
Identify any help screens, user manuals, training materials, or other documentation that must
be created or modified.
Identify any other systems, applications, libraries, or hardware components affected by the
change.
Identify any third party software that must be purchased.
Identify any impact the proposed change will have on the projects software project
management plan, software quality assurance plan, software configuration management plan,
or other plans.
Quantify any effects the proposed change will have on budgets of scarce resources, such as
memory, processing power, network bandwidth, real-time schedule.
Identify any impact the proposed change will have on fielded systems if the affected
component is not perfectly backward compatible.
Effort Estimation for a Requirements Change
Effort
(Labor Hours)
Task
Update the SRS or requirements database with the new
requirement
Develop and evaluate prototype
Create new design components
Modify existing design components
Develop new user interface components
Modify existing user interface components
Develop new user publications and help screens
Modify existing user publications and help screens
Develop new source code
Modify existing source code
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Procedure:
1.
2.
3.
4.
5.
6.
7.
Identify the subset of the above tasks that will have to be done.
Allocate resources to tasks.
Estimate effort required for pertinent tasks listed above, based on assigned resources.
Total the effort estimates.
Sequence tasks and identify predecessors.
Determine whether change is on the projects critical path.
Estimate schedule and cost impact.
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(1-9)
(1-9)
(1-9)
(1-9)
(relative to other pending requirements)
___________ labor hours
___________ labor hours (from discarded work)
___________ days
___________ dollars
__________________________________________
_____________________________________
___________________________________________
Other tasks affected:
________________________________________
______________________________________
Integration issues:
_______________________________________
Life cycle cost issues:
________________________________________
Other components to examine __________________________________________
for possible changes:
____________________________________________
Project Auditing
Post control tries to enhance the firms chances of meeting future project goals. An organization
can benefit from its past experience only when it tries to understand them through the process of
evaluation. The term evaluate means to make a judgment as to worth or value of a product or
an activity. In project management context project evaluation is the process of appraising the
progress and performance of the project in comparison to the planned objectives.
A project can be evaluated by using evaluation tools such as Project Audits and Project Reviews.
An audit is a formal enquiry in to various aspects of the project that are of interest to the top
management.
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The basic responsibility of any project auditor is to convey the facts. It is required to
acknowledge the presence of different kinds of biases of the people involved in project. The
auditor should be aware of his limitations and seek external help when he has to audit aspects of
the project that are beyond his area of expertise. All the information gathered should be kept
confidential until the audit report is released officially.
Responsibilities of the Auditor
The basic responsibility of any project auditor is to convey the facts. This responsibility is not as
simple as it seems to be. It is required to acknowledge the presence of different kinds of biases os
the people involved in the project. The auditor should be aware of his limitations and seek
external help when he has to audit aspects of project that are beyond his area of expertise. All the
information gathered should be kept confidential until the audit report is released officially. He
should not allow any political or technical pressures to influence his audit report.
The seriousness with which the top management and the project team regard the audit report
depends on the credibility of the information being presented in the report. The data should be
checked and calculated very carefully in order to ensure its accuracy. It is the responsibility of
the auditor to explore the ways in which can enhance the effectiveness, efficiency and value of
auditing process.
Project Audit Life Cycle
A project audit life cycle involves a systematic advancement of pre-defined events. The six
events that constitute a project audit life cycle:
Audit Initiation: It is the beginning of the audit process. Purpose and scope of the project audit
is defined in this step.
Defining Project Baseline: In this phase performance standards being set to enable the auditors
to measure the project performance and achievement against the standard set.
Setting up an audit database: In this phase a database is being develop.
Preliminary analysis of project
Preparing audit report
Project audit termination
Project Termination
Like all things have a beginning, projects too must have an end. The ending of a projects
generally takes place for two reasons: One, the project having been completed successfully- there
is no more to do (i.e. project success). Two, the project has been found to be unworthy of
continuation, for any reason( project failure or undesirability).
Project success means that the time, cost and technical performance specifications have been met
and the project is ready for absorption into the customers organization or the parent
organization, as the case may be. A successful project indicates that the firm has been able to
design and implement a predesigned strategy and has successfully completed yet another
business transaction.
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Projects are always based on forecasts and assumptions regarding future. Manager of the project
and the owners of the firm should be ready to accept even in case of failure rather than somehow
try to believe that it will be a success. The closing out the project as a failure may mean that
project manager losses his job or is shunted out to another job. From the point of view of top
management, termination is not considered advisable because of the fear that the project manager
and his staff may not put in their best efforts if it is known that the top management is generally
not averse to premature termination of the project if things go wrong.
Funds from successful project may be transferred to another project that is facing a cost overrun,
in a bid to keep the latter project from being terminated. When a project appears to be successful,
the management gets seriously committed to it.
The news of termination of a project kills the morale of the workers involved in it. It becomes
almost impossible task to get them interested in other projects that are not running too well also
feel insecure. In such circumstances, the general reaction is to try for jobs outside the
organization, rather than work hard to improve the condition of the project.
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the staff will be slowly transferred to other projects and project will still remain as it was. This is
generally accomplished over a period of few years, depending on the size of project.
Method of Project Termination
Regardless whether a successful project is completed by inclusion, integration, or extinction, a
plan must be developed to terminate it. An organization that is project-oriented may have a
"termination manager" whose primary responsibility is to effectively and efficiently end projects.
The duties of a termination manager may include the following:
Ensure the project is complete
Ensure delivery and client acceptance
Prepare a final report
Ensure that all bills have been paid and that the final invoice has been sent to the client
Redistribute personnel, materials, equipment, and any other resources
Determine what records (manuals, reports, and other paperwork) are to be kept and place
them in storage
Assign responsibility for product support, if necessary
Oversee the closing of the project's books
It is equally as important that team members not be penalized for participating in what may turn
out to be an unsuccessful project. If team members are penalized, they will be less willing to end
a project or will become risk averse.
This brings us to the human side of the termination process. Senior management and the team
leader must recognize and reward the accomplishments of the project team. Doing so creates a
corporate culture that encourages success and the motivation to do well. Acknowledging the
dedication and achievements of the project team will enable team members to proceed to their
next assignment with a more loyal and positive attitude. Unfortunately, near the end of a project
it is easy to neglect these kinds of important details because most of the team is looking forward
to the next project, or worse, do not want the project to end.
Impact of Project Cancellation
A project may be canceled for a variety of reasons, including lack of funding, technological
obsolescence, changes in consumer trends, mergers and acquisitions, loss of the "champion," and
negative cost/benefit relationships. Although the reasons may vary, the impact is frequently the
same. Project cancellation can affect employee productivity, the reputation of the firm, and the
value of the firm's stock. Although there is little research on the topic of employee productivity
and project cancellation, what little there is suggests that a project team's perception of the
cancellation may influence their productivity for the next several years. However, there are
guidelines to help soften the impact of cancellation on the team. To begin with, it is essential that
the project team be included in the cancellation process and should be made aware of the
rationale behind the cancellation well before the official announcement. Moreover, this rationale
should be consistent with the perceptions of the project team.
A study found eight factors that influenced whether an employee perceived the cancellation of a
project negatively:
1. The rationale for cancellation.
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resource allocation, and control techniques used during the project will help improve the future
projects.
Compare the present value derived from project if run successfully through its economic
life with its value if project is abandoned now.
Project will abandoned if value derived from cash flows earned throughout its successful
run in its economic life is less than its value if that project abandoned right now.
Example:
ABC Ltd. is seriously considering whether it should abandon the thermal power project recently
set-up by it. If the project is sold off now, the company will realize Rs. 780 crore. If the project is
sold as scrap at the end of its life, the realization is likely to be Rs. 5 crore. The cash flows
expected to accrue during the life of the project are as follows:
Year
150
170
170
185
185
200
210
170
Should the company abandon the project? The opportunity cost of capital of the company is
12%.
Solution:
Step 1:
PVp = Rs. 780 crore
Step 2:
PVc = (150/1.12) + (170/1.122) + (170/1.123) + (185/1.124) + (185/1.125) + (200/1.126) +
(170/1.127) + (5/1.127)= 793.49
Step 3:
793.49>780 or
PVe>PVp
Therefore, the project should continue to be held and should be evaluated at the end of year 1.
Once the decision to terminate is taken, the process of termination should be initiated. As
already mentioned, it is necessary to plan the termination systematically if it should proceed
smoothly and with minimum pain. Sometimes the project manager, because of his familiarity
with the project, is asked to oversee the termination process. If the project manager is not being
posted to manage another project, termination of the current project will mean the end of his
power. Therefore, there will be a tendency to prolong the termination process. Rather than
prolonging the process, the project manager may also complete apathy towards the project and
leave it entirely to the project administrator. Therefore firms often appoint a termination manager
to oversee the process. The person appointed is generally non-technical, but familiar with the
procedures and formalities of termination. If technical knowledge is called for, one of the
members of the project team is appointed as his deputy. The duties of the termination manager
are:
(i). Making sure that the work is complete and ready for delivery.
(ii). Informing the client about the delivery and making sure that the delivery takes place
smoothly.
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Completion Date:
Contract No.:
Cost Type:
Customer:
Project Manager:
The project close-out check lists are designed for use in the following manner:
Column 1: Item no.
Column 2: Task description
Column 3: Required, YES or NO
Column 4: Date Required
Column 5: Assigned responsibility
Column 6: Priority
Column 7: Notes, Reference
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Chapter-5
Project Examination
End Chapter Quizzes
1. What might be the reason/s for the undesirability of continuation of the projects?
a. As funds available are not sufficient for all the projects, the management is forced to wind up
some viable projects too.
b. Changes in technology result in the obsolescence of the current project.
c. The resignation of some key people who are working in the project.
d. Sometimes the parent firm may change its entire plans strategically as such the continuation of
the current project may become unsuitable to the changed environment.
e. Both (b) and (d) above.
2. Which of the following statement/s is/are true?
a. Top management will never recognize the unviability of the project. Instead they always insist
the project managers to turn the unfavorable to favorable at any cost.
b. When project managers perceive that the project is no longer viable they immediately advise
the top management to terminate the project.
c. As it is a question of prestige and affects their career project managers dislike to declare the
failure of a project.
d. Project managers announce the project failure immediately, otherwise top management may
not believe their honesty and integrity in doing the things.
e. None of the above.
3. Which of the following is/are reason/s for the extinction of a project?
a. Political rivalries of the project managers.
b. Mergers and acquisitions.
c. Project failure beyond redemption.
d. Successful completion of the project.
e. All of the above.
4. In integration method of termination
a. The project is taken up as separate division of the parent firm
b. The personnel of the project are absorbed into the parent organization while the property is
sold-off
c. Property relating to the project is sold and the personnel are laid off
d. Both the property and functions of the project are broken up and are integrated into the
existing departments
e. None of the above.
5. Slow killing is a method of
a. Winding up successful project due to political pressures
b. Termination in which the management reduces the budget and slowly transfers the staff to
other projects without announcing termination
c. Termination of a project due to paucity of funds
d. Termination of a project due to lack of required personnel
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Bibliography
1. Machiraju H. R. 2001, Introduction to Project Finance: An Analytical Perspective, Vikas
Publishing House Pvt. Ltd.
2. Goel B.B. 2001, Project Management: A Development Perspective, Deep & Deep
Publications
3. Chandra P. 2002, Projects: Planning, Analysis, Financing, Implementation & Review, 4th
Ed. Tata McGraw-Hill Publishing
4. Meredith J. R. & Mantel S. J., Jr. 2000, Project Management: A Managerial Approach,
4th Ed. John Wiley & Sons
5. Thakur D. 1992, Project Formulation & Implementation, Deep & Deep Publication
6. Pandey I. M. 2001, Financial Management, Vikas Publishing House Pvt. Ltd.
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