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Project Management

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Title: Project Management


1
Project Management
  • MBA Winter 2009
  • Professor Nicholas G. Hall
  • Department of Management Sciences
  • Fisher College of Business
  • The Ohio State University
  • hall_33_at_fisher.osu.edu

2
Reasons for Studying Project Management
  • Product and service life cycles are shorter than
    ever before, hence there is more rapid change
    in industry, and managing this change requires
    professional project management.
  • Emerging applications, especially IT
    implementations, are often managed as projects.
  • More managers are using a project format to
    motivate many different activities.
  • Project management skills are useful in both
    manufacturing and service sectors.

3
Objectives of the Course
  • Understand the critical tradeoffs and decisions
    in project management
  • Learn how to select and organize projects
  • Learn the uses and limitations of project
    management software
  • Learn how to monitor and control single projects
  • Learn how to manage uncertainty and risk in
    projects
  • Learn how to prioritize and manage multiple
    projects
  • Learn how to manage projects better than typical
    business practice (70 30 mix)

4
Course Overview (1 of 3)
  • History of the course
  • History of the subject
  • Textbook
  • Readings

5
Course Overview (2 of 3)
  • Software
  • Case studies
  • Case analysis presentations
  • Guest speakers

6
Course Overview (3 of 3)
  • Multitasking simulation game
  • Class participation
  • Final exam
  • Questions

7
Carmen Website Contents
  • Introduction syllabus, frequently asked
    questions
  • Lecture notes in Powerpoint
  • Background readings
  • Case report example
  • Software tutorials (5)
  • Multitasking simulation game templates, student
    note
  • Forms guest speaker evaluation, course midterm
    feedback, peer group evaluation
  • To be added case analysis assignments, guest
    speaker presentations, student requests, ...

8
Project Management Institute (PMI)
  • Weve long been acknowledged as a pioneer in the
    field and now our membership represents a truly
    global community with over 100,000 professionals,
    representing 125 countries. PMI professionals
    come from virtually every major industry

PMI offers a valuable certification program,
Project Management Professional (PMP). It also
publishes Project Management Journal, a valuable
source of practical research that is available
through OSU Library e-journals.
9
Useful Readings
  • Textbook
  • Klastorin, T. Project Management Tools and
    Tradeoffs, Wiley, Hoboken, NJ, 2004.
  • Other Useful Sources
  • Brooks, F. The Mythical Man-Month.
    Addison-Wesley, Reading, MA, 1995.
  • Goldratt, E.M. Critical Chain. The North River
    Press, Great Barrington, MA, 1997.
  • A Guide to the Project Management Body of
    Knowledge (PMBOK Guide), PMI, Newton Square, PA,
    2000.
  • Kerzner, H. Strategic Planning for Project
    Management Using a Project Management Maturity
    Model, Wiley, New York, NY, 2001.
  • Stevenson, N. Microsoft Project 2003 for Dummies,
    Wiley, Indianapolis, IN, 2004.

10
Chapter
  • Introduction to Project Management

11
History of Project Management
  • One of the first examples of project management
    was the construction of the pyramids in Egypt
  • Henry L. Gantt (1861-1919) added an important
    visualization tool around 1917 with the Gantt
    Chart
  • In the late 1950s, DuPont Company developed the
    Critical Path Method (CPM)
  • Also in the late 1950s, Booz Allen Hamilton
    developed the Program Evaluation and Review
    Technique (PERT), which models uncertainty in
    project management

12
Importance of Project Management
  • Project management effectively controls
    organizational change, allowing organizations to
    introduce new products, new processes, and new
    programs effectively.
  • Projects are becoming more complex, making them
    more difficult to control without a formal
    management structure.
  • Projects with substantially different
    characteristics, especially in IT, are emerging.
  • Project management helps cross-functional teams
    to become more effective.

13
Comment on the Importance of Project Management
  • At last we are beginning to see research which
    proves how important project management is ...
    without well-trained and capable project managers
    the percentage of GDP spent through projects is
    inflated due to many exceeding their budget
    through poor management.

Richard Pharro, author and consultant (2003)
Still, many organizations underappreciate the
contributions made by their project managers.
14
What is a Project?
  • A project is a temporary endeavor undertaken to
    create a unique product or service. (PMBOK,
    2000)
  • A project is a well-defined set of tasks or
    activities that must all be completed in order to
    meet the projects goals. Two prevalent
    characteristics
  • Each task may be started or stopped independently
    of other tasks
  • Tasks are ordered such that they must be
    performed in a technological sequence.

15
Examples of Projects
  • Construction of the pyramids
  • Apollo moon landing mission
  • Development of MS Windows
  • Making The Lord of the Rings
  • Organizing the Olympics Games
  • Development and marketing of a new drug
  • Implementing a new company wide IT system
  • Design of this course
  • Project management spans both the
  • manufacturing and service sectors.

16
Manufacturing Perspective
  • Flowshop The same sequence of operations is used
    to create each product or service.
  • Job Shop A product or service only flows through
    centers which are required to create it.

17
Characteristics of Flowshop, Job Shop and Project
18
Project Management versus Process Management
  • Ultimately, the parallels between process and
    project management give way to a fundamental
    difference process management seeks to
    eliminate variability whereas project management
    must accept variability because each project is
    unique.

J. Elton, J. Roe. 1998. Bringing Discipline to
Project Management. Harvard Business Review.
See coursepack article Oltra, Maroto and Segura
19
Lean Principles in Project Management
  • Focusing on customer needs
  • Balancing work to ensure an even flow
  • Using customer pull rather than supplier push
    to initiate work
  • Using principles of continuous improvement

See coursepack article Brown et al.
20
Measures of Project Success
  • Overall perception
  • Cost
  • Completion time
  • Technical goals, compared to initial
    specifications
  • Technical goals, compared to other projects in
    the organization
  • Technical goals, taking into account the problems
    that arose in the project

R.J. Might and W.A. Fischer (1985)
Question Was the movie Titanic successful?
See coursepack article The Chaos Report
21
Nine Factors Critical to the Success of Many
Projects
  • Clearly defined goals
  • Competent project manager
  • Top management support
  • Competent project team members
  • Sufficient resource allocation
  • Adequate communication channels
  • Effective control mechanisms
  • Use of feedback for improvement
  • Responsiveness to clients

J. Pinto and D. Slevin (1987)
See coursepack article Czuchry and Yasin
22
Famous Project Failures
  • In 1988, Westpac Banking Corporation initiated a
    5-year, 85m project to improve its information
    system. Three years later, after spending 150m
    with nothing to show for it, they cancelled the
    project and eliminated 500 development jobs.
  • The computerized baggage handling system at the
    Denver International Airport delayed the opening
    of the airport from March 1994 to February 1995
    and added 85 million to the original budget. The
    baggage system continued to unload bags even
    though they were jammed on the conveyor belt. The
    system also loaded bags into telecarts that were
    already full. Hence, some bags fell onto the
    tracks, causing the telecarts to jam. The timing
    between the conveyor belts and the moving
    telecarts was not properly synchronized, causing
    bags to fall between the conveyor belt and the
    telecarts. Then the bags became wedged under the
    telecarts, which were bumping into each other
    near the load point.

23
Famous Project Failures (cont.)
  • Disney's shipbuilder was six months late in
    delivering its new cruise ships in 1998.
    Thousands of Disney customers who had purchased
    tickets had to be compensated for making
    different plans.
  • In 1997-99, Universal Studios in Orlando,
    Florida, built a new restaurant and entertainment
    complex, a two year project. The opening was
    delayed by three months.
  • The Big Dig road construction project in Boston
    (1987-2007) was budgeted at 5.8b but cost over
    15b. The project resulted in criminal arrests,
    thousands of water leaks, death of a motorist
    from a tunnel collapse, and hundreds of millions
    of dollars in lawsuits.
  • In 2005, UK grocery chain J. Sainsbury wrote off
    its 526m investment in an automated supply chain
    management system. They hired 3000 additional
    workers to stock their shelves manually.

24
Reasons why Projects Fail
  • Improper focus of the project management system,
    e.g. on low level details
  • Fixation on first budget estimates
  • Too much reliance on inaccurate project
    management software
  • Too many people on the project team
  • Poor communication within the project team
  • Incentives that reward the wrong actions

See coursepack article Mulder
25
Common Excuses for Project Failures
  • Unexpectedly poor weather delayed construction
  • Unforeseeable poor performance by contractors
  • Senior management imposed an unrealistic schedule
  • Instructions by senior management were unclear
  • Many wasteful synchronization meetings
    interrupted actual work

See coursepack article Pinto and Kharbanda
26
Management of IT Projects
  • More than 250 billion is spent in the US each
    year on approximately 175,000 information
    technology projects.
  • IT project management is an 850 million industry
    and is expected to grow by as much as 20 percent
    per year.

Gene Bounds, The Last Word on Project
Management, IIE Solutions, 1998.
27
IT Projects are Different
  • in IT projects, if you ask people whats done
    and what remains to be done there is nothing to
    see. In an IT project, you go from zero to 100
    percent in the last second--unlike building a
    brick wall where you can see when youre halfway
    done.

J. Vowler (2001)
Engineering projects are measured by tasks
completed
Example building construction
IT projects are measured by resources used
Example software development
28
IT Project Outcomes
Standish Group Survey, 1999. (from a survey of
8000 business systems projects)
29
Why do IT Projects Fail?
  • Ill-defined or changing requirements
  • Poor project planning/management
  • Uncontrolled quality problems, e.g. software
    fails to complete computing task in time
  • Unrealistic expectations/inaccurate estimates
  • Adoption of new technology without fully
    understanding it

Construx Software Builders, Inc., 2005.
Why are IT projects more difficult?
30
Wheelwright and Clarks Classification of Projects
31
Project Life Cycle
32
Design (Scope), Cost, Time Tradeoffs
You can have your job done cheap, quick, or
right pick two. Sign in local copy center.
33
Project Management Maturity Model (PMMM)
  • PMMM is a formal tool that can be used to measure
    an organization's project management maturity.
  • Once the initial level of maturity and areas for
    improvement are identified, the PMMM outlines the
    steps to take toward project management
    excellence
  • PMMM is based on extensive empirical research
    that defines a best practice database, as well
    as a plan for improving the project management
    process

34
Project Management Maturity Model
  • 1. Ad-Hoc The project management process is
    disorganized or even chaotic. Systems and
    processes are not defined. Chronic cost and
    schedule problems exist.
  • 2. Abbreviated Some project management
    processes exist, but underlying principles are
    not consistently followed. Project success is
    largely unpredictable. Cost and schedule problems
    are common.

35
Project Management Maturity Model
  • 3. Organized Project management processes and
    systems are documented and and integrated.
    Project success rates, and cost and schedule
    performance, are improved.
  • 4. Managed Projects are effectively
    controlled by management. Project success is
    usually routine. Cost and schedule performance
    usually conform to plan.

36
Project Management Maturity Model
  • 5. Adaptive Continuous improvement of the
    project management process occurs through
    feedback and testing of innovative ideas and
    technologies. Project success rates, and cost
    and schedule performance, are continuously
    improving.

Source The Project Management Institute PM
Network 1997. Micro Frame Technologies, Inc. and
Project Management Technologies, Inc.
37
Chapter
  • Project Initiation, Selection, and Planning

38
Importance of Project Initiation Selection
There are two ways for a business to succeed at
new products doing projects right, and doing
the right projects.
R.G. Cooper, S. Edgett, E. Kleinschmidt. 2000.
Research and Technology Management.
Good project selection makes the later job of
running projects much easier. Also, some poorly
selected projects are doomed from the start.
39
Project Selection - Overview
  • 1. Strategic factors
  • Competitive necessity keep a foothold in the
    market, not get left behind
  • Market expansion opportunities not yet
    profitable, but need to establish a presence
  • Consistency in line with overall organizations
    mission statement
  • Image potential impact of project on corporate
    image

40
Project Selection - Overview
  • 2. Project portfolio factors
  • Diversification reduce market and other risks by
    maintaining a mix of projects
  • Cash flow constraints balance available cash
    over time and across projects
  • Resource constraints plan available resources
    (facility, personnel) over time

41
Analyzing Project Portfolios Bubble Diagram
Shapes Shading Color Size
Bubble diagrams are useful for representing a set
of projects and visualizing a project portfolio.
42
Analyzing Project Portfolios Product vs Process
Shape represents the production resource used
Size represents the resource requirement
Extent of Product Change
Extent of Process Change
Source S.C. Wheelwright and K.B. Clark, 1992,
Creating Project Plans to Focus, Harvard Business
Review
43
Project Selection - Overview
  • 3. Project risk factors
  • Probability of research being successful
  • Probability of development being successful
  • Probability of project success w.r.t. scope
  • Probability of commercial success
  • Overall risk of project
  • Competitors in market and their reactions

44
Project Selection - Overview
  • 4. Quantitative factors
  • Payback period
  • Net present value / internal rate of return
  • Expected commercial value
  • Real options
  • Multifactor scoring

45
Payback Period Analysis
  • Number of years needed for the project to repay
    its initial fixed investment.

Example A project costs 100,000 and is
expected to save the company 20,000 per year
Payback Period 100,000 / 20,000 5 years
46
Comments on Payback Period
  • Easy to calculate and explain, and sometimes can
    be used to achieve a common purpose throughout an
    organization.
  • Ignores the time value of money, including
    interest rates and inflation.
  • Ignores money earned after the payback period.

47
Net Present Value (NPV)
  • Let Ft net cash flow in period t
  • (t 0, 1,..., T), where F0 initial cash
    investment at time t 0 and
  • r discount rate of return (hurdle rate)

48
Internal Rate of Return (IRR)
  • Find a value of r such that NPV is equal to 0
    (but this value may not be unique)

Note that, in a typical project, early cash flows
are negative.
49
NPV Example
  • Phase I Research and Product Development 18
    million annual research cost for 2 years.
  • Phase II Market Development 10 million annual
    expenditure for 2 years to develop marketing and
    distribution channels.
  • Phase III Sales All cash flows are after-tax and
    occur at year's end.

50
NPV Example
The results of Phase II (available at the end of
year 4) identify the product's market potential
as indicated below
51
NPV Example
If the discount rate is 5 percent, the discounted
expected cash flow at the end of the 4th year is
114.62m.
52
NPV Example
Expected cash flows (with sale of product at end
of year 4)
53
Criticisms of NPV Analysis
  • Assumes that cash flow forecasts are accurate
    ignores the human bias effect
  • Does not take into account the possibility that
    decisions (and therefore cash flows) may adapt to
    changing circumstances over time
  • Ignores project portfolio issues
  • Use of a single discount rate for the entire
    project is problematic, since risk is typically
    reduced as the project evolves

See coursepack article Hodder and Riggs
54
Expected Commercial Value (ECV)
ECV is the expected NPV of the project,
calculated by using the probabilities of the
various alternatives.
55
ECV Example
  • The design of a new product is expected to take 3
    years, at a cost of 6m/year
  • There is a .8 probability that the product will
    be technically feasible
  • If feasible, the product can be launched in year
    4 with an estimated cost of 5.5M
  • If launched, the product will be a commercial
    success with probability 0.6, earning gross
    revenues of 15M per year for 5 years
  • If it is a commercial failure, then the revenue
    is only 2M per year for 5 years
  • The discount rate is 10 percent

56
ECV Example
5 Years
Probability 0.6
One-time cost of 5.5M
Commercial Success Revenue 15M/yr
Probability 0.8
3 Years
Launch New Product
Development Succeeds
Commercial Failure Revenue 2M/yr
Research Product Development
Probability 0.2
Drop Product
Probability 0.4
Annual Cost 6M
Development Fails
No Cost
Discount rate r110
Discount rate r210
57
ECV Example
M
10
Total 4.40
Example calculation .8(.6)(15)(.4)(2)-5.50.2(
0)3.44
58
Criticisms of ECV Analysis
  • The possibility of changing decisions in the
    future changes the risk characteristics of the
    project.
  • Consequently, the use of the same discount rate
    may be inappropriate.
  • However, its not clear what other discount rate
    should be used.
  • Thats where the idea of real options analysis
    can (possibly) help.

59
Real Options Analysis
  • Based on the view that the evaluation of
    financial options can be applied to other
    investments.
  • Implicitly finds the correct discount rate by
    expressing the cash flows in the project as a
    combination of flows whose cost of capital is
    supposedly known.
  • In principle, this should give more accurate
    evaluation of projects than ECV.
  • However, the usefulness of real options analysis
    for evaluating projects is unclear.

60
Real Options Analysis
  • A leader in the application of real options
    analysis is Hewlett-Packard. But they mainly use
    it for procurement and other low risk,
    contract-protected decisions, not to evaluate
    projects.
  • Real options analysis is probably not useful in
    high risk industries, such as pharmaceuticals.
  • Real options analysis may also not be useful if a
    company lacks the discipline to end a project
    without delay if the initial investment doesnt
    work out.
  • Real options author N. Kulatilaka says, Although
    you can make any project look good if you build
    in enough options, a real world approach must
    address two questions when exactly do you shut
    it down, and is there a good mechanism in sight
    to do that?

61
Multifactor Project Scoring Example
62
Multifactor Project Scoring Example
  • To convert various measurement scales to a 0,1
    range.
  • LINEAR SCALE
  • EXPONENTIAL SCALE

Note that the exponential scale places a premium
on being acceptable, but not on excellence.
63
Multifactor Project Scoring Example
Note that the linear scale recommends Project A,
whereas the exponential scale recommends Project
B.
64
Project Selection as a Portfolio Problem
  • A project is a multi-period investment problem
  • Top management typically allocates resources to
    different product lines (e.g., compact cars,
    high-end sedans)
  • Product lines sell in separate (but not
    necessarily independent) market segments
  • Product line allocations (which resources should
    produce which products) may change frequently
  • Conditions in each market segment are uncertain
    from period to period due to competition and
    changing customer preferences

65
Project Selection Example
Overall score of Project A .581 Overall score of
Project B .845
We want to maximize the total overall score, or
value delivered, of the portfolio
66
0-1 Program for Project Selection
Maximize 0.581a 0.845b Subject to 40a 65b
90 (Year 1) -10a 25b 20 (Year 2) -20a
50b 40 (Year 3) -20a 50b 55 (Year 4) a,
b 0 or 1 where a 1 if project A is
selected 0 if not
and b similarly.
See coursepack article Hall et al. (1992)
67
Project Planning Information
  • 1. Project overview and organization
  • Summary statement, work breakdown
  • structure, organization plan, subcontracting
  • plan
  • 2. Project scheduling
  • Time and schedule, budget, resource
    allocation
  • plan
  • 3. Project monitoring and control
  • Cost control system, contingency plans
  • 4. Project termination
  • Evaluation, benchmarking and archiving

68
Work Breakdown Structure (WBS)
  • Specifies the end-item deliverables
  • Divides the work, reducing the dollars and
    complexity with each additional division
  • Stop dividing when the tasks are manageable work
    packages, which will depend on
  • Skill levels of group(s) involved
  • Managerial responsibility
  • Length of time
  • Value of task
  • Rules of thumb for tasks small enough for
    estimation, large enough for measurability
  • For example, the 1969 Apollo moon landing project
    had about 500,000 tasks

69
Common Problem in WBS Design
  • The usual mistake PMs make is to lay out too
    many tasks subdividing the major achievements
    into smaller and smaller subtasks until the work
    breakdown structure (WBS) is a to do list of
    one-hour chores This springs from the screwy
    logic that a project managers job is to walk
    around with a checklist of 17,432 items and tick
    each item off as people complete them.
  • The Hampton Group (1996)

70
Two-Level WBS
WBS level 1
1. Charity Auction
1.1 Event Planning
1.2 Item Procurement
1.3 Marketing
1.4 Corporate Sponsorships
WBS level 2
71
Three-Level WBS
WBS level 2
WBS level 3
72
Sandbagging
  • A common problem in estimation of task durations
    is building in too much slack (also known as
    sandbagging).
  • Sandbagging often results from poorly aligned
    incentives. If project workers will incur a
    penalty for missing a standard task time, but no
    benefit from completing the task earlier, then
    the natural tendency is to inflate the standard
    task time.
  • A common problem in projects is that sandbagging
    and other slack proliferate.

73
New Product Development Projects
Sequential Approach
Design follows a sequential pattern where
information about the new product is slowly
accumulated in consecutive stages
74
New Product Development Projects
Overlapped Product Design Approach
Allows downstream design stages to start before
preceding upstream stages have finalized their
specifications.
75
New Product Development Projects
What are the tradeoffs when moving from a
traditional sequential product design approach to
an overlapped product design approach?
  • Time to market is smaller in the overlapped
    design
  • But the schedule is more vulnerable (which
    requires additional monitoring)
  • Can add further resources to tasks to reduce
    duration--but costs are increased

76
Chapter
  • Project Teams and Organizational Relationships

77
Role of Project Manager and Team
Client
Top Management
Project Manager
Subcontractors
Project Team
Functional Managers
Regulating Organizations
This structure is what makes being a project
manager both very interesting and very
challenging!
78
Responsibilities of a Project Manager
  • To the organization and top management
  • Meet budget and resource constraints
  • Coordinate with functional managers
  • To the project team
  • Provide timely and accurate feedback
  • Keep focus on project goals
  • Manage personnel changes
  • To the client
  • Communicate in a timely and accurate manner
  • Provide control over scope changes
  • Maintain quality standards
  • To the subcontractors
  • Provide information on overall project status

Comment Its a long list, and requires
prioritization.
79
Project Team
  • What is a project team?
  • A group of people committed to achieving a common
    set of goals for which they hold themselves
    mutually accountable
  • Characteristics of a project team
  • Diverse backgrounds/skills
  • Need to work together effectively, often under
    time and cost pressures
  • May not have worked together before
  • Have a sense of accountability as a unit (but
    perhaps only temporarily)

80
Sources of Conflicts within Projects
  • Scheduling and sequencing
  • Administrative procedures
  • Staffing issues
  • Budget and cost issues
  • Personality conflicts
  • Project priorities
  • Trade-off between technical performance and
    business performance
  • Source H.J. Thamhain and D.L. Wilemon, 1971

81
Artistic Viewpoint
  • I design user interfaces to please an audience
    of one. I write them for me. If Im happy, I
    know some cool people will like it As for
    schedules, Im not interested in schedules did
    anyone care when War and Peace came out?
  • Developer, Microsoft Corporation
  • As reported by MacCormack and Herman, HBR Case
    9-600-097 Microsoft Office 2000

However, is this comment a reasonable one for
most project management environments?
82
Group Harmony and Project Performance
  • What is the relationship between the design of
    multidisciplinary project teams and project
    success?
  • Two schools of thought
  • Humanistic school -- groups that have positive
    characteristics will perform well
  • Task oriented school -- positive group harmony
    detracts from group performance

83
Group Harmony and Project Performance
  • Experiment conducted with MBA students at U. of
    Washington and Seattle U., using computer based
    simulation of a nuclear power plant.
  • 14 project teams with a total of 44 team members
    compared high performance (low cost) teams vs low
    performance (high cost) teams
  • Measured
  • Group harmony
  • Individual contributions to group
  • Speed of decision making

K. Brown, T.D. Klastorin, J. Valluzzi. 1990.
Project Management Performance A Comparison of
Team Characteristics, IEEE Transactions on
Engineering Management, 37, 2, 117-125.
84
Group Harmony High vs Low Performing Groups
High performing (low cost) groups
Low performing (high cost) groups
High performing groups began with lots of
conflict!
85
Extent of Individual Contribution High vs Low
Performing Groups
High performing (low cost) groups
Low performing (high cost) groups
High performing groups began with individual
contributions low!
86
Decision Making Effectiveness High vs Low
Performing Groups
High performing (low cost) groups
Low performing (high cost) groups
High performing groups began with slow decision
making!
87
Organizational Issues
  • What administrative and control relationships
    should be established between the project and the
    existing organization?
  • How much autonomy and authority should be given
    to the project?
  • What management practices and systems should be
    used to manage the project, and how should they
    differ from those used in the existing
    organization?

88
Fundamental Approaches
  • Project as a Distinct Entity In order to
    maximize the chances of success, it is better to
    organize the project as an entity distinct from
    the rest of the organization. This minimizes
    interdependencies between the project and the
    rest of the organization.
  • Project Integrated into Existing Structure When
    an organization undertakes a new project, strong
    pressures favor the integration of the project
    into the existing structure and management
    systems and practices.

But, what is the overall company objective?
89
Autonomous Projects Tend to be More Successful
  • Because their results are more visible and
    attract more management attention
  • Motivation level tends to be higher
  • Because they suffer less from conflicts over
    priorities than functionally managed projects,
    which facilitates time and cost control
  • Because maintaining relationships between the
    project and the organization creates complex
    coordination problems

So, why arent all projects managed as autonomous
units?
90
Organizational Pressures for Project Integration
  • Upper management may resist special status for
    projects, because this creates additional risks
    and setup costs as well as jealousy
  • Functional managers like to believe that the
    project falls within their departments
    jurisdiction
  • Department managers may feel threatened by losing
    some of their best resources to the project
  • Personnel may resist transfer to the project,
    especially for risky projects and when
    reintegration after the project could be
    difficult
  • Personnel and accounting functions strive for
    standardized methods and procedures across the
    organization
  • Managers of autonomous projects choose methods
    and materials to optimize locally, not globally

91
Project Organization Types
  • 1. Functional The project is divided, and
    assigned to appropriate functional departments.
    The coordination of the project is carried out by
    functional and high-level managers.
  • 2. Functional matrix A manager is designated to
    oversee the project across different functional
    areas.
  • 3. Balanced matrix A manager is assigned to
    oversee the project, and interacts on an equal
    basis with functional managers.
  • 4. Project matrix A manager is assigned to
    oversee the project as an independent entity, and
    is responsible for the completion of the project.
    There may be a project team, but part time.
  • 5. Project team A manager is put in charge of a
    team drawn from several functional areas who are
    assigned to the project full time.

92
Matrix Organization
  • Motivated by conflicting incentives in the
    organization functional managers typically want
    to optimize scope and product performance and
    design, project managers focus more on the cost
    and schedule of the project
  • Matrix organization became widely used in the
    1970s and early 1980s
  • More recently, has evolved into many different
    forms (based on reporting structure, level of
    standardization, sharing of responsibility and
    authority)

93
A Business School as a Matrix Organization
Comments bureaucratic, confusing, stressful
94
Organizational Structure Project Success
  • Studies by Larson and Gobeli (1988, 1989)
  • Sent questionnaires to 855 randomly selected PMI
    members
  • Asked about organizational structure used
  • Perceptual measures of project success
    successful, marginal, unsuccessful with respect
    to
  • Meeting schedule
  • Controlling cost
  • Technical performance
  • Overall performance

95
Study Data
  • Classification of 547 respondents (64 response
    rate)
  • 30 project managers or directors of PM programs
  • 16 top management (president, vice president,
    etc.)
  • 26 managers in functional areas (e.g.,
    marketing)
  • 18 specialists working on projects
  • Industries included in studies
  • 14 pharmaceutical products
  • 10 aerospace
  • 10 computer and data processing products
  • others telecommunications, medical instruments,
    glass products, software development,
    petrochemical products, houseware goods
  • Organizational structures
  • 13 (71) Functional organizations
  • 26 (142) Functional matrix
  • 16.5 (90) Balanced matrix
  • 28.5 (156) Project matrix
  • 16 (87) Project team

96
ANOVA Results by Organizational Structure
An exception occurs here
Controlling
Meeting
Technical
Overall
Cost
Schedule
Performance
Results
Organizational Structure
N
Mean (SD)
Mean (SD)
Mean (SD)
Mean (SD)
Functional
A
Organization
71
1.76 (.83)
1.77 (.83)
2.30 (.77)
1.96 (.84)
B
Functional Matrix
142
1.91 (.77)
2.00 (.85)
2.37 (.73)
2.21 (.75)
C
Balanced Matrix
90
2.39 (.73)
2.15 (.82)
2.64 (.61)
2.52 (.61)
D
Project Matrix
156
2.64 (.76)
2.30 (.79)
2.67 (.57)
2.54 (.66)
E
Project Team
87
2.22 (.82)
2.32 (.80)
2.64 (.61)
2.52 (.70)
Total Sample
546
2.12 (.79)
2.14 (.83)
2.53 (.66)
2.38 (.70)
F-statistic
10.38
6.94
7.42
11.45
A,B lt C,D,E
E lt D
A,B lt C lt D,E
A,B lt C,D,E
A,B lt C,D,E
Scheffe Results
The results are statistically significant at the
plt0.01 level
Higher values represent greater success
97
Principles for Determining Autonomy Level in New
Projects (Organizational Factors)
  • Ready availability of resources facilitates the
    establishment of autonomous projects
  • The less the organizations information system
    and administrative policies and procedures are
    able to serve a project, the more the project
    needs specific and dedicated systems
  • The more the firms culture differs from the
    desired project management culture, the more
    autonomous a project should be

98
Principles for Determining Autonomy Level in New
Projects (Project Factors)
  • The greater the strategic importance for an
    organization and the larger the size of the
    project, the more autonomous the project should
    be
  • The more a project is interdependent
    (integrated) (e.g., there is a need for
    frequent project meetings), the more autonomous
    it should be
  • The higher the complexity, and the more the
    projects success depends on its environment, the
    more autonomous it should be
  • The greater the need to meet severe budget/time
    constraints (especially time, from Larson and
    Gobeli), the more autonomous the project should
    be
  • The more stable the resource loading, the more
    economical it is to dedicate resources to the
    project and run it as an autonomous unit

99
Decision Model for Determining the Level of
Autonomy in a New Project
  • A five step decision model (or, scoring model)
    is now proposed for determining the level of
    autonomy to be allowed in a new project.
  • This model provides useful structure and guidance
    to the process of determining an appropriate
    level of autonomy.
  • But this model is definitely NOT AN ALGORITHM!
    Thus, the same inputs can lead to different
    outcomes, based on judgment and interpretation.

This model is adapted from Organizational
Choices for Project Management , B. Hobbs and P.
Menard
100
Decision Model
  • Step 1. Evaluate the way in
  • which the organization reacts
  • to a new project.
  • Organizational Factors
  • Availability of resources
  • Inflexibility of the organizational management
    system
  • Unsupportiveness of culture

_______ _______ _______
Level or Intensity
Lowlt--gtHigh
Find the mean ______
101
Decision Model
  • Step 2. Evaluate the project
  • itself.
  • Project factors
  • Strategic importance
  • Size
  • Novelty need for innovation
  • Need for interdependence/integration
  • Environmental complexity
  • Need to meet tight constraints
  • Stability in resource loading

_______ _______ _______ _______ _______ _____
__ _______
Level or Intensity
Lowlt--gtHigh
Find the mean ______
102
Decision Model
  • Step 3. Using the information
  • from Steps 1 and 2, make a
  • subjective judgment about
  • the desired level of autonomy
  • in the new project. For
  • example, average the Step 1
  • and Step 2 numbers.

103
Decision Model
  • Step 4. Identify to what
  • extent the desired level of
  • autonomy from Step 3 is
  • compatible with the current
  • management culture (which is
  • identified on the following
  • page).

104
Current Management Culture
Level or Intensity
Lowlt--gtHigh
  • Ability to manage in an autonomous mode
  • Percentage of time assigned to projects
  • Quality of reporting process
  • Percentage of resources fully dedicated to
    projects
  • Level of control over budget and management of
    resources
  • Level of control over budget allocation and
    expenditures
  • Ability to make independent decisions about
    technical choices and tradeoffs
  • Project-specific systems and procedures already
    in place
  • Project resources located together
  • Physical separation from parent organization

________ ________ ________ ________ ________ __
______ ________ ________ ________ ________
Find the mean ______
105
Decision Model
  • Step 5. Based on the information
  • from Steps 3 and 4, and the relative
  • importance of the project to the
  • organization, make a decision about
  • the appropriate level of autonomy
  • for the project. The numbers from
  • Steps 3 and 4 inform that decision,
  • but should not dominate it.

106
Scoring Model Application Control System Project
  • A major utility is functionally structured with
    culture unsupportive of project needs
  • Management systems cannot serve project needs for
    planning, control, general administration
  • Severe shortage of specialized human resources,
    as they are badly needed for ongoing operations
  • High strategic importance technical failure
    could result in a major public catastrophe
  • Medium to large project cost is around 200
    million, and project duration is 6 years

107
Decision Model Control System Project (cont.)
  • Strong need for innovation control system of a
    large and complex distribution network needs to
    be replaced. Members of the project team
    participated in the design of existing control
    system in the 1970s, but the new system is very
    complex and state of the art.
  • Strong need for integration contributions from
    many tech departments are needed and are highly
    interdependent
  • Medium-high environmental complexity many
    external interfaces and high dependency on
    suppliers, because of highly specialized
    consulting services and software/hardware and
    because the number of potential suppliers is
    extremely small. The project impacts many users
    who have to be involved in design and
    implementation. Industry in turmoil inability to
    terminate contracts, bankruptcies,

108
Decision Model Control System Project (cont.)
  • Project is very politically sensitive, because of
    the visibility the press has given to the
    shortcomings of the present system.
  • Medium budget/time constraints There is no hard
    deadline for the new system, but the risk of
    severe problems in the existing system is too
    high after the target date. Cost issues are not
    critical, but they receive close attention from
    top management.
  • Medium stability of resource loading the level
    of internal resources assigned to the project
    varies from phase to phase, but the most critical
    resources will be with the project throughout.
  • Budget allocation and expenditures are tightly
    controlled by the overall organization.
  • The accuracy of the financial reporting system is
    low poor control system, significant potential
    for human error.

109
Summary of Project Organization Structure
  • Project structure is significantly related to
    project success
  • Projects that use a traditional functional
    organization have the worst cost, time and scope
    performance
  • Projects using either a project matrix or a
    project team were more successful in meeting
    their schedules than those using the balanced
    matrix
  • Projects using the project matrix were better
    able to control costs than those using the
    project team
  • Overall, the most successful projects used a
    balanced matrix, project team, or--especially--pro
    ject matrix. But, were these the most successful
    organizations?

110
Subcontracting Issues
  • What parts of a project will be subcontracted?
  • What type of bidding process will be used? What
    type of contract?
  • Should you use a separate request for bids for
    each task or use one for all tasks?
  • What is the impact of subcontracting on the
    expected duration of the project?
  • Should you offer incentives, such as a bonus for
    finishing early? Or require penalties for
    finishing late?
  • How does subcontracting impact risk?

111
Advice for Choosing a Subcontractor
  • Talk to at least three potential subcontractors
  • Use referrals where possible
  • Face-to-face meetings are essential
  • Tradeoff between quality and price needs to be
    considered
  • Present candidates with test scenarios
  • Communicate your needs and expectations in detail
  • Establish benchmarks for performance
  • Establish guidelines for contract termination

112
Chapter
  • Precedence Networks and The Critical Path Method
    (CPM)

113
Precedence Relationships
Several types of precedence requirements occur in
practice.
Finish-to-start (FS a) Task B cannot start
until a days after task A is finished
Start-to-start (SS a) Task B cannot start
until a days after task A has started
Finish-to-finish (FF a) Task B cannot finish
until a days after task A is finished
Start-to-finish (SF a) Task B cannot finish
until a days after task A has started
The most common precedence network has FS 0.
114
Precedence Networks
Networks represent immediate precedence
relationships among tasks and milestones
identified by the work breakdown
structure Milestones are tasks that take no time
and have no cost, but indicate significant events
in the life of the project (e.g., completion of a
project phase) Two types of networks
Activity-on-Node (AON) Activity-on-Arc
(AOA) All networks must have only one starting
and one ending point. This can always be
achieved artificially, where necessary.
115
Precedence Networks Activity-on-Node (AON)
116
Precedence Networks Activity-on-Arc (AOA)
Task A (start, 2)
Task C (2, end)
Task B (start, 1)
Task D (1, end)
Dummy task (1, 2)
117
AON vs AOA
  • Arguments for AON
  • AON is easier to explain and understand
  • AON is used in most PM software (e.g., Microsoft
    Project)
  • AON does not require the use of dummy tasks to
    represent precedence relationships
  • Arguments for AOA
  • The PERT model (Chapter 6) is based on AOA
  • AOA can be drawn using arc lengths corresponding
    to task durations, which adds intuition to the
    network representation

118
Critical Path Method AON with Two Paths
The minimum time needed to complete a project is
equal to the length of the longest path through
the network this path is known as a Critical
Path. Activities along the critical path are
called Critical Activities.
119
CPM Example 1 AON Calculations
ESB 7 LFB 11
ESA 0 LFA 8
Step 1. Work ES calculations forward. Step 2. Set
LFENDESEND. Step 3. Work LF calculations
backward.
Task B 3 months
ESStart 0 LFStart 0
Task A 7 months
ESEnd 11 LFEnd 11
Task C 11 months
ESC 0 LFC 11
ESj Earliest starting time for task (milestone)
j LFj Latest finish time for task (milestone) j
120
Example 1 Network Paths and Lengths
  • There may be more than one critical path, but
    there must be at least one
  • Critical paths can be found easily using CPM (as
    in MS Project), linear programming or other
    optimization methods

121
Critical Activities Implications
  • Activity j is a critical activity if LFj ESj
    tj
  • Any activity on a critical path is a critical
    activity
  • A delay to a critical activity causes a delay to
    the completion of the entire project
  • Therefore, critical activities require
    particularly efficient execution, so they often
    receive more and better resources and closer
    monitoring
  • Critical chain project management (Goldratt,
    1997) treats a critical path in a project
    similarly to a bottleneck in a manufacturing
    process

122
CPM Example 2 AON Network
123
Example 2 Network Paths and Lengths
Thus, START-A-D-F-END is a critical path.
124
Example 2 CPM Calculations
ESDmaxESAtA, ESBtBmax014,
0914. LFDminLFE-tE, LFF-tFmin35-6,
35-926.
125
CPM Example 2 AON Network
ESA0 LFA26-1214
ESF141226 LFF35-035
ESD max14,9 14 LFD min35-9,35-626
Ta
sk
A

14
w
k
s
Ta
sk
F
ESEND35 LFEND35
ESSTART0 LFSTART0

9
w
k
s
ESB0 LFB26-1214
Ta
sk
D

12
w
k
s
START
END
Ta
sk
B

9
w
k
s
Ta
sk
E
ESC0 LFC35-629

6
w
k
s
ESEmax020,141226 LFE35-035
Ta
sk
C

20
w
k
s
126
Types of Slack
Total Slack (TSi) assumes no delays at other
tasks (i.e., all the noncritical tasks before i
use their ES times, and all the noncritical
tasks after i use their LS times) Free Slack
(FSi) assumes no delays at earlier tasks, but
allows delays at later tasks (i.e., all the
noncritical tasks use their ES times) Safety
Slack (SSi) assumes no delays at later tasks, but
allows delays at earlier tasks (i.e., all the
noncritical tasks use their LS times) Independent
Slack (ISi) allows delays at all other tasks
(i.e., all the noncritical tasks before i use
their LS times, and all the noncritical tasks
after i use their ES times)
127
Example 2 Calculating Total Slack (TSi)
Total Slack for task i TSi LFi - ESi - ti
128
Calculating All Slack Values
Total Slack (TSi) LFi - ESi - ti Free Slack
(FSi) ESi,min - ESi - ti where ESi,min
minimum earliest start time of all tasks that
immediately follow task i Safety Slack (SSi)
LFi - LFi,max - ti where LFi,max maximum
latest finish time of all tasks that
immediately precede task i Independent
Slack (ISi) max (0, ESi,min - LFi,max -
ti)
129
Slack Calculations Example
Ta
sk
A

14
w
k
s
Ta
sk
F
ESSTART0 LFSTART0

9
w
k
s
Ta
sk
D

12
w
k
s
START
END
ESE26 LFE35
Ta
sk
B

9
w
k
s
Ta
sk
E
ESC0 LFC29

6
w
k
s
TSCLFC-ESC-tC 29-0-209
SSCLFC-LFC,max-tC LFC-LFSTART-tC
29-0-209
Ta
sk
C

20
w
k
s
FSCESC,min-ESC-tC ESE-ESC-tC
26-0-206
ISCmax(0,ESC,min-LFC,max-tC)
max(0,ESE-LFSTART-tC) max(0,26-0-20)6
130
LP Model Motivation
  • It is unnecessary to use an LP model just to find
    the critical paths (because CPM is simpler)
  • However, an LP model can easily be extended to
    evaluate, for example, time / cost tradeoffs,
    and task completion time preferences for the
    noncritical activities
  • Also, LP output provides extensive sensitivity
    and related information which should be valuable
    to project managers
  • Whereas, most project management software (such
    as MS Project) does not

131
LP Model for AON Network
Decision variables STARTj start time for task
j END ending time of project (END milestone)
Minimize END subject to
STARTj FINISHi for all tasks i that
immediately precede task j STARTj 0
for all tasks j in the project
where FINISHi STARTi ti
Note that the FINISHi variables will not
explicitly appear in the simplified version of
the model
132
LP Model for Example 2
Minimize END Subject to STARTD FINISHA
STARTA 14 STARTD FINISHB STARTB
9 STARTE FINISHC STARTC 20 STARTE
FINISHD STARTD 12 STARTF FINISHD STARTD
12 END FINISHE STARTE 6 END FINISHF
STARTF 9 STARTA, STARTB, STARTC 0
133
Simplified LP Model for Example 2
Minimize END
Subject to
134
Extension of LP Model Enforce Early Start Times
How to ensure that all tasks are started at their
earliest possible times.
135
Extension of LP Model Enforce Late Start Times
How to ensure that all tasks are started at their
latest possible times, subject to not delaying
the project.
  • Run any model (for example, CPM) that minimizes
    the project duration.
  • Call the duration of the project ENDTIME.
  • In the model on the previous page, add
    constraints which ensure that all tasks complete
    by ENDTIME
  • Change minimize to maximize

136
Microsoft Project
  • MS Project is an excellent visual aid for
    monitoring and controlling projects
  • For projects without time/cost tradeoffs,
    uncertainty in task times, and resource
    constraints, it delivers optimal solutions
  • Outside these simpler environments, the
    performance of MS Project is less reliable
  • See Klastorin, p. 195, for a discussion of the
    relative performance of several software
    packages, including MS Project

See coursepack article Fox and Spence (1998)
137
AOA Precedence Networks
Task A (start, 2)
Task C (2, end)
Task B (start, 1)
Task D (1, end)
Dummy task (1, 2)
138
AOA Computing Earliest and Latest Occurrence
Times
TE24 TL25
TEEND12 TLEND12
TESTART0 TLSTART0
Step 1. Work TE calculations forward
Step 3. Work TL calculations backward
TE12 TL12
Step 2. Set TLENDTEEND
139
Slack Calculations for AOA
  • TSij Total slack for Task (i,j)
  • FSij Free slack for Task (i,j)
  • SSij Safety slack for Task (i,j)
  • ISij Independent slack for Task (i,j)

Interpretations are the same as in AON.
140
Slack Values for AOA Example
141
AOA Calculating Slack
TE24 TL25
TSSTART21, FSSTART20 SSSTART21, ISSTART20
TS2END1, FS2END1 SS2END0, IS2END0
2
Task A 4 Weeks
Task C 7 Weeks
TEEND12 TLEND12
Start
End
Dummy task
TS123, FS122 SS123, IS122
TESTART0 TLSTART0
Task D 10 Weeks
Task B 2 Weeks
TSSTART10, FSSTART10 SSSTART10, ISSTART10
TS1END0, FS1END0 SS1END0, IS1END0
1
Step 1. Work TE calculations forward
Step 3. Work TL calculations backward
TE12 TL12
Step 2. Set TLENDTEEND
142
LP Model for AOA Network
Decision variables the occurrence time of each
node
143
Chapter
  • Planning to Minimize Cost

144
Project Budget
  • The budget is an important communication link
    between the functional units and the project
  • Should be presented in terms of measurable
    outputs, which correspond to work packages in the
    WBS
  • Should clearly indicate project milestones
  • Establishes goals, schedules and benchmarks, and
    assigns resources to tasks
  • Serves as a baseline for progress monitoring and
    control

145
Types of Budgeting
  • Top-down Budgeting Aggregate measures (cost,
    time) provided by top management, based on
    strategic goals and constraints
  • Bottom-up Budgeting Specific measures
    aggregated up from WBS tasks/costs and
    subcontractors
  • Hybrid Top management typically indicates a
    budget constraint, while project managers use a
    bottom-up approach to estimate individual costs

146
Types of Costs in Projects
  • Direct costs resource costs, including
    expediting costs. These vary with task duration.
  • Material costs reflect the cost of acquiring
    materials needed to complete work. These vary
    with project scope.
  • Overhead costs administrative costs allocated to
    support the project, and usually not attributable
    to any specific task. These vary with project
    duration.
  • Performance costs / bonuses vary with project
    duration, or sometimes with performance relative
    to milestones, depending on the contract.

147
Project Budget Example
148
Project Budget Example
Cost for Resource A worker 400/week Cost for
Resource B worker 600/week
149
Project Budget Example
The total duration is 35 weeks
150
Weekly Costs (Cash Flows)
Example 2 from Chapter 4
151
Cumulative Costs
1 3 5 7 9 11 13 15 17 19 21 23
25 27 29 31 33
152
Cash Flow Management
  • Need to manage both payments and receipts
  • It is usually better to pay as late and receive
    as early as possible
  • Must consider budget constraints and
    organizational requirements on projects (e.g.,
    payback period)
  • Noncritical activities may have flexibility in
    their start times that affects cash flow and NPV
  • Frequently, there is a tradeoff between cash flow
    (prefer LS schedule) and completion time
    reliability (prefer ES schedule)

153
Cash Flow Example
154
Cash Flow Example Solver Model
Objective Maximize NPV
10 11 12 13 14 15 16 17 18 19
C
D
E
F
F19F13F15F18
See cashflow analysis.xls on the CD
155
Material Management Example
A total of 32 units of resource must be
acquired. What is the best ordering policy?
156
Material Management Example
  • Main Issue How much to order, and when?
  • In the example
  • Single material is needed for Task B (2 units)
    and Task E (30 units)
  • Fixed cost (including delivery) to place order
    300
  • Cost of holding raw materials is 2 times the
    number of unit-weeks in stock
  • Cost of holding finished product is greater than
    the cost of holding raw material, because of
    value added
  • Project can be delayed (beyond 17 weeks) at cost
    of P per week, where P gt 30 x 2

157
Material Management Example
To minimize holding costs, only place orders at
Latest Start times Can never reduce total costs
by delaying the project
Choose the option that minimizes inventory cost
order cost holding cost of raw materials
158
Material Management Example
  • Fixed cost to place order 300/order
  • Cost of holding raw material 2/unit/week
  • Cost of option 1 30012308780
  • Cost of option 2 3002600

159
Time / Cost Tradeoffs
  • Crashing investing in additional resources (and
    usually incurring additional cost) in order to
    reduce individual task durations and therefore
    also overall project duration.
  • What are some methods for crashing?
  • Some practical models
  • minimize total of overhead, indirect, direct
    and penalty costs
  • minimize project duration subject to a budget
    for direct cost.

160
Time / Cost Tradeoff Example
7 wks
15 wks
Critical path with makespan 22
6 wks
10 wks
Assume constant marginal crash cost, i.e. linear
cost of crashing
Assume task C cannot be crashed below 13 weeks
161
Time / Cost Tradeoff Example
As we reduce the project duration, we need to
keep track of the lengths of all paths
This crashing procedu
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