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OM. CHAPTER 18. PRODUCT MANAGEMENT. DAVID A. COLLIER AND JAMES R. EVANS. Chapter 18 Learning Outcomes. l e a r n i n g o u t c o m e s. LO1 Explain the key issues associated with project management. LO2 Describe how to apply the Critical Path Method (CPM).

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OM

CHAPTER 18

PRODUCT MANAGEMENT

DAVID A. COLLIER

AND

JAMES R. EVANS


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Chapter 18 Learning Outcomes

l e a r n i n g o u t c o m e s

LO1Explain the key issues associated with projectmanagement.

LO2Describe how to apply the Critical Path Method(CPM).

LO3Explain how to make time/cost tradeoff decisionsin projects.

LO4Describe how to calculate probabilities for projectcompletion time using PERT.

LO1

LO2

LO3

LO4


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Chapter 18 Project Management

he Olympic Games were established over 2,500 years ago. Athens, Greece, was chosen in 1997 to host the 2004 Games, but badly underestimated the cost and overestimated the city’s ability to meet construction and preparation schedules. Organizers were plagued with construction delays and budget overruns, forcing them to complete 7 years’ work in just 4. Delays in the main stadium’s glass-and-steel room pushed back delivery of the entire complex to the end of July, immediately preceding the August 13, 2004, opening ceremonies. The International Olympic Committee had even considered asking the Athens organizers to cancel the games. Problems also occurred with other venues. Construction delays had consequences for Greece’s own athletes, forcing them out of their own training centers. Even the famed Parthenon, which was to have been restored for the Games, was still shrouded with scaffolding when tourists began arriving. Despite all this, the venues were ready—although some at the last minute, and the Games were successfully completed.

What do you think?Think of a project in which you have been involved, perhaps at work or in some student activity. What factors made your project either difficult or easy to accomplish?


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Chapter 18 Project Management

Aprojectis a temporary and often customized initiative that consists of many smaller tasks and activities that must be coordinated and completed to finish the entire initiative on time and within budget.

Project managementinvolves all activities associated with planning, scheduling, and controlling projects.

Olympic games provide a good example of the importance of project management and obtaining good time and cost estimates to meet due dates.


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Exhibit 18.1

Example Projects in Different Functional Areas That Impact the Value Chain


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Chapter 18 Project Management

  • The Scope of Project Management

  • Define: clearly understand the goal of the project, responsibilities, deliverables, and what must be accomplished.

  • Plan: determine the steps needed to execute the project, delegate tasks, and identify start and completion dates.

  • Organize: coordinating the resources to execute the plan cost-effectively.


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Chapter 18 Project Management

  • The Scope of Project Management

  • Control: collecting and assessing status reports and managing changes to baselines.

  • Close: compiling statistics, reassigning people, and preparing a “lessons learned” list.


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Chapter 18 Project Management

  • Several Principles for Project Managers

  • Manage people individually and as a project team.

  • Reinforce the commitment and excitement of the project team.

  • Keep everyone informed.

  • Build agreements and consensus among the team.

  • Empower the project team.


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Chapter 18 Project Management

  • Factors for Successful Projects

  • Projects fail due to schedule overruns, use of unproven technology, poor estimates or weak definitions of objectives, and supplier problems.

  • When initiatives fail, it is often due to unclear objectives, poor leadership and teamwork, ineffective use of tools, and unreasonable deadlines.

  • Ensuring project success depends on well-defined goals and objectives, clear reporting relationships and channels of communication, good procedures for estimating time, cooperation and commitment, realistic expectations, conflict resolution, and top management support.



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Chapter 18 Project Management

  • All project management decisions involve three factors: time, resources, and cost.

  • Key steps to help plan, schedule, and control projects are:

    • Project definition: identifying the activities that must be completed and the sequence to perform them.

    • Resource planning: determining resource needs for each activity.

    • Project scheduling: specifying a time schedule for the completion of each activity.

    • Project control: establishing controls for determining progress and responding to problems.


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Project Activities and Precedence Relationships

Exhibit 18.3

Project Definition

The first step is to define project objectives and deliverables. Next, list the specific activities required to complete the project and sequence in which they must be performed, as shown below.


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Project Network for the Software Integration Project

Exhibit 18.4

The activities and sequences of a project are represented graphically below using a project network, which consists of nodes(circles) representing activities and arcs (arrows) which define the precedence relationships between activities.


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Chapter 18 Project Management

  • Resource Planning & CPM

  • Resource planning includes developing time estimates for each activity and allocating resources that will be required.

  • Cost control is a vital part of project management, and resource planning aids in good budgeting.

  • Bottom-up budgeting starts with lowest-level tasks, converting labor and material estimates into dollar figures and aggregating them into higher-level activities, until a total project budget is developed.


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Wildcat Software Consulting, Inc. Project Work Activities and Costs

Exhibit 18.5

The chart below represents the cost estimates for each activity of the project.


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Chapter 18 Project Management and Costs

  • Critical Path Method (CPM)

  • CPM is an approach to scheduling and controlling project activities.

  • Thecritical path is the sequence of activities that takes the longest time and defines the total project completion time.

  • Rule 1: EF = ES + T

  • Rule 2: the ES time for an activity equals the largest EF time of all immediate predecessors.

  • Rule 3: LS = LF – T

  • Rule 4: the LF time for an activity is the smallest LS of all immediate successors.


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Activity-on-Node Format and Definitions and Costs

Exhibit 18.6

The terms below help to define the variables used in computing the critical path. Nodes in the project network are replaced with boxes that provide the following information:



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CPM Tabular Analysis for Wildcat Software and CostsConsulting Using Normal Time

Exhibit 18.8


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Chapter 18 Project Management and Costs

  • Project Control

  • Because of uncertainty of task times, unavoidable delays, or other problems, projects rarely progress on schedule.

  • Gantt charts graphically depict the project schedule so that a project manager knows exactly what activities should be performed at a given time.

  • Project management software can assist in allocating limited resources, such as labor and equipment that are shared among all the activities.




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Chapter 18 Project Management Delayed

  • Crashing a projectrefers to reducing the total time to complete the project to meet a revised due date.

  • Crash timeis the shortest possible time the activity can realistically be completed.

  • Crash costis the total additional cost associated with completing an activity in its crash time rather than in its normal time.

  • Crash cost per unit of time =

  • Crash Cost – Normal Cost

  • Normal Time – Crash Time [18.1]



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Chapter 18 Project Management Costs

  • Wildcat Software Consulting, Inc. Example

  • Using the data from previous slides, how much would it cost to complete the project in 20 weeks instead of the current 22 weeks? How much would it cost to finish in the fastest possible time?

  • First, determine the crash cost per unit of time for each activity. The only way to reduce project completion time is by reducing activities on the critical path.

  • Determine the lowest cost in reducing the critical path.

  • To minimize project completion time, trial-and-error or linear programming can be used to determine the lowest cost and shortest time.



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CPM Tabular Analysis for Wildcat Software Consulting Costsfor Target 20-Week Completion Time

Exhibit 18.13


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Chapter 18 Project Management Costs

  • Wildcat Software Consulting, Inc. Example

  • To address the first question, we need to determine the crash cost per unit of time for each activity using Equation 18.1.

  • These are: A - $400 per week, B - $500 per week, C - $250 per week, D - $50 per week, E - $1,200 per week, G - $1,100 per week, and I - $1,000 per week. Activities F, H, J, and K cannot be crashed.

  • Note that the only way the project completion time can be reduced is by crashing activities on the critical path. When we do this, however, another path in the network might become critical, so this must be carefully watched.


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Chapter 18 Project Management Costs

Wildcat Software Consulting, Inc. Example

In this example, several options exist for completing the project in 20 weeks:

Crashing Option #1Crashing Option #2

Crash B by 1 week = $500 Crash B by 2 weeks = $1,000

Crash C by 1 week = $250

Additional Cost = $750 Additional Cost = $1,000

Crashing Option #3

Crash C by 1 week = $500

Crash E by 1 week = $1,200

Additional Cost = $1,700

The least expensive option is the first. The critical path remains the same, namely, B-C-E-F-H-J-K. Exhibit 18.13 summarizes the results for this option. Notice that although activity D costs only $50 per week to crash, it is not on the critical path, so crashing it would not affect the completion time.


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Wildcat Software Consulting 17-Week Project Schedule Costsat Total Project Cost = $39,550

Exhibit 18.14


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Chapter 18 Solved Problem CPM Time/Cost Costs

Draw the project network to determine the earliest completion time for the project.


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B Costs

D

A

F

C

E

Chapter 18 Solved Problem CPM Time/Cost

  • What is the critical path?

  • Solution: there are 2 critical paths:

  • Path A-B-D-F

  • Path A-C-D-F

  • Both paths take 19 weeks to complete. Only activity E has a slack time of 1 week.


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Chapter 18 Solved Problem CPM Time/Cost Costs

Solution

One Week Crash Options:

We might first look at activities common to both critical paths, namely A and D, and consider crashing each of them individually. Other options are to crash activities B and C together, activity F, and activities A and D together.

Crashing Option #1Crashing Option #2Crashing Option #3

Crash A by 1 week=$400 Crash D by 1 week=$200 Crash B by 1 week=$350

Crash C by 1 week=$300

Total cost=$650

Crashing Option #4Crash Option # 5

Crash F by 1 week=$500 Crash A by 1 week=$400

Crash D by 1 week=$200

Total cost=$600

The lowest cost option is to crash activity D by 1 week, costing $200. Now, all three paths through the network are critical paths with a total duration of 18 weeks.


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Chapter 18 Solved Problem CPM Time/Cost Costs

Solution

Second Week Crash Options:

Crashing Option #1Crashing Option #2Crashing Option #3

Crash A by 1 week=$400 Crash D by 1 week=$200 Crash B by 1 week=$350

Crash E by 1 week=$ 50 Crash C by 1 week=$300

Total cost=$250 Total cost=$650

Crashing Option #4

Crash F by 1 week=$500

All other crash options cost more than Option #2. Therefore, we should recommend that we crash D by a second week and E by 1 week for a total cost of $250. All three network paths take 17 weeks to complete.

The total normal costs are $3,900 plus crashing D by 2 weeks (+$400) and E by 1 week (+$50), so the total cost of a 17 week project completion schedule is $4,350.


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Chapter 18 Project Management Costs

  • Uncertainty in Project Management

  • PERT (project evaluation and review technique) is another approach to project management.

  • PERT was developed to handle uncertainties in activity completion times.

  • In contrast, CPM assumes that activity times are constant (no uncertainty or probability distributions here).


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Chapter 18 Project Management Costs

  • Uncertainty in Project Management

  • Three PERT estimates are obtained for each activity:

    • Optimistic time (a): activity time under ideal conditions,

    • Most probable time (m): most likely activity time under normal conditions,

    • Pessimistic time (b): activity time if breakdowns or serious delays occur.



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Chapter 18 Project Management Software Project

  • Uncertainty in Project Management – PERT

  • Expected Time = (a + 4m + b)/6 [18.2]

  • Variance = (b – a)2/36 [18.3]

  • where:

    • a is the optimistic time estimate,

    • m is most likely or probable,

    • b is the pessimistic time estimate, and

    • assumes a beta probability distribution.



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Chapter 18 Project Management Project

  • Uncertainty in Project Management – PERT

  • The critical path is found using the expected times in the same fashion as in the Critical Path Method.

  • PERT allows us to investigate the effects of uncertainty of activity times on the project completion time.

  • In the software integration project, we found the critical path to be B-C-E-F-H-J-K with an expected completion time of 22 weeks.


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Chapter 18 Project Management Project

Uncertainty in Project Management – PERT

We found the critical path to be B-C-E-F-H-J-K with an expected completion time of 22 weeks. This is simply the sum of the expected times for the activities on the critical path. The variance (σ2) in project duration is given by the sum of the variances of the critical-path activities:

σ2 = 1.78 + 0.11 + 0.44 + 0.11 + 0.11 + 0.11 + 0.11

= 2.77.

This formula is based on the assumption that all the activity times are independent. With this assumption, we can also assume that the distribution of the project completion time is normally distributed.


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Chapter 18 Project Management Project

  • Uncertainty in Project Management – PERT

  • Although they expect completion in 22 weeks, the project manager wants to know the probability that they will meet the 25-week deadline. The z-value for the normal distribution at T = 25 is given by

    • z = (25 – 22)/1.66 = 1.81

  • Using z = 1.81 and the tables for the standard normal distribution, we see that the probability of the project meeting the 25-week deadline is 0.4649 + 0.5000 = 0.9649.


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Probability of Completing the Wildcat Software Project Projectwithin 25 Weeks

Exhibit 18.17


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C Project

A

B

E

F

D

Chapter 18 PERT Solved Problem

  • Solution

  • There are two paths, A-B-C-E-F = 12 days and A-B-D-E-F = 14 days, through the network. The critical path is A-B-D-E-F = 14 days. The variance of the project time is the sum of the activity variances on the critical path or 1 + 0.8 + 1 + 0.5 + 0.2 = 3.5 days.

  • z = (12 – 14)/ 3.5 = – 2/1.871 = – 1.0689. The probability from 0 to z = – 1.07 is 0.3577. Therefore, P (completion time = 12) = .5000 – .3577 = .1423. Also, note that given the high variances along the critical path, there is only a 50 percent chance of completing the project within 14 days (i.e., z = (14 – 14)/1.871 = 0 and

  • P (completion time = 14) = .5000 – 0 = .5000.