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# COST MANAGEMENT 642 - Paper 6 - PowerPoint PPT Presentation

COST MANAGEMENT 642 - Paper 6. PROJECT SELECTION NUMERICAL METHODOLOGIES SCORING 1.0. INTRODUCTION 2.0. SCORING METHODOLOGIES 2.1. Scoring Methodologies: Introduction 2.2. Scoring Methodologies: Unweighted Scoring 2.3. Scoring Methodologies: Weighted Scoring

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PROJECT SELECTION

NUMERICAL METHODOLOGIES

SCORING

• 1.0. INTRODUCTION

• 2.0. SCORING METHODOLOGIES

• 2.1. Scoring Methodologies: Introduction

• 2.2. Scoring Methodologies: Unweighted Scoring

• 2.3. Scoring Methodologies: Weighted Scoring

• 2.4. Scoring Methodologies: Advantages and Disadvantages

• 2.5. Scoring Methodologies: Example (Angling, 1985)

• ”Use of formal, numeric procedures for evaluation & selection of projects is a recent phenomenon, largely post-WW2"

• 2 types of numeric methods - SCORING & FINANCIAL.

• Financial PS uses cashflows as a means for selection.

• If all projects expressable in cashflows then selection is simple: alternative with largest profit or lowest cost

• But often PS criteria cannot be measured in \$\$. Scoring used to evaluate projects against a set of diverse criteria.

• Criteria usually set by upper management & derived from organisation's goals.

• Proposed projects allocated scores based on how they meet the selection criteria. The scores are totalled and projects ranked.

• Either all projects meeting a certain score chosen; or highest scoring projects selected until a total budget is reached.

• “Take care. Scores are just relative indications of best projects. Small differences are probably not significant. But, large differences indicate that 1 project is clearly better than another. Team needs to examine results to determine that they really do make sense”

• Selection by scoring typically by group process

• Scoring methodologies useful as initial screening process for project proposals

QUESTION

• PROJECT - best way to travel 3km to work - walk, bicycle, car, bus

• Select the project selection criteria - Do & Discuss

• Method 1 - - Do & Discuss

Selection CriteriaProject AProject B

Alignment with core business 1 0

Top-management support 1 1

Positive impact on stakeholders 1 0

Stage of technology development 0 1

Adequate knowledge of technology 0 0

Existing facility and equipment 0 1

Availability of raw materials 1 1

Potential market for output 1 1

Probability of share of potential market 1 0

Ability to reach market timely 1 1

Adequate return on investment 0 1

Adequate payback period 0 1

• TOTALS 78

• Project receives a point for each criteria met.

• Project meeting minimum number of criteria may be chosen.

• assumes all criteria are of equal importance

• no graduation of degree to which a project meets criteria

QUESTION

• PROJECT - best way to travel 3km to work - walk, bicycle, car, bus

• Method 2 - - Do & Discuss

• Method 3 - - Do & Discuss

Selection Criteria Project A Project B

Alignment with core business 4 4

Top-management support 4 4

Positive impact on stakeholders 5 2

Stage of technology development 1 4

Adequate knowledge of technology 2 2

Existing facility and equipment 1 3

Availability of raw materials 5 5

Potential market for output 5 5

Probability of share of market 5 1

Ability to reach market timely 5 3

Adequate return on investment 2 3

Adequate payback period 2 5

TOTAL 4141

• each criterion - each project is allocated a subjectively evaluated score within a range (e.g., 5 = very good, down to 1 = very poor).

• permits allocation of degree to which project meets each criterion

• Disadvantage - No rating of importance of criteria.

Scoring Method 3: Weighted Scoring

• Each criterion weighted according to its perceived importance relative to the other criteria.

• Against each criterion project is given a score within a range (5 = very good, down to 1 = very poor) to reflect how it meets the criterion.

• Weighted score for each criterion = Weighting x Score.

Scoring Methodologies: Weighted Scoring

Project A Project B

Selection Criteria Weighting Score Weighted Score Weigh

ScoreScore

Alignment with core business 13 4 52 4 52

Top-management support 10 4 40 4 40

Positive impact on stakeholders 10 5 50 2 20

Stage of technology development 6 1 7 4 24

Adequate knowledge of technology 7 2 14 2 14

Existing facility/equipment 4 1 4 3 12

Availability of raw materials 9 5 45 5 45

Potential market for output 10 5 50 5 50

Probability of share of market 10 5 50 1 10

Ability to reach market timely 8 5 40 3 24

Adequate return on investment 8 2 16 3 24

Adequate payback period 5 2 10 5 25

TOTAL 100 378340

Anchoring – Uses 9-point scale:

• 9= most important criterion

• 1= least important criterion.

• All other criteria are then rated to these anchoring limits.

Pairwise Comparison

• Criteria compared with each other in pairs

• For each pairwise comparison, judgement & score made of relative importance between the two.

• Allows focus on 2 selection criteria in isolation, without the distraction of considering all other criteria.

B C D

A. A8 A2 A6

B. B1 B3

C. D2

CRITERIA RAW SCORE % / WEIGHTING

Criterion A 16 73

Criterion B. 4 18

Criterion C. 0 0

Criterion D. 29

22100%

QUESTION

What are the

• benefits

• problems

with scoring methods for project selection ?

• Considers multiple criteria - can evaluate complex projects

• Beyond narrow focus of \$ - “growing realisation that profitability alone is not a sufficient test for the quality of an investment”

• convenient numerical means to summarise project’s effectiveness

• Makes management focus on what it wants from a project.

• easy to use and understand

• Reflects management policy - what is and is not important

• Easily altered to suit changes in managerial philosophy or environment

• Weighted scoring acknowledges some criteria are more important than others

• Give relative measurement. Final score does not represent absolute value - so does not directly indicate if project should proceed

• Criteria are assumed to be independent

• Unweighted scoring assumes all criteria are equally important

• Ease of use leads to the inclusion of numerous criteria which have small and insignificant weightings

• Numerical nature may delude that process is objective, whereas scores invariably reflect subjective opinions

• May requirea significant effort to achieve consensus among the stakeholders who are involved in the decision process

• Scoring Methodologies: Introduction

• Scoring Methodologies: Unweighted Scoring

• Scoring Methodologies: Weighted Scoring