Module IIPlanning the process, Strategic and Managerial Planning, Organising the process planning.Cost and costing, Cost Control systems, Economic Balancing,Network Planning, Methods (PERT/CPM), Engineering Flow Diagrams, Cost requirements, Analysis and Estimation of Process Feasibilities (Technical/Economical) Analysis, Cost – Benefit Ratio Analysis, Project Budgeting, Capital Requirements, capital Market, Cash Flow Analysis, Break even strategies.

Planning Process/Steps

1. Establishment of Objectives2. Making Assumptions (establishing premises)

about the External and Internal Conditions3. Development of Alternative Courses of Action4. Evaluation of Alternatives5. Selecting the Appropriate Course of Action6. Arranging for implementation

Features of Planning• Planning is the primary function of management as every

activity needs to be planned before it is actually performed. i.e., planning precedes all other managerial functions and provides the very basis for organising, staffing, directing and controlling.

• Planning is always goal directed. • Planning is pervasive at all levels of management and so also

for all functional area. • Planning is always futuristic. It is deciding in advance what to

do, how to do, etc., However, while planning for the future, it does take past experience and current situation into consideration.

Features of Planning

• Planning is an intellectual activity and requires certain conceptual skills to look ahead into the future. It needs good foresight and sound judgment to anticipate future events, develop alternative courses of action and make the right choice.

• Planning is a continuous process. In organisations plans are made for a specific period followed by new plans for further period.

• Planning basically involves making choices. Need for planning arises when goals/ objectives are many and alternatives to achieve them are also plenty.

• Planning is flexible.

Importance of Planning1. Planning reduces uncertainty, risk and confusion in operation. 2. Planning guides the decision making by the managers. Planning of goals to

be achieved and the course of action to be followed to achieve the goal act as a guide in their own decision making and action plans.

3. Planning helps in achieving coordination and facilitates control. Proper planning integrates the tasks at the operational level, thereby making coordination more effective. It also helps in identifying deviations and taking the corrective action.

4. Planning with an element of flexibility makes the organisation adaptable. In other words planning makes the organisation capable of coping with the changing environment and facing challenges.

5. Planning leads to economy and efficiency in operations. Best methods are selected out of available choices, thus, reducing overlapping and wasteful activities.

6. Planning begins with the determination of objectives and directed towards their achievement.

Strategy - Definition• A more recent entry appears in Strategic Planning

for Public and Non profit Organizations, published in 1996 by John Bryson, professor of planning and public policy at the University of Minnesota. Bryson defines strategy as “a pattern of purposes, policies, programs, actions, decisions, or resource allocations that define what an organization is, what it does, and why it does it.”

• Strategy refers to a general plan of action for achieving one’s goals and objectives.

Strategic Planning

Strategic planning is an organizational management activity that is used to set priorities, focus energy and resources, strengthen operations, ensure that employees and other stakeholders are working toward common goals, establish agreement around intended outcomes/results, and assess and adjust the organization's direction in response to a changing environment.

Strategic Planning

• A strategic plan is a document used to communicate with the organization the organizations goals, the actions needed to achieve those goals and all of the other critical elements developed during the planning exercise.

Strategic PlanningThe techniques involved in strategic planning and management include some variation of the

following: a strategic review or audit intended to clarify factors such as mission, strategy, driving

forces, future vision of the enterprise, and the concept of the business a stakeholders’ analysis to deteine the interests and priorities of the major stakeholders in

the enterprise (e.g., board of trustees, employees, suppliers, creditors, clients, and customers)

an assessment of external threats and opportunities as well as internal weaknesses and strengths (known variously as SWOT or TOWS), leading to the identification and prioritization of strategic issues

either as part of the assessment above, or as a separate exercise, the identification of “core” or “distinctive competencies”

also as part of the assessment above, or as separate exercises, the playing out of “scenarios” and even “war games” or simulations

situational and ongoing “scans” and analyses of key sectors in the business environment, including industries, markets, customers, competitors, regulators, technology, demographics, and the economy, to name some of the more prominent sectors of the environment

various kinds of financial and operational performance audits intended to flag areas where improvement might yield strategic advantage

Steps in Strategic Planning & Management

1) Analysis or assessment, where an understanding of the current internal and external environments is developed.

2) strategy formulation, where high level strategy is developed and a basic organization level strategic plan is documented.

3) strategy execution, where the high level plan is translated into more operational planning and action items.

4) evaluation or sustainment / management phase, where ongoing refinement and evaluation of performance, culture, communications, data reporting, and other strategic management issues occurs.

Organising

• Planning - a manager decides what is to be done in future.

• Organising - he decides on ways and means through which it will be easier to achieve what has been planned

.

Organizing is the process of…

Identifying and grouping the work to be performed.

Defining and determining responsibility and authority for each job position.

Establishing relationship among various job positions.

Determining detailed rules and regulations of working for individuals and groups in organisation.

Importance• Organising is essential because it facilitates administration as well as

operation of enterprise.• By grouping work and people properly, production increases,

overload of work is checked, wastage is reduced, duplication of work is restricted and effective delegation becomes possible.

• Secondly, organising facilitates growth and diversification of activities through clear division of work. It helps in developing a proper organisation structure and the extent and nature of decentralisation can be determined.

• In addition to the above, organising also provides for the optimum use of technical and human resources.

• It also encourages creativity and enhances interaction among different levels of management which leads to unification of efforts of all.

Organizational Structure

Organizational Structure

Cost• Cost is important to all industry. • Costs can be divided into two general classes;

absolute costs and relative costs. • Absolute cost measures the loss in value of

assets. • Relative cost involves a comparison between

the chosen course of action and the course of action that was rejected. This cost of the alternative action - the action not taken - is often called the "opportunity cost".

Types of Costs

• Costs are divided into two types:– variable costs. – fixed costs.

• Variable costs vary per unit of production. For example, they may be the cost per cubic meter of wood yarded, per cubic meter of dirt excavated, etc.

• Fixed costs, on the other hand, are incurred only once and as additional units of production are produced, the unit costs fall. Examples of fixed costs would be equipment move-in costs and road access costs.

Costing

• A costing system is designed to monitor the costs incurred by a business. The system is comprised of a set of forms, processes, controls, and reports that are designed to aggregate and report to management about revenues, costs, and profitability

Formulas

Total cost = fixed cost + variable cost × outputUnit Cost = (fixed cost/output)+variable cost

In symbols, C = F + NVUC = F/N + V

Cost control Techniques1. Planning the Project Budget

– Need to ideally make a budget at the beginning of the planning session with regard to the project at hand.

– Like any other budget, you would always have to leave room for adjustments as the costs may not remain the same right through the period of the project. Adhering to the project budget at all times is key to the profit from project.

2. Keeping a Track of Costs– Keeping track of all actual costs is also equally important as

any other technique. Here, it is best to prepare a budget that is time-based. This will help you keep track of the budget of a project in each of its phases. The actual costs will have to be tracked against the periodic targets that have been set out in the budget.

3. Effective Time Management– very important with regard to project cost control.– the longer the project is dragged on for, the higher the costs incurred

which effectively means that the budget will be exceeded.– The project manager would need to constantly remind his/her team

of the important deadlines of the project

4. Project Change Control– Change control systems are essential to take into account any

potential changes that could occur during the course of the project.– This is due to the fact that each change to the scope of the project

will have an impact on the deadlines of the deliverables, so the changes may increase project cost by increasing the effort needed for the project.

Cost control Techniques

5. Use of Earned Value– Similarly, in order to identify the value of the work

that has been carried out thus far, it is very helpful to use the accounting technique commonly known as 'Earned Value'.

– This is particularly helpful for large projects and will help you make any quick changes that are absolutely essential for the success of the project.

Cost control Techniques

Cost and Project Cost Management• Cost is a resource sacrificed or foregone to achieve a

specific objective or something given up in exchange– Costs are usually measured in monetary units like rupees

• Project cost management includes the processes required to ensure that the project is complete within an approved budget– Project managers must make sure their projects are well

defined, have accurate time and cost estimates and have a realistic budget that they were involved in approving

Project Cost Management Processes• There are three project cost management

processes:– Cost estimating: developing an approximation or

estimate of the costs of the resources needed to complete a project

– Cost budgeting: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance

– Cost control: controlling changes to the project budget

Reasons for Cost Overruns• Not emphasizing the importance of realistic project

cost estimates from the outset– Many of the original cost estimates for IT projects are low to

begin with and based on very unclear project requirements• Many IT professionals think preparing cost estimates is

a job for accountants when in fact it is a very demanding and important skill that project managers need to acquire

• Many IT projects involve new technology or business processes which involve untested products and inherent risks

Project Cost Management Summary

Cost – Benefit Analysis• Cost – Benefit analysis is a systematic approach to estimating

the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a business.

• Cost-Benefit Analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs to the community of projects to establish whether they are worthwhile.

• CBA has two purposes:– To determine if it is a sound investment/decision.– To provide a basis for comparing projects. It involves comparing the

total expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.

Principles of Cost Benefit Analysis• There Must Be a Common Unit of Measurement.• CBA Valuations Should Represent Consumers or

Producers; Valuations As Revealed by Their Actual Behaviour.– The valuation of benefits and costs should reflect

preferences revealed by choices which have been made.

– For example, the valuation of the benefit of cleaner air could be established by finding how much less people paid for housing in more polluted areas which otherwise was identical in characteristics and location to housing in less polluted areas.

Principles of Cost Benefit Analysis

• Benefits Are Usually Measured by Market Choices.• Gross Benefits of an Increase in Consumption is an

Area Under the Demand Curve.• Some Measurements of Benefits Require the Valuation

of Human Life• The Analysis of a Project Should Involve

a With Versus Without Comparison.• Cost Benefit Analysis Involves a Particular Study Area• Double Counting of Benefits or Costs Must be Avoided• Decision Criteria for Projects

Project Budgeting

• Budgets are plans for allocating organizational resources to project activities.– forecasting required resources, quantities needed,

when needed, and costs• Budgets help tie project to overall

organizational objectives.• Budgets can be used as tool by upper

management to monitor and guide projects.

Top-Down Budgeting

• Based on collective judgements and experiences of top and middle managers.

• Overall project cost estimated by estimating costs of major tasks

• Advantages– accuracy of estimating overall budget– errors in funding small tasks need not be

individually identified

Bottom-Up Budgeting

• WBS or action plan identifies elemental tasks• Those responsible for executing these tasks

estimate resource requirements• Advantage

– more accurate in the detailed tasks• Disadvantage

– risk of overlooking tasks

Project Network Models

• Activity: A task that consumes certain time and resources. • Activity List: the list of all activities in a specific project and

the precedence relationships among the activities.• Event: a time point (milestone) at which an activity

starts/ends.• Path: a sequence of connected activities that leads from

the starting point to the completion point.• Critical Path: the longest time-consuming path in a

network.• Critical Activity/Event: activities/events on the critical path

are "critical activities/events" for the project.

• Network Modeling (Graph Theory): show activity precedence’s through a network (arrows/arcs and nodes) and identify the critical path by a forward/backward scheduling approach.

• CPM (Critical Path Method): All activity times are known with a higher certainty (deterministic), so that cost/time analysis and tradeoffs can be conducted.

• PERT (Program Evaluation & Review Technique): All activity times are estimated in a probabilistic form. Primary concern is focused on the uncertainty in terms of the variation and probability of the activity project completion time. Cost/time analysis is not considered in PERT.

Project Network Models

Six Steps Common to PERT and CPM

1. Define the project and all of its significant activities or tasks.

2. Develop relationships among activities. Decide which activities must precede and which must follow others.

3. Draw the network connecting all of the activities.4. Assign time and/or cost estimates to each activity.5. Compute the longest time path through the network.

This is called the critical path6. Use the network to help plan, schedule, monitor and

control the project.

Network Relationship

Basic Terms in Project Network Models

For each activity: (in CPM) (ti - activity time)1. ES: Earliest Start time (under precedence requirements).2. EF: Earliest Finish time (EF = ES + ti).3. LS: Latest Start time (under precedence requirements).4. LF: Latest Finish time (LF = LS + ti).5. Slack: the time difference between LS and ES (or LF & EF).6. Slack = LS - ES = LF - EFFor each Node: (in PERT)7. ET: Earliest Event time (under precedence requirements).8. LT: Latest Event time (LT = ET + ti).9. Slack = LT - ET – tiAll activities that on the critical path have "zero" slack times.

Example• A TYPICAL PROJECT: THE GLOBAL OIL CREDIT CARD OPERATION No one would claim that it is like building the Great Pyramid, but the

impending move of the credit card operation to Des Moines, Iowa, from the home office in Dallas is an important project for Rebecca Goldstein and Global Oil. The board of directors of Global has set a firm deadline of 22 weeks for the move to be accomplished.

Becky is a manager in the Operations Analysis Group. She is in charge of planning the move, seeing that everything comes off according to plan, and making sure that the deadline is met. The move is difficult to coordinate because it involves many different divisions within the company. Real estate must select one of three available office sites. Personnel has to determine which employees from Dallas will move, how many new employees to hire, and who will train them.

` The systems group and the treasurer’s office must organize and implement the operating procedures and the financial arrangements for the new operation. The architects will have to design the interior space and oversee needed structural improvements. Each of the sites that Global is considering is an existing building with the appropriate amount of open space. However, office partitions, computer facilities, furnishings, and so on must all be provided.A second complicating factor is that there is an interdependence of activities. In other words, some parts of the project cannot be started until other parts are completed.

Consider two obvious examples: Global cannot construct the interior of an office before it has been designed. Neither can it hire new employees until it has determined its personnel requirements.

Solution

PERT For Dealing With Uncertainty

• For many situations DETERMINISTIC TIME is not possible, e.g Research, development, new products and projects etc.

• Use 3 time estimatesm= most likely time estimate, mode.a = optimistic time estimate,b = pessimistic time estimate, and

Expected Value (TE) = (a + 4m + b) /6Variance (V) = ( ( b – a) / 6 ) 2

Std Deviation (δ) = SQRT (V)

Precedences And Project Activity Times

Immediate Optimistic Most Likely Pessimistic EXP Var S.Dev

Activity Predecessor Time Time Time TE V

a - 10 22 22 20 4 2

b - 20 20 20 20 0 0

c - 4 10 16 10 4 2

d a 2 14 32 15 25 5

e b,c 8 8 20 10 4 2

f b,c 8 14 20 14 4 2

g b,c 4 4 4 4 0 0

h c 2 12 16 11 5.4 2.32

I g,h 6 16 38 18 28.4 5.33

j d,e 2 8 14 8 4 2

 

The complete network

2 6

1 3 7

4 5

a(20,4)

d(15,25)

e(10,4)

f(14,4)

j(8,4)

i(18,28.4)

g(4,0)

h(11,5.4)

c(10,4)

b(20,0)

The complete Network

2 6

1 3 7

4 5

b(20,0)

d(15,25)

e(10,4)

f(14,4)

j(8,4)

i(18,28.4)

g(4,0)

h(11,5.4)

c(10,4)

CRIT. TIME = 43

EF=20 35

43

2410

20

a(20,4)

Critical Path Analysis (PERT)

Activity LS ES Slacks Critical ?

a 0 0 0 Yes 

b 1 0 1

c 4 0 4  

d 20 20 0 Yes  

e 25 20 5

f 29 20 9  

g 21 20 1  

h 14 10 4  

i 25 24 1  

j 35 35 0  Yes

Assume, PM promised to complete the project in the fifty days. What are the chances of meeting that deadline? Calculate Z, where Z = (D-S) / V 

Example, D = 50; S(Scheduled date) = 20+15+8 =43; V = (4+25+4) =33 Z = (50 – 43) / 5.745 = 1.22 standard deviations. The probability value of Z = 1.22, is 0.888  

1.22

Feasibility Analysis

• Project Environment & genesis– Background, constraints, Assumptions etc.,

• Goal & concept of project• Market Analysis• Cost-Benefit Analysis

– Financial Issues• Project plan• Organizational plan• Risk analysis• Legal conditions for Implementation