Project Management Course

7/21/2019 Project Management Course

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# project is, thus, initiated to achieve the

mission-whatever the mission may be. #

project is completed as soon as the

mission is fulfilled.

# combination of human and non

human recourses pooled to"ether to in atemporary organization to serve

specific purpose.



%hat is a Project&• # project is a temporary endeavor

underta'en to create a uni(ue product,service, or result.!

• )perations is wor' done to sustain the

business.

• # project ends when its objectives have been

reached, or the project has been terminated.

• Projects can be lar"e or small and ta'e a

short or lon" time to complete.



%hat is a project&•

# "roup of tas's *activities+ performed within a definable time period*schedule+ in order to meet a specific set of "oalsobjectives

*performance+ within a bud"et *cost plan+

• # project "enerally exhibits most of the followin" conditions

R It is unique

R # project is finite

R sually complex

R # project is heterogeneous

R Non-repetitive

R /e(uires multiple resources from a finite resource pool



It is a one shot, time limited, goal

directed, major underta'in", re(uirin"the commitment of varied skills and

resources.

# project is defined to be a task which

has a definite beginning-definite end

time and which consists of several

activities or jobs.



Examples of projects include,but are not limited to:

0 1evelopin" a new product or service

0 2ffectin" a chan"e in structure, staffin", or style ofan organization

0 1esi"nin" a new transportation vehicle

01evelopin" or ac(uirin" a new or modifiedinformation system

0 Constructin" a building or facility

0 3uildin" a water system for a community0 /unnin" a campaign for political office

0Implementing a new business procedure or process



arious elements of project: !ased on set of

definitions

Projects are complex, one time processes

Projects are limited by budget ,schedule, and

resources

Projects are developed to resolve a clear goal or set of

goals

Projects are customer focused



Process 4 Project 5ana"ement"rocess

6. /epeat process or product

7. 8everal objectives

9. )n-"oin"

:. People are homo"eneous

;. 8ystems in place

<. Performance, cost, 4 time

'nown

=. Part of the line or"anization

>. 3astions of established

practice

?. 8upports status (uo

"roject

6. @ew process or product

7. )ne objective

9. )ne shot $ limited life

:. 5ore hetero"eneous

;. 8ystems must be created

<. Performance, cost 4 time less

certain

=. )utside of line or"anization

>. Aiolates established practice

?. psets status (uo



%hat is Project 5ana"ement&&&&



#hat is "roject $anagement%

Project mana"ement is the

application of 'nowled"e, s'ills,tools, and techni(ues *B8TT+ to

project activities to meet project

re(uirements.!



"roject $anagement

• Project 5ana"ement are the

mana"ement activities of planning,

directing, and controlling resources*&&&&&&&+ to meet the technical, cost,

and time constraints of a project.



Importance of P5&&&&&&



Importance of P5&&&&&&

Dast technolo"ical chan"es 2lectronic "oods @arrow product launch windows

Ei"h entropy of system2xpasion

8hort life cycle of products sw,moblile.Flobalization impact3/IC8

Gar"e or"anizations

Customer focus



&eterminants of project success%%%%%%



Cost

TimePerformance

&eterminants of project success%%%%%%

Iron triangle



3ud"et

8chedule Performance

Client

acceptance8ucc

ess

'he new (uadruple approach



)bjectives of "$* &eterminants of project

success

+ cope-cric'et, badminton, tennis players have boundaries. People

live in slums * @o of family, no of family members, their income,

etc+ .

. "erformance /technical0- %ater treatment plant- to clean 6HHHH

ltsday.

1 'ime- a project has fixed time, completion should be in time.

2 3ost* !udget- f*P,T,8+

4 3lient acceptance



Bey indicators of IT project

success &&&&&&&



Bey indicators of IT project success &&&&&&&

+ystem (uality- easy to use, and they supply (uality information.

.Information (uality- the information "enerated by the implemented

IT project must be the info re(uired by users and be of si"nificant

(uality that it is 5actionable!.

16se- IT system must be, problem solvin", decision aidin", and

networ'in" mechanism.

26ser satisfaction- team must determine user satisfaction.

4Individual impact- is decision ma'in" faster and more accurate. Is

info. more retrievable and more affordable, and assimilated.

7)rganisational impact- positive impact on entire or"anization.



1-20

Information Technolo"y Project 8uccess!

• 8oftware 4 hardware projects fail at a 748 rate

• )ver half of all IT projects become runaways

• p to 948 of all software projects are cancelled

• #vera"e cost overrun is 248 schedule overrun is 718 withonly <= of ori"inally contracted features

• 298 of I' projects delivered but not used, .;8 paid for butnot delivered +;8 abandoned



6-76

Dour 1imensions of Project 8uccess

Project

Completion

Time

Importance

6

Project

2fficiency*3"t4time+

:

Preparin" for

The Duture *newm't, product+

7

Impact on

Customer*tech. specs.+

9

3usiness8uccess*Commercialsuccess+



!enefits /organization0

Improved efficiency

Improved effectiveness

Increased profit

8trate"ic "oals

)r"anization learnin"

/educed waste



!enefits / stakeholders0

8atisfied users

8ocial and environmental impact

Personal development

Professional learnin"

Capital supplier

Project team

Impact on surroundin" community

6nderstanding success criteria



Irontriangle

Informationsystem

!enefits/organization0

!enefits / stakeholders0

Cost 5aintainability Improvedefficiency 8atisfied users

Juality /eliability Improvedeffectiveness

8ocial andenvironmental impact

Time Aalidity Increased profit Personal development

InformationJuality

8trate"ic "oals Professional learnin"

se )r"anizationlearnin"

Capital supplier

/educed waste Project team

Impact on surroundin"

community

6nderstanding success criteria



%hat is a C55 in a project&&&&&



"roject $anagement $aturity $odel:

P555 allow an or"anization to

benchmark the best practices ofsuccessful "$ firms



6-7=

&eveloping "roject $anagement $aturity

Project mana"ement maturity models : models

– 82IKs *8oftware 2n"ineerin" Institute $Carne"ie 5ellon

niversity+ capability maturity model inte"ration

– Center for business practices

– BerznerKs project mana"ement maturity model

– 28I *2ducation 8ervice Institute+ InternationalKs project

framewor'



&evelopment of "$ maturity

P555 allow an or"anization to benchmark the best practices ofsuccessful "$ firms

Gevel of sophistication is different - practices * 3oein", G4T+

Purpose of 3enchmar'- process improvements of project delivery

@ew or" $ where to start&

55 $ provide necessary frame wor' to first, analysis and evaluatecurrent practices, and second compare them with chief competitor &

Industry standards, and third, define a systematic route for improvin"

these practices



55- continuous improvement in practices, 55 offer the template for definin"

and then achievin" such a pro"ressive improvement

$$ chart both < set of standards currently accepted and as well as process

for achievin" si"nificant movement towards these benchmar's.

8pider %eb 1ia"ram



6-9H

8pider %eb 1ia"ram

=ing level $eaning

6 @ot defend or poor

7 1efined but substandard

9 8tandardized

: Industry leader





Ring level Meaning1 Not defend or poor2 Dened but substandard3 Standardized4 Industry leader





Carne"ie 5elon



>ow maturity#d hoc processes,

no common lan"ua"e,

little support

$oderate maturity1efined practices

Trainin" pro"rams

)r"anizational support

?igh

maturity

Institutionalizedsee' continues

improvement



)verview of "roject $anagement @nowledge Areas and "roject $anagement "rocesses

? areas 8JCC-PI/TE

)verview of "roject $anagement @nowledge Areas and "roject $anagement "rocesses



j g g j g





uccess is contextual: &epends on

/+0 trategy

/.0 )rganizationsB culture and

/10 tructure

"roject and organizational strategy: /strategic mgt0 85 is

the science of

Cormulating,

Implementing and,

Evaluating 3ross functional decisions that enable them toachieve its

)bjectives.

$ i t f



$ consists of

&eveloping vision statement and mission

statement: where you want to be.

Cormulating, implementing, and evaluating: based

on 8%)T, and resources

$aking cross functional decisions: #ll the

departments.

Achieving objectives: mar'et leadership throu"h cost,

innovative product, superior (uality, other means.



Projects /eflect 8trate"y

A firm wishing toD Dmay have a project

redevelop products or processes to reen"ineer products or processes.

chan"es strate"ic direction or product portfolio confi"uration to create new product lines.

improve cross-or"anizationalcommunication 4 efficiency

to install an enterprise IT system.

Projects are stepping stones of corporate strate"y

The firmKs strate"ic development is a driving force behind

project development

8ome examples include



trategy "roject

/edevelopment of products for "reater m't. share / 2 P

@ew business processes for "reater streamlinin" /2P

Creation of new strate"ic alliances 8C5

Improvin" cross or". communication &&&&&

@ew distribution strate"y &&&



trategy oals program

)bjectives

$ission

/elationship of strate"ic elements harmony



trategy oal: 2 yr "rogram product cost

improvement pro"ram6.Docus on existin" mar'ets > /)I %or' Cap *%CIP+

and products ? and so on Ima"e assessment pro"

7. )pportunities in forei"n m't Product devlp pro" *P1P+

9.@ew product line in existin" m't

)bjectives

6;/)I @on decreasin" dividends

5ore socially conscious ima"e

$ission The company is in

business

of supplyin" system

components

to worldwide non

residential #C m't

Illustratin" #li"nment bw 8trate"ic 2lement and Projects

t k h ld $ t



takeholder $anagement

-#ll individuals or "roups who have an active sta'e in project and can

influence either positively or negatively its development

-#nalyze their impact

-Internal

Top m"t

#ccountant)ther functional mana"ers

Project team members

-2xternal

Client

Competitors *lessons to be learned, status of project+

8uppliers

2nvironmental , political, consumer, and other intervener "roups



Project 8ta'eholder /elationships

3lients"roject

$anager

)ther

Cunctional

$anagers

External

Environment

"roject

'eamAccountant

'op

$anagement

"arent)rganization



5ana"in" sta'eholders

8implified sta'eholder mana"ement process

Plannin", or"anizin", directin", motivatin", and

controllin" the resources necessary to deal with

various internal and external "roups

$anaging stakeholders



$anaging stakeholders

6. #ssess the environment *mar'et research+

7. Identifyin" the "oal of principal actors *low cost software-

cost data base, follow up business- mind device, loo' for

hidden a"endas+

9. #ssess your own capabilities tech, political, financial, etc

:. 1evelop solution for needs of stoc'holders by creatin"

action plans

;. Test and refine the solution



Project 8ta'eholder 5ana"ement Cycle

"roject

$anagement

'eam

Identify8ta'eholders

Father Information

on 8ta'eholders

1etermine

8ta'eholder

8tren"ths 4

%ea'nesses

Implement

8ta'eholder

5ana"ement

8trate"y

Identify

8ta'eholders

5ission

Predict 8ta'eholder

3ehavior

Identify 8ta'eholder

8trate"y

Project 8ta'eholder 5ana"ement Cycle *3y 1.I Cleland+



)rganization structure consists of three key elements

6. )r"anizational structure *)8+ desi"nates formal

reporting relationship, includin" no of levels, span

of control of mana"ers and supervisors.

7. )8 identifies the "roupin" to"ether of individualsinto departments and departments into total

ori"ination.

9. )8 includes the desi"n of systems to ensure effectivecommunication, coordination, and integration of

efforts across departments.



Plan @ational Corporate plan with tar"ets for "rowth.

Pro"ramme Eealth pro"ramme, education pro"ramme, 8c4Tech. pro".

Project Eospitals, schools, power plants

%or' pac'a"es %ater supply 4 distn , power supply and distrn pac'a"es

Tas' #ward of water supply contract, construction of foundations.

#ctivity 2xcavation, layin" of cable, preparation of drawin"s,and sepcs.

Project Damily Tree

' 'd



%or' 3rea'down 8tructure

Eierarchical or"anization of wor' to be done on a project

Project bro'en down into modules

5odules subdivided into subcomponents, activities, and tas's

Identifies individual tas's, wor'loads, and resource re(uirements



Dinal #ssembly

8ub-assembly 8ub-assembly

Component Component

2lement2lement

5aterial



Work reakdo!n Stru"ture

#ierar"$i"al or%anization of !orkto be done on a pro&e"t

'ro&e"t broken do!n into (odules

)odules subdi*ided intosub"o(ponents+ a"ti*ities+ and

tasks

Identies indi*idual tasks+!orkloads+ and resour"e

re,uire(ents

Dinner

Pasta Sauce Salad Bread Wine Setting

Table Atmosphere

Purchase Purchase Purchase Purchase Purchase Set table Light candles

Boil water Add tomato Wash Butter top Open Turn on musicsauce/paste lettuce

Cook Saut Drain Slice Tasteonion ! garlic lettuce

Drain Cool Tear "eat Ser#emeatballs lettuce

Add Ser#e Add spices croutons/ Ser#e

dressing

Cook sauce $i%

Ser#e Ser#e

C f i ti l t t



Corms of organizational structure

Internal and external or"anization environment&

Cunctional organization: "roupin" people

performin" similar activities into departments

"roject organization: "roupin" people into project

teams on temporary assignments

$atrix organization: companies are structured by

creatin" a dual hierarchy in which functions and

project have e(ual prominence by

C ti l i ti



3oard of 1irectors

AP Production AP /41AP 5ar'etin" AP Dinance

C2)

5/ 8ales

#fter sales

service

#dvertisin"

Go"istics

)utsourcin"

1istribution

%arehousin"

5f"

&&&&&&&& @P1Testin"

Juality

Cunctional organization

Functional Organization



Cunctional organization



trengths #eaknesses

@o chan"e is re(uired in

firmLs desi"n

8iloin" $ difficult o achieve

cross functional cooperation

2nables the development ofin-depth 'nowled"e

Gac' of customer focus

#llows for standard career paths

Gon" time $ due to structure problems, lac' of ownership,slower communication

Project may be sub optimizedue to varyin" interest orcommitment

g

"roject organization



3oard of 1irectors


C2)

AP Project

Project#lpha

Project

3eta


Project Organization






trengths #eaknesses

#ssi"n authority to solely project mana"er

8ettin" up of maintainin"teams can be expensive

Improvedcommunication $ across

functions

>oyalty to project not toori"inations

2ffective and speedy &$ 1ifficult to maintainpool of intellectual capital

Promotes creation ofcadres of P5 experts

Concern M future after project "ets over

/apid response to mar'et


$atrix: #e crate a dual authority where there is a balance bw functional and pure project

ori"ination AP projects deals with C2) and other APs



3oard of 1irectors


C2)

AP Project

Project

#lpha

Project

3eta

ori"ination, AP projects deals with C2) and other APs

7 resources 6.; resources 6 resource 9 resources

6 resources 7 resources 7 resource 7.; resources



Balanced Matrix Organization

5atrix



trengths #eaknesses

8uited to dynamic environment 'wo bosses

2mphasizes the dual importanceof project mana"ement andfunctional efficiency

8ometime difficult toshare resources

Promotes coordination acrossfunctions

Crustrating $ cau"ht bw project and functionalre(uirements

se of scares recourses oncompetin" basis



)rganizational tructure Influences on "rojects



Cunctiona

l orgCunctiona

l matrix

"roject

matrix

!alanced

matrix"roject

org

ery

effective

eryineffective

effective

ineffective

3onstruction

F"&

"roject and "rogram $anagers%%%%%



"roject and "rogram $anagers%%%%%

"roject and "rogram $anagers



"roject and "rogram $anagers

• Project mana"ers wor' with project sponsors,

project teams, and other people involved in projects to meet project "oals.

• Pro"ram # "roup of related projects mana"ed

in a coordinated way to obtain benefits andcontrol not available from mana"in" them

individually.!

• Pro"ram mana"ers oversee pro"rams and oftenact as bosses for project managers.

2x. # new car model pro"ram *en"ine, transmission,

interior decoration+

Cunding and support can be assigned on the basis

of %%%%%%%%%%%%%%%%%%%%%%%%



of %%%%%%%%%%%%%%%%%%%%%%%%

Cunding and support can be assigned on the



u d g d suppo c be ss g ed o e

basis of %%%%%%%%%%%%%%%%%%%%%%%%

Dundin" and support can be assi"ned on the

basis of risk*reward cate"ories, specific linesof business, or "eneral types of projects, such

as infrastructure and internal process

improvement.

"ortfolios and "ortfolio $anagement



"ortfolios and "ortfolio $anagement

# portfolio is a collection of projects or pro"rams and other

wor' that are grouped together to facilitate effective

management of that wor' to meet strate"ic business

objectives.

The projects or pro"rams in the portfolio may not

necessarily be interdependent or directly related.

ubprojects



Projects are fre(uently divided into more manageable components or

subprojects.

8ubprojects are often contracted to an external enterprise or to another

functional unit in the performin" or"anization.

2xamples include

•8ubprojects based on the project process, such as a sin"le phase in the

project life cycle.

•8ubprojects accordin" to human resource s'ill re(uirements, such as

plumbers or electricians needed on a construction project.

•8ubprojects involvin" specialized technology, such as the automatedtestin" of computer pro"rams on a software development project * %GG,

AG8I,etc..+

•)n very lar"e projects, the subprojects can consist of a series of even

smaller subprojects *Fan"a project- B5 project+ .

>et us talk about "$) %%%%%



>et us talk about "$) %%%%%

"roject $anagement )ffice: # project mana"ement office



"roject $anagement )ffice: # project mana"ement office

*P5)+ is an or"anizational unit to centralize and

coordinate the mana"ement of projects.

pro"ram mana"ement office,!

project office,! or

pro"ram office

• )versees the mana"ement of projects, programs, or both



)versees the mana"ement of projects, programs, or both

• Coordinated planning, prioritization and execution of

projects and subprojects.

• =esource leveling and variance reporting.

• 3entral repository of lesson learned.

• @ew "$ improvements are first identified, tested refined

and passed.

• 'raining, software, standardized policies, and

procedures.

• hared and coordinated resources across all projects

d i i t d b th P5)



administered by the P5).

•

Identification and development of project mana"ementmethodology, best practices, and standards

• 3learinghouse and mana"ement for project policies,

procedures, templates, and other shared documentation.

• 3entralized repository and mana"ement for both shared

and uni(ue risks for all projects

• Central office for operation and management of project

tools, such as enterprise-wide project mana"ement software.



0 Central coordination of communication

management across projects

0 # mentoring platform for project managers

0 Central monitorin" of all P5) project timelinesand budgets, usually at the enterprise level.

0 Coordination of overall project (uality standards between the project mana"er and any internal or

external (uality personnel or standards or"anization.



Is P5) re(uired&&&&



Critics of P5)

#ll e""s in one bas'et- one location of professionals.

#nother layer of oversi"ht and bureaucracy in

or"anization

&ifferences between project managers and a "$) mayinclude the following:



include the following:

"roject $anager "$)

/esponsible for deliverin" specificproject objectives /within constraints+, P5) is an or"anizational structure withspecific mandates that can include anenterprise-wide perspective.

P5) mana"es major pro"ram to betterachieve business objectives.

Controls the assi"ned project resources

to best meet project objectives.%hile the P5) optimizes the use ofshared or"anizational resources across all

projects.

Project mana"er mana"es the scope,schedule, cost, and (uality of the

products of the wor' pac'a"es.

%hile the P5) mana"es overall risk,overall opportunity, and the

interdependencies among projects

The project mana"er reports on project pro"ress and other project specific

information.

P5) provides consolidated reporting andan enterprise view of projects under its

purview

Gocation of P5)



Chief )peratin"

)fficer

3 Corporate support

8ales 1elivery upport

Project #

Project C

Project 3

P)

P)

P)

P)

Gevel 9 Corporate

Gevel 7

Dunctional

Gevel 6

Project

P5)



#eather station:

*tracking and monitoring

status+

-milestones achieved

-diff bw plan and actual

pro"ress

-bud"et warnin" si"nal

-money paid

- status of major project

ris's

-update contin"ency plan

-=eport to top mgt

3ontrol tower: *development of

P5 s'ills, find and resolve

shortcomin"s, directly supportto mana"er and team+

-establish standards for

mana"in" projects *uniform

methodolo"y-bud"et-ris' m"t,

etc+

-consult how to follow

standards

-Enforces the standards-

awards-refusal.

-Improve standards

=esource pool:

To maintain and provide a

cadre of trained and s'illed professionals



)rganizational culture%%%%%

?ow do cultures form%%%%%%



)rganizational culture is the collective behavior of

humans that are part of an or"anization.

It is also the pattern of such collective behaviors and

assumptions that are taught to new organizational

members as a way of perceivin", and even thin'in" and

feelin".

)r"anizational culture affects the way people and groups

interact with each other, with clients, and with

sta'eholders.

?ow do cultures form%



• Technolo"y hi"h$low

• 2nvironment "lobal-re"ional

• Feo"raphical location &&&

• /eward systems

• /ules and procedures

• Bey or"anizational members

• )r"anization values, visions, wor'in" lan"ua"e,

systems, symbols, beliefs, and habits.

'ypes of projects



6. Personal exam, vacation, writin" boo', "ettin" dressed, weddin",

etc.

7. Gocal school function, cleanliness drives

9. )r"anizational @P1, new hi"hway, dam, etc.

:. @ational Poverty, satellite, annual bud"et, census.etc.

;. Industrial and non industrial

<. Type of partnership

'ypes of projects



=. 2uropean )r"anization for @uclear /esearch *Drench )r"anisation

europNenne pour la recherche nuclNaire+, 'nown as C2/@ .

>. Ei"h and low tech

'ypes of "rojects

https://en.wikipedia.org/wiki/French_language

https://en.wikipedia.org/wiki/French_language



a0!ased on duration: Gon" term 6H O, medium ;-

6H, short less than ;.

b0!ased on investment: Ei"h 7H crore, medium ;-

7H, low less than ;, cotta"e ;H lac.

c0!ased on ownership: Fovt, public sector,

corporate , cooperative, proprietorship, partnership.

d0!ased on risk:



6.Freenfield project"rass root project- new venture by fresh

entrepreneur promoter

7.3rown field projects- existin" promoter company or

existin" projects "oes for addition of product*capacity

3rown field projects

2xpansion projects- add capacity throu"h m't

intensification or m't development

Aertical inte"ration projects-de"ree to which a firm owns its

upstream suppliers and down stream customers is called

vertical inte ration .

ertical integration



Dorward inte"ration &&&&&

3ac'ward inte"ration &&&&&

ertical integration



g

Corward inte"ration downward expansion is called forward

inte"ration, ex.- steel industry moves for manufacturin" of steel pipes

!ackward inte"ration upstream expansion is called bac'ward

inte"ration, pipe manufacturer ma'es its own steel

&iversification "roject: Dinancial syner"y may obtained by

combinin" two firms $ lower tech and hi"h financial.

Concentric diversification project firm adds related products cars $scooter and bi'es

Con"lomerate diversification project nrelated areas

'he "roject >ife 3ycle



Project mana"ers or the or"anization can divide projects into phases

to provide better management control with appropriate lin's to the

on"oin" operations of the performin" or"anization.

Collectively, these phases are known as the project life cycle.

5any or"anizations identify a specific set of life cycles for use on all

of their projects.

"roject life cycles generally define:



0 #hat technical work to do in each phase *for example, in

which phase should the architectKs wor' be performed&+.

0 #hen the deliverables are to be generated in each phase

and how each deliverable is reviewed, verified, and validated.

0 #ho is involved in each phase *for example, concurrent

engineering re(uires that the implementers be involved with

re(uirements and desi"n+.

0 Eow to control and approve each phase.

5ost project life cycles share a number of



common characteristics

0 Phases are "enerally se(uential /%%%%0 and are

usually defined by some form of technical

information transfer or technical component

handoff.

0 3ost and staffing levels are low at the start,peak during the intermediate phases, and drop

rapidly as the project draws to a conclusion



'ypical "roject 3ost and taffing >evel Across the "roject >ife 3ycle

"roject life cycle phases



j y p

6a.Conception phase

6b.1efinition phase

7. Plannin" and or"anizin"

9. Implementation

:.Project clean-up phase

Initiation phase or

8election of a project



>evel

ofefforts

3oncept "lanning Implementation 'ermination



takeholdersB Influence )ver 'ime

+ "roject selection : 5ajor decision of top m"t.

/?ow to select a project %%%%%%0 Project selection



/?ow to select a project %%%%%%0 Project selection

can be divided into three major activities

"roject identification

"roject appraisal

"roject selection

"roject identification: 3rainstormin" *structured$

se(uential, 7H-9H ideas,+ and unstructured.

#ays to create new product development



through brainstorming%%%%%%%%%%%%%

#ays to create new product development



through brainstorming

-/un pizza video parties, Boda'- informal sessions-

en"ineer and desi"ner with customers -problems -need.-#llow time off scoutin" time- for technical people to putter

in their own, pet projects-8urvey your customers- se iterative models customers "roup discussin" problems-

technical people in another room listenin" and solvin"

-8et up an idea vault Interaction bw technical people and supplier - throu"h

visits

Corces fighting new ideas



I have "ot "reat idea




It wont wor' here




%e have tried it before




This is not the ri"ht time




It canKt be done




ItKs not the way we do thin"s




%e have done all ri"ht without it




It will cost too much




Get us discuss in our next meetin"

&uring brainstorming activity: management has



to be:

/eceptiveAision for future "rowth

Beep lon" term objectives in mind

8%)T

Perform preliminary project analysis to assess whether a project

proposal is worthwhile or not.

1ocuments li'e project * product documents *characteristics of

project+, feasibility document *constraints+, project concept

document *what, how, why $ is to be done+, project charter * it

formally communicates the initiation of the project, scope, authority,

B8D+

2x /educe vehicular pollution in /oor'eeolutions to the

problems of students not attending classes



p g

6.

7.

9.

.

.

. @

3riteria for screening ideas

2ffectiveness to achieve objectivesCost of the proposal

2ase of implementation

Time needed

"roject appraisal



$arket appraisal: customer * who- needs+, m'tshare, current and future competitors- their m't sahre,

a""re"ate demand, possible pricin" options.

"roject appraisal



'echnical : 2n"ineerin" aspects, location , size,

process, etc. *bore well+

Cinancial factor%%%%%

"roject appraisal



Cinancial appraisal: Cost of project and means of

sources, impact on financial position of the firm, wor'in"capital, cash flows over time, profitability, 32P, net

present worth, I//, P3P, /is'.

"roject appraisal



Ecological: Environmental damage /air, water, noise0

restoration measures

Economic%%%%%%%%

"roject appraisal



"roject appraisal

Economic: Impacts of project on society. 3enefits and

costs *in shadow price+, distribution of income in society,

level of savin" and investments, employment, etc.

"roject appraisal



"roduction factors: Time to complete project,

availability of resources, flexibility of operations,connection with existin" production line, ener"y

re(uirements and its sources. 2xpected (uality of product.

"ersonal factors:%%%%%%

>egal factors%%%%%%%

. "lanning and organizing



1"roject implementation :%%%%%%%%%%%%



1"roject implementation :



• )r"anization of project team and allocation of wor'

•

5onitorin" $ cost, value and time• 2ffective control action to minimize time and cost

overruns

• pdatin" of project schedules * time and cost+

• Provisionin" of financial and other resources

needed in the project

• Coordination

• #wardin" of contracts-vendors, sub contactor • Procure and erectin" of e(uipment and services

2 "roject completion and =eview%%%%%



2 "roject completion and =eview



1isbandin" project team

Eandin" over

#ccountin" and report writin"

Gearnin" from experience

%hat else &&&&&&&

$odel for project selection: 5ethods for selection

run on continuum from hi"hly (ualitative or judgmental



run on continuum, from hi"hly (ualitative or judgmental

to (uantitative. The screenin" models should have


run on continuum, from hi"hly (ualitative or jud"mental to



(uantitative. The screenin" models should have

+ =ealism or"anizationLs objectives, constraints on money

and resources.

. 3apability flexible enou"h to respond to chan"es inconditions under which projects are carried out.

Comparison of projects should be there *time, technolo"y,

commercial aspects+.

1 Clexibility model should allow tax rate and tax laws,

buildin" codes.


run on continuum from hi"hly (ualitative or jud"mental to



run on continuum, from hi"hly (ualitative or jud"mental to

(uantitative. The screenin" models should have

2 Ease of use simple enou"h, help people involved in project

roles and functional roles

4 3ost model should be cost effective

7 3omparability broad enou"h *&&&&+ to be applied to

multiple projects

$ethods of project selection*evaluation



!oston 3onsulting roup /!30 $atrix is a four celled

matrix *a 7 7 matrix+ developed by 3CF, 8#. It is the

most renowned corporate portfolio analysis tool. It provides

a "raphic representation for an or"anization to examine

different businesses in itBs portfolio on the basis of their

related market share and industry growth rates

It is a two dimensional analysis on mana"ement of 83Ks*8trate"ic 3usiness nits+. In other words, it is a comparative

l i f b i t ti l d th l ti f



analysis of business potential and the evaluation of

environment

#ccordin" to this matrix, business could be classified as high

or low accordin" to their industry "rowth rate and relative

mar'et share.

=elative $arket hare 83 8ales this year leadin"

competitors sales this year.

$arket rowth =ate Industry sales this year Industry

8ales last year.

8elect few



tars- 8tars represent business units havin" large market share in afast growing industry. They may "enerate cash but because of fast

"rowin" mar'et, stars re(uire hu"e investments to maintain their lead.

@et cash flow is usually modest.

83Ks located in this cell are attractive as they are located in a robust

industry and these business units are hi"hly competitive in the industry.

If successful, a star will become a cash cow when the industry

matures

Gi(uid

ate

1ivest

others



3ash 3ows- Cash Cows represent business units havin" a large

market share in a mature, slow growing industry.

Cash cows re(uire little investment and "enerate cash that can be

utilized for investment in other business units. These 83Ksproducts

are the corporationKs 'ey source of cash, and are specifically the core

business.

They are the base of an or"anization. 'hese businesses usually follow

stability strategies %hen cash cows loose their appeal and move

towards deterioration, then a retrenchment policy may be pursued.



Guestion $arks- They re(uire huge amount of cash to maintain or

"ain mar'et share. They re(uire attention to determine if the venture

can be viable.

If the firm thin's it has dominant market share, then it can adopt

expansion strate"y, else retrenchment strate"y can be adopted.

5ost businesses start as (uestion mar's as the company tries to enter ahi"h "rowth mar'et in which there is already a mar'et-share.

If ignored, then (uestion marks may become dogs, while if huge

investment is made, then they have potential of becoming stars



&ogs- 1o"s represent businesses havin" wea' mar'et shares in low-

"rowth mar'ets.

'hey neither generate cash nor re(uire huge amount of cash 1ue tolow mar'et share, these business units face cost disadvantages.

Fenerally retrenchment strategies are adopted because these firms

can "ain mar'et share only at the expense of competitorKsrival firms.

These business firms have weak market share because of high costs,

poor (uality, ineffective marketing, etc. nless a do" has some other

strate"ic aim, it should be li(uidated if there is fewer prospects for it to

"ain mar'et share. Fumber of dogs should be avoided and minimized

in an or anization

#s a particular industry matures and its growth slows,

all business units become either cash cows or dogs.



The natural cycle for most business units is that theystart as question marks, then turn into stars

2ventually the mar'et stops "rowin" thus the business

unit becomes a cash cow

#t the end of the cycle the cash cow turns into a dog

BCG looks at only growth–share, ignores otherelements

$c@IFEH*E $atrix: It is similar to the 3CF 5atrix andactually the F2 5cBinsey 5atrix is an extension of the 3CF

5atrix This tool compares different businesses on Q!usiness



5atrix. This tool compares different businesses on !usiness

trengthQ and Industry* $arket AttractivenessQ .

The F2 5cBinsey 5atrix is divided into nine cells - nine

alternatives for positionin" of any 83 or product offerin".

!ased on the strength of the business and its market

attractiveness each !6 will have a different position in

the matrix

Industry Attractiveness%%%%%%

!usiness 6nit trength%%%%%%



Industry Attractiveness

•5ar'et size



5ar'et size

•5ar'et "rowth rate

•Industry profitability

•Industry rivalry

•Fovt support

•1emand variability

•Flobal opportunities

•5acroenvironmental factors

!usiness 6nit trength5ar'et shareFrowth in mar'et share

Customer loyalty3rand e(uity1istribution channel accessProduction capacityProfitcost mar"ins relative to competitorsDinancial and channelsK stren"th



"lotting the Information: 2ach business unit can beportrayed as a circle plotted on the matrix, with the

information conveyed as follows

•5ar'et size is represented by the size of the circle.•5ar'et share is shown by usin" the circle as a pie chart.•The expected future position of the circle is portrayed by

means of an arrow.



8e"ment I This is the best segment. The business is stron" and the mar'et

is attractive. The company should allocate resources in this business and

focus on growing the business and increase market share

8e"ment II The business is either strong but the market is not attractiveor the market is strong and the business is not strong enou"h to pursue

potential opportunities. &ecision makers should make judgment on how

to further deal with these !6s. 8ome of them may consume to much

resources and are not promisin" while others may need additional resources

and better strate"y for "rowth.

8e"ment III This is the worst segment. 3usinesses in this se"ment are

weak and their market is not attractive. 1ecision ma'ers should consider

either repositioning these 83s into a different mar'et se"ment, develop

better cost-effective offering, or get rid of these !6s and invest the

resources into more promisin" and attractive 83s

"A3E : /trategic "osition and Action Elevation0 diagram: # mana"ement tool

to analyse a company and decide its future strate"y.



# set of variables should be selected to define financial strength, competitive

advantage, environmental stability, and industry strengths. The set of variables

could be as follows

set of *ariables s$ould be sele"ted to dene fnancialstrength, competitive advantage, environmental stability,and industry strengths. /$e set of *ariables "ould be as follo!s



y g

xternal !imensions

nvironmental "tability /e"$nolo%i"al "$an%es Ination !emand elasticity o(petitor5s pri"e ran%es arriers to entry

o(petiti*e pressure ase o# exit 'ri"e elasti"ity of de(and Risk e6posure

$ndustry "trength

7ro!t$ potential 'rot potential 8inan"ial stability Resour"e a*ailability ase o# entry apa"ity utilization

$nternal !imensions

Financial "trength Return of in*est(ent bility to raise funds 9i,uidity %or&ing capital as$ o!s

'ompetitive (dvantage )arket s$are apa"ity utilization

)ocation advantage rand i(a%e 'rodu"t :uality 'rodu"t life "y"le usto(er preferen"e /e"$nolo%i"al inno*ation Sound supply "$ain

Criteria



Tan"ible

/s, ,

/syear

Intan"ible *@ot

measurable on a

well defined

scale+

Commensurate Incommensurate

*/s for investment

4 years for P3

period+

*@ot measurable $ 8core on a

subjective scale &&&&&+

Projects



1ominance

@on dominancePareto optimal set

election method: 3heck list /un-weighted0* &ominance"roject 3riteria "erformance on criteria

Ei"h 5edium Gow



#lpha Cost x

Profit potential x

Time to mar'et x

1evelopment ris' x

3eta Cost x

Profit potential x

Time to mar'et x

1evelopment ris' x

Famma Cost x

Profit potential x

Time to mar'et

1evelopment ris' x

5aximize which is the best project based on maximizin" all the criteria&

Fon-&ominance



/eturn

@PA

P6

P<

P>

P=P:

P;P9P7

2fficient frontier

I$">ICIE& 3)=IF $)&E> /#EI?'E&0"roject 3riteria "erformance on criteria

?igh $edium >ow



#eight

Cost 6

Profit potential 7

Time to mar'et 9

1evelopment ris' 7

Alpha 3ost x

"rofit potential x

'ime to market x

&evelopment risk x

!eta 3ost x

"rofit potential x

'ime to market x

&evelopment risk x

amma 3ost x

"rofit potential x

'ime to market x

&evelopment risk x

&elta 3ost x

Gow-6 5idium-7 Ei"h-9

oal programming%%:



In GP, only one dimension of *R+, or"anizations often have

several objectives *conflictin" + and not measured in sameunits.

FP as's m"t to ran' objectives.

FP tries to minimize deviations from the tar"ets .

2x # Company manufactures two products, radios and TA,which must be processed throu"h assembly and finishin"

departments.



departments.

#ssembly has ?H hrs available, and finishin" can handle upto =7 hrs of wor'.

5anufacturin" one radio re(uires < hrs in assembly and 9

hrs in finishin".

2ach TA re(uires 9 hrs in assembly and < hrs in finishin".

If profit is /s67H per radio and /s ?H per TA, determine the

best combination of radios and 's to realize a profit of

=s .+

This is a sin"le "oal *profit+ problem. Get1u #mount by which profit "oal is underachieved.

1o #mount by which profit "oal is overachieved.



5inimize R 1u * underachievement of profit "oal+

8T 67Hx6 O?Hx7O1u-1o 76HH

<x6O 9x7S?H

9x6O <x7S=7

x6,x7,1u,1o H

<x6O 9x7Os6 ?H

9x6O <x7Os7=7

x6,x7,s6,s7H

#fter usin" simplex method, x6 67, x7<, 1u 67H, 5eans actual profit earned is /s

76HH-67H6?>H, underachieved by /s 67H.

2x If the company sets two e(ually ran'ed "oals, one to reach a profit of /s 6;HHand the other to meet a radio "oal of 6H, find the optimal solution.

8olution



1up #mount by which profit "oal is underachieved

1op #mount by which profit "oal is overachieved1ur #mount by which radio "oal is underachieved

1or #mount by which radio "oal is overachieved

5inimize R 1upO1ur

8T 67Hx6 O?Hx7O1up-1op 6;HH

x6O1ur-1or 6H

<x6O 9x7S?H

9x6O <x7S=7

x6,x7,1up,1op,1ur,1or H

#fter usin" simplex method, x67;7, 1or ;7, 5eans profit "oal of /s 6;HH

achieved, since both 1up and 1op do not appear in final table.

2x 8uppose the company has established the followin" "oals and has assi"ned them priorities P6,P7,P9 *%here P6 is most important+

P6 Produce to meet a radio "oal of 69



P7 /each a profit "oal of /s 6?;H

P9 Produce to meet a TA "oal of ;

8olution 5inimize R P61urOP71upOP91ut

8T 67Hx6 O?Hx7O1up-1op 6?;H

x6O1ur-1or 69

x7O1ut-1ot;

<x6O 9x7Os6?H

9x6O <x7Os7=7

x6,x7,s6,s7,1up,1op,1ur,1or ,1ut,1ot H

#fter usin" simplex method, x669, x7 :. 1up9H, 1ut6.

3A"I'A> !6&E'IF 'E3?FIG6E



F"

Fon discounting &iscounting

&iscounted "!"

"!"

Internal rate of return"rofitability index

A==

"!" J 'ime period in which investor gets back hisinvested money in fixed assets from the project



Initial investment 9HHHHH#nnual cost of operation 7HHHH

2xpected annual revenues

first two years 6HHHHH

next three years 7HHHHH

Plannin" horizone ; yrs

Cind : "!" %%#hat are the drawbacks of "!" %

"!" J time period in which investor gets back his invested money infixed assets from the project



P3P UH - *CuCDH+*CD6+

UH is the year just before the pay bac' period is attainedCuCDH cumulative cash flow of UH

CD6 cash flow of pay bac' year

&rawbacks of "!"

6. 1oes not consider %C and 8alva"e value

7. 1oes not considerter cash flows after the P3P9. 1oes not consider time value of money

:. @o consideration for ris'

;. I"nores cost of capital

Initial investment 9HHHHH

"!" J time period in which investor gets back hisinvested money in fixed assets from the project



Initial investment 9HHHHH

#nnual cost of operation 7HHHH

2xpected annual revenuesfirst two years 6HHHHH

next three years 7HHHHH

Plannin" horizon ; yrs

Uear Cash flow Cum CD

H -9HH -9HH

6 >H -77H

7 >H -6:H9 6>H :H

: 6>H 77H

; 6>H :HHP3P *interpolated as the year when CCD becomes zero+ 7- *-6:H6>H+7.=> yrs

Example Projected cash flow 9H lac in firstear, CD is "oin" to increase by 6H lac for next



, " " y9 years, and then decreases by 6; lac and closesin ; year. Initial investment 6:H lac, wor'in"capital re(uirement is 7H lac. The companyforesees to fetch a net salva"e value of 9; lac

after ; years. Cind "!"%%

Example Projected cash flow 9H lac in firstear, CD is "oin" to increase by 6H lac for next



" " y9 years, and then decreases by 6; lac and closesin ; year. Initial investment 6:H lac, wor'in"capital re(uirement is 7H lac. The companyforesees to fetch a net salva"e value of 9; lac

after ; years. Cind "!"%%

Uear Cash flow Cum CD

H -6: -6:

6 9 -667 : -=

9 ; -7

: < :

; :

Example

Uear Project # Project 3 Project C



j j j

H -66H -66H -66H6 7H 7H H

7 9H 9H H

9 :H :H ?H: 9H 9H 9H

; 7H 7H 7H

< 7H 6H 7H %hich is the best project and why&&&

"roject AHear 3ash flow 3um 3C

-++ -++

+ . -;

. 1 -7

1 2 .



1 2 -.

2 1 +

4 . 1

7 . 4

"roject !Hear 3ash flow 3um 3C

-++ -++

+ . -;

. 1 -7

1 2 -.2 1 +

4 . 1

7 + 2

"roject 3Hear 3ash flow 3um 3C

-++ -++

+ -++

. -++

1 ; -.

2 1 +

4 . 1

7 . 4

# better than 3, additional 6H lac,

# better than C early recovery

Average rate of return /A==0:3onsiders cashflows after "!", working capital and salvage



value

#// avera"e return avera"e investment#vera"e return 8um of all CDsn,#vera"e investment

67 *initial investmentO terminal cash flow+67**fixed investment O%C+ O*%CO8A++DI fixed invest., %C wor'in" capital, 8A salva"evalue

Ex Projected cash flow 9H lac in first year, CD is"oin" to increase by 6H lac for next 9 years, and then



decreases by 6; lac and closes in ; year. Initial

investment 6:H lac, wor'in" capital re(uirement is 7Hlac. The company foresees to fetch a net salva"e valueof 9; lac after ; years.

Cind :A==

2x. Projected cash flow 9H lac in first year, CD is "oin" toincrease by 6H lac for : years, and then decreases by 6; lac and



y y , ycloses in ; year. Initial investment 6:H lac, wor'in" capital

re(uirement is 7H lac. The company foresees to fetch a netsalva"e value of 9; lac after ; years.

Dind #//

olutionUear Cash flow

H -6:

6 9

7 :

9 ;

: <

; 6H

#vera"e return 8um of all CDsn, 6:; 7.> lac

#vera"e investment 7HO *6:HO9;+76H =;

5achine # 5achine 3

Cost ;<,67; ;>,67;

Example:- Get us determine the #// for the followin" 7 alternative investments



#nnual estimated income after depreciation 4 tax

Uear 6 9,9=; 66,9=;Uear 7 ;,9=; ?,9=;

Uear 9 =,9=; =,9=;

Uear : ?,9=; ;,9=;

Uear ; 66,9=; 9,9=;

'otal earnings 9<,>=; 9<,>=;2stimated life ; years ; years

2stimated salva"e value 9,HHH 9,HHH

#hich investment is better%%%%

5achine # 5achine 3

Cost ;<,67; ;>,67;

#nnual estimated income after depreciation 4 tax

Uear 6 9,9=; 66,9=;



A== J Annual average net earnings after taxes K +

Average investment over the life of the project

Average earnings J 'otal earnings * Estimated life in years

Cor machines A:- 17,L94 * 4 J 9,194

Cor machines !:- 17,L94 * 4 J 9,194

Average investment J /Initial investment - alvage alue0 * . M #orking capital M alvage value

Cor $achine A: /47,+.4 - 10 * . M M 1 J .;,47.4

Cor $achine !: /4L,+.4 - 10 * . M M 1 J 1,47.4

A== for $achine A : 9194*.;47.4 N + J .2;48 or .48

A== for $achine ! : 9194*1,47.4 N + J .2+18 or .28

$achine A would be preferred as A== is higher

Uear 7 ;,9=; ?,9=;

Uear 9 =,9=; =,9=;

Uear : ?,9=; ;,9=;Uear ; 66,9=; 9,9=;

'otal earnings 9<,>=; 9<,>=;

2stimated life ; years ; years

2stimated salva"e value 9,HHH 9,HHH

&e-merits of A== method:

Gi'e the pay-bac' period method, this method i"nores the



time value of money

This method ta'es into account the accountin" profits rather

than the cash inflows and hence ignores the fact that the

actual cash flows can be re-invested

It is the discretion of the mana"ement to choose the

arbitrary cut-off rate of return in choosin" the projects.

This may not always ensure the ri"ht selection.

The concept of avera"e investment and avera"e earnin"s

differ widely and hence may produce different results

Capital bud"etin" techni(ues



@PA

1iscountin"

1iscounted P3P Internal rate of returnProfitability index

'ime value of money: 5oney available today is more than tomorrow.Compound amount Principal *6Or+n

or , Principal Compound amount *6Or+n



or , present value of money J future value N present value factor

where PAD 6*6Or+n

r 1iscount factor,

n @o of periods

"resent value: #ny value that occurs at the beginning ofthe problem is a present value. #s zero is "ood baseline,

all cash flows are converted into their present value for

analysis. PAD is the ratio of PA and future value and is

available in the form of table.

Cuture value: &&&&&&&&&&&&

Cuture value: The last cash flow is "enerally

called future value, it can be understood the cash

transaction taking place after certain



transaction taking place after certain

duration of time. If the same amount istransacted after a regular interval, it is termed

annuity.

Annuity payment: &&&&&&&&&&&&&&&&&&

Annuity payment: #s per literary meanin", an

annuity payment means the yearly payment that

f th



occurs every year for more than one year

3ut in financial terms, the duration may not be

yearly, it may be less as well, say (uarterly,

monthly, wee'ly etc., but the duration b*w twosuccessive payments remains constant.

2ach payment, if taken alone, is a future value,

but to"ether they ma'e an annuity.

&iscount factor: 1D is the expected returns per

unit of period over the life of the project or



investment. It is necessary to understand that if

annuity is for (uarterly payment or

transactions, the annual expected return should

be reduced to one (uarter for computational

purpose, similarly 667, if it is monthly.

Fumber of periods: The total no. of periods in any annuityis very important as they define the value of annuity.



It should a"ain be noted that if transactions are done

yearly, it is the no. of years, but in the situation of (uarterly

payments, the no of periods should be (uadrupled the

no of years

2x 5r 8harma wishes to invest some money forfuture need of ; lac after ; yrs. M ? , how much

money should he deposit in 3an'.

If interest is paid semi annually, then how muchmoney should he deposit in 3an'.

2x 5r 8harma wishes to invest some money for future needof ; lac after ; yrs, M ? , how much money should hedeposit in 3an'



deposit in 3an'

Present value ;HHHHH*6O.H?+;

97;HHH

%hat if interest is paid semi annually&

Present value ;HHHHH*6O.H:;+6H 96>=67

2x 5r V wants to receive 67H,HHH for next 6H yearsfrom now. Eow much should he deposit now & Ifinterest rate is 6H.&&&&

2x 5r V wants to receive 67H,HHH for



,

next 6H years from now. Eow muchshould he deposit now & If interest rate is6H.

8olutn67HHHH<.6::; *from table+=9=9:H.

&iscounted "!": while evaluatin" projectswith 1P3P method, present values of cash

flow are considered instead of cash flow



flow are considered instead of cash flow

itself as in the case of P3P method. 1P3P islength of time re(uired to recover the initial

cash outflow from the discounted future cash

flow.

1P3P UH- *Cu.PAH+*CD6+

UH is the year just before the pay bac' period isattained

CuPAH cumulative present value of UH

CD6 cash flow of pay bac' year

2x Dind 1P3P &&&&, if discount factor is 6H

Uear H

Cash flow-6:H



H679:;

6:H9H:H;H<H:;

1P3P UH- *Cu.PAH+*CD6+,

UH is the year just before the pay bac' period is attained

CuPAH cumulative present value of UHCD6 cash flow of pay bac' year

2x DI@1 1P3P, if discount factor is 6H

U C h fl PAD PA C PA



Uear Cash flow PAD PA CuPA

H -6:H 6 -6:H -6:H

6 9H 66.6H H.? 7= -669

7 :H 6*6.6H+7H.>7< 99.H: -=?.?<

9 ;H H.=;6 9=.;; -:7.:6

: <H H.<>9 :H.?> -6.:9; :; H.<76 7=.?:; 7<.;6;

1P3P :O *6 :97= ?:+ : H;

2x Dind 1P3P, if 1D6H



Uear Cash flow PAD PA CuPAH -9HH 6 -9HH -9HH

6 >H H.?H? =7.=7 -77=.7>

7 >H H.>7< <<.H> -6<6.79 6>H H.=;6 69;.6> -7<.H7

: 6>H H.<>9 677.?: ?<.?7

; 6>H H.<76 666.=> 7H>.=

1P3P 9O *7<.H76>H+ 9.76yrs

"rofitability index and F""rofitability index /"I0 : PI is the ratio of sum of cash inflows to sum

of cash outflow, a necessary condition for project to be feasible is that

h PI h ld b h 6



the PI should be more than 6.

PI *sum of cash inflows+* sum of cash outflow+

@et profitability index PI-6

F": @PA is the most common approach used in the filed of financial

investment analysis. It is very simple to use and evaluates on the basis

of wealth maximization objective. It is defined as the difference b*w

the present value of cash inflows and present value of cash out

flows

"I : is ratio of cash inflows and outflows whereas @PA is the difference

bw them

Advantages of F"

6. Considers all cash flows

7 C id i l f



7. Considers time value of money

9. Computes contribution towards wealth

creation

:. #llows expected chan"es in cost of capital

'he limitation of F"

;. /e(uires pre-determination of 1D<. 1oes not consider ris' factors

&etermine "I and F", assuming &C as +8,should we accept project%%%%%%%%%



Uear Cash flow

H -6<H

6 9H

7 :H

9 ;H

: <H

; 6HH

&etermine "I and F", assuming &C as +8Uear Cash flow PAD *6H+ PA

H -6<H 6 -6<H



6 9H H.?H?6 7=.7=

7 :H H.>7< 99.H<

9 ;H H.=;6 9=.;=

: <H H.<>9 :H.;=

; 6HH H.<76 <7.H?'otal 2;9

PI 7HH.;<6<H 6.7;

@PA 7HH.;<-6<H :H.;<

8hould we accept project&&&&

Internal =ate of =eturn /I==0: I// is defined as the

discounting rate which delivers a @et Present Aalue e(ual



to zero.

# simple criterion can be stated to accept a project if its

rate of return exceeds the cost of capital and rejected if

this I== is less than cost of capital.

I// may result in no of complexities ne"lects the size of

the project and assumes that cash flows are reinvested at

constant rate.

The relationship bw discountin" rates and @PA is not alinear, and for calculation of exact I//, this should be linear,

can be assumes linear, if we ta'e small piece.



6:H

H

-:H

@

PA

1iscountin" factor

; 6H 6; 7H

Calculatin" I// is a tedious process. It should be done with the help of trial and error

method Continue increasing r! to decrease



method. Continue increasing r to decrease

F" till it reaches negative. #nd theninterpolate bw the consecutive r! values

where it is positive and ne"ative, respectively.

3alculate I==

Uear Cash flow

H -6<H

6 9H

7 :H

9 ;H

: <H

; 6HH

+L8 +9 8

Hear 3ash flow "C " "C "

Get us try at 6> and then 6= , at6> @PA is just ne"ative.



H -6<H 6 -6<H 6 -6<H6 9H 66.6>.>:= 7;.:7 .>;; 7;.<:

7 :H 6*6.6>+7. =6> 7>.=9 .=96 7?.77

9 ;H .<H? 9H.:9 .<7: 96.77

: <H .;6< 9H.?; .;9: 97.H7

; 6HH .:9= :9.=6 .:;< :;.<6

'otal -97 19+

I// 6=O9.=6*9.=6-H.=<+ 6=.>:

TimePeriod *T+

Project # 1iscount/ate *1/+

1/ O6

*1/ O 6+ W T @PA of Cash DlowXCash Dlow *1/O6+WTY

1iscount rate >



H *6,HHH,HHH.HH+ H.H> - - *6,HHH,HHH.HH+

6 :;H,HHH.HH H.H> 6.H> 6.H> :6<,<<<.<=

7 :HH,HHH.HH H.H> 6.H> 6.6= 9:7,?9;.;9

9 9;H,HHH.HH H.H> 6.H> 6.7< 7==,>:6.7>: 9HH,HHH.HH H.H> 6.H> 6.9< 77H,;H>.?<

; 7;H,HHH.HH H.H> 6.H> 6.:= 6=H,6:;.>H

F" 2.L,;L.1

In the above example if you replace the > with a 7; the

@PA will become zero, and thatKs your I//. ?ence, the

statement that I== is the discount rate at which the F"

of a project becomes zero is true

TimePeriod

Project # I// I// O 6 *I// O 6+ WT

@PA ofCash Dlow

1iscount rate 7;



H *6,HHH,HHH.HH+ H.7; - - *6,HHH,HHH.HH+

6 :;H,HHH.HH H.7; 6.7; 6.7; 9<H,HHH.HH

7 :HH,HHH.HH H.7; 6.7; 6.;< 7;<,HHH.HH

9 9;H,HHH.HH H.7; 6.7; 6.?; 6=?,7HH.HH: 9HH,HHH.HH H.7; 6.7; 7.:: 677,>>H.HH

; 7;H,HHH.HH H.7; 6.7; 9.H; >6,?7H.HH

'otal of

3ashClows

/i(e'eriod

'ro&e"t 'ro&e"t

0 ;1+000+000.00<

;1+000+000.00<

1 4=0+000.00 2=0+000.00

2 400 000 00 300 000 00



2 400+000.00 300+000.00

3 3=0+000.00 4=0+000.004 300+000.00 4=0+000.00

= 2=0+000.00 4=0+000.00

/i(e'eriod

'ro&e"t IRR IRR > 1 ;IRR > 1< ? /

N'@ ofas$ 8lo!

0 -1000000 0.23A - - ;1+000+000.

00<

1 2=0000 0.23A 1.22BB 1.23 203+2C.=C

2 300000 0.23A 1.22BB 1.=1 1B+32C.B1

3 4=0000 0.23A 1.22BB 1.C 241+1.E=

4 4=0000 0.23A 1.22BB 2.2B 1BC+CCE.2

= 4=0000 0.23A 1.22BB 2.1 1=B+B0=.=4

/otal ofas$ 8lo!s

=1

#ormation tells you that one project has an $RR o# -. +hile the other has an $es you more in#ormation to ma&e your decision #rom0

election of capital budgeting techni(ue / F" vs I==0 : In capital bud"etin" ,there are number of different approaches that can be used to evaluate any "iven

project, and each approach has its own distinct advantages and disadvantages as

discussed earlier.



#ll other thin"s bein" e(ual , usin" I// and @PA measurements to evaluate projects

often results in the same findings. Eowever, there are number of projects for which

using I== is not as effective as using F" to discount cash flows.

%hile ranking the various techni(ues, F" stands on top priority, followed by I//.

%hy I// is not as "ood as @PA is&

-I== presumes that the same rate of return is available in other

projects as well

-If cash flows are not normal, I== may arrive at multiple solutions

Integer programming : # company is plannin" itscapital spendin" for the next ' periods. There are

F projects that compete for the limited capital !i,



j

available for investment in period OiO 2ach project re(uires a certain investment in each period

once it is selected. Get aij! be the re(uired

investment in project j for period i. The value ofthe project is measured in terms of F". Get, Aj

is @PA of project j.

The problem is to select the proper project for

investment that will maximize total F"

Integer programming : # company is plannin" its capital spendin"for the next T periods,. There are @ projects that compete for the

limited capital 3i, available for investment in period QiQ. 2ach project

re(uires a certain investment in each period once it is selected. Get

ij! b h i d i i j j f i d i Th l f



aij! be the re(uired investment in project j for period i. The value of

the project is measured in terms of @PA. Get , Aj is @PA of project j.

The problem is to select the proper project for investment that will

maximize total @PA.

xj 6 if project j isselected

xj H if project j is not selected

5ax R Zvjxj *j6to @+8T Zaij xj S3i, for i6 to T

HSxjS6, xj a binary and for all j 6 to @

"roject + "roject . "roject 1 "roject 2

Investment 6H; 6:H >H 6HH



Cash flow*first year+ <H 6H> 7HH ?H

Cash flow*second

year+

6<H :H 6;H =H

Cash flows in first and second year should not exceed <HHand =HH.

Project 6 and 9 are mutually exclusive.

Company wants to maximize total assets.

"roject + "roject . "roject 1 "roject 2

Investment 6H; 6:H >H 6HH

Cash flow *first year+ <H 6H> 7HH ?H



Cash flow *first year+ <H 6H> 7HH ?H

Cash flow *second year+ 6<H :H 6;H =H

Cash flows in first and second year should not exceed <HH and =HH.

Project 6 and 9 are mutually exclusive.

Company wants to maximize total assets.

5ax R 6H;x6O6:Hx7O>Hx9O6HHx:

8T <Hx6O6H>x7O7HHx9O?Hx: S<HH 6<Hx6O:Hx7O6;Hx9O=Hx: S=HH

x6Ox76,

#ll HS xiS6

"roject selection no of criteria&&&&&&&&

5ulti criteria evaluation

Projects

Criteria

C6 C7 C5



P6

P7

P@

This @x5 matrix contains

the scores of /ij of each

project Pi on each selection

criteria Cj

86

87

8@

Projects C6, C7,[[[[[[[[[[[.. C5

%6, %7[[[[[[[[[[[[%5

%ei"hts

8i 8um of j 6

to @ /ij %j

#nalytic Eierarchy Process *#EP+

# l i Ei h P i l i i i d i i 'i

=esearch $ethodology



• #nalytic Eierarchy Process is a multi-criteria decision ma'in"

*5C15+ techni(ue was developed by 8aaty in 7HHH year.

• The analytic hierarchy process *#EP+ is also a structured

techni(ue for helpin" people deal with or"anizin" and analyzin"

complex decisions.

• #EP is also a measurement theory that priorities the hierarchy

and consistency of jud"mental data provided by a "roup of

decision ma'ers.

• The #EP provides a comprehensive and rational framewor' for

structurin" a problem, for representin" and (uantifyin" itselements, for relatin" those elements to overall "oals, and for

evaluatin" alternative solutions

i. 2stablish the hierarchy structure

ii. Aarious hierarchiesK elements wei"ht computation



.2stablishment of pair-wise comparison matrix The relative importance of two elements is rated usin" a scale with the

values 6, 9, ;, =, and ?.

7, :, <, and > indicate intermediate value.

E(ually"referred

$oderately"referred

trongly"referred

Extremely"referred

Absolutely"referred

6 9 ; = ?

C6 C7 Cn

# \aij]



%here aij 6 and aij 6a ji 6, 7, .......n.

C6 C7 Cn

# \aij]

%here %i % j aij

• 2i"en value and ei"en vector calculation



• Consistency test

CI *Consistency Index+

C/ *Consistency /atio+

/andom index values were already "iven by 8aaty where

iii. )verall hierarchy wei"ht computation

nJ+ nJ. nJ1 nJ2 nJ4 nJ7 nJ9 nJL

/IH /IH /IH.;7 /IH.>? /I6.66 /I6.7; /I6.9; /I6.:

2valuation process usin" #EP

• Indian industry is facin" tou"h competition both from imports and

Analysis



Indian industry is facin" tou"h competition both from imports and

multinational companies in the domestic mar'ets.• Thus, the new competition is in terms of reduced cost^ improved (uality,

products with hi"her performance, a wider ran"e of products and betterservices, and all delivered simultaneously *1an"ayach and 1eshmu'h, 7HH6+.

8upply chain performance model

Juality of the

Product

1elivery of

the Product

Cost of the

Product

Dlexibility of

the Product

Innovation of

the Product

8upply Chain

Performance

• The modified 1elphi method has been applied to define

evaluation criteria throu"h literature review and then

summarized by opinion of experts belon"in" to automotive

i d i d d i



industries and academia.

• To summarize these criteria^ 6< experts *ei"ht industries and

ei"ht academia+ were included.

Di"ure 9 Eierarchical structure to evaluate the supply chain performanceevaluation of automotive industries

8upply Chain Performance 2valuation

of #utomotive Industries

Juality InnovationDlexibilityCost1elivery>evel .:

Criteria

>evel +:

ltimate

Foal

=espondents

/=0

Eigen

alue

#eights /Eigen ector0

C6 C7 C9 C: C;

/ 6 ;.9H6H H.7H=H H.H?9< H.6>>; H.:>6= H.H7?7

/ 7 ;.96?: H.7<=: H.H?;7 H.6?>= H.:H?> H.H7?H

/ 9 ;.7=:; H.777> H.66>= H.69?H H.:><= H.H97>

Faol C6 C7 C9 C: C;

C6 6 9 6 69 ?

C7 69 6 69 6; <

C9 6 9 6 6: =



Table 6 Pair-wise comparison matrix

of respondent 6 for all criteria

Table 2i"en values and wei"hts *ei"en vectors+

for criteria of all respondents

9

/ : ;.9<>< H.7H<; H.6::> H.67:> H.:>=? H.H9<6

/ ; ;.9;;: H.7<7: H.67?= H.H>79 H.:>?> H.H9;>

/ < ;.9<9> H.7?<H H.6=>> H.H<<H H.:79H H.H9<7

/ = ;.:::= H.77;; H.H=7< H.:<6: H.H:?H H.6?6;

/ > ;.:6:< H.9>>? H.66:6 H.9>>= H.H97? H.H=;9

/ ? ;.99:; H.6;;? H.99=: H.797? H.7H;9 H.H<><

/ 6H ;.7=:6 H.9H=? H.6<7= H.H=== H.:6:7 H.H9=<

/ 66 ;.6966 H.97?7 H.7H<= H.H>6= H.9:9< H.H9>?

/ 67 ;.9776 H.:6:< H.6?;= H.H==H H.7=:7 H.H9><

/ 69 ;.:H6H H.:H<H H.7H>H H.H<<H H.7=?< H.H:H:

/ 6: ;.9:79 H.9=>: H.9669 H.H<9? H.766= H.H9:=

/ 6; ;.6?;; H.7?>7 H.:69< H.H>6H H.6<?< H.H9=;

/ 6< ;.9>== H.997= H.:H?H H.677; H.H??9 H.H9<;

C: 9 ; : 6 >

C; 6? 6< 6= 6> 6

=espondents 3I 3= =espondents 3I 3=

/ 6 H.H==:? H.H<?6> / ? H.H>9<: H.H=:<=

/ 7 H.H=?>< H.H=696 / 6H H.H<>;9 H.H<66?

/ 9 H.H<><7 H.H<67= / 66 H.H97== H.H7?7<

/ : H.H?76: H.H>77= / 67 H.H>H;7 H.H=6>?



Table Consistency index *CI+ and consistency ratio *C/+ of all respondents

Table /elative wei"hts of the criteria and "lobal priority

/ ;

H.H>>>: H.H=?99 / 69

H.6HH7: H.H>?;H

/ < H.H?H?; H.H>67H / 6: H.H>;;< H.H=<:H

/ = H.6666> H.H??7= / 6; H.H:>>= H.H:9<9

/ > H.6H9<< H.H?7;; / 6< H.H?<?7 H.H><;9

Criteria !eights of Criteria "ank

Juality C6 H.7?9= 7

1elivery C7 H.6??; 9

Cost C9 H.6;99 :

Dlexibility C: H.9H9< 6

Innovation C;

H.H:?? ;

8elect the best project



Juality Price 8ervice 1elivery

P6

P7P9

P:

P6

P7P9

P:

P6

P7P9

P:

P6

P7P9

P:

)riginal matrix G " &

J 6 7 : 9

P _ 6 9 9

Pair wise comparison matrix and computations evaluation criteria



P _ 6 9 9

8 ` 69 6 7

1 69 69 67 6

Column total 7;67 669 6=7 ?

Adjusted matrix G " & #eights/row avg0

J 677; <66 >6= 9? H.:;=

P <7; 966 <6= 9? H.9HH

8 97; 666 76= 7? H.69>

1 :7; 666 66= 6? H.6H;

Total 6.H

8upplier pair wise comparison matrices and priorities

# wrt (uality # wrt price



"+ ". "1 "2

P6 6 ; < 69

P7 6 7 6<

P9 6 6>

P: 6

%ts H.7?= H.H> .H;9 .;<9

"+ ". "1 "2

P6 6 69 ; >

P7 6 = ?

P9 6 7

P: 6

%ts .9H9 .;=9 .H=> .H:<

# wrt service"+ ". "1 "2

P6 6 ; : >

P7 6 67 :

P9 6 ;

P: 6

# wrt delivery

"+ ". "1 "2

P6 6 9 6; 6

P7 6 6> 69

P9 6 ;

P: 6

%ts 6;6 H<H <9> 6;6

Computation of wei"hts supplier alternatives

Adjusted

matrix

#eights

/row avg0



Guality "rice ervice &elivery #ts

/GN"NN&0

P6 .:;=.7?= .9HH.9H9 .69>.;?= .6H;.6;6 .97;

P7 .:;=.H>= .9HH.;=9 .69>.6:H .6H;.H<H .79=

P9 .:;=.H;9 .9HH.H=> .69>.76: .6H;.<9> .6::

P: .:;=.;<9 .9HH.H:< .69>.H;H .6H;.6;6 .7?:

Juality .:;=Price .9HH

8ervice .69>

1elivery .6H;

3hoosing a job research/=0

rowth/0

!enefit /!0 3olleagues/30

>ocation/>0

=eputation/= 0

6 6 6 : 6 67

6 7 : 6 67



6 ; 9 67

6 69 69

6 6

6

0.1=40

0.1B24E

0.1BEBBE

0.043104

0.1=024=

0.2==EB2

5aximum 2i"en Aalue <.:7H9:

C.I.H.H>:H<>>

%ei"hts *2i"en Aector+

?ierarchy for Cighter Aircraft "roblem

G l 6



Di"hter #ircraft 8election

8peed /an"e Payload /eliability 5aneuverability

#lternative 6 #lternative 7 #lternative 9 #lternative 6

Gevel 6

Gevel 7

Gevel 9

Cost

5ulti-Criteria 1ecision 5a'in"



T)P8I8 52TE)1

')"I $E'?)&

• Techni(ue of )rder Preference by 8imilarity



to Ideal 8olution

• This method considers three types of

attributes or criteria

– Jualitative benefit attributescriteria

–

Juantitative benefit attributes – Cost attributes or criteria

')"I $E'?)&

• In this method two artificial alternatives are



76H

hypothesized

• Ideal alternative the one which has the best level

for all attributes considered.

• @e"ative ideal alternative the one which has the

worst attribute values.

• T)P8I8 selects the alternative that is the closest to the ideal solution and farthest from negative

ideal alternative.

Input to ')"I

• T)P8I8 assumes that we have m alternatives



766

*options+ and n attributescriteria and we have thescore of each option with respect to each criterion.

• Get xij

score of option i with respect to criterion j

%e have a matrix V *xij+ m×n matrix.

• Get be the set of benefit attributes or criteria

*more is better+

• Get L be the set of ne"ative attributes or criteria

*less is better+

teps of ')"I



767

• 8tep 6 Construct normalized decisionmatrix.

• This step transforms various attributedimensions into non-dimensional attributes,which allows comparisons across criteria.

• @ormalize scores or data as follows

r ij xij *Σx7ij+ for i 6, [, m^ j 6, [, n

i

teps of ')"I



•

8tep 7 Construct the wei"hted normalizeddecision matrix.

• #ssume we have a set of wei"hts for eachcriteria w j for j 6,[n.

• 5ultiply each column of the normalized decisionmatrix by its associated wei"ht.

• #n element of the new matrix is

vij w j r ij

teps of ')"I

• 8tep 9 1etermine the ideal and ne"ative ideal



76:

solutions.

• Ideal solution.

# X v6 , [, vn

Y, where

v j X max *vij+ if j ∈ ^ min *vij+ if j ∈ L Y i i

• @e"ative ideal solution.

#L X v6L , [, vnL Y, wherevL X min *vij+ if j ∈ ^ max *vij+ if j ∈ L Y

i i

teps of ')"I



76;

• 8tep : Calculate the separation measures foreach alternative.

• The separation from the ideal alternative is

8i \ Σ *v j

$ vij+7 ] _ i 6, [, m j

•

8imilarly, the separation from the ne"ative idealalternative is

8Li \ Σ *v jL $ vij+7 ] _ i 6, [, m

j

teps of ')"I

•



76<

•

8tep ; Calculate the relative closeness to theideal solution Ci

Ci

8Li *8i

O8Li + , H<

Ci

<

6

8elect the option with Ci closest to 6.

%EU &

Applying ')"I $ethod to Example



76=

#eight + 2 1 .

tyle =eliability Cuel Eco

aturn

Cord

9 ; ; L

L 9 L 9

; 7 L ;

3ivic

$azda

7 9

L 7

3ost

Applying ')"I to Example

•



76>

•

m : alternatives *car models+• n : attributescriteria

• xij score of option i with respect to criterion j

V XxijY :×: score matrix.

• set of benefit attributes style, reliability, fuel

economy *more is better+

• L set of ne"ative attributes cost *less is better+

teps of ')"I

• 8tep 6*a+ calculate *Σx7ij +

67 for each column



76?

p * + * ij +

tyle =el Cuel

aturn

Cord

2; L+ L+ 72

72 2; 72 2;

L+ 17 72 L+

3ivic

$azda

3ost

Σxij7

*Σx7+67

17 2; 72 17

.1 .+4 .91 .1

+4+9 +277 +74. +4+9

teps of ')"I

• 8tep 6 *b+ divide each column by *Σx7ij +

67

to "et rij



77H

j

tyle =el Cuel

aturn

Cord

27 7+ 42 41

41 2L 2L 27

4; 2+ 2L 4;

3ivic

$azda 22L

2L 2

3ost

=6;.6=

teps of ')"I



776

• 8tep 7 *b+ multiply each column by w j to "et vij.

tyle =el Cuel

aturn

Cord

27 .22 +7. +7

41 +;. +22 ;.

4; +72 +22 ++L

3ivic

$azda 2 +;.

+22 L

3ost

#eight + 2 1 .

teps of ')"I

• 8tep 9 *a+ determine ideal solution #.



777

8tep 9 *a+ determine ideal solution # .

# XH.H;?, H.7::, H.6<7, H.H>HY

tyle =el Cuel

aturn

Cord

27 .22 +7. +7

41 +;. +22 ;.

4; +72 +22 ++L

3ivic

$azda 2

+;. +22 L

3ost

teps of ')"I

• 8tep 9 *a+ find ne"ative ideal solution #L.



779

p * + "

#L XH.H:H, H.6<:, H.6::, H.66>Y

tyle =el Cuel

aturn

Cord

27 .22 +7. +7

41 +;. +22 ;.

4; +72 +22 ++L

3ivic

$azda 2

+;. +22 L

3ost

teps of ')"I

• 8tep : *a+ determine separation from ideal



77:

solution # XH.H;?, H.7::, H.6<7, H.H>HY 8i \ Σ *v j

$ vij+7 ] _ for each row

tyle =el Cuel

aturn

Cord

/27-4;0. /.22-.220. /+7.-+7.0. /+7-L0.3ivic

$azda

3ost

/41-4;0. /+;.-.220. /+22-+7.0. /;.-L0.

/4;-4;0. /+72-.220. /+22-+7.0. /++L-L0.

/2-4;0. /+;.-.220. /+22-+7.0. /L-L0.

teps of ')"I

•



8tep : *a+ determine separation from idealsolution 8i

Σ*v

j $v

ij+7 8i

\ Σ *v j $ vij+

7 ] _

aturn

Cord

L24 .;

1.L 49

L+L7 ;

3ivic

$azda 11L; 4L

teps of ')"I

• 8tep : *b+ find separation from ne"ative ideal



77<

solution #L XH.H:H, H.6<:, H.6::, H.66>Y 8iL \ Σ *v jL$ vij+

7 ] _ for each row j

tyle =el Cuel

aturn

Cord

/27-20. /.22-+720. /+7.-+220. /+7-++L0.3ivic

$azda

3ost

/41-20. /+;.-+720. /0. /;.-++L0.

/4;-20. /+72-+720. /0. /0.

/2-20. /+;.-+720. /0. /L-++L0.

teps of ')"I



77=

• 8tep : *b+ determine separation from ne"ativeideal solution 8iL

Σ*v jL$vij+

7 8iL \ Σ *v jL$ vij+7 ] _

aturn

Cord

7;2 L1

+7.; 2

17+ +;

3ivic

$azda ...L 29

teps of ')"I



77>

• 8tep ; Calculate the relative closeness tothe ideal solution Ci

8Li *8i

O8Li +

8Li *8iO8Li+ Ci

aturn

Cord

L1*++. 92

!E'

2*;9 2+

+;*+; +9

3ivic

$azda 29*+4 24

olve by ')"I

Di"hter #ircraft 8election



peed =ange "ayload 3ost =eliability $aneuverability

V6 V7 V9 V: V; V<

#6 7 6;HH 7HHHH ;.; ; ?

#7 7.; 7=HH 6>HHH <.; 9 ;

#9 6.> 7HHH 76HHH :.; = =

"

Project Management Course

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