Chapter 1
Introduction to Operations and Supply Chain
Management
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Company and Resource Weblinks
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In this chapter, you will learn about...
• The Operations Function
• The Evolution of Operations and Supply Chain Management
• Globalization
• Productivity and Competitiveness
• Strategy and Operations
• Organization of This Text
• Learning Objectives of This Course
Operations and Supply
Chain Management FOR CHOCOLATE
THROUGHOUT THIS TEXT, we'll use chocolate to introduce the topics to be covered in each
chapter. The cacao bean, from which chocolate is made, is the third most traded raw material
in the world. We'll trace the path of cacao beans through the supply chain from South
America and the Ivory Coast of Africa through the roasters, brokers, and importers, to global
factories and regional distribution centers, to local stores and other outlets that sell the
myriad types of chocolate products. We'll look at large and small companies, specialty
products, mass-produced products, and services. We'll cover design and quality, processes
and technology, planning and control, supply chains, and more. At each stage we'll illustrate
how the principles of operations and supply chain management can be applied. Join us on
this journey through the world of chocolate.
Operations management designs, operates, and improves productive systems—systems for
getting work done. The food you eat, the movies you watch, the stores in which you shop, and
the books you read are provided to you by the people in operations. Operations managers are
found in banks, hospitals, factories, and government. They design systems, ensure quality,
produce products, and deliver services. They work with customers and suppliers, the latest
technology, and global partners. They solve problems, reengineer processes, innovate, and
integrate. Operations is more than planning and controlling; it's doing. Whether it's superior
quality, speed-to-market, customization, or low cost, excellence in operations is critical to a
firm's success.
Operations management:
the design, operation, and improvement of productive systems.
Operations is often defined as a transformation process. As shown in Figure 1.1, inputs (such
as material, machines, labor, management, and capital) are transformed into outputs (goods and
services). Requirements and feedback from customers are used to adjust factors in the
transformation process, which may in turn alter inputs. In operations management, we try to
ensure that the transformation process is performed efficiently and that the output is of greater
value than the sum of the inputs. Thus, the role of operations is to create value. The
transformation process itself can be viewed as a series of activities along a value chain
extending from supplier to customer.
Operations:
a function or system that transforms inputs into outputs of greater value.
Value chain:
a series of activities from supplier to customer that add value to a product or service.
The input-transformation-output process is characteristic of a wide variety of operating
systems. In an automobile factory, sheet steel is formed into different shapes, painted and
finished, and then assembled with thousands of component parts to produce a working
automobile. In an aluminum factory, various grades of bauxite are mixed, heated, and cast into
ingots of different sizes. In a hospital, patients are helped to become healthier individuals
through special care, meals, medication, lab work, and surgical procedures. Obviously,
“operations” can take many different forms. The transformation process can be
physical,
as in manufacturing operations;
locational,
as in transportation or warehouse operations;
exchange,
as in retail operations;
physiological,
as in health care;
psychological,
as in entertainment; or
informational,
as in communication.
THE OPERATIONS FUNCTION
Activities in operations management (OM) include organizing work, selecting processes,
arranging layouts, locating facilities, designing jobs, measuring performance, controlling
quality, scheduling work, managing inventory, and planning production. Operations
managers deal with people, technology, and deadlines. These managers need good technical,
conceptual, and behavioral skills. Their activities are closely intertwined with other
functional areas of a firm.
Figure 1.1 Operations as a Transformation Process
ALONG THE SUPPLY CHAIN
Supply Chain Managers Do?
What Do Operations and
Operations managers are the improvement people, the realistic, hard-nosed, make-it-work,
get-it-done people; the planners, coordinators, and negotiators. They perform a variety of
tasks in many different types of businesses and organizations.
Tom McCarthy/Index Stock
iStockphoto
Let's meet Claire Thielen, director of informatics at ARAMARK Healthcare; Ada Liu,
division manager for Li & Fung Trading Company; and Erin Hiller, food technologist at a
major chocolate manufacturer.
Claire Thielen is a health-care professional who specializes in decision support, process
improvement, and organizational performance. She facilitates interdisciplinary teams as
they pursue continuous quality improvement projects and analyzes methods and systems
for managing information. Her projects include determining staffing patterns and workflow
for computerized scheduling systems; consolidating policies, procedures, and practices for
hospital mergers; developing and implementing balanced scorecards and benchmarking
reports; designing clinical studies of new medication effectiveness; and conducting training
sessions on process mapping and analysis. Claire Thielen improves quality, productivity,
and information in the health-care industry.
© H. Mark Weidman Photography/Alamy
Ada Liu is a division manager for Li & Fung, a global sourcing company. She coordinates
global production and distribution for major players in the garment industry. For one
particular trouser order, she had the fabric woven in China (for their unique dyeing
process), chose fasteners from Hong Kong and Korea (for their durability), and sent the
raw materials to Guatemala for sewing (for their basic skills, low cost, and proximity to the
United States). If problems should arise. Liu can reroute the order to one of its 7,500
suppliers in 37 countries. Ada Liu is a supply chain expert for Li & Fung.
Erin Hiller is a food technologist at a major chocolate manufacturer. She supports product,
process, and cost improvement activities across various product lines in the manufacturing
facilities. She undertakes, initiates, and coordinates projects for determining process
capabilities, reducing waste and rework, and improving both quality and productivity. She
evaluates new and emerging technologies and determines whether they would be beneficial
to the product lines and manufacturing operations. Erin Hiller keeps operations up-to-date
and running smoothly for making chocolate.
Sources: Claire Theilen, LinkedIn, accessed January 10, 2010; Joanne Lee-Young,
“Furiously Fast Fashions.” The Industry Standard Magazine, (June 22, 2001); Job posting,
http://jobview.monster.com/Food-Technologist-Confectionery-Chocolate-Experience-Job,
accessed January 10, 2010 (fictional name).
Figure 1.2 Operations as the Technical Core
The four primary functional areas of a firm are marketing, finance, operations, and human
resources. As shown in Figure 1.2, for most firms, operations is the technical core or “hub”
of the organization, interacting with the other functional areas and suppliers to produce goods
and provide services for customers. For example, to obtain monetary resources for
production, operations provides finance and accounting with production and inventory data,
capital budgeting requests, and capacity expansion and technology plans. Finance pays
workers and suppliers, performs cost analyses, approves capital investments, and
communicates requirements of shareholders and financial markets. Marketing provides
operations with sales forecasts, customer orders, customer feedback, and information on
promotions and product development. Operations, in turn, provides marketing with
information on product or service availability, lead-time estimates, order status, and delivery
schedules. For personnel needs, operations relies on human resources to recruit, train,
evaluate, and compensate workers and to assist with legal issues, job design, and union
activities. Outside the organization operations interacts with suppliers to order materials or
services, communicate production and delivery requirements, certify quality, negotiate
contracts, and finalize design specifications.
As a field of study, operations brings together many disciplines and provides an integrated
view of business organizations. Operations managers are in demand in business, industry,
and government. Chief operating officers (COOs) run major corporations as shown in Figure
1.3, Vice-presidents of Operations and Supply Chain Management oversee scores of
departments, facilities, and employees. Typical jobs for new college graduates include
business process analyst, inventory analyst, project coordinator, unit supervisor, supply chain
analyst, materials manager, quality assurance specialist, production scheduler, and logistics
planner. Even if you do not pursue a career in operations, you'll be able to use the ideas you
learn in this course to organize work, ensure quality, and manage processes. Regardless of
your major, you can apply some aspect of operations management to your future career—as
did Mark, Nicole, John, Vignesh, Margie, and Anastasia who tell their stories in Figure 1.4
and the OM Dialogues dispersed throughout the text. Let's hear first from Mark Jackson,
marketing manager for Pizza Hut.
Figure 1.3 Sample Organizational Structure
Figure 1.4 How Is Operations Relevant to My Major?
MARK JACKSON, Marketing Manager for Pizza Hut
As regional marketing manager for Pizza Hut, I'm responsible for 21 stores. It's my job to
make sure each store is operating properly and, when new products come out, to see that
they are given the attention they deserve. I also coach managers and employees about their
job and their relationship with the customer.
You would think that a marketing manager's job would be concerned solely with
advertising, special promotions, store signage, customer service, and the like. But we also
deal with quality, forecasting, logistics, and other operational issues. Marketing and
operations are almost inseparable in services. We can come out with a new product and
spend mega bucks advertising it, but if the product is not made or delivered properly, all is
lost.
The most important aspect of quality is consistency—so that the customer gets the same
pizza at any Pizza Hut from whichever cook happens to be on shift. We have exact
standards and specifications for our products, and it's important that operating procedures
be followed.
Scheduling is somewhat of a headache because of staff turnover and individual limitations
on working hours. Some of that is alleviated in our new system where we allow employees
to request days off up to six months in advance. They can put requests into the system
when they clock in each day, and they can view upcoming schedules.
Our forecasting system keeps historical data on sales by hour and day of the week five
years back. Forecasts are weighted averages of past demand—usually 60% of the past two
weeks' sales and 40% of the past six weeks' sales. A manager can freeze the forecast and
make manual adjustments, such as increasing demand during a home football game
weekend or when a local festival is under way. Managers can also enter notes into the
system when unusual occurrences affect demand, like a snowstorm. When the forecast is
set, it generates a labor plan for the week, along with prep plans for salad, dough,
breadsticks, and so forth. The labor plan just specifies the number of workers needed; it is
up to the manager to do the detailed scheduling of individuals.
After quality, it's all about speed of delivery—whether to the customer's table or to the
customer's home. We have initiatives such as Ready for Revenue where we pre-sauce and
pre-cheese in anticipation of customer orders, and Aces in Their Places where we make
sure the best people are scheduled and ready to go for peak demand periods. As for
delivery, we keep track of percent of deliveries under 39 minutes and percent of deliveries
to promise. We found we could significantly reduce the number of drivers needed (and
keep the same customer satisfaction numbers] by promising delivery within 39 minutes
rather than 30. We also are more efficient now that dispatching divides our delivery areas
into delivery pods and uses computerized estimates of transit time.
Now that you are aware of how operations might relate to your interests, let's take a brief
look at how the field of OM has evolved to its present state.
THE EVOLUTION OF OPERATIONS AND SUPPLY CHAIN
MANAGEMENT
Although history is full of amazing production feats—the pyramids of Egypt, the Great Wall
of China, the roads and aqueducts of Rome—the widespread production of consumer
goods—and thus, operations management—did not begin until the Industrial Revolution in
the 1700s. Prior to that time, skilled craftspersons and their apprentices fashioned goods for
individual customers from studios in their own homes. Every piece was unique, hand-fitted,
and made entirely by one person, a process known as craft production. Although craft
production still exists today, the availability of coal, iron ore, and steam power set into
motion a series of industrial inventions that revolutionized the way work was performed.
Great mechanically powered machines replaced the laborer as the primary factor of
production and brought workers to a central location to perform tasks under the direction of
an “overseer” in a place called a “factory.” The revolution first took hold in textile mills,
grain mills, metalworking, and machine-making facilities.
Craft production:
the process of handcrafting products or services for individual customers.
Around the same time, Adam Smith's Wealth of Nations (1776) proposed the division of
labor, in which the production process was broken down into a series of small tasks, each
performed by a different worker. The specialization of the workers on limited, repetitive
tasks allowed them to become very proficient at those tasks and further encouraged the
development of specialized machinery.
Division of labor:
dividing a job into a series of small tasks each performed by a different worker.
The introduction of interchangeable parts by Eli Whitney (1790s) allowed the manufacture
of firearms, clocks, watches, sewing machines, and other goods to shift from customized
one-at-a-time production to volume production of standardized parts. This meant the factory
needed a system of measurements and inspection, a standard method of production, and
supervisors to check the quality of the worker's production.
Interchangeable parts:
the standardization of parts initially as replacement parts enabled mass production.
Advances in technology continued through the 1800s. Cost accounting and other control
systems were developed, but management theory and practice were virtually nonexistent.
In the early 1900s an enterprising laborer (and later chief engineer) at Midvale Steel Works
named Frederick W. Taylor approached the management of work as a science. Based on
observation, measurement, and analysis, he identified the best method for performing each
job. Once determined, the methods were standardized for all workers, and economic
incentives were established to encourage workers to follow the standards. Taylor's
philosophy became known as scientific management. His ideas were embraced and
extended by efficiency experts Frank and Lillian Gilbreth, Henry Gantt, and others. One of
Taylor's biggest advocates was Henry Ford.
Scientific management:
the systematic analysis of work methods.
Henry Ford applied scientific management to the production of the Model T in 1913 and
reduced the time required to assemble a car from a high of 728 hours to 1 ½ hours. A Model
T chassis moved slowly down a conveyor belt with six workers walking alongside it, picking
up parts from carefully spaced piles on the floor and fitting them to the chassis.1 The short
assembly time per car allowed the Model T to be produced in high volumes, or “en masse,”
yielding the name mass production.
Mass production:
the high-volume production of a standardized product for a mass market.
American manufacturers became adept at mass production over the next 50 years and easily
dominated manufacturing worldwide. The human relations movement of the 1930s, led by
Elton Mayo and the Hawthorne studies, introduced the idea that worker motivation, as well
as the technical aspects of work, affected productivity. Theories of motivation were
developed by Frederick Herzberg, Abraham Maslow, Douglas McGregor, and others.
Quantitative models and techniques spawned by the operations research groups of World
War II continued to develop and were applied successfully to manufacturing and services.
Computers and automation led still another upsurge in technological advancements applied
to operations. These events are summarized in Table 1.1.
From the Industrial Revolution through the 1960s, the United States was the world's greatest
producer of goods and services, as well as the major source of managerial and technical
expertise. But in the 1970s and 1980s, industry by industry, U.S. manufacturing superiority
was challenged by lower costs and higher quality from foreign manufacturers, led by Japan.
Several studies published during those years confirmed what the consumer already knew—
U.S.-made products of that era were inferior and could not compete on the world market.
Early rationalizations that the Japanese success in manufacturing was a cultural phenomenon
were disproved by the successes of Japanese-owned plants in the United States, such as the
Matsushita purchase of a failing Quasar television plant in Chicago from Motorola. Part of
the purchase contract specified that Matsushita had to retain the entire hourly workforce of
1000 persons. After only two years, with the identical workers, half the management staff,
and little or no capital investment, Matsushita doubled production, cut assembly repairs from
130% to 6%, and reduced warranty costs from $16 million a year to $2 million a year. You
can bet Motorola took notice, as did the rest of U.S. industry.
The quality revolution brought with it a realization that production should be tied to
consumer demand. Product proliferation, shortened product lifecycles, shortened product
development times, changes in technology, more customized products, and segmented
markets did not fit mass production assumptions. Using a concept known as just-in-time,
Toyota changed the rules of production from mass production to lean production, a system
that prizes flexibility (rather than efficiency) and quality (rather than quantity).
Quality revolution:
an emphasis on quality and the strategic role of operations.
Lean production:
an adaptation of mass production that prizes quality and flexibility.
The renewed emphasis on quality and the strategic importance of operations made some U.S.
companies competitive again. Others continued to stagnate, buoyed temporarily by the
expanding economies of the Internet era and globalization. Productivity soared as return on
investment in information technology finally came to fruition. New types of businesses and
business models emerged, such as Amazon, Google, and eBay, and companies used the
Internet to connect with customers and suppliers around the world. The inflated expectations
of the dot-com era came to an end and, coupled with the terrorist attacks of 9-11 and their
aftermath, brought many companies back to reality, searching for ways to cut costs and
survive in a global economy. They found relief in the emerging economies of China and
India, and began accelerating the outsourcing of not only goods production, but services,
such as information technology, call centers, and other business processes. The outsourcing
of business processes brought with it a new awareness of business-to-business (B2B) services
and the need for viewing services as a science.
Table 1.1
Historical Events in Operations Management
Era
Events/Concepts
Dates
Originator
Industrial Revolution
Steam engine
1769
James Walt
Division of labor
1776
Adam Smith
Interchangeable parts
1790
Eli Whitney
Scientific Management
Principles of scientific management
1911
Frederick W. Taylor
Time and motion studies
1911
Frank and Lillian Gilbreth
Activity scheduling chart
1912
Henry Gantt
Moving assembly line
1913
Henry Ford
Human Relations
Hawthorne studies
1930
Elton Mayo
Motivation theories
1940s
Abraham Maslow
1950s
Frederick Herzberg
1960s
Douglas McGregor
Operations Research
Linear programming
1947
George Dantzig
Digital computer
1951
Remington Rand
Stimulation, waiting line theory, decision theory
1950s
Operations research groups
PERT/CPM
1960s
MRP, EDI, EFT, CIM
1970s
Joseph Orlicky, IBM, and others
Quality Revolution
JIT (just-in-time)
1970s
Taiichi Ohno (Toyota)
TQM (total quality management)
1980s
W. Edwards Deming, Joseph Juran
Strategy and operations
Wickham Skinner, Robert Hayes
Reengineering
1990s
Michael Hammer, James Champy
Six Sigma
1990s
GE, Motorola
Internet Revolution
Internet, WWW
1990s
ARPANET, Tim Berners-Lee
ERP, supply chain management
SAP, i2 Technologies, ORACLE, DELL
E-commerce
2000s
Amazon, Yahoo, eBay, Google and others
Globalization
World Trade Organization
1990s
China, India
European Union
2000s
Emerging economics
Global supply chains
Outsourcing
Service Science
Green Revolution
Global warming
Today
Numerous
An Inconvenient Truth
scientists, statesmen, goverments
KYOTO
• Internet Exercises
With more and more activities taking place outside the enterprise in factories, distribution
centers, offices and stores overseas, managers needed to develop skills in coordinating
operations across a global supply chain. The field of supply chain management was born to
manage the flow of information, products, and services across a network of customers,
enterprises, and supply chain partners. In Figure 1.1, we depicted operations as a
transformation process. Extending that analogy in Figure 1.5, supply chain management
concentrates on the input and output sides of transformation processes. Increasingly,
however, as the transformation process is performed by suppliers who may be located around
the world, the supply chain manager is also concerned with the timeliness, quality, and
legalities of the supplier's operations.
Supply chain management:
managing the flow of information, products, and services across a network of
customers, enterprises, and suppliers.
Figure 1.5 Supply Chain Management
The era of globalization was in full swing in 2008 when a financial crisis brought on by risky
loans, inflated expectations, and unsavory financial practices brought the global economy to
a standstill. Operations management practices based on assumptions of growth had to be
reevaluated for declining markets and resources. At the same time, concerns about global
warming (worldwide) and health-care operations (domestically) ramped up investment and
innovation in those fields.
It is likely that the next era in the evolution of OM will be the Green Revolution, which some
companies and industries are embracing wholeheartedly, while others are hesitant to accept.
We discuss green initiatives at length later in the text. The next section presents a brief
discussion of globalization.
The Green Revolution is the next era in OM.
1
David Halberstam, The Reckoning (New York: William Morrow, 1986), pp. 79-81.
GLOBALIZATION
Two thirds of today's businesses operate globally through global markets, global operations,
global financing, and global supply chains. Globalization can take the form of selling in
foreign markets, producing in foreign lands, purchasing from foreign suppliers, or partnering
with foreign firms. Companies “go global” to take advantage of favorable costs, to gain
access to international markets, to be more responsive to changes in demand, to build reliable
sources of supply, and to keep abreast of the latest trends and technologies.
• Internet Exercises
Falling trade barriers and the Internet paved the way for globalization. The World Trade
Organization (WTO) has opened up the heavily protected industries of agriculture, textiles,
and telecommunications, and extended the scope of international trade rules to cover
services, as well as goods. The European Union (EU) required that strict quality and
environmental standards be met before companies can do business with member countries.
Strategic alliances, joint ventures, licensing arrangements, research consortia, supplier
partnerships, and direct marketing agreements among global partners have proliferated.
Figure 1.6 Hourly Compensation Costs for Production
Workers [in U.S. Dollars]
Source: Bureau of Labor Statistics, International Comparisons of Hourly Compensation
Costs in Manufacturing 2007. Washington, DC: March 26, 2009, p. 23.
Figure 1.6 shows the hourly wage rates in U.S. dollars for production workers in nine
countries. Wage rates in Norway are the highest at $48.56 an hour, with comparable rates in
Denmark. The United States and Japan pay workers $24.59 and $19.75 an hour, respectively,
while China and Sri Lanka exhibit the lowest wage rates of $0.81 and $0.61 an hour. To put
the wage differentials in perspective, a U.S. worker receives roughly the equivalent sum of
money for working one hour as a Sri Lankan worker earns in a 40-hour week ($24.40).
China's wage rate is $32.40 a week. Not surprisingly, much of the world has moved its
manufacturing to Asia, in particular to the large and populous country of China.
THE CHINA FACTOR
China accounts for 20% of the world's population and is the world's largest manufacturer,
employing more production workers than the Unites States, United Kingdom, Germany,
Japan, Italy, Canada, and France combined. Its 1.3 billion people represent not only an
immense labor market, but a huge consumer market as well. As China's industrial base
multiplies, so does its need for machinery and basic materials, and as more companies
move to China, so do their suppliers and their supplier's suppliers. Although initially the
preferred location for the production of low-tech goods such as toys, textiles, and furniture,
China has become a strategic manufacturing base for nearly every industry worldwide.
The scale of manufacturing in China is mind-boggling. For example, Foxconn (the trade
name of Taiwan's Hon Hai Precision Industry Company) has two enormous industrial
complexes in mainland China. The Guangdong Province site employs and houses
approximately 270,000 workers, with its own dormitories, restaurants, hospital, police
force, chicken farm, and soccer stadium. There are 40 separate production facilities “on
campus,” each dedicated to one of its major customers such as Apple, Dell, Motorola,
Sony, Nintendo, and HP. Foxconn is the world's largest electronics manufacturer and
China's largest exporter. It also represents a shorter supply chain because it makes
components as well as assembles final products. Currently. Foxconn is making a bid to
enter the retail market in China and is expanding production into Mexico to better serve the
U.S. market.
Figure 1.7 shows the gross domestic product (GDP) per capita for the United State and the
largest emerging economies. China's GDP per capita is about 12% of the U.S. level.
However, as shown in Figure 1.8, China's trade as a percent of GDP is almost triple that of
the United States. Having a producer economy and healthy trade balance is an advantage in
a global slump. China has problems with pollution, quality, and corruption but is steering
its way out of the recession and entering into what it calls “the decade of China.”
Figure 1.7
GDP per Capita
Source: U.S. Department of Labor, A Chartbook of International Labor Comparisons,
Washington, DC: March 2009, p. 39.
Figure 1.8
Trade in Goods as a Percent of GDP
Source: U.S. Department of Labor, A Chartbook of International Labor Comparisons,
Washington, DC: March 2009, p. 43.
With over 18 million people, 5,000 skyscrapers, and the world's largest deep sea
container port, Shanghai is China's largest city, and the financial heart of the
burgeoning economy.
• Virtual Tour
While China's manufacturing prowess may seem unbeatable, many companies have sought
to reduce the risk of sourcing from only one country by expanding trade relationships with
other low-cost countries, particularly India, Bangladesh, Pakistan, Vietnam, and to a lesser
extent, Indonesia and Eastern Europe. Because of its proximity to the United States,
Mexico and several Central American countries are popular sources for shorter lifecycle
products.
Whether or not a company decides to do business with China, every company must
consider the implications of the “China factor” on their profitability and competitive
position. Managing global operations and quality in a far-reaching supply chain is an added
challenge for operations and supply chain managers. Keeping domestic production
competitive is an even bigger challenge. The New Balance “Along the Supply Chain” box
shows how one company has met that challenge.
ALONG THE SUPPLY CHAIN
Balance
The Balancing Act at New
Boston-based New Balance Corporation is a nonconformist in many ways. It refuses to
hire superstars to endorse its product, it shuns style in favor of performance, it holds fast
to its emphasis on running shoes, and it is committed to manufacturing at least some of
its product in the United States. New Balance currently has five factories in the United
States, the last of its kind of makers of athletic shoes. It also has wholly-owned
subsidiaries in 13 countries and a number of licensees, joint ventures, and distributors all
over the globe.
Of its domestic production, owner Jim Davis says “it's part of the company's culture to
design and manufacture here.” Producing close to their customers also allows quick
turnarounds on new designs and order fulfillment. At New Balance's factory in
Norridgewock, Maine, well-trained employees make $14 an hour working in small teams
performing half-a-dozen different jobs and switching tasks every few minutes. They
operate computerized sewing equipment and automated stitchers that allow one person to
do the work of 20.
New Balance is able to remain competitive at home by creatively adapting new
technologies to shoemaking and constantly training their employees in teamwork and
technical skills. Employees start with 22 hours of classroom training on teamwork and
get constant training on the factory floor. They work in teams of five or six, sharing tasks
and helping one another to make sure everything gets done. Many of the ideas for process
improvement come from shop floor workers.
Says Davis, “In Asia, their labor is so inexpensive that they waste it. Ours is so dear that
we come up with techniques to be very efficient.” Borrowing technology from apparel
manufacturers, New Balance purchased 70 see-and-sew machines for $100,000 each and
set up on-site machine shops to grind the 30 templates needed for a typical shoe. Making
each set of templates takes about a week, but they allow workers to produce a pair of
shoes in 24 minutes, versus 3 hours in China. Labor cost per shoe is $4 an hour in Maine
compared to $1.30 in China. The $2.70 labor cost differential is a manageable 4% of the
$70 selling price.
Staying involved with the manufacturing process helps New Balance develop better
designs, improve quality, and innovate their processes, capabilities the company would
lose if it outsourced all of its production. But staying in one country is not advantageous
either, especially when a 10% market share of athletic shoes in China would be the
equivalent of 100 million customers. New Balance relaunched a China strategy to prepare
for the 2008 Beijing Olympic Games. To sell in China, it is necessary to produce there.
The company's earlier foray into outsourcing on the mainland was not a good experience.
In one of the most notorious cases of counterfeiting. New Balance's own supplier flooded
the market with unauthorized New Balance footwear and continued to do so even after
the contact was canceled. New Balance spent millions of dollars in legal fees and lost
millions more in sales without a satisfactory resolution to the problem. Today, the
company has reduced the number of Asian suppliers and monitors them more closely.
New Balance continues the balancing act between domestic and foreign production, and
strives to produce closer to its markets, wherever in the world they might be.
Think about the differences between New Balance and Nike. How has each company
chosen to compete? What types of shoes might New Balance want to make in its own
factories? What types of shoes might it outsource?
Sources: Gabriel Kahn. “A Sneaker Maker Says China Partner Became Its Rival,” The
Wall Street Journal (December 19, 2002), pp. A1. A8; “New Balance Shoots for Second
in Local Market,” China Daily (November 13, 2003); “A Balancing Act,” Business and
Industry (February 11, 2004), p. 22; Anne Thompson, “Companies Buck the Outsorcing
Trend,” NBC News (May 12, 2006); New Balance Web site,
http://www.newbalance.com/usa/
INDIA, THE WORLD'S SERVICE PROVIDER
Although we may think of globalization more in the context of products than services, there
has been a dramatic rise in the global outsourcing of services as well. It began with backoffice work such as accounting, claims processing, and computer programming. Now it
extends to call centers, brokerage firms, financial analysis, research and development,
engineering, medical diagnosis, architectural design, and more advanced work in
information technology. As much as China is known as the world's manufacturer, India is
renowned for its export of services.
India has an enormous resource of highly skilled engineers, scientists, and technically
trained workers available at less than half the cost of those located in developed countries.
In 2009, India exported $47 billion in IT services, a number that is expected to reach $200
billion by 2020. Indian companies, such as WIPRO, Infosys, and Tata Consultancy
Services, are world leaders in software development and business processes, with plenty of
room to expand. Some of that expansion is taking place in client countries, such as the
United States. At the same time, multinational companies are setting up shop and
expanding in India. IBM, the largest multinational company in India, employs 70,000 IT
workers and is hiring an additional 5,000 workers in 2010.
China and India are not the only popular outsourcing venues. Increased outsourcing
competition comes from other low-cost countries such as the Philippines, Vietnam,
Malaysia, Mexico, Brazil, and Eastern Europe. In addition, many companies are bringing
their supply chain closer to home, a concept known as near-sourcing.
• Internet Exercises
All this means that the dynamic nature of global competition is accelerating, and
companies need to fight harder to remain competitive. Operations and supply chain
managers are an important part of that fight, whether it's maintaining overseas operations,
coordinating supply chains, negotiating contracts, or monitoring quality. In the next
section, we explore the concepts of competitiveness, and its surrogate, productivity.
PRODUCTIVITY AND COMPETITIVENESS
A global marketplace for products and services means more customers and more intense
competition. In the broadest terms, we speak of competitiveness in reference to other
countries rather than to other companies. That's because how effectively a nation competes in
the global marketplace, affects the economic success of the nation and the quality of life for
its citizens. The OECD (Organization for Economic Cooperation and Development) defines
competitiveness as “the degree to which a nation can produce goods and services that meet
the test of international markets while simultaneously maintaining or expanding the real
incomes of its citizens.” The most common measure of competitiveness is productivity.
Increases in productivity allow wages to grow without producing inflation, thus raising the
standard of living. Productivity growth also represents how quickly an economy can expand
its capacity to supply goods and services.
Competitiveness:
the degree to which a nation can produce goods and services that meet the test of
international markets.
Productivity is calculated by dividing units of output by units of input.
Productivity:
the ratio of output to input.
Output can be expressed in units or dollars in a variety of scenarios, such as sales made,
products produced, customers served, meals delivered, or calls answered. Single-factor
productivity compares output to individual inputs, such as labor hours, investment in
equipment, material usage, or square footage. Multifactor productivity relates output to a
combination of inputs, such as (labor + capital) or (labor + capital + energy + materials).
Capital can include the value of equipment, facilities, inventory, and land. Total factor
productivity compares the total quantity of goods and services produced with all the inputs
used to produce them. These productivity formulas are summarized in Table 1.2.
Table 1.2
Measures of Productivity
Example 1.1
Calculating Productivity
Osborne Industries is compiling the monthly productivity report for its Board of Directors.
From the following data, calculate (a) labor productivity, (b) machine productivity, and (c)
the multifactor productivity of dollars spent on labor, machine, materials, and energy. The
average labor rate is $15 an hour, and the average machine usage rate is $10 an hour.
Units produced
100,000
Labor hours
10,000
Machine hours
5,000
Cost of materials
$35,000
Cost of energy
$15,000
Solution
(a)
(b)
(c)
The Excel solution to this problem is shown in Exhibit 1.1.
• Animated Demo Problem
Exhibit 1.1 Osborne Industries
• Excel File
Figure 1.9 Productivity Growth, 2008 (output per Labor
hours)
Source: U.S. Bureau of Labor Statistics. International Comparisons of Manufacturing
Productivity and Unit Labor Costs—2008, Washington, DC: October 22, 2009, p. 3.
The most common input in productivity calculations is labor hours. Labor is an easily
identified input to virtually every production process. Productivity is a relative measure.
Thus, productivity statistics provided in government reports typically measure percent
changes in productivity from month to month, quarter to quarter, year to year, or over a
number of years.
Productivity statistics can be misleading. Examining the formula for productivity,
output/input, it becomes apparent that productivity can be increased in different ways. For
example, a country or firm may increase productivity by decreasing input faster than output.
Thus, although the company may be retrenching, its productivity is increasing. Seldom is this
avenue for increasing productivity sustainable.
Figure 1.9 shows the growth rate in productivity for select countries for 2008, a year of
global recession. Only five countries exhibited positive growth rates, led by Korea and the
United States with increases of 1.2%. Examining the outputs and inputs more closely in
Figure 1.10, we find that Korea and the United States achieved those increases in very
different ways. Korea saw small increases in both its output and the input required to produce
that output. The recession in the United States caused a decrease in both output and input;
however, the cut in input (i.e., labor hours) was more severe, thereby producing a slight
increase in productivity.
Figure 1.10
Percent Change in Input and Output, 2008
Source: U.S. Bureau of Labor Statistics. International Comparisons of Manufacturing
Productivity and Unit Labor Costs—2008, Washington, DC. October 22, 2009, p. 3.
Productivity statistics also assume that if more input were available, output would increase at
the same rate. This may not be true, as there may be limits to output other than those on
which the productivity calculations are based. Furthermore, productivity emphasizes output
produced, not output sold. If products produced are not sold, inventories pile up and
increases in output can actually accelerate a company's decline.
As the business world becomes more competitive, firms must find their own path to
sustainable competitive advantage. Effectively managed operations are important to a firm's
competitiveness. How a firm chooses to compete in the marketplace is the subject of the next
section: Strategy and Operations.
STRATEGY AND OPERATIONS
Strategy is how the mission of a company is accomplished. It unites an organization,
provides consistency in decisions, and keeps the organization moving in the right direction.
Operations and supply chain management play an important role in corporate strategy.
Strategy:
provides direction for achieving a mission.
As shown in Figure 1.11, the strategic planning process involves a hierarchy of decisions.
Senior management, with input and participation from different levels of the organization,
develops a corporate strategic plan in concurrence with the firm's mission and vision,
customer requirements (voice of the customer), and business conditions (voice of the
business). The strategic plan focuses on the gap between the firm's vision and its current
position. It identifies and prioritizes what needs to be done to close the gap, and it provides
direction for formulating strategies in the functional areas of the firm, such as marketing,
operations, and finance. It is important that strategy in each of the functional areas be
internally consistent as well as consistent with the firm's overall strategy.
Strategy formulation consists of five basic steps:
1.
Defining a primary task
2.
Assessing core competencies
3.
Determining order winners and order qualifiers
4.
Positioning the firm
5.
Deploying the strategy
PRIMARY TASK
The primary task represents the purpose of a firm—what the firm is in the business of
doing. It also determines the competitive arena. As such, the primary task should not be
defined too narrowly. For example, Norfolk Southern Railways is in the business of
transportation, not railroads. Paramount is in the business of communication, not making
movies. Amazon's business is providing the fastest, easiest, and most enjoyable shopping
experience, while Disney's is making people happy! The primary task is usually expressed
in a firm's mission statement.
Primary task:
what the firm is in the business of doing.
Figure 1.11
Strategic Planning
Mission statements clarify what business a company is in—for Levi Strauss it's “branded
casual apparel”; for Intel it's supplying “building blocks to the Internet economy”; for
Binney & Smith (Crayola) it's “colorful visual expression”; for Currency Doubleday it's
“ideas that link business with life's meaning”; for eBay it's “trading communities”; and for
Merck it's “preserving and improving human life.” Mission statements are the
“constitution” for an organization, the corporate directive, but they are no good unless they
are supported by strategy and converted into action. Thus, the next step in strategy
formulation is assessing the core competencies of a firm.
• Internet Exercises
CORE COMPETENCIES
Core competency is what a firm does better than anyone else, its distinctive competence. A
firm's core competence can be exceptional service, higher quality, faster delivery, or lower
cost. One company may strive to be first to the market with innovative designs, whereas
another may look for success arriving later but with better quality.
Core competency:
what the firm does better than anyone else.
Based on experience, knowledge, and know-how, core competencies represent sustainable
competitive advantages. For this reason, products and technologies are seldom core
competencies. The advantage they provide is short-lived, and other companies can readily
purchase, emulate, or improve on them. Core competencies are more likely to be processes,
a company's ability to do certain things better than a competitor. Thus, while a particular
product is not a core competence, the process of developing new products is. For example,
while the iPod was a breakthrough product, it is Apple's ability to turn out hit product after
hit product (e.g., iPhone, iPad, MacBook, etc.) that gives it that competitive advantage.
Core competencies are not static. They should be nurtured, enhanced, and developed over
time. Close contact with the customer is essential to ensuring that a competence does not
become obsolete. Core competencies that do not evolve and are not aligned with customer
needs can become core rigidities for a firm. Walmart and Dell, seemingly unstoppable
companies in their field, went astray when they failed to update their competencies to
match changes in customer desires. For Dell, the low cost and mail order delivery of
computers did not match the customer's desire to see and test computers before purchase,
or to receive personalized after-purchase customer service. For Walmart, the obsession
with lower costs led to image problems of a behemoth corporation with little regard for
employees, suppliers, or local communities. Customers preferred to pay slightly more for
the better designed products of more community-involved companies like Target. To avoid
these problems, companies need to continually evaluate the characteristics of their products
or services that prompt customer purchase; that is, the order qualifiers and order winners.
ORDER WINNERS AND ORDER QUALIFIERS
A firm is in trouble if the things it does best are not important to the customer. That's why
it's essential to look toward customers to determine what influences their purchase
decision.
Order qualifiers are the characteristics of a product or service that qualify it to be
considered for purchase by a customer. An order winner is the characteristic of a product
or service that wins orders in the marketplace—the final factor in the purchasing decision.
For example, when purchasing a DVD or Blu-ray player, customers may determine a price
range (order qualifier) and then choose the product with the most features (order winner)
within that price range. Or they may have a set of features in mind (order qualifiers) and
then select the least expensive player (order winner) that has all the required features.
Order qualifiers:
what qualifies an item to be considered for purchase.
Order winner:
what wins the order.
Order winners and order qualifiers can evolve over time, just as competencies can be
gained and lost. Japanese and Korean automakers initially competed on price but had to
ensure certain levels of quality before the U.S. consumer would consider their product.
Over time, the consumer was willing to pay a higher price (within reason) for the assurance
of a superior-quality Japanese car. Price became a qualifier, but quality won the orders.
Today, high quality, as a standard of the automotive industry, has become an order
qualifier, and innovative design or superior gas mileage wins the orders.
Figure 1.12
Order Winners and Order Qualifiers
Source: Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan Betts,
Operations and Process Management, Prentice Hall, 2006, p. 47.
As shown in Figure 1.12, order qualifiers will only take a firm so far. The customer expects
the qualifiers, but is not “wowed” by them. For example, a low price might be a qualifier,
but reducing the price further may not win orders if the features or design are not adequate.
At a minimum, a firm should meet the qualifiers. To excel, the firm needs to develop
competencies that are in tune with the order winners. Marketing helps to identify these
qualifiers and winners. Oftentimes, these characteristics are in the purview of operations
and supply chain management, such as cost, speed to the market, speed of delivery, or
customization. Other characteristics such as product or service design are supported by
operations and supply chain management, but are not completely under their control.
POSITIONING THE FIRM
No firm can be all things to all people. Strategic positioning involves making choices—
choosing one or two important things on which to concentrate and doing them extremely
well. A firm's positioning strategy defines how it will compete in the marketplace—what
unique value it will deliver to the customer. An effective positioning strategy considers the
strengths and weaknesses of the organization, the needs of the marketplace, and the
positions of competitors.2
Positioning:
how the firm chooses to compete.
Let's look at firms that have positioned themselves to compete on cost, speed, quality, and
flexibility.
Eliminate all waste.
Competing on Cost
Companies that compete on cost relentlessly pursue the elimination of all waste. In the
past, companies in this category produced standardized products for large markets. They
improved yield by stabilizing the production process, tightening productivity standards,
and investing in automation. Today, the entire cost structure is examined for reduction
potential, not just direct labor costs. High-volume production and automation may or may
not provide the most cost-effective alternative. A lean production system provides low
costs through disciplined operations.
2
These factors can be depicted in a SWOT matrix, which lists the current strengths
(S) and weaknesses (W) internal to the company, and the opportunities (O) and threats
(T) external to the company.
Competing on Speed
More than ever before, speed has become a source of competitive advantage. The
Internet has conditioned customers to expect immediate response and rapid product
shipment. Service organizations such as McDonald's, LensCrafters, and Federal Express
have always competed on speed. Now manufacturers are discovering the advantages of
time-based competition, with build-to-order production and efficient supply chains. In the
fashion industry where trends are temporary, Gap's six-month time-to-market can no
longer compete with the nine-day design-to-rack lead time of Spanish retailer, Zara.
Speed:
Fast moves, fast adaptations, tight linkages.
ALONG THE SUPPLY CHAIN Trader Joe's Unique Strategy
There are two basic approaches to strategy. Do what everyone else does, only better; or
do something entirely different. Trader Joe's has chosen the “differentiation” strategy.
TJ is a specialty grocery store chain located primarily in urban areas that stocks unusual
goods at value prices. The stores are small, cramped, and low-rent; not at all what you
would expect for upscale shoppers. With only about 10% of the stock of a traditional
supermarket, selection is limited; but what a selection it is—unusual recipes, high
quality ingredients, imported wines and cheeses, health foods, exotic products from
around the world, and private label specialties. The stock is constantly changing, with
new products being brought in as others are phased out. This creates a “treasure hunt”
type atmosphere that encourages frequent visits from loyal customers. The stores are
fun and quirky, too. The staff gives excellent, if irreverent, service with the feel of a
mom-and-pop store (only Mom and Pop wear Hawaiian shirts).
Behind this strategy is an operations and supply chain network that is cost conscious
and efficient. Product selection is carefully tended to. Every item sold in TJ is tested,
tasted, or used by one of its buyers or employees. TJ stocks fresh items only in season
and does not worry about running out of items or replenishing stock within a certain
time frame. Scarcity helps to create the adventuresome atmosphere. The supply chain is
simpler without national brands and general merchandise to contend with, but it does
involve more legwork for TJ buyers to personally find, vet, and purchase the
merchandise to be sold. This sometimes involves making single purchases of large
amounts (often sell-outs) or traveling across the globe to find those special items.
The stores themselves are rustic, with hand-painted signs and chalkboards to announce
daily specials. Store managers are called captains; assistant managers are known as first
mates. Company policy is for full-time employees to make at least the median
household income for their communities. Store captains can make six figures annually.
Turnover among full-time crew is a mere 4%. Seventy percent of the crew are parttime; part-timers can earn health-care benefits, a draw for creative types who wouldn't
normally seek supermarket jobs.
TJ doesn't accept coupons, issue loyalty cards, or feature weekly sales. Instead it adopts
an everyday, low-price strategy, with the highest margin in the industry. Advertising is
local and folksy. The TJ model attempts to make grocery shopping an enriching
experience rather than a weekly chore to be avoided.
TJ has a well-crafted strategy, matching the product offerings to its customer base,
creating a culture of customer service and excitement, and building an operations and
supply chain network that provides value (and a treasure, perhaps) for the customer.
1. How is TJ able to offer upscale products at bargain prices?
2. How does TJ compare with Whole Foods or Costco?
3. Is TJ strategy scalable? In other words, as the company grows, will it be able to
maintain the same focused strategy?
Sources: Christopher Palmeri, “Trader Joe's Recipe for Success.” BusinessWeek
(February 21, 2008); Irwin Speizer, “The Grocery Chain That Shouldn't Be.” Fast
Company (December 19, 2007); Len Lewis. The Trader Joe's Adventure; A Unique
Approach to Business into a Retail and Cultural Phenomenon (Chicago: Dearborn
Trade Publication, 2005).
Competing on Quality
Most companies approach quality in a defensive or reactive mode; quality is confined to
minimizing defect rates or conforming to design specifications. To compete on quality,
companies must view it as an opportunity to please the customer, not just a way to avoid
problems or reduce rework costs.
Quality:
a way to please the customer.
To please the customer, one must first understand customer attitudes toward and
expectations of quality. One good source is the American Customer Satisfaction Index
compiled each year by the American Society for Quality and the National Quality
Research Center. Examining recent winners of the Malcolm Baldrige National Quality
Award and the criteria on which the award are based also provides insight into companies
that compete on quality.
The Ritz-Carlton Hotel Company is a Baldrige Award winner and a recognized symbol
of quality. The entire service system is designed to understand the individual expectations
of more than 500,000 customers and to “move heaven and earth” to satisfy them. Every
employee is empowered to take immediate action to satisfy a guest's wish or resolve a
problem. Processes are uniform and well defined. Teams of workers at all levels set
objectives and devise quality action plans. Each hotel has a quality leader who serves as a
resource and advocate for the development and implementation of those plans.
• Virtual Tour
Competing on Flexibility
Marketing always wants more variety to offer its customers. Manufacturing resists this
trend because variety upsets the stability (and efficiency) of a production system and
increases costs. The ability of manufacturing to respond to variation has opened up a new
level of competition. Flexibility has become a competitive weapon. It includes the ability
to produce a wide variety of products, to introduce new products and modify existing
ones quickly, and to respond to customer needs.
Flexibility:
the ability to adjust to changes in product mix, production volume, or design.
National Bicycle Industrial Company fits bicycles to exact customer measurements.
Bicycle manufacturers typically offer customers a choice among 20 or 30 different
models. National offers 11,231,862 variations and delivers within two weeks at costs
only 10% above standard models. Computerized design and computer-controlled
machinery allow customized products to be essentially mass produced. The popular term
for this phenomenon is mass customization.
Mass customization:
the mass production of customized products.
STRATEGY DEPLOYMENT
“The difficulty is not in knowing what to do. It's doing it,” said Kodak's former CEO,
George Fisher. Implementing strategy can be more difficult than formulating strategy.
Strategies unveiled with much fanfare may never be followed because they are hard to
understand, too general, or unrealistic. Strategies that aim for results five years or so down
the road mean very little to the worker who is evaluated on his or her daily performance.
Different departments or functional areas in a firm may interpret the same strategy in
different ways. If their efforts are not coordinated, the results can be disastrous.
Consider Schlitz Brewing Company, whose strategy called for reduced costs and increased
efficiency. Operations achieved its goals by dramatically shortening its brewing cycle—
and, in the process, lost 6 of every 10 customers when the clarity and taste of the beer
suffered. The efficiency move that was to make the company the most profitable in its
industry instead caused its stock value to plummet from $69 per share to $5 per share.
Schiltz has since been sold to Pabst Brewing Company who combed through company
documents and interviewed retired Schlitz brewmasters and taste-testers to derive and
reintroduce the original 1960's “with gusto” formula.
Strategy deployment converts a firm's positioning strategy and resultant order winners and
order qualifiers into specific performance requirements.
Companies struggling to align day-to-day decisions with corporate strategy have found
success with two types of planning systems—policy deployment and the balanced
scorecard.
Policy Deployment
Policy deployment, also known as hoshin planning, is adapted from Japan's system of
hoshin kanri, which is roughly translated from Japanese as “shining metal pointing
direction”—a compass.
Policy deployment tries to focus everyone in an organization on common goals and
priorities by translating corporate strategy into measurable objectives throughout the
various functions and levels of the organization. As a result, everyone in the organization
should understand the strategic plan, be able to derive several goals from the plan, and
determine how each goal ties into their own daily activities.
Policy deployment:
translates corporate strategy into measurable objectives.
Is your company pointed in one direction? AT&T uses the analogy of migrating geese
to explain the concept of policy deployment. Naturalists believe the instinctive Vformation allows the geese to follow one leader and migrate in a cohesive unit toward
their destination. Policy deployment does the same thing—it enables business leaders
to mobilize the organization toward a common destination, aligning all employees
behind a common goal and a collective wisdom.
Suppose the corporate strategic plan of competing on speed called for a reduction of 50%
in the length of the supply chain cycle. Senior management from each functional area
would assess how their activities contribute to the cycle, confer on the feasibility of
reducing the cycle by 50%, and agree on each person's particular role in achieving the
reduction. Marketing might decide that creating strategic alliances with its distributors
would shorten the average time to release a new product. Operations might try to reduce
its purchasing and production cycles by reducing its supplier base, certifying suppliers,
using e-procurement, and implementing a just-in-time (JIT) system. Finance might decide
to eliminate unnecessary approval loops for expenditures, begin prequalifying sales
prospects, and explore the use of electronic funds transfer (EFT) in conjunction with
operations' lean strategy.
• Internet Exercises
The process for forming objectives would continue in a similar manner down the
organization with the means of achieving objectives for one level of management
becoming the target, or objectives, for the next level. The outcome of the process is a
cascade of action plans (or Hoshins) aligned to complete each functional objective,
which will, in turn, combine to achieve the strategic plan.
Hoshins:
the action plans generated from the policy deployment process.
Figure 1.13 Derivation of an Action Plan Using Policy
Deployment
Figure 1.13 shows an abbreviated operations action plan for reducing supply chain cycle
time. Policy deployment has become more popular as organizations are more
geographically dispersed and culturally diverse.
Balanced Scorecard
The balanced scorecard, developed by Robert Kaplan and David Norton,3 examines a
firm's performance in four critical areas:
Balanced Storecard:
a performance assessment that includes metrics related to customers, processes,
and learning and growing, as well as financials.
1.
Finances—How should we look to our shareholders?
2.
Customers—How should we look to our customers?
3.
Processes—At which business processes must we excel?
4.
Learning and Growing—How will we sustain our ability to change and improve?
It's called a balanced scorecard because more than financial measures are used to assess
performance. Operational excellence is important in all four areas. How efficiently a
firm's assets are managed, products produced, and services provided affects the financial
health of the firm. Identifying and understanding targeted customers helps determine the
processes and capabilities the organization must concentrate on to deliver value to the
customer. The firm's ability to improve those processes and develop competencies in new
areas is critical to sustaining competitive advantage.
Table 1.3 is a balanced scorecard worksheet. The worksheet selects areas of the strategy
map to incorporate in annual objectives for the company. The objectives are then
operationalized with key performance indicators (KPI). The goals for the year are
given, and the KPI results are recorded. The score converts the different performance
measures into percentage completed. For example, if the goal is to achieve 12 inventory
turns a year and the company manages only 6, then the goal is 50% achieved. The mean
performance column averages the score for each dimension. The scorecard performance
can be visualized in many ways, two of which are illustrated in Figures 1.14 and 1.15.
Table 1.3
The Balanced Scorecard Worksheet
Figure 1.14
A Radar Chart of the Balanced Scorecard
Key performance indicators [KPI]:
a set of measures that help managers evaluate performance in critical areas.
Figure 1.14 is a radar chart of the balanced scorecard. Goals 0% to 40% achieved appear
in the red “danger” zone, 40% to 80% achieved are in the yellow “cautionary” zone, and
80% to 100% achieved are in the green “moving ahead” zone. In this example, the
company is in the danger zone for human capital and distribution, but is doing well with
growth, quality, timeliness, and service. Figure 1.15 shows the same information in an
alternative format. The dashboard presents each scorecard perspective in a different
graphic. The red zone is set at 25% or less goal achievement, yellow from 25% to 75%,
and green in excess of 75%, although different limits can be set for each perspective. The
company excels in growth, quality, and timeliness, and is not in danger on any measure.
Note that different limits can be set for each gauge, and measures other than percentages
can be used. Dashboards are popular ways for managers to quickly interpret the massive
amounts of data collected each day and in some cases can be updated in real time.
Figure 1.15
A Dashboard for the Balanced Scorecard
Figure 1.16
An Integrated Operations Strategy
See Robert S. Kaplan and David P. Norton. “Transforming the Balanced
Scorecard from Performance Measurement to Strategic Management.” Accounting
Horizons (March 2001), pp. 87-104; and Robert S. Kaplan and David P. Norton.
“Having Trouble with Your Strategy? Then Map It,” Harvard Business Review
(September/October 2000), pp. 167-176.
3
OPERATIONS STRATEGY
The operations function helps strategy evolve by creating new and better ways of
delivering a firm's competitive priorities to the customer. Once a firm's competitive
priorities have been established, its operating system must be configured and managed to
provide for those priorities. This involves a whole series of interrelated decisions on
products and services, processes and technology, capacity and facilities, human resources,
quality, sourcing, and operating systems. As shown in Figure 1.16, all these decisions
should “fit” like pieces in a puzzle. A tight strategic fit means competitors must replicate
the entire system to obtain its advantages. Thus, the competitive advantage from an
integrated operating system is more sustainable than short-lived products or technologies.
Beginning with quality, the remaining chapters in Part I put together the pieces of the
operations strategy puzzle.
ORGANIZATION OF THIS TEXT
The organization of this textbook reflects the emergence of supply chain management as an
integral part of the study of operations. The first half of the text concentrates on issues and
decisions that are common to most enterprises—ensuring quality, designing products and
services, analyzing processes, designing facilities, developing human resources, and managing
projects. The second half emphasizes activities that are influenced by and are most likely
shared with entities along the supply chain—sourcing and logistics, forecasting demand,
establishing inventory levels, coordinating sales and operations, developing resource plans,
leaning operations and supply chains, and scheduling work. A diagram of the chapters in each
half of the text is shown in Table 1.4. Please note that your professor may elect to cover these
topics in a different order than presented in the text. This is perfectly understandable given the
interdependency of decisions in operations and supply chain management.
Chapter 9
Project Management
Project Management AT MARS
In November 2009, Mars Chocolate North America completed two significant large-scale
projects in Hackettstown, New Jersey: a solar garden, one of the largest solar projects in the
state; and a renovated, state-of-the-art headquarters facility. The solar garden consists of
more than 28,000 ground-mounted solar panels on 18 acres next to the Mars headquarters in
Hackettstown, where M&M chocolate candies are also manufactured. The solar garden
(owned and operated by PSEG Solar Source) provides about 2MW of power to the plant—
enough power for about 1,800 homes—and approximately 20% of the plant's, peek energy
consumption. The solar garden reduced carbon dioxide emissions by more than 1,000 metric
tons, the equivalent of removing 190 cars from the road each year. The renovation project to
the Mars headquarters included an open, flexible workplace designed to retain and attract
employees and improve productivity. Environmentally friendly enhancements included the
installation of water-conserving fixtures that reduced water usage by more than 30% an
upgraded Building Energy Management System that reduced energy use by 15%; energyefficient lighting and controls; an upgraded roof that utilizes a highly reflective material that
offsets the direct heat gain to the building; and the use of more than 20% recycled content in
building materials, from carpet to ceiling tiles.
In this chapter we will learn how companies plan, manage, control, and schedule projects like
Mars' solar garden, including project management tools like CPM/PERT.
Source: PRNewswire (http://multivu.prnewswire.com), November 10, 2009
In other chapters we discuss the scheduling of repetitive operations and activities, such as
work scheduling and job scheduling, as an important aspect of managing an operation.
Operational schedules are established to keep the flow of products or services through the
supply chain on time. However, not all operational activities are repetitive; some are unique,
occurring only once within a specified time frame. Such unique, one-time activities are referred
to as projects.
Activity:
individual job or work effort requiring labor, resources and time, and is subject to
management control.
Project:
a unique, one-time operational activity or effort.
Project management is the management of the work to develop and implement an innovation
or change in an existing operation. It encompasses planning the project and controlling the
project activities, subject to resource and budget constraints, to keep the project on schedule.
Examples of projects include constructing facilities and buildings, such as houses, factories, a
shopping mall, an athletic stadium, or an arena; developing a military weapons system, new
aircraft, or new ship; launching a satellite system; constructing an oil pipeline, developing and
implementing a new computer system; planning a rock concert, football bowl game, or
basketball tournament; and introducing new products into the market.
Projects have become increasingly pervasive in companies in recent years. The nature of the
global business environment is such that new machinery and equipment, as well as new
production processes and computer support systems, are constantly evolving. This provides the
capability of developing new products and services, which generates consumer demand for
even greater product diversity. As a result, a larger proportion of total organizational effort
now goes toward project-oriented activities than in the past. Thus, the planning and
management of projects has taken on a more crucial role in operations management.
In this chapter we focus on project management using CPM and PERT network scheduling
techniques that are popular because they provide a graph or visual representation of the
interrelationship and sequence of individual project activities. However, prior to our
presentation of the CPM/PERT technique, we will discuss the primary elements of the project
management process—planning, scheduling, and control.
PROJECT PLANNING
The general management process is concerned with the planning, organization, and control of
an ongoing process or activity such as the production of a product or delivery of a service.
Project management is different in that it requires a commitment of resources and people to
an important undertaking that is not repetitive and involves a relatively short period of time,
after which the management effort is dissolved. A project has a unique purpose, it is
temporary, and it draws resources from various areas in the organization; as a result, it is
subject to more uncertainty than the normal management process. Thus, the features and
characteristics of the project management process tend to be unique.
Figure 9.1 provides an overview of the project management process, which encompasses
three other major processes—planning, scheduling, and control. It also includes a number of
the more prominent elements of these processes. In the remainder of this section, we will
discuss some features of the project planning process, and in the following few sections we
will discuss the scheduling and control processes.
Figure 9.1 The Project Management Process
ELEMENTS OF A PROJECT PLAN
Project plans generally include the following basic elements.
•
Objectives—a detailed statement of what the project is to accomplish and how it
will achieve the company's goals and meet the strategic plan; and an estimate of when it
needs to be completed, the cost and the return.
•
Project scope—a discussion of how to approach the project, the technological and
resource feasibility, the major tasks involved, and a preliminary schedule; includes a
justification of the project and what constitutes project success.
•
Contract requirements—a general structure of managerial, reporting, and
performance responsibilities, including a detailed list of staff, suppliers, subcontractors,
managerial requirements and agreements, reporting requirements, and a projected
organizational structure.
•
Schedules—a list of all major events, tasks, and subschedules, from which a
master schedule is developed.
•
Resources—the overall project budget for all resource requirements and
procedures for budgetry control.
•
Personnel—identification and recruitment of personnel required for the project
team, including special skills and training.
•
Control—procedures for monitoring and evaluating progress and performance
including schedules and cost.
•
Risk and problem analysis—anticipating and assessing uncertainties, problems
and potential difficulties that might increase the risk of project delays and/or failure and
threaten project success.
PROJECT RETURN
In order for a project to be selected to be undertaken it typically has to have some kind of
positive gain or benefit for the organization that is considering it. In a business one of the
most popular measures of benefit is return on investment (ROI). ROI is a performance
measure that is often used to evaluate the expected outcome of a project or to compare a
number of different projects. To calculate ROI. the benefit (return) of a project is divided
by the cost of the project; the result is expressed as a percentage or a ratio:
If a project does not have a positive ROI, or if there are other projects with a higher ROI.
then the project might not be undertaken. ROI is a very popular metric for project planning
because of its versatility and simplicity.
However, projects sometimes have benefits that cannot be measured in a tangible way with
something like an ROI, what's referred to as a “soft” return. For example, a project that has
raising employee satisfaction as its goal can result in real benefits—increased productivity,
improved quality, and lower costs—which are difficult to measure monetarily in the short
run. A project by an Internet online retailer to install backup power generators to keep
orders coming in and customers happy during a power outage is like insurance for
something that may never happen, making an ROI difficult to determine. A “green” project
may not have a tangible dollar ROI, but it can protect a company against regulatory
infractions and improve its public image. In general, it may be more appropriate to measure
a project's benefit not just in terms of financial return, but also in terms of the positive
impact it may have on a company's employees and customers, that is, quality improvement.
Projects undertaken by government agencies or “not-for-profits” typically do not have an
ROI-type benefit; they are undertaken to benefit the “public good,” Examples of such
projects are the restorations of the Royal Shakespeare and Company Theater in England
and the American History Museum in Washington, DC, described, in the “Along the
Supply Chain” box on page 388, and the U.S. Corps of Engineers New Orleans Restoration
project following hurricane Katrina described in the “Along the Supply Chain” box on page
399. Cost containment is certainly an important consideration in such projects, but the
actual benefit is not easy to measure in terms of dollars.
THE PROJECT TEAM
The project team is typically cross-functional, consisting of a group of individuals selected
from other areas in the organization or from outside the organization because of their
special skills, expertise, and experience related to the project activities. Members of the
engineering staff are often assigned to project work because of their technical skills,
especially if the project is related to production processes or equipment. The project team
may also include managers and staff personnel from specific areas related to the project.
Workers can also be involved on the project team if their job is a function of the project
activity. For example, a project team for the construction of a new loading dock facility
might include truck drivers, forklift operators, dock workers, and staff personnel and
managers from purchasing, shipping, receiving, and packaging, as well as engineers to
assess vehicle flow, routes, and space considerations.
The term matrix organization refers to a team approach to special projects. The team is
developed from members of different functional areas or departments in the company. For
example, team members might come from engineering, production, marketing, or human
resources, depending on the specialized skills required by the project. The team members
are, in effect, on loan from their home departments to work on a project. The term matrix is
derived from the two-dimensional characteristics of this type of organizational structure.
On one dimension, the vertical, is the company's normal organizational structure for
performing jobs, whereas the horizontal dimension is the special functional structure (i.e.,
the functional team members) required by the project.
Project teams are made up of individuals from various areas and departments within a
company.
Matrix organization:
a team structure with members from functional areas, depending on the skills
required.
Assignment to a project team is usually temporary, which can have both positive and
negative repercussions. The temporary loss of workers and staff from their permanent jobs
can be disruptive for both the employee and the work area. The employee must sometimes
“serve two masters,” reporting to both the project manager and a regular supervisor. Since
projects are usually exciting, they provide an opportunity to do work that is new and
innovative, making the employee reluctant to report back to a more mundane, regular job
after the project is completed.
ALONG THE SUPPLY CHAIN
Cross-Cultural Project Teams
In today's global economy, cross-cultural project teams have become relatively common,
but they still present unique situational problems because of the diversity of the team
members. A project manager from the United States can be in Saudi Arabia working with
local Saudi team members as well as team members from France and the United States
and a virtual team in India on a project for a Chinese firm. This requires an awareness of
cultural differences on the part of all team members and especially the project manager.
In Saudi Arabia Islam will play a large role in a project; religious beliefs strongly
influence how Saudis interact with foreigners in a business setting. For example, Saudi
workers take time out several times a day for prayer, which will affect work schedules
and productivity. Since Saudi women don't work alongside Saudi men, having foreign
women as team members may create an uncomfortable situation. Being respectful of the
culture is essential, thus foreign women should always cover their heads. Punctuality can
vary across cultures; in some countries being late for a meeting may be casually
overlooked while in others it may be considered bad manners or a sign of disrespect. The
Korean culture has a very strong work ethic so foreign project team members should
expect to work 16 hour days, 7 days a week, whereas for the French weekends and
holidays are sacrosanct. In projects in China, Chinese team members will sometimes
show too much deference and politeness, thus avoiding useful criticisms that are expected
and would be beneficial to U.S. team members. As such, project team members in any
country should understand the cultural environment of the country by reading the local
newspapers and tourist guides and learning about their history; avoiding stereotypes and
not letting them influence behavior; developing and showing an interest in cultural
differences and learning about local traditions; communicating effectively and not always
assuming you are being understood; and listening carefully and emphatically. By
developing a cultural sensitivity and understanding, team members can see how cultural
differences may impact the project environment and work together more effectively to
achieve project success on time and within budget.
Source: Deborah Silver, “Abroad Spectrum.” PM Network, vol. 23. (1: January 2009),
pp. 62-68.
THE PROJECT MANAGER
The most important member of the project team is the project manager. Managing a project
is subject to lots of uncertainty and the distinct possibility of failure. Since a project is
unique and usually has not been attempted previously, the outcome is not as certain as the
outcome of an ongoing process would be. A degree of security is attained in the
supervision of a continuing process that is not present in project management. The project
team members are often from diverse areas of the organization and possess different skills,
which must be coordinated into a single, focused effort to complete the project
successfully. The project is subject to time and budgetary constraints that are not the same
as normal work schedules and resource consumption in an ongoing process. There is
usually more perceived and real pressure associated with project management than in a
normal management position. However, there are potential opportunities, including
demonstrating management abilities in a difficult situation, the challenge of working on a
unique project, and the excitement of doing something new.
SCOPE STATEMENT
The scope statement is a document that provides a common understanding of a project. It
includes a justification for the project that describes which factors created a need within the
company for the project. It also includes an indication of what the expected results of the
project will be and what will constitute project success. The scope statement might also
include a list of the types of planning reports and documents that are part of the project
management process.
The project manager is often under greater pressure.
Scope statement:
a document that provides an understanding, justification, and expected result of a
project.
A similar planning document is the statement of work. In a large project, the statement of
work is often prepared for individual team members, groups, departments, subcontractors,
and suppliers. This statement describes the work in sufficient detail so that the team members
responsible for it know what is required and if they have sufficient resources to accomplish
the work successfully and on time. For suppliers and subcontractors it is often the basis for
determining whether they can perform the work and for bidding on it. Some companies
require that a statement of work be part of an official contract with a supplier or
subcontractor.
Statement of work:
a written description of the objectives of a project.
WORK BREAKDOWN STRUCTURE
The work breakdown structure (WBS) is a tool used for project planning. The WBS
organizes the work to be done on a project. In a WBS, a project is broken down into its
major components, referred to as modules. These components are then subdivided into
detailed subcomponents, which are further broken down into activities and, finally,
individual tasks. The end result is a project hierarchical organizational structure made up of
different levels, with the overall project at the top of the structure and the individual tasks
for each activity at the bottom level. The WBS format is a good way to identify activities
and to determine the individual task, module, and project workloads and resources
required. It also helps to identify relationships between modules and activities as well as
unnecessary duplication of activities. Finally, it provides the basis for developing and
managing the project schedule, resources, and modifications.
Work breakdown structure (WBS):
breaks down a project into components, subcomponents, activities, and tasks.
There is no specific model to follow for the development of a WBS. It can be in the form of
a chart or a table. It can be organized around project groups, project phases, or project tasks
and events. However, experience has shown that there are two good ways for a project
team to develop a WBS. One way is to start at the top and work one's way down asking,
“What components constitute this level?” until the WBS is developed in sufficient detail.
The other way is simply to brainstorm the entire project, writing down each item on a
sticky note and then organizing them together into the branches of a WBS. The upper
levels of the WBS hierarchy tend to indicate the summary activities, major components, or
functional areas involved in the project. They are typically described by nouns that indicate
“what” is to be done. The lower levels of the WBS tend to describe the detailed work
activities of the project required under the major components or areas. They are typically
described by verbs that indicate “how” things are done.
Figure 9.2 shows a WBS for a project for installing a new computerized order processing
system for a textile manufacturer that links customers, the manufacturer, and suppliers (see
Example 9.1 on page 389.). The WBS is organized according to the three major project
categories for development of the system—hardware, software/system, and personnel.
Within each of these categories the major tasks and activities under those tasks are detailed.
For example, under hardware, a major task is “installation,” and activities required in
installation include area preparation, technical/engineering layouts and configurations, and
wiring and electrical connections.
Figure 9.2
Work Breakdown Structure for a Computer
Order Processing System Project
RESPONSIBILITY ASSIGNMENT MATRIX
After the work breakdown structure is developed, which organizes the project work into
smaller, manageable elements, the project manager assigns the work elements to
organizational units—departments, groups, individuals, or subcontractors—using an
organizational breakdown structure (OBS). The OBS is an organizational chart that
shows which organizational units are responsible for work items. After the OBS is
developed, the project manager can then develop a responsibility assignment matrix
(RAM). The RAM shows who in the organization is responsible for doing the work in the
project. Figure 9.3 on the next page shows a RAM for the “Hardware/Installation” category
from the work breakdown structure for the computerized order processing project shown in
Figure 9.2. Notice that there are three levels of work assignment in the matrix reflecting
who is responsible for the work, who actually performs the work, and those who perform
support activities. As with the WBS, both the OBS and RAM can take many different
forms depending on the needs and preferences of the company, project team, and project
manager.
Organizational breakdown structure (OBS):
a chart that shows which organizational units are responsible for work items.
Responsibility assignment matrix (RAM):
shows who is responsible for the work in a project.
ALONG THE SUPPLY CHAIN
Around the World
Green Projects on the Increase
Sustainability or “green” projects are increasing around the world, not simply because
they are a “good” thing for the future of the world's environment, but also because they
can also have a positive impact on a company's bottom line. A recent survey of Fortune
500 executives reported that they expected sustainability projects to increase by almost
75% through 2010. Most sustainability projects involve reducing energy consumption,
resource use, and waste, and thus have cost-cutting implications. They uniquely mix cost
cutting and savings with an inspiring green message, which appeals to customers and
stockholders; they provide an opportunity to achieve multiple benefits—they benefit the
larger community, they benefit the environment, and they benefit the bottom line. The
New York-based Environmental Defense Fund reaches out to firms to engage them in
environmentally focused projects, but knows companies won't undertake such projects
out of the goodness of their heart. Rather, it requires business-oriented incentives—
bottom line results and reduced regulatory risk. British Petroleum (BP) has a portfolio of
solar, wind, and hydrogen energy projects, and plans to spend $8 billion on alternative
and renewable energy projects in the next decade. GE Energy China will invest $15
billion in clean energy projects including coal, wind, solar, and biofuel in China by 2010.
Foster's, the Australian brewer, invested $14 million in a water management project at
one of its breweries which allowed it to double its brewing capacity with only a 10%
increase in water consumption, making it the most water-efficient brewery in the world.
The Coca-Cola Foundation has provided $1 million to support four water infrastructure
projects in developing countries. Finnish telecom company Nokia Siemens Networks
plans to decrease the energy consumption of its building by 6% and increase the use of
renewable energy in company operations by 50% in the next few years, initiatives that
will reduce carbon dioxide emissions by about 2 million tons annually. Paper
manufacturer Boise, Inc., has launched a program to reduce carbon dioxide emissions by
10% over 10 years. Food distributor U.S. Foodservice undertook a project to reduce fuel
throughout its vehicle fleet and achieved fuel cost savings of $8.2 million, and a
corresponding reduction in carbon dioxide emissions of 22,000 tons in just three months.
At mattress manufacturer Sealy, in just three months sustainability projects in its
manufacturing and delivery operations saved $1.2 million in fuel costs, reduced carbon
dioxide emissions by 3,000 tons, and saved $4 million in material costs while eliminating
650 tons of solid waste. A $450,000 project at the State University of New York at
Buffalo to upgrade a quarter of its older computer servers with more energy-efficient
models saved $150,000 in annual energy costs while increasing computing capacity by
50%.
Identify and discuss some potential “green” projects at your university.
Sources: Shawn Henry, “Give and Take,” PM Network, vol. 23, (8: August 2009), pp.
28-33; Sarah Gale, “Survival of the Greenest,” PM Network, vol. 23, (4: April 2009), pp.
14-15; Tegan Jones and Sarah Gale, “Keeping the Faith,” PM Network, vol. 23, (2:
February 2009), pp. 42-47; Sarah Gale, “Sink or Swim,” PM Network, vol. 23, (3: March
2009), pp. 16-17; and, Sarah Gale, “Measuring Up,” PM Network, vol. 23, (7: July 2009),
pp. 14-15.
Figure 9.3
A Responsibility Assignment Matrix
GLOBAL AND DIVERSITY ISSUES IN PROJECT MANAGEMENT
In the existing global business environment, project teams form a mosaic of different
genders, cultures, ethnicities, nationalities, religions, and races. Only by acknowledging and
embracing this diversity will companies be able to attract the best people and achieve project
success. Diversity offers a significant business advantage by providing a more well rounded
perspective on a project from team members with different views, experiences, and values.
The project leader must focus on creating common goals and objectives for the project by
using good communication techniques and developing a cooperative environment that
identifies common values and fosters mutual respect for differences. However, while a
globally diverse project team can have advantages, project success typically requires respect
for cultural differences and a management style that acknowledges these differences.
Global projects that involve companies and team members from different countries have
expanded dramatically in recent years as a result of increased information and
communication technology. Teamwork is a critical element in achieving project success, and
in global projects diversity among international team members can add an extra dimension to
project planning. For projects to be successful, cultural differences, idiosyncrasies, and issues
must be considered as important parts of the planning process. The basics of project
management tend to be universal, but cultural differences in priorities, nuances, and
terminology can result in communication failures. Since English is used widely around the
world, language is not necessarily an overriding problem. However, often it is not what
people say that matters but what they mean.
An example of one cultural difference that can play havoc with developing project schedules
is the difference in work days and holidays in different countries. Southern Europeans take a
lot of holidays, which can mess up a project schedule if they are not planned for. In the
United States you can ask people to move their vacations or work while on vacation (via
phone or Internet), but in countries like France or Italy, don't ask. In India the work ethic is
closer to the European than the U.S. model: when the day ends it's over, and weekends are
inviolate. In some cultures, certain days are auspicious for starting a new venture or ending a
task.
Some cultures tend to be less aggressive than others, and team members will avoid
confrontation so that when problems on a project occur (such as cost overruns or missed due
dates) they will not be as aggressively addressed as they might be in the United States or in
Germany, for example. Some team members in underdeveloped countries may bow to the
perceived superiority of those from developed countries and not aggressively press their
points even though they may be correct. Some people may simply have trouble working with
others with cultural differences. Team members may think they do not understand team
members from a foreign country, when it's actually their culture they don't understand.
In Asian countries business typically employ a more methodical management style that
values patience and building relationships. Project managers and team members in Japan
consider establishing plans and providing direction to be more important managerial
competencies than exist in the United States. What's considered to be micromanaging in the
United States is the more common way of doing things in China. In Latin America a formal
management style with specific managerial direction is a cultural trait. Business relationships
are built slowly over time and they are based on trust and a sense of personal integrity. In
Latin countries personal connections (that might include inquires into team members'
personal lives) are often expected before business is transacted. In Malaysia a “boss” has
almost absolute power over subordinates, whereas in Austria the perception is almost
completely the opposite. The United States, Scandinavia, and many European countries fall
somewhere in-between. In countries like the United Kingdom, Sweden, and Denmark, people
tend to cope with uncertainty and unexpected events much better than people in Italy and
Portugal.
ALONG THE SUPPLY CHAIN
in China
Project Management Diversity
China is the most likely country in the world where U.S. companies will be doing future
global business. Business between U.S. and Chinese companies includes projects in which
diversity and teamwork will be critical factors in determining project success. However, the
cultural differences between the United States and China are probably as different as any
two countries could be, thus making project teamwork a potential problem that requires
special attention. That doesn't mean that the way things are done in the United States (or
China) is better or worse, just different. Following are some examples of these cultural
differences that should be addressed in order to achieve project success. First, while U.S.
companies value individualism, China, reflecting 2,000 years of traditional Confucianism
values, does not. Chinese managers can be good but their leadership style is typically
different from U.S. project managers, using a more collaborative rather than direct
leadership style. Relationships are very important in China. The Chinese word guanxi
(Gwan-shee) refers to the strong reliance of business on social connections. A Chinese
business partner with strong, well-placed relationships can enhance project success;
however, such relationships are developed slowly. The Chinese focus on the “long-term”
rather than the “short-term” view prevalent in many Western companies. “Face” or mianzi
(me-ahn-zee) is very important in China. Every conversation, meeting, meal, social, or
business engagement is an opportunity for an individual to gain or lose stature. Rudeness
and anger have very negative consequences; raising your voice to a Chinese manager will
cause him shame and embarrassment, and brand the offending person as a barbarian. Rank
is important in China; people of high rank are given an extraordinary degree of deference.
As such, instructions from team leaders are respected and followed, and advice from junior
team members is not generally expected or valued. Humility helps; U.S. food is not better
than Chinese food and the U.S. way of doing business is not better than the Chinese way,
they're just different. Gifts are important in China, not so much for their intrinsic value as
for their symbolic value (of respect). They should reflect a degree of thoughtfulness and
effort, that is, not just a logo t-shirt. Patience is a respected virtue in China where time is
used as a competitive tool. The little things can be important; learn the Chinese way of
doing things like smiling, friendliness, and attention, which can pay off in successful
teamwork.
Discuss the kind of training and personality characteristics that a company should look for
in the U.S. members of a joint Chinese-American project.
Source: Bud Baker, “When in China….” PM Network, Vol. 20, no. 6 (June 2006): 24-25.
As a result, the project manager must address the issue of cultural diversity up front in the
planning process. Project managers have to approach diversity differently from country to
country. The project manager should never assume that something that works at home will
work abroad or that what will work in country A will work in country B. This makes cultural
research and communication important elements in the planning process. The manager must
determine what cultural faux pas must be avoided—the things you don't do. It's important to
discover at the start what holidays and cultural celebrations exist and the work ethic of team
members.
The project manager must often find team members who are particularly adept at bridging
cultural differences. It may be helpful to identify a team associate who can keep the project
manager and other team members informed of important cultural differences. Although longdistance communication via phone or e-mail is very easy, the face-to-face meeting is often
better with someone with cultural differences, even with the added expense of travel.
PROJECT SCHEDULING
The project schedule evolves from the planning documents we discussed in the previous
section. It is typically the most critical element in the project management process, especially
during the implementation phase (i.e., the actual project work), and it is the source of most
conflict and problems. One reason is that frequently the single most important criterion for
the success of a project is that it be finished on time. If a stadium is supposed to be finished
in time for the first game of the season and it's not, there will be a lot of angry ticket holders;
if a school building is not completed by the time the school year starts, there will be a lot of
angry parents; if a shopping mall is not completed on time, there will be a lot of angry
tenants; if a new product is not completed by the scheduled launch date, millions of dollars
can be lost; and if a new military weapon is not completed on time, it could affect national
security. Time is also a measure of progress that is very visible. It is an absolute with little
flexibility; you can spend less money or use fewer people, but you cannot slow down or stop
the passage of time.
Developing a schedule encompasses the following basic steps. First, define the activities that
must be performed to complete the project; second, sequence the activities in the order in
which they must be completed; next, estimate the time required to complete each activity;
and finally, develop the schedule based on this sequencing and time estimates of the
activities.
Because scheduling involves a quantifiable measure, time, several quantitative techniques,
including the Gantt chart and CPM/PERT networks, are available that can be used to develop
a project schedule. There are also various computer software packages that can be used to
schedule projects, including the popular Microsoft Project. Later in this chapter we are going
to discuss CPM/PERT and Microsoft Project in greater detail. For now, we are going to
describe one of the oldest and most widely used scheduling techniques, the Gantt chart.
THE GANTT CHART
A Gantt chart (also called a bar chart) was developed by Henry Gantt, a pioneer in the
field of industrial engineering, at the artillery ammunition shops of the Frankford Arsenal
in 1914. The Gantt chart has been a popular project scheduling tool since its inception and
is still widely used today. It is the direct precursor of the CPM/PERT technique, which we
will discuss later.
Gantt chart:
a graph or bar chart with a bar for each project activity that shows the passage of
time.
The Gantt chart is a graph with a bar representing time for each activity in the project being
analyzed. Figure 9.4 below illustrates a Gantt chart of a simplified project description for
building a house. The project contains only seven primary activities, such as designing the
house, laying the foundation, ordering materials, and so forth. The first activity is “design
house and obtain financing,” and it requires three months to complete, shown by the bar
from left to right across the chart. After the first activity is finished, the next two activities,
“lay foundation” and “order and receive materials,” can start simultaneously. This set of
activities demonstrates how a precedence relationship works; the design of the house and
the financing must precede the next two activities.
Precedence relationship:
the sequential relationship of project activities to each other.
The activity “lay foundation” requires two months to complete, so it will be finished, at the
earliest, at the end of month 5. “Order and receive materials” requires one month to
complete, and it could be finished after month 4. However, observe that it is possible to
delay the start of this activity one month until month 4. This delay would still enable the
activity to be completed by the end of month 5, when the next activity, “build house,” is
scheduled to start. This extra time for the activity “order materials” is called slack. Slack is
the amount by which an activity can be delayed without delaying any of the activities that
follow it or the project as a whole. The remainder of the Gantt chart is constructed in a
similar manner, and the project is scheduled to be completed at the end of month 9.
Slack:
the amount of time an activity can be delayed without delaying the project.
Figure 9.4
A Gantt Chart
The Gantt chart provides a visual display of the project schedule, indicating when activities
are scheduled to start, when they will be finished, and where extra time is available and
activities can be delayed. The project manager can use the chart to monitor the progress of
the activities and see which ones are ahead of schedule and which ones are behind
schedule. The Gantt chart also indicates the precedence relationships between activities;
however, these relationships are not always easily discernible. This problem is one of the
disadvantages of the Gantt chart method, and it sometimes limits the chart's use to smaller
projects with relatively few activities. The CPM/PERT network technique does not suffer
this disadvantage.
PROJECT CONTROL
Project control is the process of making sure the project progresses toward a successful
completion. It requires that the project be monitored and progress be measured so that any
deviations from the project plan, and particularly the project schedule, are minimized. If the
project is found to be deviating from the plan—that is, it is not on schedule, cost overruns are
occurring, activity results are not as expected, and so on—then corrective action must be
taken. In the rest of this section we will describe several key elements of project control,
including time management, quality control, performance monitoring, and communication.
TIME MANAGEMENT
Time management is the process of making sure the project schedule does not slip and it is
on time. This requires the monitoring of individual activity schedules and frequent updates.
If the schedule is being delayed to an extent that jeopardizes the project success, then the
project manager may have to shift resources to accelerate critical activities. Some activities
may have slack time, and resources can be shifted from them to activities that are not on
schedule. This is referred to as time-cost tradeoff. However, this can also push the project
cost above budget. In some cases, the work may need to be corrected or made more
efficient. In other cases, original activity time estimates upon implementation may prove to
be unrealistic, with the result that the schedule must be changed and the repercussions of
such changes on project success evaluated.
COST MANAGEMENT
Cost management is often closely tied to time management because of the time-cost
tradeoff occurrences that we mentioned previously. If the schedule is delayed, costs tend to
increase in order to get the project back on schedule. Also, as the project progresses, some
cost estimates may prove to be unrealistic or erroneous. As such, it will be necessary to
revise cost estimates and develop budget updates. If cost overruns are excessive, then
corrective actions must be taken.
QUALITY MANAGEMENT
Quality management and control are an integral part of the project management process.
The process requires that project work be monitored for quality and that improvements be
made as the project progresses just the same as in a normal production or manufacturing
operation. Tasks and activities must be monitored to make sure that work is done correctly
and that activities are completed correctly according to plan. If the work on an activity or
task is flawed, subsequent activities may be affected, requiring rework, delaying the
project, and threatening project success. Poor-quality work increases the risk of project
failure, just as a defective part can result in a defective final product if not corrected. As
such, the principles of quality management and many of the same techniques for statistical
analysis and statistical process control discussed in earlier chapters for traditional
production processes can also be applied to the project management process.
PERFORMANCE MANAGEMENT
Performance management is the process of monitoring a project and developing timed (i.e.,
daily, weekly, monthly) status reports to make sure that goals are being met and the plan is
being followed. It compares planned target dates for events, milestones, and work
completion with dates actually achieved to determine whether the project is on schedule or
behind schedule. Key measures of performance include deviation from the schedule,
resource usage, and cost overruns. These reports are developed by the project manager and
by individuals and organizational units with performance responsibility.
Earned value analysis (EVA) is a specific system for performance management.
Activities “earn value” as they are completed. EVA is a recognized standard procedure for
numerically measuring a project's progress, forecasting its completion date and final cost,
and providing measures of schedule and budget variation as activities are completed. For
example, an EVA metric such as “schedule variance” compares the work performed during
a time period with the work that was scheduled to be performed. A negative variance
means the project is behind schedule. “Cost variance” is the budgeted cost of work
performed minus the actual cost of the work. A negative variance means the project is over
budget. EVA works best when it is used in conjunction with a work breakdown structure
(WBS) that compartmentalizes project work into small packages that are easier to measure.
The drawbacks of EVA are that it's sometimes difficult to measure work progress and the
time required for data measurement can be considerable.
Earned value analysis (EVA):
a standard procedure for numerically measuring a project's progress, forecasting its
completion date and cost and measuring schedule and budget variation.
COMMUNICATION
Communication needs for project and program management control in today's global
business environment tend to be substantial and complex. The distribution of design
documents, budget and cost documents, plans, status reports, schedules, and schedule
changes in a timely manner is often critical to project success. As a result, more and more
companies are using the Internet to communicate project information, and are using
company intranet project Web sites to provide a single location for team members to access
project information. Internet communication and software combined with faxing,
videoconferencing systems, phones, handheld computers, and jet travel are enabling
transnational companies to engage in global project management.
ALONG THE SUPPLY CHAIN
after 9/11
Reconstructing the Pentagon
On September 11, 2001 at 9:37 A.M. American Airlines Flight 77, which had been
hijacked by terrorists, was flown into the west face of the Pentagon in Arlington,
Virginia. More than 400,000 square feet of office space were destroyed, and an additional
1.6 million square feet were damaged. Almost immediately the “Phoenix Project” to
restore the Pentagon was initiated. A deadline of one year was established for the project
completion, which required the demolition and removal of the destroyed portion of the
building followed by the building restoration including the limestone facade. The
Pentagon consists of five rings of offices (housing 25,000 employees) that emanate from
the center of the building; ring “A” is the innermost ring, while ring “E” is the outermost.
Ten corridors radiate out from the building's hub bisecting the rings and forming the
Pentagon's five distinctive wedges. At the time of the attack, the Pentagon was
undergoing a 20-year, $1.2 billion renovation program and the renovation of Wedge 1
that was demolished in the attack was nearing completion. As a result, the Phoenix
Project leaders were able to use the Wedge 1 renovation project structure and plans as a
basis for its own reconstruction plan and schedule, saving much time in the process.
Project leaders were in place and able to assign resources on the very day of the attack.
The project included over 30,000 activities and a 3,000-member project team and
required 3 million man-hours of work during the project duration. Over 56,000 tons of
contaminated debris were removed from the site, 2.5 million pounds of limestone were
used to reconstruct the facade (using the original drawings from 1941), 21,000 cubic
yards of concrete were poured, and 3,800 tons of reinforcing steel were placed. The
Phoenix Project was completed almost a month ahead of schedule and nearly $194
million under the original budget estimate of $700 million.
The project planning process for the reconstruction of the Pentagon began virtually
on the day of the September 11 attack. The project was completed a month ahead of
schedule and $194 million under budget.
Building construction is one of the main applications of project management; discuss
some of the unique factors associated with the Pentagon project had that made it different
from other, more typical, construction projects.
Source: N. Bauer, “Rising from the Ashes.” PM Network, Vol. 18, no. 5 (May 2004): 2432.
ENTERPRISE PROJECT MANAGEMENT
In many companies, project control takes place within the larger context of a multiple
project environment. Enterprise project management refers to the management and control
of a company-wide portfolio of projects. In the enterprise approach to managing projects, a
company's goals are achieved through the coordination of simultaneous projects. The
company grows, changes, and adds value by systematically implementing projects of all
types across the enterprise. The aggregate result of an organization's portfolio of projects
becomes the company's bottom line. As such, program management is a managerial
approach that sits above project management. Whereas project management concentrates
on delivering a clearly defined, tangible outcome with its own scope and goals within a
specified time frame, in a program management environment the company's goals and
changes are achieved through a carefully planned and coordinated set of projects. Programs
tend to cut across and affect all business areas and thus require a higher degree of crossbusiness functional coordination than individual projects.
CPM/PERT
In 1956, a research team at E. I. du Pont de Nemours & Company, Inc., led by a du Pont
engineer, Morgan R. Walker, and a Remington-Rand computer specialist, James E. Kelley,
Jr., initiated a project to develop a computerized system to improve the planning, scheduling,
and reporting of the company's engineering programs (including plant maintenance and
construction projects). The resulting network approach is known as the critical path method
(CPM). At the same time, the U.S. Navy established a research team composed of members
of the Navy Special Projects Office, Lockheed, and the consulting firm of Booz, Allen, and
Hamilton, led by D. G. Malcolm.
The Lafayette, the nuclear-powered ballistic missile submarine shown here, is a direct
descendent of the USS George Washington, the first nuclear submarine of this type. In the
late 1950s the Polaris Fleet Ballistic Missile Project included more than 250 prime
contractors and 9000 subcontractors. The Navy Department credited PERT with
bringing the Polaris missile submarine to combat readiness approximately two years
ahead of the originally scheduled completion date.
They developed a similar network approach for the design of a management control system
for the development of the Polaris Missile Project (a ballistic missile-firing nuclear
submarine). This network scheduling technique was named the program evaluation and
review technique, or PERT. The Polaris project eventually included 23 PERT networks
encompassing 3000 activities.
Both CPM and PERT are derivatives of the Gantt chart and, as a result, are very similar.
There were originally two primary differences between CPM and PERT. With CPM a single
estimate for activity time was used that did not allow for any variation in activity times—
activity times were treated as if they were known for certain, or “deterministic.” With PERT,
multiple time estimates were used for each activity that allowed for variation in activity
times—activity times were treated as “probabilistic.” The other difference was related to the
mechanics of drawing the project network. In PERT, activities were represented as arcs, or
arrowed lines, between two nodes, or circles, whereas in CPM activities were represented as
the nodes or circles. However, over time CPM and PERT have been effectively merged into
a single technique conventionally referred to as CPM/PERT.
The advantage of CPM/PERT over the Gantt chart is in the use of a network to depict the
precedence relationships between activities. The Gantt chart does not clearly show
precedence relationships, which is a disadvantage that limited its use to small projects. The
CPM/PERT network is a more efficient and direct means of displaying precedence
relationships. In other words, in a network it is visually easier to see the precedence
relationships, which makes CPM/PERT popular with managers and other users, especially
for large projects with many activities.
CPM/PERT uses a network to depict the precedence relationships among activities.
THE PROJECT NETWORK
A CPM/PERT network consists of branches and nodes, as shown in Figure 9.5. When CPM
and PERT were first developed, they employed different conventions for constructing a
network. With CPM the nodes, or circles in Figure 9.5, represented the project activities. The
arrows in between the nodes indicated the precedence relationships between activities. For
the network in Figure 9.5, activity 1, represented by node 1, precedes activity 2, and 2
precedes 3. This approach to network construction is called activity-on-node (AON). With
PERT the opposite convention was taken. The branches represented the activities, and the
nodes in between them reflected events, or points in time such as the end of one activity and
the beginning of another. In this approach, referred to as activity-on-arrow (AOA), the
activities are normally identified by the node numbers at the start and end of an activity; for
example, activity 1-2 precedes activity 2-3 in Figure 9.5. In this book, we will focus on the
AON convention, but we will also provide an overview of AOA networks.
Activity-on-node (AON):
nodes represent activities, and arrows show precedence relationships.
Activity-on-arrow (AOA):
arrows represent activities and nodes are events for points in time.
Events:
completion or beginning of an activity.
Figure 9.5 Network Components
Figure 9.6 The AOA Project Network for Building a House
AOA NETWORK
To demonstrate how these components are used to construct the two types of network, we
will use our example project of building a house used in the Gantt chart in Figure 9.4. The
comparable AOA CPM/PERT network for this project is shown in Figure 9.6. The
precedence relationships are reflected in this network by the arrangement of the arrowed
(or directed) branches in Figure 9.6. The first activity (1-2) in the project is to design the
house and obtain financing. This activity must be completed before any subsequent
activities can begin. Thus, activities 2-3, laying the foundation, and 2-4, ordering and
receiving materials, can start only when node 2 is realized, indicating the event that activity
1-2 is finished. (Notice in Figure 9.6 that a time estimate of three months has been assigned
for the completion of this activity). Activity 2-3 and activity 2-4 can occur concurrently;
neither depends on the other, and both depend only on the completion of activity 1-2.
When the activities of laying the foundation (2-3) and ordering and receiving materials (24) are completed, then activities 4-5 and 4—6 can begin simultaneously. However, before
discussing these activities further, notice activity 3-4, referred to in the network as a
dummy.
A dummy activity is inserted into the network to show a precedence relationship, but it
does not represent any actual passage of time. Activities 2-3 and 2-4 have the precedence
relationship shown in Figure 9.7a. However, in an AOA network, two or more activities are
not allowed to share the same starting and ending nodes. Instead, activity 3-4 is inserted to
give two activities separate end nodes and, thus, two separate identities as shown in Figure
9.7b. Notice, however, that a time of zero months has been assigned to activity 3-4. The
dummy activity shows that activity 2-3 must be completed prior to any activities beginning
at node 4, but it does not represent the passage of time.
Dummy:
two or more activities cannot share the same start and end nodes.
Figure 9.7
Concurrent Activities
Returning to the network in Figure 9.6, we see that two activities start at node 4. Activity 46 is the actual building of the house, and activity 4—5 is the search for and selection of the
paint for the exterior and interior of the house. Activity 4—6 and activity 4-5 can begin
simultaneously and take place concurrently. Following the selection of the paint (activity 45) and the realization of node 5, the carpet can be selected (since the carpet color depends
on the paint color). This activity can also occur concurrently with the building of the house
(activity 4—6). When the building is completed and the paint and carpet are selected, the
house can be finished (activity 6-7).
Figure 9.8
AON Network for House Building Project
AON NETWORK
Figure 9.8 shows the comparable AON network to the AOA network in Figure 9.6 for our
house building project. Notice that the activities and activity times are on the nodes and not
on the activities as they were previously with the AOA network. The branches or arrows
simply show the precedence relationships between the activities. Also, notice that there is
no dummy activity; dummy activities are not required in an AON network since two
activities will never be confused because they have the same start and end nodes. This is
one advantage of the AON convention, although each has minor advantages and
disadvantages. In general, both of the two methods accomplish the same thing, and the one
that is used is usually a matter of individual preference. However, for our purposes the
AON network has one distinct advantage—it is the convention used in the popular
Microsoft Project software package, and because we want to demonstrate how to use this
software, we will use the AON convention in this chapter.
ALONG THE SUPPLY CHAIN British Airport Authority's
Terminal 5 Project at Heathrow Airport
British Airport Authority's (BAA) terminal five (T5) at Heathrow Airport in London,
completed in March 2008, was one of Europe's largest construction projects taking 5.5
years to complete the construction and 60,000 people. Located between two runways in a
space equal in size to Hyde Park in London, T5 has the largest single-span roof in
Europe— made up of six sections and requiring 10 months to lift into place—and 11
miles of baggage conveyor belt. The facility, which cost 4.3 billion British pounds to
build, provides Heathrow (and British Airways) with 47 additional aircraft stands and
increases Heathrow's capacity by 35 million annual passengers. For the first time in a
project of this size and complexity, off-site prefabrication was used extensively. This
involved assembling components in off-site modules (2,800 in all) and then transporting
them to the building site where they were bolted together, thus reducing on-site
construction time and disruption and construction traffic at the airport. Key clients
worked collaboratively through integrated teams. A Web-based system was created to
provide an effective communication vehicle for all project participants so that they could
collaborate effectively. The Internet enabled the diverse off-site project module
manufacturers in Dover and Scotland to be coordinated though a database system, or
“virtual factory.” The supply of material, equipment, and work flows could all be
monitored through one integrated system. All project participants could see when
modules were in production, completed, delivered, and stored. The database system
included a “lessons learned” component where lessons learned were recorded for all
participants to see and learn from. The system was especially important for planning and
coordinating deliveries between suppliers because of the high volume of deliveries and
the limited on-site space involved. The modules in particular required wide-load
deliveries and roads had to be closed for delivery. The collaborative nature of this project
combined with the “virtual factory” Web-based computer system facilitated the
performance of the integrated project teams resulting in a reduction in construction times,
a safer working environment, and better quality.
Discuss some of the unique problems that you think might exist for a project like this one
that involves a facility with daily, heavy public usage.
Source: John Summers, “The Virtual Factory.” Quality World, vol. 31, no. 10, (October
2005): 24-28; and Patricia Curmi. “Terminal Velocity.” Quality World, vol. 33. no. 8,
(August 2007): 17-21.
THE CRITICAL PATH
A network path is a sequence of connected activities that runs from the start to the end of
the network. The network in Figure 9.8 has several paths through it. In fact, close
observations of this network show four paths, identified as A. B, C. and D:
A:
1-2-4-7
B:
1-2-5-6-7
C:
1-3-4-7
D:
1-3-5-6-7
The project cannot be completed (i.e., the house cannot be built) sooner than the time
required by the longest path in the network, in terms of time. The path with the longest
duration of time is referred to as the critical path.
Critical path:
the longest path through a network; it is the minimum project completion time.
By summing the activity times (shown in Figure 9.8) along each of the four paths, we can
compute the length of each path, as follows:
Path A:
1-2-4-7
3+ 2+ 3+ 1=9 months
Path B: 1-2-5-6-7
3+2+1+1+1=8 months
Path C:1-3-4-7
3+1+3+1=8 months
Path D:
1-3-5-6-7
3+1+1+1+1=7 months
Figure 9.9
Activity Start Times
Because path A is the longest, it is the critical path: thus, the minimum completion time for
the project is nine months. Now let us analyze the critical path more closely. From Figure
9.9 we can see that activity 3 cannot start until three months have passed. It is also easy to
see that activity 4 will not start until five months have passed. The start of activity 4 is
dependent on two activities leading into node 4. Activity 2 is completed after five months,
but activity 3 is completed at the end of four months. Thus, we have two possible start
times for activity 4, five months and four months. However, since the activity at node 4
cannot start until all preceding activities have been finished, the soonest node 4 can be
realized is five months.
Now consider the activity following node 4. Using the same logic as before, activity 7
cannot start until after eight months (five months at node 4 plus the three months required
by activity 4) or after seven months. Because all activities preceding node 7 must be
completed before activity 7 can start, the soonest this can occur is eight months. Adding
one month for activity 7 to the start time at node 7 gives a project duration of nine months.
This is the time of the longest path in the network—the critical path.
This brief analysis demonstrates the concept of a critical path and the determination of the
minimum completion time of a project. However, this was a cumbersome method for
determining a critical path. Next, we discuss a mathematical approach to scheduling the
project activities and determining the critical path.
ACTIVITY SCHEDULING
In our analysis of the critical path, we determined the earliest time that each activity could
be finished. For example, we found that the earliest time activity 4 could start was five
months. This time is referred to as the earliest start time, and it is expressed symbolically
as ES. In order to show the earliest start time on the network as well as some other activity
times we will develop in the scheduling process, we will alter our node structure a little.
Figure 9.10 shows the structure for node 1, the first activity in our example network for
designing the house and obtaining financing.
Earliest start time (ES):
the earliest time an activity can start.
Figure 9.10
Node Configuration
To determine the earliest start time for every activity, we make a forward pass through the
network. That is. we start at the first node and move forward through the network. The
earliest start time for an activity is the maximum time in which all preceding activities have
been completed— the time when the activity start node is realized.
Forward pass:
starts at the beginning of a CPM/PERT network to determine the earliest activity
times.
The earliest finish time (EF), for an activity is simply the earliest start time plus the
activity time estimate. For example, if the earliest start time for activity 1 is at time 0, then
the earliest finish time is three months. In general, the earliest start and finish times for an
activity are computed according to the following mathematical relationship.
Earliest finish time (EF):
is the earliest start time plus the activity time.
The earliest start and earliest finish times for all the activities in our project network are
shown in Figure 9.11.
The earliest start time for the first activity in the network (for which there are no
predecessor activities) is always 0, or, ES = 0. This enables us to compute the earliest finish
time for activity 1 as
The earliest start for activity 2 is
and the corresponding earliest finish time is
For activity 3 the earliest start time (ES) is three months, and the earliest finish time (EF) is
four months.
Now consider activity 4, which has two predecessor activities. The earliest start time is
Figure 9.11
Earliest Activity Start and Finish Times
and the earliest finish time is
All the remaining earliest start and finish times are computed similarly. Notice in Figure
9.11 that the earliest finish time for activity 7, the last activity in the network, is nine
months, which is the total project duration, or critical path time.
Companions to the earliest start and finish are the latest start and latest finish times. LS
and LF. The latest start time is the latest time an activity can start without delaying the
completion of the project beyond the project critical path time. For our example, the project
completion time (and earliest finish time) at node 7 is nine months. Thus, the objective of
determining latest times is to see how long each activity can be delayed without the project
exceeding nine months.
Latest start time (LS):
the latest time an activity can start without delaying critical path time.
Latest finish time (LF):
the latest time an activity can be completed and still maintain the project critical
path time.
In general, the latest start and finish times for an activity are computed according to the
following formulas:
Whereas a forward pass through the network is made to determine the earliest times, the
latest times are computed using a backward pass. We start at the end of the network at
node 7 and work backward, computing the latest times for each activity. Since we want to
determine how long each activity in the network can be delayed without extending the
project time, the latest finish time at node 7 cannot exceed the earliest finish time.
Therefore, the latest finish time at node 7 is nine months. This and all other latest times are
shown in Figure 9.12.
Backward pass:
determines latest activity times by starting at the end of a CPM/PERT network and
working forward.
Starting at the end of the network, the critical path time, which is also equal to the earliest
finish time of activity 7. is nine months. This automatically becomes the latest finish time
for activity 7, or
Using this value, the latest start time for activity 7 is
The latest finish time for activity 6 is the minimum of the latest start times for the activities
following node 6. Since activity 7 follows node 6, the latest finish time is
Figure 9.12
Latest Activity Start and Finish Times
The latest start time for activity 6 is
For activity 4, the latest finish time (LF) is eight months, and the latest start time (LS) is
five months; for activity 5, the latest finish time (LF) is seven months, and the latest start
time (LS) is six months.
Now consider activity 3, which has two activities, 4 and 5, following it. The latest finish
time is computed as
The latest start time is
All the remaining latest start and latest finish times are computed similarly. Figure 9.12
includes the earliest and latest start times, and earliest and latest finish times for all
activities.
ACTIVITY SLACK
The project network in Figure 9.12, with all activity start and finish times, highlights the
critical path (1-2-4-7) we determined earlier by inspection. Notice that for the activities on
the critical path, the earliest start times and latest start times are equal. This means that
these activities on the critical path must start exactly on time and cannot be delayed at all.
If the start of any activity on the critical path is delayed, then the overall project time will
be increased. We now have an alternative way to determine the critical path besides simply
inspecting the network. The activities on the critical path can be determined by seeing for
which activities ES = LS or EF = LF. In Figure 9.12 the activities 1, 2, 4, and 7 all have
earliest start times and latest start times that are equal (and EF = LF); thus, they are on the
critical path.
A primary use of CPM/PERT is to plan and manage construction projects of all types,
such as the 80,000-seat 2012 Olympic Stadium in Stratford, near London, at a cost of £
469 million.
Table 9.1 Activity Slack
Activity
LS
ES
LF
EF
Slack S
*
1
0
0
3
3
0
*
2
3
3
5
5
0
3
4
3
5
4
1
*
4
5
5
8
8
0
5
6
5
7
6
1
6
7
6
8
7
1
*
7
8
8
9
9
0
*
Critical path.
For activities not on the critical path for which the earliest and latest start times (or earliest
and latest finish times) are not equal, slack time exists. We introduced slack with our
discussion of the Gantt chart in Figure 9.4. Slack is the amount of time an activity can be
delayed without affecting the overall project duration. In effect, it is extra time available for
completing an activity.
Slack, S, is computed using either of the following formulas:
S = LS − ES
or
S = LF − EF
For example, the slack for activity 3 is
If the start of activity 3 were delayed for one month, the activity could still be completed by
month 5 without delaying the project completion time. The slack for each activity in our
example project network is shown in Table 9.1. Table 9.1 shows there is no slack for the
activities on the critical path (marked with an asterisk); activities not on the critical path
have slack.
Notice in Figure 9.12 that activity 3 can be delayed one month and activity 5 that follows it
can be delayed one more month, but then activity 6 cannot be delayed at all even though it
has one month of slack. If activity 3 starts late at month 4 instead of month 3, then it will be
completed at month 5, which will not allow activity 5 to start until month 5. If the start of
activity 5 is delayed one month, then it will be completed at month 7, and activity 6 cannot
be delayed at all without exceeding the critical path time. The slack on these three activities
is called shared slack. This means that the sequence of activities 3-5-6 can be delayed two
months jointly without delaying the project, but not three months.
Slack is beneficial to the project manager because it enables resources to be temporarily
diverted from activities with slack and used for other activities that might be delayed for
various reasons or for which the time estimate has proved to be inaccurate.
The times for the network activities are simply estimates, for which there is usually not a
lot of historical basis (since projects tend to be unique undertakings). As such, activity time
estimates are subject to quite a bit of uncertainty. However, the uncertainty inherent in
activity time estimates can be reflected to a certain extent by using probabilistic time
estimates instead of the single, deterministic estimates we have used so far.
ALONG THE SUPPLY CHAIN
Renovation Projects
A Couple of Iconic Building
The National Museum of American History in Washington, DC, reopened in November,
2008 after a two-year, $85 million renovation project. The project focused on three
areas—architectural enhancements to the Museum's interior, constructing a state-of-theart gallery for the Star-Spangled Banner, and updating the 42-year-old building's
infrastructure (mechanical, electrical, plumbing, lighting, fire, and security systems). The
interior renovations included a five-story central atrium with a skylight that opens up the
building to bright daylight, a grand staircase connecting the Museum's first and second
floors, 10-foot-high artifact walls on both the first and second floors showcasing the
breadth of the Museum's 3 million objects, and a welcome center on the second floor to
improve visitor orientation. One of the renovation challenges was protecting the museum
items. Smaller items, like Dorothy's ruby slippers from the Wizard of Oz, were moved to
specially constructed storage areas and sealed in enormous boxes lined with monitors and
vibration sensors, while larger artifacts, such as an 18-ton statue of George Washington,
had to be protected in place. However, the project's centerpiece was a new $19 million
chamber with special lighting for the museum's most prized artifact, the Star Spangled
Banner.
Across the Atlantic in England a six-year project is on-going to restore and modernize the
Royal Shakespeare and Company main theater in Stratford-upon-Avon, at a cost of 112.8
million British pounds. Shakespeare created his plays with an intimate environment in
mind, with the audience standing right in front of the stage. However, a reconstruction of
the theater in the 1930s included a traditional fanshaped seating design with the audience
far from the stage, which dramatically altered Shakespeare's intended playgoer's
experience. The renovation project is creating a new stage that extends into the audience
on three sides and which can also be reconfigured and set up in the round, immersing the
1,000 audience members in the type of performance Shakespeare intended. Although the
project plan seemed straightforward at first, like many projects involving historical
building sites, the reality proved different. The new stage required a 23-foot-deep
basement to be dug, but the theater is located on the banks of the River Avon. When the
project team began digging the basement they discovered that the 1930s approach to
keeping the river water out was to fill in an enormous hole with concrete, so instead of
simply digging out the new basement, a mass of concrete had to be broken up. When the
concrete was removed the basement was under the water table, so water had to be
constantly pumped away from the work site and a special rig had to pump sealants into
the ground around the basement's outer wall. Despite the unique problems posed by
historic building renovation projects—like building a special room for the United States's
flag and creating a stage for plays as the Bard intended—as he might say himself, “All's
well that ends well.”
Sources: Jesss Wangness, “Cleaning Out the Attic,” PM Network, vol. 23 (8: August
2009), pp. 50-53; and Libby Ellis, “All the World's a Stage,” PM Network, vol. 23(7: July
2009), pp. 52-59.
Renovation projects use project management techniques, such as the six-year project
to restore and renovate the Royal Shakespeare and Company theater in Stratfordupon-Avon, at a cost of £ 11.28 million.
PROBABILISTIC ACTIVITY TIMES
In the project network for building a house in the previous section, all activity time estimates
were single values. By using only a single activity time estimate, we are, in effect, assuming
that activity times are known with certainty (i.e., they are deterministic). For example, in
Figure 9.8, the time estimate for activity 2 (laying the foundation) is two months. Since only
this one value is given, we must assume that the activity time does not vary (or varies very
little) from two months. It is rare that activity time estimates can be made with certainty.
Project activities are likely to be unique with little historical evidence that can be used as a
basis to predict activity times. Recall that one of the primary differences between CPM and
PERT is that PERT uses probabilistic activity times.
PROBABILISTIC TIME ESTIMATES
In the PERT-type approach to estimating activity times, three time estimates for each
activity are determined, which enables us to estimate the mean and variance of a beta
distribution of the activity times.
Probabilistic time estimates reflect uncertainty of activity times.
Beta distribution:
a probability distribution traditionally used in CPM/PERT.
We assume that the activity times can be described by a beta distribution for several
reasons. The beta distribution mean and variance can be approximated with three time
estimates. Also, the beta distribution is continuous, but it has no predetermined shape (such
as the bell shape of the normal curve). It will take on the shape indicated—that is, be
skewed—by the time estimates given. This is beneficial, since typically we have no prior
knowledge of the shapes of the distributions of activity times in a unique project network.
Although other types of distributions have been shown to be no more or less accurate than
the beta, it has become traditional to use the beta distribution to estimate probabilistic
activity times.
The three time estimates for each activity are the most likely time (m), the optimistic time
(a), and the pessimistic time (b). The most likely time is a subjective estimate of the
activity time that would most frequently occur if the activity were repeated many times.
The optimistic time is the shortest possible time to complete the activity if everything went
right. The pessimistic time is the longest possible time to complete the activity assuming
everything went wrong. The person most familiar with an activity or the project manager
makes these “subjective” estimates to the best of his or her knowledge and ability.
Optimistic (a), most likely (m), and pessimistic (b):
time estimates for an activity.
These three time estimates are used to estimate the mean and variance of a beta
distribution, as follows:
where
These formulas provide a reasonable estimate of the mean and variance of the beta
distribution, a distribution that is continuous and can take on various shapes, or exhibit
skewness.
Figure 9.13 illustrates the general form of beta distributions for different relative values of
a, m, and b.
Example 9.1
Estimates
A Project Network with Probabilistic Time
The Southern Textile Company has decided to install a new computerized order
processing system that will link the company with customers and suppliers. In the past,
orders were processed manually, which contributed to delays in delivery orders and
resulted in lost sales. The new system will improve the quality of the service the company
provides. The company wants to develop a project network for the installation of the new
system. The network for the installation of the new order processing system is shown in
the following figure.
The network begins with three concurrent activities: The new computer equipment is
installed (activity 1); the computerized order processing system is developed (activity 2);
and people are recruited to operate the system (activity 3). Once people are hired, they
are trained for the job (activity 6), and other personnel in the company, such as
marketing, accounting, and production personnel, are introduced to the new system
(activity 7). Once the system is developed (activity 2) it is tested manually to make sure
that it is logical (activity 5). Following activity 1, the new equipment is tested, any
necessary modifications are made (activity 4), and the newly trained personnel begin
training on the computerized system (activity 8). Also, node 9 begins the testing of the
system on the computer to check for errors (activity 9). The final activities include a trial
run and changeover to the system (activity 11), and final debugging of the computer
system (activity 10).
Figure 9.13
Examples of the Beta Distribution
The three time estimates, the mean, and the variance for all the activities in the network
as shown in the figure are provided in the following table:
Activity Time Estimates
Solution
As an example of the computation of the individual activity mean times and variance,
consider activity 1. The three time estimates (a = 6, m = 8, b = 10) are substituted in the
formulas as follows:
The other values for the mean and variance are computed similarly.
Once the mean times have been computed for each activity, we can determine the critical
path the same way we did in the deterministic time network, except that we use the
expected activity times, t. Recall that in the home building project network, we identified
the critical path as the one containing those activities with zero slack. This requires the
determination of earliest and latest start and finish times for each activity, as shown in the
following table and figure:
Activity Earliest and Latest Times and Slack
From the table, we can see that the critical path encompasses activities 2-5-8-11, since
these activities have no available slack. We can also see that the expected project
completion time (tp) is the same as the earliest or latest finish for activity 11, or tp = 25
weeks. To determine the project variance, we sum the variances for the activities on the
critical path. Using the variances shown in the table for the critical path activities, we can
compute the total project variance as follows:
ALONG THE SUPPLY CHAIN An Interstate Highway
Construction Project in Virginia
One of the most frequent applications of project management is for construction projects.
Many companies and government agencies contractually require a formal project
management process plan as part of the bid process. One such project is for the
construction of four new high occupancy toll (HOT) lanes totaling 96 miles on 1-495,
one of the nation's busiest traffic corridors near Washington, DC, at a cost of $1.4 billion.
HOT lanes are tolled lanes that operate alongside existing highways to provide drivers
with a faster and more reliable travel option, for a fee. This Virginia Department of
Transportation (VDOT) five-year project scheduled to be completed in 2013 also
includes replacing more than 50 aging bridges and overpasses, upgrading 10
interchanges, improving bike and pedestrian access, and improving sound protection for
local neighborhoods. The project employs as many as 500 skilled workers on-site that
work under extreme safety conditions. As many as a quarter million vehicles pass
through this corridor daily so all work is done under heavy traffic conditions. Much of it
is done at night, during off-hours, and on weekends, which adds costs for premium-time
and late-shift pay and makes scheduling complex and difficult. Another dimension which
has added complexity to the project is that it requires a “public-private” partnership
between VDOT and private contractors. While VDOT, as a government agency, has a
responsibility to review and evaluate every contract package carefully (and sometimes
slowly), the private contractors want to accelerate the contract biding and award process
in order to maintain schedules. When designs have not been approved and contracts have
not been bid, the contractors may not be able to keep workers busy and work will slow
down and lag. Thus, the project management process requires a high degree of
communication and coordination between team members, and focused administration by
the project leaders.
Source: Sarah Gale, “A Closer Look: Virginia Department of Transportation,” PM
Network, vol. 23 (4: April 2009), pp. 48-51; and, the Virginia Department of
Transportation Web site at http://virginiadot.org.
CPM/PERT ANALYSIS WITH OM TOOLS
The “Project Management” module in OM Tools has the capability to develop both singletime estimate and three-time estimate networks. Exhibit 9.1 shows the OM Tools spreadsheet
for the “Order Processing System” project in Example 9.1.
Exhibit 9.1
• OM Tools File
PROBABILISTIC NETWORK ANALYSIS
The CPM/PERT method assumes that the activity times are statistically independent, which
allows us to sum the individual expected activity times and variances to get an expected
project time and variance. It is further assumed that the network mean and variance are
normally distributed. This assumption is based on the central limit theorem of probability,
which for CPM/PERT analysis and our purposes states that if the number of activities is
large enough and the activities are statistically independent, then the sum of the means of
the activities along the critical path will approach the mean of a normal distribution. For the
small examples in this chapter, it is questionable whether there are sufficient activities to
guarantee that the mean project completion time and variance are normally distributed.
Although it has become conventional in CPM/PERT analysis to employ probability
analysis using the normal distribution regardless of the network size, the prudent user
should bear this limitation in mind.
Probabilistic analysis of a CPM/PERT network is the determination of the probability that
the project will be completed within a certain time period given the mean and variance of a
normally distributed project completion time. This is illustrated in Figure 9.14. The value Z
is computed using the following formula:
Figure 9.14
Normal Distribution of Project Time
where
This value of Z is then used to find the corresponding probability in Table A.1 (Appendix
A).
Example 9.2
Probabilistic Analysis of the Project Network
The Southern Textile Company in Example 9.1 has told its customers that the new order
processing system will be operational in 30 weeks. What is the probability that the
system will be ready by that time?
Solution
The probability that the project will be completed within 30 weeks is shown as the
shaded area in the accompanying figure. To compute the Z value for a time of 30 weeks,
we must first compute the standard deviation (σ) from the variance (σ2).
Next we substitute this value for the standard deviation along with the value for the mean,
25 weeks, and our proposed project completion time, 30 weeks, into the following
formula:
A Z value of 1.91 corresponds to a probability of 0.4719 in Table A.1 in Appendix A.
This means that there is a 0.9719 probability of completing the project in 30 weeks or
less (adding the probability of the area to the left of μ = 25, or 0.5000 to 0.4719).
Example 9.3
Probabilistic Analysis of the Project Network
A customer of the Southern Textile Company has become frustrated with delayed orders
and told the company that if the new ordering system is not working within 22 weeks, it
will not do any more business with the textile company. What is the probability the order
processing system will be operational within 22 weeks?
Solution
The probability that the project will be completed within 22 weeks is shown as the
shaded area in the accompanying figure.
The probability of the project's being completed within 22 weeks is computed as follows:
A Z value of −1.14 corresponds to a probability of 0.3729 in the normal table in
Appendix A. Thus, there is only a 0.1271 (i.e., 0.5000 − 0.3729) probability that the
system will be operational in 22 weeks.
MICROSOFT PROJECT
• Microsoft Project File
Microsoft Project is a very popular and widely used software package for project
management and CPM/PERT analysis. It is also relatively easy to use. We will demonstrate
how to use Microsoft Project using our project network for building a house in Figure 9.8.
Note that the Microsoft Project file for this example beginning with Exhibit 9.2 can be
downloaded from the text Web site.
When you open Microsoft Project, a screen comes up for a new project. Click on the “Tasks”
button and the screen like the one shown in Exhibit 9.2 will appear. Notice the set of steps on
the left side of the screen starting with “define the project.” If you click on “this step,” it
enables you to set a start date and save it. We set the start date for our house building project
as June 10, 2010.
Exhibit 9.2
The second step in the “Tasks” menu. “Define general working times,” allows the user to
specify general work rules and a work calendar including such things as working hours per
day, holidays, and weekend days off. In the third step in the “Tasks” menu, we can “List the
tasks in the project.” The tasks for our house building project are shown in Exhibit 9.3.
Notice that we also indicated the duration of each task in the “Duration” column. For
example, to enter the duration of the first activity, you would type in “3 months” in the
duration column. Notice that the first task is shown to start on June 10.
The next thing we will do is “Schedule tasks” by specifying the predecessor and successor
activities in our network. This is done by using the buttons under the “Link dependent tasks”
window in Exhibit 9.3. For example, to show that activity 1 precedes activity 2, we put the
cursor on activity 1 and then hold down the “Ctrl” key while clicking on activity 2. This
makes a “finish to start” link between two activities, which means that activity 2 cannot start
until activity 1 is finished. This creates the precedence relationship between these two
activities, which is shown under the “Predecessor” column in Exhibit 9.3.
Exhibit 9.3
Exhibit 9.4
Exhibit 9.3 also shows the completed Gantt chart for our network. The Gantt chart is
accessed by clicking on the “View” button on the toolbar at the top of the screen and then
clicking on the “Gantt Chart.” You may also need to alter the time frame to get all of the
Gantt chart on your screen as shown in Exhibit 9.3. This can be accomplished by clicking on
the “Format” button on the toolbar and then clicking on the “Timescale” option. This results
in a window from which you can adjust the timescale from “days” as shown in Exhibit 9.2 to
“months” as shown in Exhibit 9.3. Notice in Exhibit 9.3 that the critical path is highlighted in
red. You can show the critical path by again clicking on “Format” on the toolbar and then
activating the “Gantt Chart Wizard,” which allows you to highlight the critical path, among
other options.
To see the project network, click on the “View” button again on the toolbar and then click on
“Network Diagram.” Exhibit 9.4 shows the project network with the critical path highlighted
in red. Exhibit 9.5 shows the project network “nodes” using the “Zoom” option from the
“View” menu to increase the network size. Notice that each node includes the start and finish
dates and the activity number.
Microsoft Project has many additional tools and features for project updating and resource
management. As an example, we will demonstrate one feature that updates the project
schedule. First we double click on the first task, “Design and finance,” resulting in the
window labeled “Task Information” shown in Exhibit 9.6. On the “General” tab screen we
have entered 100% in the “Percent complete” window, meaning this activity has been
completed. We will also indicate that activities 2 and 3 have been completed while activity 4
is 60% complete and activity 5 is 20% complete. The resulting screen is shown in Exhibit
9.7. Notice that the dark lines through the Gantt chart bars indicates the degree of
completion.
Exhibit 9.5
Exhibit 9.6
Exhibit 9.7
PERT ANALYSIS WITH MICROSOFT PROJECT
A PERT network with three time estimates can also be developed using Microsoft Project.
We will demonstrate this capability using our “Order Processing System” project from
Example 9.1. After all of the project tasks are listed, then the three activity time estimates are
entered by clicking on the “PERT Entry Sheet” button on the toolbar. If this button is not on
your toolbar, you must add it in by clicking on “View” and then from the Toolbars options
select “PERT Analysis.” Exhibit 9.8 shows the PERT time estimate entries for the activities
in our order processing system project example. Exhibit 9.9 shows the estimated activity
durations based on the three time estimates for each activity, the precedence relationships,
and the project Gantt chart. Exhibit 9.10 shows the project network.
Exhibit 9.8
Exhibit 9.9
Exhibit 9.10
ALONG THE SUPPLY CHAIN
The Corps of Engineers
Hurricane Katrina New Orleans Restoration Project
Although category 3 Hurricane Katrina veered east of New Orleans and the city avoided a
direct hit on August 29. 2005, the resulting rising floodwaters from the Mississippi River
crushed the city's levees and floodwalls, causing the flood protection system to fail at more
than 50 places and sub-merging 80% of the city. Almost 2,000 people lost their lives and
damage estimates totaled well over $100 billion, making it arguably the largest natural
disaster in the history of The United States Less than a month later Hurricane Rita, the
third-largest storm in U.S. history, hit the same Gulf coast area.
It was the responsibility of the United States Army Corps of Engineers to help the city
recover and restore the flood protection system in a very short period of time. The project
task list included pumping or draining 250 billion gallons of water from New Orleans;
removing about 28 million cubic yards of debris from the city and Gulf Coast; and
repairing and restoring 220 miles of levees and floodwalls to at least pre-Katrina levels.
The project team was also charged with rebuilding floodgates, upgrading the hurricane
protection system in New Orleans, and restoring navigation along the Mississippi River.
Draining floodwater was a priority since it was essential for public health; the original
estimate was that it would take six months but it was accomplished in 45 days. At the same
time Army helicopter crews working around the clock dropped an average of 600 sandbags
weighing 7,000 pounds every day for 10 days and closed the system's breaches only two
weeks after the hurricane hit. Meanwhile debris was removed, water distributed (including
170 million pounds of ice), power restored, over 81,000 temporary roofs were installed,
80.000 trees were removed, and, 7,100 structures were demolished. The levees were rebuilt
with erosion-resistant clay and a more stable floodwall formation by mid-January 2006,
well before the target date of June 1, the start of the next hurricane season. The project
team accomplished what might normally have taken a decade in eight months. The project
cost $3.7 billion in Louisiana alone, and more than 10,000 workers were involved with the
project including 8,000 Corps of Engineers employees and team members from as far away
as the Netherlands, Germany, Korea, and Japan. Despite public criticism of the Federal
Emergency Management Agency (FEMA). the city's preparedness, and the government's
handling of various recovery and citizen relocation efforts, the Corps of Engineer's
restoration project immediately following the hurricane was a success by any measure.
The construction project to restore the levees along the Mississippi River in New
Orleans after Hurricane Katrina was accomplished well before the target date with the
aid of project management techniques.
Source: Deborah Silver, “A City in Ruins,” PM Network, vol. 23 (5: May 2009), pp. 46-52.
PROJECT CRASHING AND TIME-COST TRADEOFF
The project manager is frequently confronted with having to reduce the scheduled
completion time of a project to meet a deadline. In other words, the manager must finish the
project sooner than indicated by the CPM/PERT network analysis. Project duration can often
be reduced by assigning more labor to project activities, in the form of overtime, and by
assigning more resources (material, equipment, and so on). However, additional labor and
resources increase the project cost. Thus, the decision to reduce the project duration must be
based on an analysis of the tradeoff between time and cost. Project crashing is a method for
shortening the project duration by reducing the time of one (or more) of the critical project
activities to less than its normal activity time. This reduction in the normal activity time is
referred to as crashing. Crashing is achieved by devoting more resources, usually measured
in terms' of dollars, to the activities to be crashed.
Crashing: reducing project time by expending additional
resources.
Figure 9.15
The Project Network for Building a House
PROJECT CRASHING
To demonstrate how project crashing works, we will employ the CPM/PERT network for
constructing a house in Figure 9.8. This network is repeated in Figure 9.15, except that the
activity times previously shown as months have been converted to weeks. Although this
sample network encompasses only single-activity time estimates, the project crashing
procedure can be applied in the same manner to PERT networks with probabilistic activity
time estimates.
We will assume that the times (in weeks) shown on the network activities are the normal
activity times. For example, 12 weeks are normally required to complete activity 1.
Furthermore, we will assume that the cost required to complete this activity in the time
indicated is $3000. This cost is referred to as the normal activity cost. Next, we will assume
that the building contractor has estimated that activity 1 can be completed in seven weeks,
but it will cost S5000 instead of $3000 to complete the activity. This new estimated activity
time is known as the crash time, and the cost to achieve the crash time is referred to as the
crash cost.
Activity 1 can be crashed a total of five weeks (normal time − crash time = 12-7 = 5 weeks)
at a total crash cost of $2000 (crash cost − normal cost = $5000 − 3000 = $2000). Dividing
the total crash cost by the total allowable crash time yields the crash cost per week:
Total crash cost\Total crash time = $2000/5 = $400 per week
If we assume that the relationship between crash cost and crash time is linear, then activity 1
can be crashed by any amount of time (not exceeding the maximum allowable crash time) at
a rate of $400 per week. For example, if the contractor decided to crash activity 1-2 by only
two weeks (reducing activity time to 10 weeks), the crash cost would be $800 ($400 per
week × 2 weeks). The linear relationships between crash cost and crash time and between
normal cost and normal time are illustrated in Figure 9.16.
Crash time:
an amount of time an activity is reduced.
Crash cost: is the cost of reducing activity time.
Figure 9.16
The Relationship Between Normal Time and
Cost, and Crash Time and Cost
The goal of crashing is to reduce project duration at minimum cost.
The objective of project crashing is to reduce project duration while minimizing the cost of
crashing. Since the project completion time can be shortened only by crashing activities on
the critical path, it may turn out that not all activities have to be crashed. However, as
activities are crashed, the critical path may change, requiring crashing of previously
noncritical activities to reduce the project completion time even further.
Example 9.4
Project Crashing
Recall that the critical path for the house building network in Figure 9.15 encompassed
activities 1-2-7 and the project duration was nine months, or 36 weeks. Suppose the home
builder needed the house in 30 weeks and wanted to know how much extra cost would be
incurred to complete the house by this time.
The normal times and costs, the crash times and costs, the total allowable crash times, and
the crash cost per week for each activity in the network in Figure 9.15 are summarized in
the following table:
Normal Activity and Crash Data
Solution
We start by looking at the critical path and seeing which activity has the minimum crash
cost per week. Observing the preceding table and the figure below, we see activity 1 has
the minimum crash cost of $400. Activity 1 will be reduced as much as possible. The table
shows that the maximum allowable reduction for activity 1 is five weeks, but we can
reduce activity 1 only to the point at which another path becomes critical. When two paths
simultaneously become critical, activities on both must be reduced by the same amount. If
we reduce the activity I time beyond the point at which another path becomes critical, we
may be incurring an unnecessary cost. This last stipulation means that we must keep up
with all the network paths as we reduce individual activities, a condition that makes manual
crashing very cumbersome. For that reason the computer is generally required for project
crashing: however, we will solve this example manually in order to demonstrate the logic
of project crashing.
It turns out that activity 1 can be crashed by the total amount of five weeks without another path becoming critical, since activity 1 is included in all four paths in the network.
Crashing this activity results in a revised project duration of 31 weeks at a crashing cost of
S2000. The revised network is shown in the following figure.
Since we have not reached our crashing goal of 30 weeks, we must continue, and the
process is repeated. The critical path in the preceding figure remains the same, and the
minimum activity crash cost on the critical path is $500 for activity 2. Activity 2 can be
crashed a total of three weeks, but since the contractor desires to crash the network only to
30 weeks, we need to crash activity 2 by only one week. Crashing activity 2 by one week
does not result in any other path becoming critical, so we can safely make this reduction.
Crashing activity 2 to seven weeks (i.e., a one-week reduction) costs $500 and reduces the
project duration to 30 weeks.
The total cost of crashing the project to 30 weeks is $2500. The contractor could inform the
customer that an additional cost of only $2500 would be incurred to finish the house in 30
weeks.
Suppose we wanted to continue to crash this network, reducing the project duration down
to the minimum time possible—that is, crashing the network the maximum amount
possible. We can determine how much the network can be crashed by crashing each
activity the maximum amount possible and then determining the critical path of this
completely crashed network. For example, activity 1 is seven weeks, activity 2 is five
weeks, 3 is three weeks, and so on. The critical path of this totally crashed network is 1-24—6-7, with a project duration of 24 weeks. This is the least amount of time in which the
project can be completed. If we crashed all the activities by their maximum amount, the
total crashing cost would be $35,700, computed by subtracting the total normal cost of
$75,000 from the total crash cost of $110,700 in the preceding table. However, if we
followed the crashing procedure outlined in this example, the network could be crashed to
24 weeks at a cost of $31,500, a savings of $4000.
THE GENERAL RELATIONSHIP OF TIME AND COST
In our discussion of project crashing, we demonstrated how the project critical path time
could be reduced by increasing expenditures for labor and other direct resources. The
objective of crashing was to reduce the scheduled completion time to reap the results of the
project sooner. However, there may be other reasons for reducing project time. As projects
continue over time, they consume indirect costs, including the cost of facilities, equipment,
and machinery, interest on investment, utilities, labor, personnel costs, and the loss of skills
and labor from members of the project team who are not working at their regular jobs. There
also may be direct financial penalties for not completing a project on time. For example,
many construction contracts and government contracts have penalty clauses for exceeding
the project completion date.
Figure 9.17
The Time-Cost Tradeoff
In general, project crashing costs and indirect costs have an inverse relationship; crashing
costs are highest when the project is shortened, whereas indirect costs increase as the project
duration increases. This time—cost relationship is illustrated in Figure 9.17. The best, or
optimal, project time is at the minimum point on the total cost curve.
• Practice Quizzes
SUMMARY
Since the development of CPM/PERT in the 1950s, it has been applied in a variety of
government agencies concerned with project control, including military agencies, NASA, the
Federal Aviation Agency (FAA), and the General Services Administration (GSA). These
agencies are frequently involved in large-scale projects involving millions of dollars and
many subcontractors. Examples of such governmental projects include the development of
weapons systems, aircraft, and such NASA space-exploration projects as the space shuttle. It
has become common for these agencies to require subcontractors to develop and use a
CPM/PERT analysis to maintain management control of the myriad project components and
subprojects.
CPM/PERT has also been widely applied in the private sector. Two of the areas of
application of CPM/PERT in the private sector have been research and development (R&D)
and construction. CPM/PERT has been applied to R&D projects, such as developing new
drugs, planning and introducing new products, and developing new and more powerful
computer systems. CPM/PERT analysis has been particularly applicable to construction
projects. Almost every type of construction project—from building a house to constructing a
major sports stadium, to building a ship, to constructing the Alaska oil pipeline—has been
the subject of network analysis.
One reason for this popularity is that a network analysis provides a visual display of the
project that is easy for managers and staff to understand and interpret. It is a powerful tool for
identifying and organizing the activities in a project and controlling the project schedule.
However, beyond that it provides an effective focal point for organizing the efforts of
management and the project team.
Currently, hundreds of project management software packages are commercially available
for personal computers, ranging in cost from several hundred dollars to thousands of dollars.
CPM/PERT also has certain limitations. The project manager tends to rely so heavily on the
project network that errors in the precedence relationship or missing activities can be
overlooked, until a point in time where these omissions become a problem. Attention to
critical path activities can become excessive to the extent that other project activities may be
neglected, or they may be delayed to the point that other paths become critical. Obtaining
accurate single-time estimates and even three probabilistic time estimates is difficult and
subject to a great deal of uncertainty. Since persons directly associated with the project
activity within the organization are typically the primary source for time estimates, they may
be overly pessimistic if they have a vested interest in the scheduling process or overly
optimistic if they do not. Personal interests aside, it is frequently difficult to define, within
the context of an activity, what an optimistic or pessimistic time means. Nevertheless, such
reservations have not diminished the popularity of CPM/PERT because most people feel its
usefulness far outweighs any speculative or theoretical drawbacks.
SUMMARY OF KEY FORMULAS
Earliest Start and Finish Times
ES = max (EF of immediately preceding activities)
EF = ES + t
Latest Start and Finish Times
LS = LF - t
LF = min (LS of immediately following activities)
Activity Slack
S = LS - ES = LF - EF
Mean Activity Time and Variance
SUMMARY OF KEY TERMS
activity
performance of an individual job or work effort that requires labor, resources, and time
and is subject to management control.
activity-on-arrow (AOA)
a convention for constructing a CPM/PERT network in which the branches between
nodes represent project activities.
activity-on-node [AON)
a convention for constructing a CPM/PERT network in which the nodes represent
project activities.
backward pass
starting at the end of a CPM/PERT network, a procedure for determining latest activity
times.
beta distribution
a probability distribution traditionally used in CPM/PERT for estimating the mean and
variance of project activity times.
crash cost
the cost of reducing the normal activity time.
crash time
the amount of time an activity is reduced.
crashing
a method for shortening the project duration by reducing the time of one or more
critical activities at a cost.
critical path
the longest path through a CPM/PERT network, indicating the minimum time in which
a project can be completed.
dummy
an activity in a network that shows a precedence relationship but represents no passage
of time.
earliest finish time (EF)
the earliest time an activity can be completed.
earliest start time (ES)
the earliest time an activity can begin subject to preceding activities.
earned value analysis (EVA)
a standard procedure for measuring a project's progress, forecasting its completion time
and cost, and measuring schedule and budget variation.
event
the completion or beginning of an activity in a project.
forward pass
starting at the beginning of a CPM/PERT network, a procedure for determining earliest
activity times.
Gantt chart
a graphical display using bars (or time lines) to show the duration of project activities
and precedence relationships.
latest finish time (LF)
the latest time an activity can be completed and still maintain the project critical path
time.
latest start time (LS)
the latest time an activity can begin and not delay subsequent activities.
matrix organization
an organizational structure of project teams that includes members from various
functional areas in the company.
most likely time (m)
the subjective estimate of the time that would occur most frequently if the activity were
repeated many times.
optimistic time (a)
the shortest possible time to complete the activity if everything went right.
organizational breakdown structure (OBS)
a chart that shows which organizational units are responsible for work items.
pessimistic time (b)
the longest possible time to complete the activity given that everything went wrong.
precedence relationship
the sequential relationship of project activities to each other.
project
a unique, one-time operation or effort.
responsibility assignment matrix (RAM)
shows who in the organization is responsible for doing the work in the project.
scope statement
a document that provides an understanding, justification and expected result for the
project.
slack
the amount by which an activity can be delayed without delaying any of the activities
that follow it or the project as a whole.
statement of work
a written description of the objectives of a project.
work breakdown structure [WBS)
a method for subdividing a project into different hierarchical levels of components.
SOLVED PROBLEMS
• Animated Demo Problem
CPM/PERT NETWORK ANALYSIS
Given the following network and activity time estimates, determine earliest and latest
activity times, slack, the expected project completion time and variance, and the
probability that the project will be completed in 28 days or less.
SOLUTION
Step 1. Compute the expected activity times and variances:
For example, the expected time and variance for activity 1 are
These values and the remaining expected times and variances for each activity are shown
in the following table:
Step 2. Determine the earliest and latest activity times and activity slack:
As an example, the earliest start and finish times for activity 1 are
ES = max (EF immediate predecessors)
The latest start and finish times for activity 7 are
LF = min (LS following activities)
Step 3. Identify the critical path and compute expected project completion time and
variance. Observing the preceding table and those activities with no slack (i.e., s = 0), we
can identify the critical path as 1-3-5-7. The expected project completion time (tp) is 24
days. The variance is computed by summing the variances for the activities in the critical
path:
Step 4. Determine the probability that the project will be completed in 28 days or less.
The following normal probability distribution describes the probability analysis.
Compute Z using the following formula:
The corresponding probability from the normal table in Appendix A is 0.4633; thus,
• Internet Exercises Weblinks