How to Determine when Project Management Techniques are Required

MARCH 1982

Program Manager

SP Communications, Inc.

Burlingame, CA 94010

A project is an organizational unit dedicated to the attainment of a goal – usually the successful completion of a development product on time, within budget, in conformance with predetermined specifications.

Project Management is the process whereby a single manager is responsible for planning, organizing, coordinating, directing and controlling the combined efforts of all functions and staff groups in accomplishing project objectives.

Tools and techniques of Project Management are:

A.   Planning the Project

B.   Work Breakdown Structures – Work Packages -Cost Accounts

C.   Schedule Planning

D.   Financial Planning

E.   Work Authorization Process

Planning the Project

The requirements of the statement of work, specifications, and company policies and procedures are the basis for planning the project. Planning the project work requires the definition of the technical effort and the requirements for labor, material, tooling, equipment, facilities and funding. Planning is evolutionary and continues through the life of the project. Planning establishes the framework upon which the Project Manager issues work authorization to the task organizations which include scope of work, schedules, budgets and technical objectives. It includes the development of Work Breakdown Structures, Work Packages, and associated authorization documents.

Work Breakdown Structures – Work Packages –Cost Accounts

The Work Breakdown Structure (WBS) is the basic cornerstone of project management. The WBS is a product-oriented family tree division of hardware, software, services, and other work tasks which organizes, defines, and graphically displays the product to be produced as well as the work to be accomplished in order to achieve the specified product. The next logical subdivision for planning and control is a breakdown of each end item subdivision into specific work packages. A work package is a unit of work required to complete a specific job, such as a report, a piece of hardware or a service, which is the responsibility of one operating unit within the organization. A work package is a specific job applicable to the work force involved. A cost account is a group of related work packages.

Schedule Planning

Schedule planning involves the preparation of project schedules and includes the development of project master schedules and subordinate schedules, based on the Work Breakdown Structure, to insure that all elements of the project requirements including hardware, software, and support items are delivered on time. Schedules are necessary to integrate the activities of the task organizations to significant milestones.

There are three basic scheduling techniques:

A.  Gantt Charts

B.  PERT/CPM

C.  Line of Balance

GANTT

A Gantt chart is basically a bar chart showing planned and actual performance for those resources that the manager wishes to control.

PERT (Performance Evaluation and Review Technique)/CPM (Critical Path Method)

A PERT network is a graphic illustration of events connected in logical sequence by activity lines that show all the activities necessary to complete a project and the interrelationship and dependency between the events in the project. Networks are built from events, activities and activity time estimates. PERT events are definable points in time by which an activity can be said to have been started or completed.

PERT Time Estimates

image

Te – Expressed Time

To – Optimistic Time

Ta – Average (most likely)

Tp – Pessimistic Time

Line of Balance

The Line of Balance method is a management-oriented charting tool for collecting, measuring and presenting information relating to time and accomplishment. It is utilized mainly in the production process from the point when incoming or raw materials arrive to the shipment of the end product. It is a means of integrating and monitoring the flow of material, components and subcomponents into the manufacturing process in accordance with phased delivery requirements. It provides a means of comparing actual with planned performance, and information concerning the critical areas where a project is or will be behind schedule.

Financial Planning

Financial Planning continues throughout the project. It involves the allocation of resources required for the project. Financial plans include project budgets, budgets for WBS elements and for subordinate cost accounts and work packages. Financial plans include expenditure plans based on rate of expenditure related to the availability of funds, capital investment plans, profit plans and the retention and use of management reserves. Budgets are negotiated between the Project Manager and task organization. When agreement is reached the budget is fixed by the work authorization process.

Work Authorization Process

The planning process breaks the WBS requirements down into subordinate elements of work appropriate to the size of the project, schedules its accomplishments, establishes budgets and allocates resources. The work authorization process is the means by which the Project Manager controls the flow of work, authorizes the task organizations to perform work and establishes performance, budget and schedule parameters.

When to Use Project Management Techniques

To use project management successfully, it is necessary to recognize when project management is needed versus the use of the regular functional organization to do the job. The following are some of the criteria that should be considered:

A. Magnitude of the effort. Project management is appropriate for ad hoc undertakings concerned with a single, specific end product such as a complex weapon system for the government, a move to a new plant site, a corporate acquisition, or the placing of a new product on the market.

B. The importance of the project to the company.

C. Risks are high and the uncertainty factors make prediction of the future difficult.

D. Relationship of the project to future company objectives, follow-on business, etc.

E. Ability of the present management structure to successfully complete projects on time, within budget, and in conformance with predetermined performance specifications.

F. Unfamiliarity. An undertaking is not a project unless it is something out of the ordinary, different from a normal, routine affair within the organization.

G. Interrelatedness. A decisive criteria for establishing a project is the degree of interdependence existing between the tasks of the effort. If the effort calls for many functionally separate activities to be pulled together, and these activities are so closely related that moving one affects the others, then project techniques are clearly needed.

H. Organizational reputation. The organization’s stake in the undertaking is a crucial factor in the decision of whether or not to use project management, i.e., severe financial loss or loss of reputation. A project manager who sees his role as that of an integrator generalist responsible for meeting time, cost and quality objectives can do much to lessen dangers inherent in a large undertaking.

Case History:

Expertec, Inc. is a peripherals manufacturer serving the Small-Business-Computer market. They manufacture three lines of peripherals: Line Printers, Floppy Disc Drives, and Card Readers. All three of their product lines enjoy a reputation for quality.

Last Quarter, an analysis of their Income Statement looked like this:

Line Printer Floppy Disc Card Reader Total
Sales $350,000 $300,000 $200,000 $850,000
Variable Costs 210,000 195,000 150,000 555,000
Marginal Profit $140,000 $105,000 $ 50,000 $295,000
Fixed Costs 110,000 80,000 50,000 240,000
Profit $ 30,000 $ 25,000 $ 0 $ 55,000

Lately, a trend away from batch-processing, toward online processing, has eroded the market for card readers. However, there is a growing market for CRT Terminals. An analysis of Expertec’s Income Statement, this quarter, looks like this:

Line Printer Floppy Disc Card Reader Total
Sales $350,000 $300,000 $100,000 $750,000
Variable Costs 210,000 195,000 75,000 480,000
Marginal Profit $140,000 $105,000 $25,000 $270,000
Fixed Costs 110,000 80,000 50,000 240,000
Profit $ 30,000 $ 25,000 $ (25,000) $ 55,000

Because of the sales trend of the Card Reader product line, the management of Expertec, Inc. realized that they have a decision to make regarding the disposition of the Card Reader product line. They decided to do an analysis of the product contribution of the Card Reader product line. Product contribution analysis is designed to measure the impact of management decisions concerning volume, cost reduction, and selling price on the company’s profit potential.

Product contribution = Sales - Variable costs

Product contribution = Marginal income

For the Card Reader product line the Product contribution is $25,000. In other words the Card Reader line is contributing $25,000 to Fixed Costs and Profit. Without it, Profit for the quarter would be $5,000. Therefore, it would not be acceptable to simply drop the product line. The Card Reader product line does not have enough profit potential to be an attractive candidate for divestiture, either. A contribution ratio was calculated for the Card Reader product line.

image

When this ratio is high, a relatively small increase in sales volume can create a large increase in profits and a small decrease in sales volume can create a large decrease in profits. When the contribution ratio is low, the impact of volume changes in either direction is relatively small.

The contribution ratio for the Card Reader product line is relatively low. It is .33. Therefore, a strong sales campaign to improve sales is not the answer.

And because of the sales trend of the product line, it is not a likely candidate for a cost-reduction program.

Expertec management decides to replace the Card Reader product line with a new product line designed and developed at Expertec and manufactured at Expertec to Expertec standards of quality. The new product line will be CRT Terminals.

Expertec management realizes that to finance, design, develop and produce the new product line, project management techniques are required, for the following reasons:

1. The effort is too large relative to business as usual.

2. The project is very important to the company’s future profits.

3. Risks are high.

4. The project has a strong relationship to company objectives, and 5. It is important to Expertec’s reputation.

Summary

A project is an organizational unit dedicated to the attainment of a goal. Project Management is the process whereby a single manager is responsible for cost, schedule and technical performance of his project.

Criteria can be established to help determine when project management techniques are required. If any one or more of the criteria are met, project management techniques should be used. The potential risks in not using project management when its use is indicated, can be prohibitive.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

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