Project Management
Prague, CZ
Project Compression and Risk Management
Accelerating Project Completion
Compressing a Project
Why is this Topic Important?
• My project is late and I NEED to finish earlier.
o Early Finish is December
o Need to finish in October
• What can I do?
• How can I shorten the project?
o I need to SAVE some time.
§ SS lags can shorten a project.
§ But I STILL NEED to shorten the project further.
• Which tasks can I shorten? (reduce the task duration)
• Let’s learn how to compress a project to make it shorter?
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Problem:
• Project is running late.
• Finish date is too late.
• Must finish earlier than currently scheduled.
Solution Approach
• Need to Accelerate the Project
o Crash (not used in air transport industry)
o Compress
• Lags can shorten, but limited.
• Use compression techniques to shorten time (reduction in task duration)
• Pay for higher capacity, i.e., increasing your capacity
o More powerful machines
New machine finishes earlier
o Purchase more labor
Compress task time with more people
o Pay for higher expertise
Expert can finish more quickly
o Pay for more time, such s overtime shifts. Same people, more work per day
o Additional sub-contractors
New people, parallel activity
o Outsourcing to a 3rd party
New resources, parallel activity
Overall Idea
• Assumptions
o Normal time assumes low-cost, normal efficient work
o Must spend money and pay a higher cost to accomplish in shorter time.
o No longer most efficient.
You pay to get it done sooner!
Think of the comparison of regular postal mail 4-5 day time vs. DHL or FEDEX overnight time.
Normal Total Project Cost
• Direct costs assume low-cost, normal efficient work times.
They can be billed directly to a specific task. I work on a task. I bill for that task.
Paying for work effort directly associated with a task.
o Labor
o Materials
o Equipment
•
Indirect costs vary with time.
Each day has the same fixed cost associated with the project, but not a specific task
Cost is spread over a period of time, not for particular task work effort.
Therefore, this cost is only indirectly part of the project cost, not a particular task cost.
o
o
o
o
Rentals (buildings, hammock equipment, etc.)
Supervision, administrative costs (office)
Interest on money (short-term loans)
Consulting fees
Crashing Changes Project Cost Structure
• Direct costs will no longer be low-cost and efficient.
• Direct Cost will increase for shorter time period.
• Indirect cost will reduce directly (linearly) with time.
(ex: $500/day)
(ex: $1,000/day)
(ex: $x% per day)
(ex: $500/day)
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Total cost = direct cost + indirect cost
Total Cost
Optimum Cost-Time Point
Direct Cost
Indirect Cost
Note: It is possible to save money on the project by spending money on accelerating tasks, i.e., indirect cost
reduction may be greater than the increase in direct cost for particular periods of time.
3. Crash Cost Graph (Slope)
$400
Crash
Slope = Rise / Run
= (400 – 200) / (10 – 5)
= 200 / 5
= $40 per unit of time
Normal
$200
0
5
10
Normal Cost/Time assumes efficient low cost to complete the task.
Crash Cost/Time is the greatest amount of cost for the least time to complete the task.
Example:
• $400 represents the crash cost to complete in least time of 5 days.
• $200 represents the normal cost to complete in normal time of 10 days.
What are the Two Steps to Reduce the Project Duration (compress the project)?
1. Identify the critical path. Off-CP activities will not change the project finish date.
2. Select task with least crash cost. Examine tasks with least crash slope, representing the least cost to
compress one time period. The low slope value is the low crash cost to a shorten task one time period.
Test Note: It is important to work through the lab tutorial before attempting to complete the Zuma 3 project
assignment. The lab tutorial explains and shows the technique to crash a project using MS Project.
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Exercise 9-2
Assume the network and data that follow. Compute the total direct cost for each project duration. If the
indirect costs for each project duration are $400 (19 time units), $350 (18), $300 (17), and $250 (16),
compute the total project cost for each duration. Plot the total direct, indirect, and project costs for each
of these durations on a cost-time graph. What is this cost? What is the optimum cost-time schedule for
the project?
The normal cost of $50 is the total cost for the normal time of 3 weeks.
The “crash cost” is the simple add-on cost added to the normal cost (for each week’s reduction).
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The following two situations are fairly typical in performing projects in a company:
1. A project starts, begins to fall behind schedule, and you want to bring it back to its original time. 116
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Complete the table and determine the total cost to bring the project back to 32 days from 35 days.
____$________________
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2. A customer requests if you can shorten a project more than just the technical and resource
solution that you have presented.
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Using the results from compression to make business decisions
Refer to the Graph below
Assume we have the following results from compressing a project. We know the following as a result of
the compression analysis:
• The project Early Finish at 16 months is not the best duration in terms of achieving the lowest
project cost.
• Month 13 is the “optimal” time/cost tradeoff point, namely, $1,760 dollar units of cost is the
lowest cost to complete the project.
o These costs are based on direct costs that increase as we try to shorten the time
duration.
o The indirect costs are decreasing as we shorten the time duration.
Normally, the most economic decision would be to use the optimal time duration to set the finish date
for the project, i.e., at the end of the 13th week. But, would there ever be a situation or time that it
would make sense to pay more and attempt to schedule the project for an earlier completion date,
such as at the end of the 11th or 10th month?
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Business Decisions using the Results from Compression Analysis
The business decision that we will be generally looking at will be the basic idea of comparing
expected revenues with expenses. A straightforward example would be the cost tradeoff about getting
a product to market:
• Pay $1,760 to finish the project (designing and testing the product) and launch the product in 13
months
o This option will cost less, but
o will take longer to get to market with the new product.
• Pay $2,080 to finish the project and launch the product in 10 months.
o This option will cost more, but
o will get the product to market 3 months earlier.
This is the first-mover advantage decision. What are you willing to pay to get your product to
market sooner, and hopefully have the first mover advantage of developing brand recognition and
advantage before any of your other competitors? An example is Apple products, such as the iPod,
iPhone, and iPad. All represent product innovations. Getting them to market first established Apple as
a product innovation leader.
But there is a cost associated with finishing our product launch project 3 months earlier than the
“optimal.” If the numbers represent millions of dollar, then the difference if $2,080 - $1,760 = $320 or
an 18% increase in cost from the optimal amount of $1,760. If this were a project where the numbers
represent units of $10,000, we would be talking about
$20,800,000
- $17,600,000
---------------$ 3,200,000 or 3 million “plus” dollar difference.
This analysis tells us that we can launch the product (iPhone for example) in 10 months, instead
of 13 months, if we are willing to spend an addition $3.2 million dollars. The expenses of our
accelerated project completion have increased significantly.
On the revenues side, can we generate profits that will exceed the $3.2 million dollars? And if
we did just break even, would it be worth the “pressure” to finish early for that much extra cost?
Again, here is a brief perspective on the revenues, expenses, and worthiness of finishing in 10 months
compared to 13 months:
• 13-month duration.
o Later to market. This could be ok if nobody else finds out about what we are planning
to do.
o No first-mover advantage. Competitor may be working on such a product innovation,
also. We may be just one of many companies, launching at the “same time” and there
would be no apparent product differentiation and/or first to the market advantage.
o Save Money. We would save $3.2 million dollars by not compressing (“rushing”) the
product launch.
•
10-month duration
o Earlier to market. We get out product out there first. This can be a big advantage if it is
a truly innovative and “insanely” new product (As Steve Jobs used to describe new apple
products).
o First Mover Advantage. Getting out to market early can potentially establish our
product as a brand that is radically innovative and the standard for the competitors to
imitate. Their product would be offered as a substitute product to our product in the
competitive market.
o Cost more money. We will spend $3.2 million dollars MORE by finishing 3 months
earlier, and not waiting the 13 months (at the optimal point).
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Expected Higher Sales. We are expecting much higher (more) sales of our product
than if we wait for the 13 months:
§ The difference is between launching a computer product in June/July compared
to October/November. It is the difference in making the new computer available
before the fall semester begins, rather than offering it one to two months after the
semester begins and students have already purchased a competitor computer
anyway.
§ Launching the iPhone two months before the Christmas and holiday season so
that consumers can think about purchasing this product as a Christmas present
to family, etc.
So, let’s bring this to a conclusion. Project management is about planning and implementing
projects. This example has been about planning and implementing the development and sales
of an innovative product. The business decision is to decide when to launch the sales of the
innovative product:
• Project Manager. The PM can perform the compression analysis to show marketing
and operations management the cost tradeoffs with time in terms of when the product
launch can be initiated. I.e., the PM can say to management, “Provide me the money for
the increased project budget, and I can schedule and manage the project to
accommodate the new [accelerated] completion date.”
• Business Manager. I understand the business side of my new product launch. I
understand the cost differences presented by the project manager in terms of a time/cost
tradeoff to launch the project. I know from my own business analysis the profitability by
waiting for 10 months and for 13 months.
o
Ultimately, the project management and its related project compression techniques and analysis
of time/cost tradeoffs can serve a higher level purpose in our own company. Also, this
compression analysis could possibly assist our external customer by providing valuable input
information into the business decision on how to compete more strategically in the customer’s
industry. Managers need information to make business decisions. They engage in a what-ifthen-impact kinds of analysis:
• What-If I want to do this and that.
• Then I will have these particular times and costs that I can expect.
• The impact will be the following on my expenses and eventually on my profitability.
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Additional Problem Exercises using Compression Analysis and Techniques
Exercise 9-4
If the indirect costs for each duration are $1200 for 16 weeks, $1130 for 15 weeks, $1000 for 14 weeks,
$900 for 13 weeks, $860 for 12 weeks, $820 for 11 weeks and $790 for 10 weeks, compute the total
costs for each duration. Plot these costs on a graph. What is the optimum cost-time schedule?
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ANSWERS
Exercise 9-2
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Exercise 9-4
Project Compression and Risk Management
ANSWERS
Authors skipped time periods 15, 14, 13. Work through a solution and you should get:
15: H for $40 /// 14: B for $70 /// 13: B for $70 /// 12: D and E for $70 …
The indirect costs come from the accounting department in a company.
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For this course, they will be given to you by the instructor and at the beginning of the exercise
explanation (see very first part of this problem exercise).
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