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TM 665 Lecture 01_ Introduction_ Project Definitions

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					TM 665: Lecture 02


Strategic Management and Project
            Selection


          TM 665: Project Planning & Control   1
Agenda
 Review of Pinto Reading
 Project Selection and Criteria
 Project Selection Models
 Uncertainty and Risk
 Information for Project Selection
 Project Portfolio Process (PPP)
 Project Proposals



                  TM 665: Project Planning & Control   2
Lessons for an Accidental Profession

 Understand the context of project
  management
 Recognize project team conflict as progress
 Understand who the stakeholders are and
  what they want
 Accept the political nature of organizations
  and use it to your advantage



                   TM 665: Project Planning & Control   3
 Characteristics of Political Behaviors
Characteristics          Naïve                        Sensible        Sharks
Underlying        Politics is                  Politics is        Politics is an
Attitude          unpleasant                   necessary          opportunity

Intent            Avoid at all                 Further dept.      Self-serving,
                  costs                        goals              Predatory

Techniques        Tell it like it is           Network,           Manipulate:
                                               expand             Fraud & Deceit
                                               connections        if necessary
                                               give & take
Favorite          None – truth will Negotiate &                   Bully, misuse
Tactics           win out           Bargain                       info, “use”
                                                                  friends
                             TM 665: Project Planning & Control                    4
Lessons for an Accidental Profession

 Lead from the front; the view is better
 Understand what success means
 Build and maintain a cohesive team
 Enthusiasm and despair are both infectious
 One look forward is worth two looks back
 Remember what you are trying to do
 Use time carefully or it will use you
 Above all, plan , plan, plan
                   TM 665: Project Planning & Control   5
Project Maturity and Reality
 Reality:
      Many projects may fall outside the company mission
      There are projects without an organizational goal/objective “fit”
      Sometimes project budgets are not tied to a cost-benefit
       analysis


 Since each project will compete for company resources, both
  with other projects and with routine operations, a company
  with a high level of project maturity selects and manages its’
  project portfolio with care



                          TM 665: Project Planning & Control         6
Multiple Project Management Issues

 Delays in one project may impact others
     Resource conflicts
     Technology dependencies

 Lack of resource “smoothing”
     Peaks and valleys of resource utilization

 Bottlenecks may form with scarce resources
     Lack of workarounds

                    TM 665: Project Planning & Control   7
Project Selection
 Evaluation process -- individual projects or
  groups of projects
     Choosing some set of project options
     Organizational objectives achieved

 Managers use decision-aiding models
   Models represent the problem’s structure
   Aid in evaluating risks and options


 Model manipulation allows the project manager
  to explore “What if” situations – aids planning!
                   TM 665: Project Planning & Control   8
Criteria for Project Selection Models
 Realism – model reflects the reality of manager’s decision situation
 Capability – able to simulate different scenarios and optimize the
   decision
 Flexibility – provide valid results within the range of conditions
 Ease of Use – reasonably convenient, easy execution, and easily
   understood
 Cost – Data gathering and modeling costs should be low relative to
   the cost of the project
 Easy Computerization – must be easy and convenient to gather,
   store and manipulate data in the model




                             TM 665: Project Planning & Control          9
Nature of Project Selection Models

     Two Basic Types of Models
          Nonnumeric
          Numeric


     Two Critical Facts:
          Models do not make decisions – people do!
          All models are only partial representations of
           reality



                        TM 665: Project Planning & Control   10
Nonnumeric Models
 Sacred Cow - project is suggested by a senior and powerful official
  in the organization
 Operating Necessity       - the project is required to keep the system
  running
 Competitive Necessity - project is necessary to sustain a
  competitive position
 Product Line Extension - projects are judged on how they fit with
  current product line, fill a gap, strengthen a weak link, or extend the
  line in a new desirable way.
 Comparative Benefit Model - several projects are considered and
  the one with the most benefit to the firm is selected


                           TM 665: Project Planning & Control               11
Q-Sort Project Selection
                                 Deck of Projects


               High Benefit Level                        Low Benefit Level


    High Benefit Level          Medium Benefit                     Low Benefit Level



Very High      High       Med-High                Med-Low         Low Level    Very Low
  Level        Level       Level                   Level                        Level


               Even with multiple persons sorting, the
               final order usually does not vary much!

                           TM 665: Project Planning & Control                      12
Numeric Models: Profit/Profitability
    Payback period - initial fixed investment divided by
     the estimated net annual cash inflows from the project

    Average Rate of Return - average annual profit
     divided by the initial investment
    Discounted Cash Flow - Net Present Value Method
    Internal Rate of Return - Finds rate of return that
     equates present value of inflows and outflows

     Profitability Index - NPV of all future expected cash
     flows divided by the initial cash investment


                          TM 665: Project Planning & Control   13
 Financial Selection Criteria

 Payback Model
    Interpreted as the time to recover project investment
        Investment $/Annual Net Savings = PB

    Widely used
    Emphasis on Cash Flow (during the project)

 Net Present Value (NPV)
    Future cash flows discounted by rate of return
    Requires a desired rate of return (MARR or target RoR)
       (1 + k + pt)
                     – t  discounted RoR factor

    Compares “RoR” of project(s) to “target”
       If NPV > $0, it beats RoR target, but may not compare
        projects with differing lifetimes
                        TM 665: Project Planning & Control   14
           Example Problem
Project A costs $10,000 and will last for 10 years.
   Annual, end of the year revenues will be
   $3,000, and expenses will be $1,000. There is
   no salvage value.

Project B costs $10,000 and will also last for 10
   years. Annual revenues will be $3,000 with
   annual expenses of $1,500. Salvage value is
   $5,000.

Conduct an economic analysis to select the
  preferred project using a MARR of 10% per
  year, compounded annually.
                 TM 665: Project Planning & Control   15
                         Example Problem
             Project A costs $10,000 and will last for 10 years. Annual,
                end of the year revenues will be $3,000, and expenses
                will be $1,000. There is no salvage value.
GIVEN:                                     DIAGRAM:
     LIFETIME = 10 YRS                     NPWA ?
     MARR = 10%/YR, CPD ANNUALLY                                         $3 000
     FIRST COST = $10 000
    ANNUAL REVENUES = $3 000/YR             0                            10
    ANNUAL COSTS = $1 000/YR                        1    2 3         4   $1 000
     SALVAGE VALUE = $0
FIND NPWA:                                       $10 000
      NET ANNUAL = ANNUAL REVENUES – ANNUAL COSTS
             = $3000/YR – $1000/YR = $2000/YR
      NPWA = A(P|A,i,n) – 1ST COST
             = $2 000(P|A,10%,10) – $10 000
             = $2 000(6.1446) – $10 000 = $2 289
                                TM 665: Project Planning & Control        16
                         Example Problem
             Project B costs $10,000 and will also last for 10 years.
                Annual revenues will be $3,000 with annual expenses
                of $1,500. Salvage value is $5,000.
GIVEN:                                       DIAGRAM:
     LIFETIME = 10 YRS                       NPWB ?                    $5 000
     MARR = 10%/YR, CPD ANNUALLY                                       $3 000
     FIRST COST = $10 000
    ANNUAL REVENUES = $3 000/YR               0                       10
    ANNUAL COSTS = $1 500/YR                         1    2   3  4     $1 500
     SALVAGE VALUE = $5 000
FIND NPWB:                                        $10 000
      NET ANNUAL = ANNUAL REVENUES – ANNUAL COSTS
             = $3 000/YR – $1 000/YR = $1 500/YR
      NPWB = A(P|A,i,n) + SALVAGE(P|F,i,n) – 1ST COST
             = $1 500(P|A,10%,10) + $5 000(P|F,10%,10) – $10 000
             = $1 500(6.1446) + $5 000(0.3855) – $10 000 = $1 144 ►PREFER A
                                TM 665: Project Planning & Control      17
    What does this mean?

NPWA = $2 289 NPWB = $1 144

We prefer project A over project B.

Does NOT mean $2289 profit!

Concept:
 We favor Project A by $2 289 over
 taking $10 000 and putting it in an
 account earning 10%.
           TM 665: Project Planning & Control   18
Financial Selection Criteria

    Internal Rate of Return
         Set up for NPV, then solve for the rate of return that sets
          NPV = 0 (usually trial & error)
         Can be used with incremental analysis to choose
          among multiple projects
         May have multiple rates of return for same project
    Profitability Index
         Find the NPV of the ratio of Benefits to Costs at MARR
         B/C >1 is requirement for each project
         Can be used with incremental analysis to choose
          among multiple projects

                          TM 665: Project Planning & Control       19
Incremental Benefit / Cost Analysis
   Steps:
   1. Define the set of feasible, mutually exclusive,
      alternative projects to be compared.
   2. Define the planning horizon (same lifetimes).
   3. Develop the cost and benefit profiles in monetary
      terms for each alternative.
   4. Specify the MARR to be used.
   5. Order the alternatives from smallest to largest Cost
   6. Compare the alternatives using NPV.
   7. If the B/C ratio is:
            >1                 higher cost project is justified
            ≤1                 lower cost project is still better



                    TM 665: Project Planning & Control              20
Numeric Models: Scoring

 Unweighted 0-1 Factor Model
 Unweighted Factor Scoring Model

 Weighted Factor Scoring Model

 Constrained Weighted Factor Scoring Model

 Goal Programming with Multiple Objectives
      Requires an objective function that measures each
       criterion and relates them to the others by weights
      Can be used to find “best mix” of projects
                                                            Chapter 2-6
                       TM 665: Project Planning & Control                 21
Risk Versus Uncertainty
 Analysis Under Uncertainty - The Management of Risk

      The difference between risk and uncertainty:
         Risk - when the decision maker knows the
          probability of each and every state of nature and
          thus each and every outcome. An expected value
          of each alternative action can be determined

           Uncertainty - when a decision maker has
            information that is not complete and therefore
            cannot determine the expected value of each
            alternative


                         TM 665: Project Planning & Control   22
Risk Analysis

 Principal contribution of risk analysis is to focus
  the attention on understanding the nature and
  extent of the uncertainty associated with some
  variables used in a decision making process

 Usually understood to use financial measures in
  determining the desirability of an investment
  project


                  TM 665: Project Planning & Control   23
Risk Analysis

 Probability distributions are determined or subjectively
  estimated for each of the “uncertain” variables

 The probability distribution for the rate of return (or net
  present value) is then found by simulation

 Both the expectation and its variability are important
  criteria in the evaluation of a project



                      TM 665: Project Planning & Control   24
Risk Analysis




           TM 665: Project Planning & Control   25
Measurements and Models
 Objective v. Subjective
    Objective relates to an external standard
    Subjective relates to an internal standard
        Either standard could be inaccurate!

 Quantitative v. Qualitative
    Quantitative measures add
    Qualitative measures can be converted to a number
     (but not added)
 Reliable v. Unreliable
    Reliability is repeatable within small variation band
 Valid v. Invalid
    Reliability is different from accuracy (validity)


                      TM 665: Project Planning & Control     26
Aggregate Project Planning




               TM 665: Project Planning & Control   27
Aggregate Planning Matrix
 Means to visual risk and investment of the project
  portfolio

 Axes represent extent of change in process and
  product
      Increasing risk as they move from minor to extensive
      Location of project icon communicates extent of risk

 Size of project icons indicate resources required

 Senior management reviews relative to comfort level
  in the business environment

                       TM 665: Project Planning & Control     28
 Project Portfolio Process - Purpose

 Identify Projects that Meet Strategic Needs
    Support Multiple Goals
    Direct Organizational Improvement
    Enhance/Enable Key Areas



 Prioritize Potential Projects
    Limit Active Projects to Manageable Level
    Identify Risk-intensive Efforts
    Balance Short, Medium, Long-term Returns



 Reduce Projects from Getting in via “Backdoor”

                      TM 665: Project Planning & Control   29
Project Portfolio Process - Steps

1.   Establish a Project Management “Governance”
     Structure
        Senior Leaders and Technical Experts

2.   Identify (Common) Project Selection Criteria
        Tied to Strategic Vision, Mission, Goals, Objectives

3.   Collect Project-specific Data
        Project Attributes Tied to Selection Criteria

4.   Assess Available Resources
        Internal and External
        Financial and Other
                         TM 665: Project Planning & Control     30
Project Portfolio Process - Steps

5.       Reduce Project List
     -     Screen for Potential “Differentiators”

6.       Prioritize within Categories
     -     Assuring Balance of Portfolio
     -     Avoid Overabundance of Similar Projects

7.       Select Primary and “Reserve” Projects
     -     Leave Budget for “Surprise” Opportunities

8.       Implement the Project Process
     -     Communicate Results to Selectees and Non-selectees
     -     Fund Projects to Promised Levels
                           TM 665: Project Planning & Control   31
Project Selection Evaluation Factors

 Production
    Interruptions, learning, process
 Marketing
    Customer management issues
 Financial
    Return on investment
 Personnel
    Skills and training, working conditions Project Selection
 Administrative
    Regulatory standards, strategic fit



                     TM 665: Project Planning & Control    32
Project Proposal Contents

1.   Executive Summary
2.   Cover Letter
3.   Nature of the technical problem
4.   Plan for Implementation of Project
5.   Plan for Logistic Support & Administration of the
     project
6.   Description of group proposing to do the work
7.   Any relevant past experience that can be applied
        Executive summary is written last!


                      TM 665: Project Planning & Control   33
Assignment
 CH 2 Problems from textbook:
     pp. 27-37
     #1
     # 3, 4, 5
          Note that 4 and 5 are alternate measures of #3
     #9, 10
          Note that if you set up a spreadsheet to do #9,
           then #10 can easily be adjusted for the “what if”
           scenarios.
 Start CH 8

                        TM 665: Project Planning & Control     34

				
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