Project management and quality control

Module 1
Project management

Project management is an organized venture for managing

projects. Project management includes the scientific application of modern techniques in
planning, financing, monitoring, controlling and coordinating the unique activities of
project in order to produce the desirable outputs within the constraints of time and cost.
Project management consists of the following stages.
1. Project planning
2. Project scheduling
3. Project implementation, controlling and monitoring.

Project characteristics

a) Objectives - Project has a set of objectives which on achieved can be considered

as the completion of the project.
b) Lifecycle - Project has a life cycle consisting of stages like analysis, design and
implementation & commissioning.
c) Definite time limit - Every project has a definite time limit within which it should be
completed.
d) Uniqueness - Every project is unique and no two projects are similar.
e) Teamwork - Coordination among the personals from diverse area of specialization is
needed.
f) Complexity - Activities that contribute to the complexity of the project are technology
survey, choosing the appropriate technology, procuring appropriate machinery and
equipment, hiring the right kind of people, arranging for financial resources, execution of
project in time by proper scheduling.
g) Subcontracting - Some of the activities are entrusted to sub contractors to reduce the
complexity of the project. Greater the complexity, larger will be sub contracting.
h) Risk and uncertainty - All projects suffer from unexpected situations. E.g. – Suppose
during the production of an item, the customer choice changes or sudden entry of a strong
competitor.

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i) Customer specific nature - It is the duty of any organization to go for projects that are
suited to customer needs.
j) Change - Changes can occur throughout the lifespan of the project. During the course
of implementation the technology may have improved and it is better to shift to the new
technology.
k) Forecasting - Forecasting the demand of any product that the project is going to
produce is important.
l) Optimality - Since resources are always scarce and are costly, optimum utilization of
resources is a must.
m) All projects have pre-designed control mechanisms in order to ensure completion of
the projects within the time schedule.

Capital Expenditure

Capital Expenditure can also be called as capital investment or capital project. It is shown
as asset in the balance sheet.
Capital expenditure has
1) Long term effects - Consequences of a capital expenditure decisions extend far in to
the future. Current manufacturing activities and basic nature of a firm depends on
the capital expenditure in the past.
2) Irreversibility - If the capital investment is made in the form of equipment, a wrong
investment decision will lead to substantial loss.
3) Substantial outlays - Capital expenditure involves substantial outlays.
4) Measurement problem - It is very difficult to measure exactly the capital expenditure.
5) Uncertainty - Benefits of a capital expenditure decision extend far in to the future.
Since it is very difficult to predict exactly what will happen in the future there is a
great uncertainty.
6) Temporal spread - Some projects take 10-20 years to complete. Such a temporal
spread creates difficulties in estimating the correct capital expenditure.

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Types of Capital expenditure

Physical assets - They are tangible investments like land, buildings, plant, machinery,
vehicles and computers.
Monetary assets - financial claims like deposits, bonds, and equity shares.
Intangible assets - represents outlays on R&D, training, market development etc.
Strategic investment - one that has a significant impact on the direction of the firm. Eg:-
invest in a new product.
Tactical investment - To implement the current strategy more efficiently and more
profitably.
Mandatory investment - pollution control, fire fighting equipment, medical dispensary.
Replacement investment - meant to replace worn out equipment with new equipment.
Expansion investment - meant to increase the capacity to cater to the growing demands.
Diversification investment - aimed at producing new products or services.
R&D investment - meant to develop new products and processes.
Miscellaneous investment - investment on interior decoration, recreational facilities, garden.

Phases of Capital budgeting

It can be divided in to 6 broad phases.

Planning

Analysis

Selection

Financing

Implementation

Review
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Planning

Planning is concerned with the articulation of investment strategy and the generation and
preliminary screening of project proposals. Once a project proposal is identified, a project
analysis is done. A feasibility check is also made to check whether the project is
worthwhile.

Analysis

If the project seems to be worthwhile, a detailed analysis of marketing, technical,

financial, economic and ecological aspects is under taken. This phase gathers, prepares,
and summarizes relevant information about various project proposals.
Market analysis is concerned with:
1. Consumption trends in the past & present consumption level
2. Production possibilities and constraints
3. Imports & exports
4. Structure of competition
5. Cost structure
6. Consumer behavior, preferences & requirements
7. Distribution channels and marketing policies in use
8. Administrative, technical and legal constraints
Technical analysis
1. Check whether the preliminary tests and studies have been conducted
2. Check whether the availability of inputs has been established
3. Check whether the production process chosen is suitable
4. Check whether provision has been made for treatment of effluents
5. Check whether the selected scale of operation is optimal
Financial analysis checks whether project is financially viable. It deals with:
1. Investment outlay and cost of project
2. Means of financing
3. Cost of capital
4. Projected profitability

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 5. Cash flows of the project
Economic analysis checks how the cost & benefit of the project is going to affect the
society. It deals with:
1. Impact of the project on the distribution of income in the society
2. Impact of the project on the level of savings & investment in the society
3. Contribution of the project towards self sufficiency, employment

Ecological analysis: - Deals with environmental issues

1. Check the damage caused by the project to the environment
2. Cost of restoration measures required to reduce the damage

Selection

Project is selected based on the following

Criterion Accept Reject
Payback period PBP<target period PBP>target period

Accounting rate of return ARR>target rate ARR<target rate

Net present value NPV>0 NPV<0

Internal Rate of return IRR>cost of capital IRR<cost of capital

Benefit cost ratio BCR>1 BCR<1

Payback period:-Defined as the length of time required to recover the original investment
through cash flows earned.

Accounting rate of return (Also known as the average rate of return):-

ARR=Profit after tax/Book value of investment (recorded value of investment)
Profit after tax is the average annual post tax benefit over the life of the project.

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Net present value:-

NPV = (Present value of all cash inflows over the life of the project) – (Present value of
cash out flow)
Present value of future cash flows is arrived at by discounting the future
cash inflows at an interest rate equal to the cost of capital.

NPV= CF1 CF2 CFn

+ . ……… _ CF0
(1+r)1 (1+r)2 (1+r)n

Where CF1 , CF2,…..are the future cash flows occurring at the end of first year, second
year etc.
n = life of the project.
r = discount rate (cost of capital).
CF0 = Present cash outflow.
NPV = 0 indicates that present cash outflow and present value of future cash inflows are
equal.
NPV<1 indicates that the present value of future cash inflows is less than the present cash
outflow.
NPV >1 indicates that the present value of future cash inflow is more than the present
cash outflow.

Internal rate of return (IRR):- IRR is the rate of discount which would equate the present
value of cash outflows to the present value of cash inflows.

Benefit cost ratio (BCR):- Present value of cash inflows/Present value of cash outflows.
If BCR >1 it indicates that the benefits from the project are in excess of the cost incurred
towards the project.
Financing
After selecting a project financial arrangements have to be made. Sources of finance are
1) Equity shares
2) Debt (consists of term loans and debenture.)

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Implementation

Stage Activity

Project & engineering Site probing, preparation of plant designs, selection of specific

design machines and equipment.

Negotiations and Legal contracts with respect to project financing, contracts for
contracting acquisition of technology, construction of buildings E.g.tendors.

Construction Site preparation, construction of buildings, installation of machinery.

Training Training of engineers, technicians.

Plant commissioning Start up of the plant.

Review
Performance review should be made periodically to compare actual performance with
projected performance.

Project model
A project is viewed as a conversion or transformation of some form of input in to an
output under a set of constraints and utilizing a set of mechanisms to make the project
happen.
Constraints

Project
Input Output

Mechanisms

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Inputs
Inputs refers to the want or need to start a project. For many organizations, this need will
be encapsulated into a brief document describing the nature of the work to be undertaken.
For the project manager, there will be both explicitly stated requirements (original needs)
and those that emerge during the course of the project due to the customer‟s changing
needs or perceptions (emergent needs).

Constraints

The main constraints are time, cost and quality. All projects by definition have a time
constraint. In practice, it is often found to be the most challenging to meet. Cost
constraint refers to the value and timing of financial resources required to carry out the
project work. Quality constraint indicates the standards by which both the product and the
process will be judged. In addition to these three, the following constraints can prove
limiting on the project:

1. Legal - this may not be explicitly stated but there will be legal constraints.

2. Ethical – a major area of many organizations today, particularly those where the ethics
of their organizational policies has been questioned in the past.

3. Environmental – the deluge of environmental legislation that has been generated by

governments has changed the role of environmental control from a subsidiary issue to
one which is at the forefront of management thinking in many sectors.

4. Logic– the need for certain activities to have been completed before a project can start.

5. Activation – actions to show when a project or activity can begin.

6. Indirect effects – it is practically impossible for any change to take place in isolation.
There will be ripple effects, which will need to be taken into account at the outset.

Outputs

Output can be described as a „satisfied need‟. This will be usually in the form of :

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 Converted information e.g. a set of specifications for a new product

 A tangible product e.g. a building

 Changed people e.g. through a training project, the participants have received new
knowledge

Mechanisms
The means of mechanisms by which the output is achieved are as follows:

People – those involved both directly and indirectly in the project.

Knowledge and expertise – brought to the project by the participants and outside
recruited help of both technical specialisms and management processes.
Financial resources
Tools and techniques – the methods for organizing the potential work with the
available resources.
Technology – the available physical assets that will be performing part or all of
the conversion process.

Phases of project management

Define the project

Design the project

process

Develop the process Deliver the project

Define the project – this is the time when it is determined what the project is about, its
reasons for existence and the intentions that it intends to progress. It is a time to explore
the possibilities, find alternatives to the problems presented.
Design the process – construct models to show how the needs will be developed,
evaluate these to determine the optimum process for the task and minimise risk.

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 Deliver the project – carry out the project in line with the models or plans generated
above.
Develop the project process – improve the products and processes in the light of the
experience gained from the project.

Phase Sub phases Description

Define the project 1) Conceptualization Generate explicit statement of needs.

2) Analysis Identify what has to be provided to meet

those needs – is it likely to be feasible?
Design the project process 1) Proposal Show how those needs will be met
through the project activities.

2) Justification Prepare and evaluate financial costs and

benefits from the project.

3) Agreement Point at which go-ahead is agreed by

project sponsor.

Deliver the project 1)Start-up Gather resources, assemble project teams.

2)Execution Carry out defined activities.

3)Completion Time/Money constraint reached or

activity series completed.

4)Handover Output of project passed to client/user.

Develop the process 1)Review Identify the outcomes for all stakeholders.

2)Feedback Put in place improvements to procedures,

fill gaps in knowledge and document
lessons for the future.

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7-s of project management
Works of a project manager can be categorized in to 7.
1) Strategy – Strategy stands for the high level requirements of the project and the means
to achieve them. Strategy is a process. It involves a high level consideration of objectives,
which can be seen as points of principle rather than activity-level details. Success starts
with a rational strategy process, which then guides and informs the decisions made in all
areas of the project. Strategic issues that lead to project failures are
1) Organization lacks coordination.
2) Resource is not available
3) Company doesn‟t have the capacity to take up the project.
2) Structure – It is the organizational arrangement that will be used to carry out the
project. Project team can be dedicated, full time team or one where staffs are borrowed as
and when needed.
3) Systems – The methods for work to be designed monitored and controlled. Both
formal and informal systems will need to be designed or at least recognized for key tasks,
including communication and quality assurance.
4) Staff - deals with selection, recruitment and management of those working on the
project.
5) Skills - The managerial and technical tools available to the project manager and the
staff.
6) Style – The underlying way of working and inter-relating within the work team or
organization.
7) Stakeholders – Individuals and groups who have an interest in the outcome of the
project.

Project Environment
The change in the competitive environment in which the majority of organizations
operate has necessitated a major rethink of the way in which projects are managed. The
effects of the changes on projects and their managers include the following:
Time has become a major source of competitive advantage.

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 Human resource management has moved from considering that members of a project
team should be treated as anonymous cogs in the machine to the idea that individual
creativity can be harnessed.
Rates of change in technology and methods have increased.
Organizations are having to become customer focused and exceed rather than just
meet customer requirements.
There is a trend towards integration and openness between customers and suppliers.
Company information that would previously have been closely guarded secrets is
often shared in a move towards partnership rather than adversarial relationships.
The project environment may be summarized by the four Cs.
1) Complexity
2) Completeness
3) Competitiveness
4) Customer focus

The Complexity of projects

The level of complexity of an activity is a function of three features:
Organizational Complexity: the number of people, departments, organizations, countries,
languages, cultures and time zones involved.
Resource complexity: the volume of resources involved often assessed through the
budget of the project.
Technical Complexity: the level of innovation involved in the product or the project
process, or novelty of interfaces between different parts of that process or product.
Overall complexity = Organizational complexity * Resource complexity * Technical
complexity.

Project manager
Project manager is a single person who heads the project.
He is the focal point for bringing together all efforts towards a project objective.
He is responsible for people from different functional departments working on the
project.

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He should see that the particular product or services is delivered within the correct time
and cost.
He should have the conflict resolution capability.
Outcomes and rewards are shared among the members of the project team.

Types of project managers

Project Expeditors - They speed up work and they are the communication link to the
general manager. Their purpose is to achieve unity of communication.
Project coordinators - They disburse fund from the budget. They have no authority over
the workers. They deal with upper level executives and they bring unity of control.
Matrix managers - They perform all the management functions like planning, motivating,
directing and controlling the project work. They achieve unity of direction. They control
people located in other departments. Due to this criss-cross nature they are called matrix
managers.

Attributes of a project manager

A project should have the following skills
1) Planning and organizational skills.
2) Personnel management skills.
3) Communicational skills.
4) Change orientation.
5) Ability to solve problems.
6) High energy levels.
7) Ambition for achievement.
8) Ability to take suggestion.
9) Understanding the views of project team members.
10) Ability to develop alternative actions quickly.
11) Knowledge of project management tools.
12) Ability to make self evaluation.
13) Effective time management.
14) Solving issues without postponing them.

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 15) Risk taking ability.
16) Familiarity with the organization.
17) Tolerance for difference of opinion.
18) Knowledge of technology.
19) Conflict resolving capacity.

Forms of project Organization

Forms of project organization means the way in which the human resource is
categorized.
1) Project organization

Board of directors

Project board A Project board B Project board C

Project manager A
Employed by the company

Contractors Brought in as needed

At the highest level in the organization there are staff posts – senior managers, directors,
administrative staff etc. (called the project board). The next level down is a series of
project managers who have control over one or more projects at a time. Contractors carry
out works such as electrical works etc. Once project is completed, the team is disbanded.
Advantages:- Main company only has to administer the employment of its own staff.
Less labor burden.
Disadvantages:-
Team is temporary.
Less commitment.
Lessons studied during the past projects can‟t be taken to the future.

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 4.2) Functional organization

Research & Marketing Engineering Manufacturing Sales HR

Development
This arrangement prevails in many traditional industries. It leads the functional managers
to build their own empires by creating work for themselves without considering whether it
will help the organization as a whole. This arrangement forms a hierarchical pyramid

Chief executive
Board of directors

Line managers

Supervisors
workers

This traditional form is not suitable because

1) A project requires contribution of efforts from different department
2) No means of integrating people below the top management.
3) No effective communication between departments.

4.3) Line and staff organization

There is a project coordinator who act as a focal point to receive information from
one department and pass that to another department. He can give advice, but not have a
direct control over functional managers. He has very close relationship to the top
management.

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4.4) Divisional organization

A separate division is formed for the project. Project manager heads the division.
He has a direct control over the functional managers. There is more dedication and
commitment.

4.5) Matrix organization

Authority is shared between project manager and the functional managers. The
organization of the matrix follows one of the three models:
1) The Light weight matrix - Project manager chairs meetings of all department
representatives. Responsibility for the success is shared. This is the weakest form of
matrix.
2)Balanced model - Power of project manager and line manger is balanced. Both of them
governing a team member is the drawback of the system.
3) The heavy weight matrix - Departments provide resources on a full time basis to the
project team. On completion they return to their own departments.

Comparison

Functional Light weight Heavy weight Project

Large
Major
Example of Minor change to construction
IT system innovation
usage existing product projects
projects

Quality through
Quality Speed & quality
Advantages depth of Speed highest
maintained improvement
specialization
Coordination Coordination Expense of
Disadvantages Relatively slow
expense expense contractors
Integration of
Issues for Two bosses Two bosses Management of
work within
project manager problem problem knowledge
organization

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 MODULE 2 PROJECT ANALYSIS

Market Analysis – Technical Analysis - Financial Analysis – Risk Analysis –

Social cost Benefit Analysis.
Introduction to Project Analysis:
Project analysis consists of a number of steps:
1) Market analysis
2) Technical analysis
3) Financial analysis
4) Economical analysis
5) Ecological analysis

Market analysis – Market analysis is done to find the size of the market for the

product and the demand for the project. Market analysis consists of steps like
a) Situational analysis and specification of objectives
b) Collection of secondary information
c) Conduct of market survey
d) Characterization of the market
e) Demand forecasting
f) Market planning

Collection of Demand
secondary forecasting
information

Situational analysis Characterization of

and specification of the market
objectives

Market
Conduct of planning
market
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a) Situational analysis and specification of objectives
In order to get a feel of the relationship between the product and the market, the
project analyst may informally talk to customers, competitors, middlemen and others in the
industry. Wherever possible, he may look at the experience of the company to study the
preferences and the purchasing power of the customers, actions and strategies of competitors.
After that a formal study of the market and demand has to be conducted. To carry out such a
study, it is necessary to spell out its objectives clearly and comprehensively. A helpful
approach to spell out objectives is to structure them in the form of questions. I.e. The
objectives of the market and demand analysis may be to answer questions like:
What is the demand of the item in the industry?
What price will the customers be willing to pay for the item?
What price and warranty will ensure its acceptance?
b) Collection of secondary information
Secondary information provides the base and starting point for the market and demand
analysis. The sources of secondary information are:-
1) Census of India – A decennial publication of the Government of India. It provides
information on population, demographic characteristics, household size and composition, and
maps.
2) Nation Sample Survey Reports - Issued by the Cabinet Secretariat, Government of India. It
includes information like patterns of consumption, distribution of households, distribution of
industries and characteristics of economically active population.
3) Plan reports - Issued by the Planning Commission usually at the beginning, middle and
end of 5 year plans. It provides information on plan proposals, physical and financial targets,
actual outlays etc.
4) Statistical Abstract of the Indian Union - Publication of the Central statistical organization.
It provides information on demographic information, estimates of national income and
agricultural and industrial statistics
5) India year book - Publication of ministry of information and broad casting. It provides a
wide range of information on economic and other aspects.

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6) Statistical Year Book - Publication of United Nations. It provides world statistics relating
to various aspects like population, demography, gross domestic publication, industrial
production, international trade etc.
7) Economic Survey – An annual publication of the Ministry of Finance. It provides the latest
data on industrial production, wholesale prices, consumer prices, exports, agricultural
production, national income etc.
8) Guidelines to industries - Publication of Ministry of Industrial development.
9) Annual Survey of Industries - Publication of Central Statistical Organization. It contains
information on various aspects of industry: number of units and state wise distribution,
employment, quantity of products etc.
10) Annual bulletin of statistics of exports & imports - Publication of the Ministry of
commerce. It provides data on imports and exports for a very large number of items.
11) Stock Exchange Directory - Published by Bombay Stock Exchange. It provides a ten-
year picture of performance for all listed companies and other important companies.
12) Monthly studies of production of selected industries – Monthly publication of Central
Statistical Organization. It provides all-India data on production, number of units installed,
capacity, state wise break up etc. for selected industries.
The secondary information gathered are then evaluated for its reliability, accuracy and
relevance for the purpose under consideration. The market analyst should seek to know the
following:
Who gathered the information? What was the objective?
When was the information gathered? When was it published?
What was the target population?
How was the sample chosen?
How satisfactory was the process of information gathering?

c) Conduct of market survey

Secondary information needs to be supplemented with primary information
gathered through market survey. Market survey is more specific to project being appraised. It
can be of two types: 1) Census survey
2) Sample survey

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Census survey – In census survey, entire population is covered. Census
surveys are employed for intermediate goods and investment goods.
Census survey is costly and infeasible. It is difficult to cover every user.

Sample survey – Due to the limitations of census survey, the market

survey, in practice, is typically a sample survey. In such a survey, a
sample of population is observed and relevant information is gathered.
The information sought in a market survey may relate to one or more of
the following:
Total demand and rate of growth of demand
Demand in different segments of the market
Income and price elasticities of demand
Motives for buying
Purchasing plans and intentions
Satisfaction with existing products
Unsatisfied needs
Attitudes towards various products
Distributive trade practices and preferences
Socio-economic characteristics of buyers
Steps in Sample Survey are:-
1) Define target population
Population is divided into various segments based on income range.
2) Select the sampling scheme and sampling size
Sample is a portion of the population. There are several sampling schemes
like simple sampling, random sampling, cluster sampling, sequential sampling etc. Larger the
sample size, greater the reliability of the estimates.
3) Develop the questionnaire
Questionnaire is the best method for getting information. Developing the
questionnaire requires a thorough understanding of the product and its usage. The result of
the market survey depends on the quality of the survey.

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4) Recruit and train field investigators
Field investigators should be recruited and training should be given to them.
They need to have knowledge of the product and its technical background.
5) Collect information from questionnaire
Customers can be interviewed personally, telephonically. Personal interviews
ensure a high rate of response, but they are expensive. Mail surveys are economical but have
less response. Telephonic interviews are common in western countries only.
6) Scrutinize the information gathered – Information gathered should be thoroughly
scrutinized to eliminate data which is internally inconsistent and which is of dubious validity.
7) Analyze and interpret the information - Results of the data based on the sample survey will
have to be extrapolated to the target population. For this we take the ratio of the size of target
population to the size of the sample.

Market survey can fail due to the following reasons:-

1) Inadequacies in the questions
2) Failure of the respondents to comprehend the questions
3) Inept handling of the interviews by the investigators
4) Deliberate distortions in the answers given by the respondents
5) Non-representativeness of the sample

d) Characterization of the market – Based on the information gathered from secondary

sources and through the market survey, the market for the product/service may be described
in terms of the following:

Effective Demand in the Past and Present

Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy

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Effective Demand in the past and present – To gauge the effective demand in the past and
present, apparent consumption has to be calculated. Apparent consumption is defined as:
Production + Imports – Exports – Changes in stock level
The apparent consumption has to be adjusted for consumption of the product by the
producers and the effect of abnormal factors.
Breakdown of Demand – To get a deeper insight into the nature of demand, the aggregate
market demand may be broken down into demand for different segments of the market.
Market segments may be defined by i) nature of product ii) consumer group iii) geographical
division.
Price – Price statistics must be gathered along with statistics pertaining to physical quantities.
It may be helpful to distinguish the following types of prices: i) manufacturer‟s price quoted
as FOB (free on board) price or CIF (cost, insurance and freight) price, ii) landed price for
imported goods, iii) average wholesale price and iv) average retail price.
Methods of Distribution and Sales Promotion – The method of distribution may vary with
nature of product. Capital goods, industrial raw materials or intermediates, and consumer
products tend to have different distribution channels. Likewise, methods used for sales
promotion (advertising, discounts, gift schemes etc.) may vary from product to product.
Consumers – Consumers may be characterized along two dimensions as follows:

Demographic & Sociological Attitudinal

Age Preferences
S Sex Intentions
Income Habits
Profession Attitudes
Residence Responses
Social background

Supply and Competition – It is necessary to know the existing sources of supply and whether
they are foreign or domestic. For domestic sources of supply, information along the
following lines may be gathered: location, present production capacity, planned expansion,
capacity utilization level and cost structure. Competition from substitutes and near-
substitutes should be specified because almost any product may be replaced by some other
product as a result of relative changes in price, quality and so on.

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Government Policy – The role of the government in influencing the demand and market for a
product may be significant. Governmental plans, policies and legislations, which have a
bearing on the market and demand of the product under examination, should be spelt out.
These are reflected in production targets in national plans, import and export trade controls,
import duties etc.

e) Demand Forecasting
After gathering information about various aspects of the market and demand from primary
and secondary sources, an attempt may be made to estimate future demand. The methods of
Demand Forecasting are:
1. Qualitative methods – These methods rely on the judgment of experts to translate
qualitative information into quantitative estimates. The important qualitative methods are:
1. a) Jury of executive method – This method involves soliciting opinions of a group of
managers on expected future sales and combining them in to a sales estimate.
Advantages
It is an expeditious method for developing a demand forecast.
It permits a variety of factors like economic climate, consumer preferences etc.
Disadvantages
The biases underlying subjective estimates cannot be unearthed easily.
The reliability of this technique is questionable.
1. b) Delphi method – The steps involved in this method are:
1. A group of experts is sent a questionnaire by mail and asked to express their
views.
2. The responses received from the experts are summarized without disclosing the
identity of the experts and sent back to the experts along with a questionnaire to
probe further the reasons for the extreme views expressed in the first round.
3. The process may be continued for one or more rounds till a reasonable agreement
emerges in the view of the experts.
Advantages
It is intelligible to users.
It is more accurate and less expensive.

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2. Time series projection method – These methods generate forecasts on the basis of an
analysis of the historical time series. The important time series projection methods are:
2. a) Trend projection method – It involves determining the trend of consumption by
analyzing the past consumption statistics and projecting future consumption by extrapolating
the trend.
In this method, a linear relationship is used
Yt = a + bT where
Yt = demand for year t
T = time variable
a = intercept of the relationship
b = slope of the relationship
To estimate the parameters a and b of the linear relationship, the least squares method is
used. According to the least squares method, linear relationship is chosen in such a manner
that the sum of squared deviations of the observations from the line is minimized
Sum of squared deviations = (Y-a-bT) 2
To minimize this with respect to a & b, partial derivative of this sum with respect to a & b are
set equal to zero
i.e., / a (Y-a-bT) 2 = -2 (Y-a-bT) = 0 ----------------- (1)
/ b (Y-a-bT) 2 = -2T (Y-a-bT) = 0 ---------------- (2)
Considering (1) (Y-a-bT) = 0
Y = (a+bT) -------------------------------------- (3)
Considering (2) TY- aT- bT2 =0
TY= (aT-bT2 ) ------------------------------------(4)
Solving (3) & (4) we get the value of a & b
Dividing (3) by n we get
Y/n = a/n + bT/n

y = na/n + b T , a = y -b T

b = ( TY-n T y )/ ( T2 -n T 2 )
Where T=time

SlipNotes.in
 Y=demand
n = no of observations

T =mean of T
y =mean of Y
a=intercept
b=slope.
We can use other relationships like
1) Exponential relationship
Yt =aebt
2) Polynomial relationship Yt = a0 +a1t ….an tn

2. b) Exponential smoothing method -

Ft+1 =Ft + et where Ft = forecast for year t
Ft+1 = forecast for year t+1
= smoothing parameter lies between 0 & 1
et = error in the forecast for year t. (St -ft ) where St is the
actual value for year t.
2. c) Moving average method - According to this method, forecast for the next period is equal
to the average of the sales for several preceding periods.
Ft+1 = (St +St-1+……St-n-1)/n
Where F t+1 = forecast for the next period.
S t = sales for the current period.
n = period over which averaging is done.
Weighted moving average method - It is likely that the sales for the recent years give a clear
picture of the trend than that in the past .So a weight is assigned to the sales in all the years.

3.) Causal M ethods – This method develop forecasts on the basis of

cause-effect relationships specified in an explicit, quantitative manner.
3.1 Chain ratio method – The chain ratio method uses a simple analytical approach to
demand estimation. Given below is an example of chain ratio method to estimate the
potential sales of stainless steel blades in India.

SlipNotes.in
 Adult male population in the country=150 million.
Proportion of adult male population using shaving blades=60%
Adult male population using shaving blades=150*60/100=90 million
No of times in a year a person who uses shaving blades=100
Total shavings done per year = 9000 million.
Proportion of shavings done with stainless steel blades = 40%
Average no of shavings per stainless steel blade = 6
No of stainless steel blades used per year = 600 million
Proportion of the stainless steel blade market the firm could capture = 20%
Potential Sales = 600*20/100 =120 million

3.2 Consumption level method – This method estimates consumption level, on the basis of
elasticity coefficients.
Income elasticity of demand: - Reflects the responsiveness of demand to variations in
income. It is measured as
E1 =Q 2 -Q1 /I2 -I1 * I1 +I2 /Q2 +Q1
where E1 =income elasticity of demand
Q1 =quantity demanded in the base year.
Q2 =quantity demanded in the following year
I1 =Income level in the base year
I2 =Income level in the following year.

3.3 Price elasticity of demand - This measures the responsiveness of

demand to variations in price. It is defined as
Ep= Q 2 -Q1 /P2 -P1 * P1 +P2 /Q 2 +Q1 where
Ep=price elasticity of demand.
Q1 =quantity demanded in the base year.
Q2 =quantity demanded in the following year.
P1 =price per unit in the base year.
P2 =price per unit in the following year.

SlipNotes.in
3.4 End Use Method – It is also known as consumption coefficient method. It involves the
following steps:
1. Identify the possible uses of the product.
2. Define the consumption coefficient of the product for various uses.
3. Project the output levels for the consuming industries.
4. Derive the demand for the product.
The key inputs required for the application of the end use method are: i) projected output
levels of consuming industries ii) consumption coefficients.
3.5 Leading Indicator Method – Leading indicators are variables which change ahead of
other variables, the lagging variables. Hence observed changes in leading indicators may
be used to predict the changes in lagging variables. Steps involved in this method are:
i) Identify the leading indicators.
ii) Establish the relationship between the leading indicator(s) and the variable to
forecast.
3.6 Econometric Method – Steps involved are:

1. Specification – This refers to the expression of an economic relationship in a

mathematical form.
2. Estimation – This involves the determination of the parameter values and other
statistics by a suitable method such as the least squares method.
3. Verification – This step is concerned with accepting or rejecting the specification
as a reasonable approximation to the truth on the basis of the results of estimation.
4. Prediction – This involves projection of the value of the explained variable(s).
Advantages
1. Sharpens the understanding of complex cause-effect relationships.
2. Provides a basis for testing assumptions and for judging how sensitive the results
are to changes in assumptions.
Uncertainties in demand forecasting – Demand forecasts are subject to error and
uncertainty arise from three principal sources:
Data about past and present market
Methods of forecasting

SlipNotes.in
 Environmental change

f) Market Planning – A market planning usually has the following components:

1) Current marketing situation

2) Opportunity and issue analysis
3) Objectives
4) Marketing strategy
5) Action programme
1. Current marketing situation – This part of the marketing plan deals with the different
dimensions of the current situation. It examines the market situation, competitive
situation, distribution situation and the macro-environment.
a. Market situation – This deals with size, the growth, the consumer aspirations and
buying behavior in the market under consideration.
b. Competitive situation – This dwells on the major competitors, their objectives,
strategies, strengths etc.
c. Distribution situation – This compares the distribution capabilities of the competitors.
d. Macro environment – This describes the effect of social, political, economic,
technological and other external variables on the market.
2. Opportunity and issue analysis – In this section a SWOT (Strength, Weakness,
Opportunity, Threat analysis) is conducted and the core issues before the product are
identified.
3. Objectives – Objectives have to be clear-cut, specific and achievable.
4. Marketing Strategy – The marketing strategy covers the following: target positioning,
product line, price, distribution, sales force, sales promotion and advertising.
5. Action programme – Action programmes operationalize the strategy.

Technical analysis
The purpose of technical analysis is to ensure that the project is technically feasible. It
deals with the following aspects:
Manufacturing process/technology
Technical arrangements

SlipNotes.in
 Material and inputs
Product mix
Plant capacity
Location and site
Machineries and equipments
Structures and civil works
Environmental aspects
Project charts and layouts
Project implementation schedule
Need for considering alternatives
a) Manufacturing process/technology
There can be 2 or more alternative technologies for manufacturing a product.
E.g.:- Steel can be manufactured by Bessemer process or open hearth process. Cement
can be made either by the dry process or wet process. Soap can be manufactured by the
semi boiled process or the fully boiled process.
The appropriate technology can be chosen by considering factors like
1) Plant capacity - Plant should have the capacity to accept the new technology.
2) Principal inputs - Inputs for the process must be available.
3) Production cost - Cost of the technology should be feasible.
4) Use by other units – The technology adopted must be proven successful by other units.
5) Product mix – The technology chosen must be judged in terms of the total product mix
and saleable by-products generated by it.
6) Latest development - The technology adopted must be based on latest development.
7) Ease of absorption - Sometimes a high level technology may be beyond the absorptive
capacity of a developing country. Country may lack trained personnel to handle that
technology.
b) Technical arrangements - Satisfactory arrangements must be made to obtain the
technical know-how needed for the proposed manufacturing process.
The following aspects have to be worked out
a) Nature of support to be provided by the collaborators during the phases of project
development.

SlipNotes.in
 b) Process and performance guarantees in terms of plant capacity, product quality etc.
c) Price of technology in terms of one-time licensing fee and periodic royalty fee.
d) Period of collaboration agreement.
e) Restrictions to be imposed by the collaborator with respect to exports.
f) Termination of the agreement when either party fails to meet its obligation.
c) Material inputs and utilities – This can be classified into four broad categories:
i) Raw materials
ii) Processed industrial materials and components
iii) Auxiliary materials and factory supplies
iv) Utilities
Raw materials – It may be classified into four types: i) Agricultural Products ii) Mineral
Products iii) Livestock and Forest Products iv) Marine Products.
d) Product mix - There can be wide range of items manufactured by a particular
company. Some products can be manufactured in varying size, smell etc. This helps to
increase the market.
e) Plant capacity - The plant capacity depends on factors like
1) Technological requirement
2) Input constraints
3) Investment cost
4) Market conditions
5) Resources of the firm
6) Governmental policy
f) Location and site - The choice of location and site follows an assessment of demand,
size and input requirement. Location refers to the broad area like city and site refers to
the specific piece of land.
g) Machineries and equipment - To select machinery the steps to be followed are
1) Estimate the likely level of production
2) Define the machining operations
3) Calculate the machine hours
4) Select machineries and equipment
The equipments can be classified in to

SlipNotes.in
 a) Plant equipment
b) Mechanical equipment
c) Electrical equipment
d) Instruments
e) Controls
f) Internal transportation system
h) Structures and civil works – This can be classified into
a) Site preparation and development
b) Buildings and structures
c) Outdoor works
i) Environmental aspects
Project has to consider
a) Types of effluents and emissions generated
b) Proper disposal of effluents and emissions.
c) Statutory requirements
j) Project charts and layouts
1) General functional layout
2) Material flow diagram
3) Production line diagram
4) Transport layout
5) Utility consumption layout etc

Financial Analysis
Introduction to Financial Analysis - To judge a project from financial angle, we need
information about the following: (i) cost of project (ii) means of financing (iii) estimates
of sales and production (iv) Cost of Production (v) working capital requirement and its
financing (vi) Estimates of Working results (vii) break-even point (viii) projected cash
flow statements and (ix) projected balance sheets.
Cost of Project – Cost of Project represents the total of all items of outlay associated
with a project which are supported by long-term funds. It is the sum of the outlays on the
following:

SlipNotes.in
 Land and site development
Buildings and civil works
Plant and machinery
Technical know-how and engineering fees
Expenses on foreign technicians and training of Indian technicians abroad
Miscellaneous fixed assets
Preliminary and capital issue expenses
Pre-operative expenses
Margin money for working capital
Initial cash losses
Means of finance – To meet the cost of project the following means of finance are
available:
1. Share capital – There are two types of share capital – equity capital and
preference capital. Equity capital represents the contribution made by the owners
of the business, the equity shareholders. Equity capital does not carry fixed rate of
dividend. Preference capital represents the contribution made by preference
shareholders and the dividend paid on it is generally fixed.
2. Term Loans – Term loans represent secured borrowings which are a very
important source for financing new projects as well as for the expansion,
modernization and renovation schemes of existing firms. There are two broad
types of term loans available in India: rupee term loans, given for financing land,
building, civil works etc. and foreign currency term loans, provided for meeting
the foreign currency expenditures towards the import of equipment and technical
know-how.
3. Debenture Capital – Debentures are instruments for raising long debt capital.
There are two broad types of debentures: non-convertible debentures and
convertible debentures. Non-convertible debentures carry a fixed rate of interest
and have a maturity period of 5 to 9 years. Convertible debentures are convertible,
wholly or partly, into equity shares.

SlipNotes.in
 4. Deferred Credit – Many a time the suppliers of the plant and machinery offer a
deferred credit facility under which payment for the purchase of plant and
machinery can be made over a period of time.
5. Incentive Sources – The government and its agencies may provide financial
support as an incentive to certain types of promoters or for setting up industrial
units in certain locations. These incentives may take the form of seed capital
assistance or capital subsidy or tax deferment or exemption for a certain period.
6. Miscellaneous Sources – A small portion of the project finance may come from
miscellaneous sources like unsecured loans, public deposits and leasing and hire
purchase finance.
7. Lease Financing - Lease is a contract where by the lessor (the owner of an asset)
gives to the lessee (user of the asset) the right to use the asset for an agreed period
of time. In return the lessee has to pay the lease rentals.

Financial Evaluation Techniques

Financial evaluation techniques are broadly classified into two types: Non-discounted
cash flow techniques and discounted cash flow techniques. Non-discounted cash flow
techniques are further divided into Payback period (PB) method and Accounting rate of
return (ARR) method. Discounted cash flow techniques are divided into Net Present
Value (NPV) method, Profitability Index (PI) method, Internal Rate of Return (IRR)
method and Benefit Cost Ratio (BCR) method.

Payback period Method – Payback period is defined as the length of time required to
recover the original investment on the project through cash flows earned. The cash inflow
includes operating profit, less income tax payable plus depreciation.

Find the payback period of the project with the following details
Investment -14,00,000
Years to implement-2
Expected profit –from third year onwards

SlipNotes.in
 Year 3 4 5 6 7

Profit 1,50,000 1,75,000 2,00,000 2,25,000 2,00,000

Tax 50,000 60,000 68,000 75,000 68,000

Depreciation 3, 30,000 2, 21,000 1, 48,000 99,000 67,000

Solution:

Year Profit – tax + depreciation Cumulative cash flow

3 430000 4,30,000
4 336000 7,66,000
5 280000 10,46,000
6 249000 12,95,000
7 199000 14,94,000

Cumulative profit
(4 years after implementation) = Rs 12, 95, 000
Cumulative profit
(5 years after implementation) = Rs 14, 94, 000

Difference =1, 99, 000

Pay back period = 4 + 12*(14, 00,000-12, 95,000)

1, 99,000
= 4 years + 6.33 months

NPV method

Net present value of cash flow = (Present value of all future cash in
flows over the life of the project) – (Present value of cash out flow).
The present value of future cash inflows is arrived at by discounting
the future cash inflows at an interest rate equal to the cost of capi tal.

E.g. compare projects A and B using the given data. Use NPV method of evaluation.
Project-A

SlipNotes.in
Investment on the project :Rs 10,00,000/-
Life of the project :5 years
Period of implementation :1year
Cost of capital :15%

Year 1 2 3 4 5

Cash inflow 2,00,000 3,00,000 4,00,000 3,00,000 1,00,000

Project-B
Investment on the project :Rs 10,00,000/-
Life of the project :5 years
Period of implementation :1year
Cost of capital :13%

Year 1 2 3 4 5

Cash inflow 3,00,000 4,00,000 4,00,000 3,00,000 2,00,000

Solution:
Project A
Present value of future cash inflows is given by
=CF1 + CF2 + CF3 + CF4 + CF5
1 2 3 4
(1+r) (1+r) (1+r) (1+r) (1+r)5

=2,00,000 + 3,00,000 + 4,00,000 + 3,00,000 + 1,00,000

(1+.15)1 (1+.15)2 (1+.15)3 (1+.15)4 (1+.15)5

=1,73,913+2,26,843+2,63,002,1,71527+49,717
=8,85,002
NPV=8,85002-10,00,000
= -1,14,998
The net present value is negative, so the project should not be taken up.

SlipNotes.in
Project B
Present value of future cash inflows is given by
=CF1 + CF2 + CF3 + CF4 + CF5
(1+r)1 (1+r)2 (1+r)3 (1+r)4 (1+r)5

=3,00,000 + 4,00,000 + 4,00,000 + 3,00,000 + 2,00,000

(1+.13)1 (1+.13)2 (1+.13)3 (1+.13)4 (1+.13)5

=2,65487+313259+277219+183993+108548
=1148506
NPV=1148506-10,00,000
=1,48,506/-
since net present value is positive, project can be taken up.
Profitability Index method
If there are two projects that require the same amount of investment, the project with a
higher net present value can be chosen. If the two projects have different investment
outlays, comparing the net present value of the projects will not give a correct picture
since net present value only indicates the excess of present values of cash inflows over
cash outflow in absolute terms.
E.g. Compare 2 projects using the Profitability Index using the following data

Project A Project B
Present value of investment 5,00,000 11,00,000
Present value of cash inflows 6,00,000 12,50,000
Net present value 1,00,000 1,50,000
If NPV is compared project B is better
But since investment is different we take P.I for comparison
Profitability Index (PI) = (Present value of cash inflows) ÷ (Present value of cash
outflows)
P.I for project A = 6,00,000 ÷ 5,00,000
= 1.200

SlipNotes.in
P.I for project B = 12,50,000 ÷ 11,00,000
=1.136
Since PI of project A is more than project B, project A is better than project B.

Risk analysis
1) Sensitivity analysis

If a small change in one factor leads to a major change in the profitability of the proposed
investment, the project is said to be more sensitive to that factor. The technique used to
measure this is known as sensitivity analysis.
E.g.:- What happens to NPV if the demand of the project drops down.

What happens to the NPV if the economic life of the project reduces?

2) Breakeven analysis

Break even point refers to the level of operation at which the project neither earns profit
nor incur loss. It indicates the minimum capacity utilization the firm should aim inorder
to have a no-gain no-loss situation.

BEP = fixed cost ÷ (Selling price/unit -Variable cost/unit)

Fixed cost - Costs that are fixed in nature are fixed cost. They remain constant
irrespective of the changes in the volume of output.
E.g.:-Rent payable for land
Rent payable for factory
Insurance premium
Interest payable on long term borrowing
Administrative expenses
Annual maintenance charges
Depreciation
Property tax

SlipNotes.in
Variable cost - Cost that vary directly with the level of output.
Eg:-1) Consumable stores
2) Power, fuel, water charges
3) Advertisement expenses.
E.g.:- Estimates for the third year of production of ABC private Ltd with production
capacity of 400000 units/annum of umbrellas are given below.
Cost of raw materials -1, 62, 00,000.
Cost of consumables -40,00,000.
Salary for permanent staff –60,00,000.
Wages for casual workers –8,00,000.
Repair and maintenance charges -6,00,000.
Interest payment -42,00,000.

Selling expenses -10,00,000.

Rent, Insurance etc. -4,00,000.
Power, fuel, water etc -20,00,000.
Depreciation -32,00,000

Work out
a) Sales realization.
b) Contribution
c) variable cost/unit.
d) Break-even point in terms of volume of production.

Solution

Fixed cost
60,00,000.+8,00,000+6,00,000+42,00,000+10,00,000+4,00,000+32,00,000=20200000

Variable cost
1, 62, 00,000+20, 00,000=18200000

Sales realization = total cost +fixed cost = 38400000

Selling price/unit=38400000/400000= Rs 96/-
Variable price/unit=18200000/400000=Rs 45.5/-
Contribution=Selling price/unit-variable cost/unit = 96-45.5= Rs 50.5/-

BEP in terms of volume = fixed cost/(contribution) = 20200000/50.5 = 400000 units .

SlipNotes.in
3) Decision tree analysis
It is a graphical technique used to analyze the pros and cons of alternative decisions and
choosing the best possible course of action .A decision tree is made of nodes and
branches. Nodes are of two types
1) Decision nodes (decision point) represented by
2) Chance node (chance point)

Different alternatives available for the given situation emerge from the decision point. At
each chance point this different possible outcomes of one decisions are marked.

Alternative 1 1 chance point

Decision
Point

2
Alternative 2 chance point

E.g.:-A chief executive of a company wants to introduce a new product

There are two alternatives for him.
1) Importing the product from abroad-net benefit is 500,000
2) Setting up a new plant for the manufacture –net benefit is 6, 00,000

Draw the decision tree.

1 Net benefit=5, 00,000

Import

Decision
point
Manufacture 2 Net benefit=6, 00,000

4) Simulation analysis – Sensitivity analysis indicates the sensitivity of each factor on

the performance of the project. But it will not give the combination effect of each factor.

SlipNotes.in
Simulation analysis can find the result of each combination and will help in decision
making.
Monte Carlo simulation method – Steps in this method are:
1) From the given probability of events, establish cumulative probability
2) Assign tag numbers to the events
3) Obtain random numbers from random number table
4) Correlate random numbers with the tag numbers

E.g.:
Demand per day 25 33 42 51
Probability 0.15 0.25 0.45 0.15

Solution:

Demand Probability Cumulative probability Tag no

25 0.15 0.15 0-14
33 0.25 0.40 15-39
42 0.45 0.85 40-84
51 0.15 1.00 85-99

Let the random numbers and the simulated demand/day be

Trial no Random no Simulated

demand/day
1 40 42
2 92 51
3 47 42
4 01 25
5 60 42
6 05 25
7 69 42
8 79 42
9 09 25
10 66 42
11 77 42
12 69 42
13 45 42
14 18 33
15 93 51

SlipNotes.in
The result will illustrate the effect of each variable in combination on the performance
of the project.

Social Cost benefit analysis

The main objective of company is to earn maximum profit from the investment. So
project promoters are solely interested in wealth maximization. There are some projects
which are undertaken due to their social implications. Such projects are public projects
like road, railway, bridge, irrigation projects etc. Analysis of such projects is known as
socio economic cost benefit analysis. (SCBA)

Objectives of SCBA

Contribution of the project to the GDP of the economy

Contribution of the project to improve the benefits of the poorer sections of the
society.
Justification of the use of scarce resources of the company.

There are 2 approaches to SCBA

1) UNIDO approach
2) Little-Mirrless approach

UNIDO approach

Stages
1) Arriving at the financial profitability of the project based on the market prices
2) Using shadow prices for the resources to arrive at the net benefit of the project at
economic process
3) Adjustment of the net benefit for the project‟s impact on savings and investment
4) Adjustment of the net benefit for the project‟s impact on income distribution
5) Adjustment of the net benefit for the goods produced whose social values differ from
their economic values

SlipNotes.in
Shadow prices - For SCBA market prices of both inputs and outputs of a project are
required to be corrected if they do not represent the real prices of inputs/outputs. E.g.:-
The newly setup small scale industries are given subsidy on electricity charges by State
Electricity Board (SEB). SEB produces electricity at the rate of 2.50/unit
The company may be charged as follows:
Year rate/unit
1 1.50
2 1.75
3 2.00
Here the price of electricity to be taken for SCBA is 2.5/unit which is the actual price
(shadow price).

Numeraire - The unit of account used in UNIDO. It is the domestic rupee.

Tradeability of goods/services - A tradeable good is that one which can be traded

without restrictions. Shadow price for traded goods is border price or international price.
A non tradeable good is that which can‟t be traded due to the trade policies of the
country. A non tradeable good can become tradeable only if the domestic cost of it
becomes cheaper as compared to international price. A good is non tradeable if its import
price (CIF price) is greater than domestic cost of production and its export price (FOB) is
less than domestic cost of production.

Externalities - Certain effects of the project do not impose a cost or do not confer a
benefit within the domain of the project. But if these effects have a bearing on the
achievement of countries objectives, they need to be considered for economic analysis.
They are known as externalities. For calculating the NPV consumption rate of interest,
(CRI) is used as the discount rate in UNIDO. CRI = [parameter of utility function *
growth rate of per capita consumption] + rate of pure time preference.

SlipNotes.in
Shadow wage rate - When labor is used in one project, its use in the best alternative
project is ruled out. The formula suggested by UNIDO to arrive at the shadow wage rate
(SWR) is
Shadow Wage Rate = Labor‟s forgone marginal product at accounting prices + Net social
cost of increased consumption + Social cost of reduced leisure.

Little mirrless approach

Numeraire – Measured in terms of convertible foreign exchange.

L-M shadow price - Measures costs and benefits in terms of

international price (border price)

L-M Standard Wage Rate (SWR)

SWR = C-1/s[c-m]
C = Additional resources devoted to consumption
1/s = Social value of unit of consumption
c = consumption of wage earner
m = marginal productivity of wage earner

UNIDO versus L-M

UNIDO L-M
Measures cost and benefit in terms of Measures costs and benefit in terms
consumption of uncommitted social income
Measures shadow price in terms of Measures shadow price in terms of
domestic price border price

SlipNotes.in
 Module 3
The Control Process
The control process is concerned with assessing actual against planned technical
accomplishment, reviewing and verifying the validity of technical objectives, confirming
the continued need for the project, timing it to coincide with operational requirements,
overseeing resource expenditures and comparing the anticipated value to the cost
incurred. In general the process is achieved in three phases:
(1) Setting Performance standards
(2) Comparing these standards with actual performance
(3) Taking necessary corrective action.
In the first phase, performance standards are defined and expressed in terms of
technical specifications, budgeted cost, schedules and resource requirements.
Performance standards are derived from the user requirements, the project plan, and the
statement of work. These standards precisely define the cost, schedule and technical
factors to be regulated and the boundaries within which they must be maintained.
In the second phase the standards are compared with the actual project
performance. Schedules, Budgets and performance specifications are compared to current
expenditures and work completed. The time and cost of work still remaining are
estimated and used to forecast the anticipated date and cost of the completed project.
Finally whenever actual performance significantly deviates from standards,
corrective action is taken. Either the work is altered or expedited, or plans and standards
revised. When work performance is deficient, resources are added, shifted or altered.
When original estimates or expectations prove unrealistic, then the project goals are
changed and the performance standards themselves revised.

Information Monitoring
To enable timely and effective project control, the project must be
systematically tracked and observed. This requires setting up a project monitoring
function. The monitoring function is composed of two activities: Data Collection and
Information reporting.

SlipNotes.in
 It is during the first phase of the control process that a data collection and
information reporting system is established. Data for monitoring the project must be
directly related to the project - its plans, outputs, schedules, budgets and standards. A
balance must be struck between gathering too much data and too little. The monitoring
function must ensure that management receives reports in sufficient detail and frequency
to enable them to identify and correct problems while they are small. It must guarantee
that significant deviations from plan, called variances will be flagged. The timing of
information reporting is also important. Data can be collected periodically or topically
and reported topically or periodically by exception.

Internal and External Project Control

Both internal and external control systems are used to monitor and regulate project
activities. Internal control refers to the contractor‟s systems and procedures for
monitoring work and taking corrective action. External control refers to the additional
procedures and standards imposed by the client, including taking over project
coordination and administration functions.

Traditional Cost Control

In traditional cost control, the method for measuring performance is called variance
analysis. This involves comparing actual costs to see if the amount spent was more or less
budgeted. In project management, cost variance analysis is by itself, inadequate because
it indicates neither how much work has been completed nor what the future expenses are
likely to be.
There are times when even work progress information is not enough. Whenever
large developmental problems, schedule delays or changes to the scope of work arise,
then the original plans, schedules and budgets are invalidated. It is then necessary to
modify the plans and update the budgets and schedules themselves. Effective project
control thus requires comparison not only of actual costs and work completed to budgets
and plans, but of budgets and work plans to revised estimates of the costs and work
necessary to complete the project.

SlipNotes.in
Cost Accounting System for Project Control
PERT/Cost Systems
The traditional cost variance analysis alone is insufficient for evaluating performance;
information also is needed on work progress. Early attempts to correct for this using
PERT/CPM went to the opposite extreme by ignoring costs and focusing entirely on
work progress. If PERT/CPM users wanted to integrate cost control with network
planning methods they had to develop their own system. In 1962 the U.S government
developed a PERT-based system which combined cost-accounting with scheduling,
called PERT/Cost system. The system became mandatory for all military and R&D
contracts with the Department of Defense and National Aeronautics and space
administration. PERT/Cost was a major improvement over traditional cost-accounting
techniques because it blended cost with work schedules.

Work Package and Cost Account Control

Each work package is considered a contract for a specific job, with a manager or
supervisor responsible for overseeing costs and work performance. A cost account
consists of one or more work packages. Both include information such as work
descriptions, time phased budgets, work plans and schedules, people responsible,
resource requirements and so on.

Project Control Process

Work Authorization
Work authorization begins with upper management, moves down through middle
management and ends with the work team. Actual work begins when a department or
work unit receives a work order or requisition, which might be an engineering order, shop
order, test order or similar document, depending on the kind of work. Each work order is
a small but crucial part of project control. Work order includes
Statement of work
Time-phased budget of direct labour hours, material and other direct costs.

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 Schedules, milestones and relationships to other work packages.
Position of the task in the WBS (Work Break down Structure).
Specifications and requirements.
Cost-account number and position in the cost-account structure.
Signatures of person authorizing and person accepting responsibility.

Collecting Cost, Schedule and Work Progress Data

Work orders and their cost accounts are the fundamental elements of project control. For
each work order, data about actual costs and work progress is periodically collected and
entered in to the PCAS. The PCAS tallies and summarizes information up through the
WBS and project organization structure in a process similar to creating the budget.
Assessing the impact of work progress on work schedules is the responsibility of the
functional manager or team supervisor in charge of the work order. The conventional
ways to measure ongoing project performance, the following things were identified.
1. Supervision:-Managers and supervisors assess progress by direct observation,
asking questions, and reviewing written reports and project documentation.
2. Milestones:-Milestones are easily measured and end-points of tasks or transition
point s between tasks. Milestones, usually considered critical to project.
3. Test and demonstrations:-These can range from simple testing of system
elements and components to full-system and user acceptance testing They are
good way of obtaining periodic, objective measures of technical systems progress
at intermediate stages of the project.
4. Design Reviews:-These are review meetings with managers and technical
personnel to review the state of progress of a design or system against the plan.
5. Outside Expert:-The project manager or other stakeholder invites a person or
expert panel with experience to review project status. Such experts assess project
status by observation.
6. Status of design documentation:-Experienced project managers can determine
when a design is nearly finished by the completeness of documentation such as
drawing, schematics, functional diagrams, manuals and test procedure.
7. Resource Utilization:-A request for or change in resources may reflect progress

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 8. Telltale Tasks:-Certain tasks such as concept deign, requirements and
specification definition, feasibility analysis and repeated testing should be
completed early or midway through the project; they may signify a lack of
progress when occurring later in the project.
9. Benchmarking:-Certain tasks, or the entire project, may be compared to similar
tasks or projects as a crude way to weigh relative progress.
10. Changes, bugs and rework:-The rate of changes to the plan, number of system
bugs, and amount of rework also are measures of progress.

Project Control Emphasis

Scope Change Control
A change in project scope is an alteration to the original, agreed-upon scope
statement defined in the project plan and specified in the WBS. Projects have a natural
tendency to grow over time because of changes and additions in the scope, a phenomenon
called “creeping scope”. Changes or additions to the scope reflect changes in
requirements and work definition that usually results in time and cost increase. The aim
of scope change control is to identify where changes have occurred, ensure that the
changes are necessary and/or beneficial, contain or delimit the changes whenever
possible and manage the implementation of changes. Scope change control is
implemented through the change control system and configuration management.

Quality Control
Quality is synonymous with ability to conform to the requirement of the end-item and
work processes and procedures. Quality control is managing the work to achieve the
desired requirements and specifications, taking preventive measures to keep errors or
mistakes out of the work process and determining and eliminating the sources of errors
and mistakes as they occur.

The quality system contains a number of key elements – policies, system description and
procedures. These are arranged hierarchically. The policies of quality control are
determined and set out either as part of organizational policy or as required by contractual

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terms laid down by a client organization. The systems are then put in place to meet the
requirements of these policies and procedures are carried out by people at all levels of
organization on a day-to-day basis. The objective of such quality control is to provide a
formalized system within the project system which ensures that the needs of the customer
or the stated objectives of the system are continually being met. The system needs to be
formalized and so much of the informalities which exist within the organization have to
be removed. Another important reason for having a quality system is to protect the
project organization from legal liability. The organization through its quality system, can
demonstrate that it has taken every reasonable precaution to ensure that the project was
carried out in a way that ensures that the stated needs were met. The third reason for
having a quality system is that it is a pre-requisite for obtaining business in many markets
including aerospace, defense, public procurement and the motor industry.

The emergence of the importance of quality systems is a natural extension of the role of
specialization. Early quality systems were a set of procedures which developed with the
emergence of international standards setting out how systems should be constructed and
operated. Standards provide details of minimum specifications for the systems, based on
procedural adherence to ensure the quality of process. Quality system implementations
must follow the following steps to ensure the specifications.
1. Establish the reason for quality system
2. Training people to the requirements of system
3. Create documents including reference manual
4. Carry out internal audit
5. External auditing
6. Publishes the quality system

Schedule Control
The intent of Schedule Control is to keep the project on schedule and minimize schedule
overruns. One cause of project schedule overruns is poor planning and especially poor
definition and time estimating However even when projects are carefully planned and
estimated, they can fall behind schedule from causes beyond anyone‟s control, including,

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for example, changes in project scope, weather problems and interrupted shipments of
materials. Other more controllable, causes of schedule overrun are as follows :

1. Multitasking
2. Procrastination
3. Task variability

Cost Control
Cost Control tracks expenditures versus budgets to detect variances. It seeks to eliminate
unauthorized or inappropriate expenditures and to minimize or contain cost changes. It
identifies why variances occur, here changes to cost baselines are necessary and what
cost changes are reflected in budgets and cost baselines. Cost Control is accomplished at
both the work-package level and project level using the cost account structure and PCAS.

PERFORMANCE ANALYSIS
Data Collected through the PCAS is used to assess project work, schedule and cost
performance. Analytical methods for assessing performance are described below:-
Cost and Schedule Analysis with Budgeted Cost of Work Performed.
Updating Time Estimates
Technical Performance Measurement

Cost and Schedule Analysis with Budgeted Cost of Work Performed.

The Status of the project or any portion of it can be assessed with three variables:-BCWS,
ACWP and BCWP
1. BCWS is the budgeted cost of the work scheduled - the sum of cost of all work, plus
apportioned effort, scheduled to be completed within a given period as specified in the
original budget.
2. ACWP is the actual cost of the work performed - the actual expenditure incurred in a
given time period. It is the sum of the costs for all completed work packages plus all open
work packages and overhead.

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3. BCWP is the budgeted cost of the work performed – This variable is same as the
earned value. It is determined by looking at work tasks already performed as well as their
corresponding budget to see what they were supposed to cost.
With BCWS, ACWP, BCWP we can specify four types of variances. They are
AV = BCWS - ACWP (Accounting variance)
SV = BCWP - BCWS (Schedule variance)
TV = SD - BCSP (time variance) [SD is the status rate]
CV = BCWP - ACWP (cost variance)

Updating Time Estimates

The time required to be completed is measured in two ways
Time remaining = Percent of task remaining
Percent progress per day

where Percent Progress per day = Percent of task completed so far

Days worked on task so far

As the project manager moves along the project manager reviews not only what has been
accomplished so far, but what remains to be done. Throughout the project, the expected
final cost and completion date might have to be revised repeatedly, depending up on its
current status and direction.

Technical Performance Measurement

Besides Costs and Schedules, project performance depends on how well the project is
meeting technical requirement of the end-item. Technical performance measurement is a
methodology for tracking the history of a set of technical objectives or requirements over
time. It provides management with information about how well the system development
process is progressing with respect to particular system objectives, target or requirements.
TPM‟s intent is to monitor progress in performance measures and their relationship to
goals or target by providing (1) a best estimate of current technical performance or
progress to date and (2) an estimate of technical performance at project completion.

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Functions of Project management Information system
It is almost impossible for any contemporary manager to do her job adequately with-out
using some kind of manual or computer based management information system (MIS).
Virtually all managers use information systems for functions such as payroll, billing,
ordering, accounting and inventory control. Project managers also use these systems. The
major difference between these and PMI systems is that the latter are dedicated solely to
the function of project management. They are utilized by project managers and staff to
fulfill the unique requirement of project management.
Project Management Information Systems have capabilities that assist project
managers in planning, budgeting and resource allocation. Many Project Management
Information Systems additionally perform assorted analysis such as variance,
performance, and forecasting for any level of the WBS and project organization.
A good project management information system enables facile control of changes
to system configuration and project plans as well. This project management information
system allows for quick reviews and easy periodic updating. They filter and reduce data
to provide information on summary, exception or what if bases.

Computer Based Tools

The benefits of computer based PMIS over manual systems are speed, capacity,
efficiency, economy, accuracy and ability to handle complexity. The major benefit is
speed. Once data have been collected and entered, practically any manipulation can be
done more rapidly by computers. To create or revise printed plans, schedules and budgets
takes days or weeks with manual system. Computer based project management
information system store large amount of information that is easily accessed, prioritized
and summarized.
Project manages have dozens of kinds of project software packages to choose
from. Software packages vary greatly in capacity and flexibility; generally as size and
capacity increase, so does the prize. As if choosing the right software were not enough of
a problem, the project manager also must determine the right combination of computer
and peripheral devices.

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Computer Based PMI Systems
A computer based PMIS should be able to
Create and update project files containing information necessary for planning.
control and summary documents.
Enable data from other information files to be transferred to the project database.
Integrate work, cost, labors and schedule information to produce planning, control
and summary reports for project, functional and upper level managers.

Features of Project Management Information system

Scheduling and network planning
Resource management
Budgeting
Cost control and performance analysis
Reporting ,graphics and communication
Interface, flexibility and Ease of use.

Functions of PMIS
Because the purpose of a PMIS is to support management decisions and to provide
information necessary to conduct the project, the functions of PMISs closely parallel
those of project management. In most projects these are
1. Planning
2. Budgeting
3. Work authorization and control
4. Control of changes
5. Communicating all of these functions.

Representative Computer Based Information System

Most Project management Information systems are designed for usage on desktop
computers, either individually or with client-server systems, centralized databases and
internet and/or intranet capabilities. We will see six different vendors and their product.

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These descriptions are intended as basic introduction and are not product endorsements.
Software products change rapidly and no description remains current for long.

Microsoft
Microsoft project (MS Project) dominates project management software systems. The
software system carries its own database and is compatible with SQL server or Oracle
databases.

Project Scheduler
Project scheduler works with an SQL database and is MS Office compatible. Information
from multiple projects or subprojects can be merged or consolidated to reveal company-
wide resource utilization. The report writer enables a wide range of standards and
customized reports, which can be output in HTML format.

Welcom
Welcom has three software products: Open Plan, Cobra and Spider. Open Plan has
advanced scheduling and modeling tools for resource management. It integrates
company-wide information and enables information sharing across multiple projects.
Cobra is a cost-management tool designed to manage and analyze budgets, earned value
forecasts. Spider is a multi-user, multiproject web-based tool for viewing and updating
project data from Open Plan user Web browser.

Trakker
Trakker offers a variety of interesting products including for example, tools for risk
management, activity-based costing, earned value management, as well as the usual
planning, budgeting and tracking tools.

Primavera
Primavera offers four s/w products:
1. SureTrak Project Manager – This software enables modeling and scheduling of
simultaneous projects of up to 10,000 activities per project.

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2. Primavera Project Planner (P3) – This program provides for unlimited projects, up to
10, 0000 activities per project, concurrent, multiuser accessibility and scheduling options
similar to SureTrak.
3. Primavera Expedition Contract Control Software – This software assists in change
management and tracking of contracts and purchase orders.
4. Webster for Primavera – This software provides access to the project database, time-
card activities and project information from SureTrak and P3.

Artemis
Artemis offers a suite of project management software solutions; all work in conjunction
with SQL Server, Oracle or Sybase databases. All are compatible with each other and are
independently functional. The components include:
1. Track View – This application tracks resources and worker time.
2. Cost View – This is a client-server based application designed to provide managers
and controllers with tools for planning and budgeting multiple projects, reviewing
contracts and managing finances.
3. Project View – This is a powerful enterprise multiuser, multiproject management
application created for project and resource managers and project planners. It has
capabilities for scheduling, cost control, multiuser planning, resource assignments and
graphical reporting.
4. Global View – This software is designed for high-level managers. It is an OLAP tool
that can be used on an intranet or internet. It provides point-and-click access to cost,
resource and schedule status for multiproject analysis.

Web-Based Project Management

Virtually all project management software products include the capability to take
advantage of web-based technology. This is because the benefits of Web Technology are
well suited to the needs of project management.

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Benefits
A project website and web-based project software are especially helpful in situations
where project team members are located at different sites. Putting project information on
the internet or other network utilizing Internet standards expedites projects that might
ordinarily be delayed because team members are dispersed.
Web-based tools are easy to learn, understand and use. Because the
training and learning required for Web-based tools are minimal, team members can
concentrate on their job rather than spend time in training, or in trying to figure out the
software.

Project Evaluation
In project Environment the work must be tracked, evaluated and corrected so that
schedules, expenditures and technical performance can be kept on target. The project
manager oversees the work, assesses progress and issues instruction for corrective action.
As information is received, the project manager judges the status of the project and
communicates this to workers, upper management and the client.
Projects are open system. They are goal-oriented and utilize feedback to
determine how well they are doing and when they should alter their courses of action.
The primary purpose of evaluation in project management is to access performance,
reveal areas where the project deviates from goals and uncover extant or potential
problems so they can be corrected. Although it is certain that problems and deviations
will occur, it is not known a priori where or when.
Evaluation also serves the purpose of summarizing project status to keep stake
holders informed. Upper management and the customer want to know how the project is
progressing, and project personnel need to be kept abreast of project status and work
changes. Once the project is completed, evaluation‟s purpose is to summarize and assess
the outcome.

Two kind of evaluation occur in project: (1) Formative evaluation happens throughout the
project life cycle and provides information to guide corrective action. (2)Summary

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evaluation occurs after the project is completed and focuses on the end product or result.
Formative evaluation is designed to pilot the project as it progresses.

Project Formative Evaluation

Project formative evaluation must account for the fact that project are complex systems:
Cost, schedule and work performance criteria are interrelated and interdependent work
packages draw from the same pool of limited resources. As a result, well-intended
corrective measures directed exclusively on just one performance criteria can lead to
problems in others. Similarly attempts directed solely at improving performance in one
work area can have detrimental effects on others. To provide information that realistically
portrays the status of the project and enables the project manager to draw accurate
conclusions, project evaluation must incorporate three performance criteria
simultaneously-cost, schedule and technical performance and it must account for the
impact that changes in any one work area will have on other related areas.

Methods and Measures

A variety of methods, measures and sources should be used to obtain evaluation
information. These methods and measures should be specified before the project begins
and included in the project plan. By relying on a variety of methods and measures,
project manager can more readily spot problems and opportunities, Variety in the sources
of information increases the validity of the evaluation, particularly when several sources
all lead to the same conclusion. The four primary ways for obtaining and/or conveying
project evaluative information are graphics (charts and tables), reports (oral and written),
observations and review meetings.

Project Review Meetings

Purpose of review meetings
The main function of project review meetings is to identify deviations from the project
plan so corrective action can be quickly taken. During these meetings, participants focus
on (1) Current problems with the work, schedule or costs, and how they should be
resolved (2) Anticipated problems and (3) Opportunities to improve project performance.

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Review meetings are the managerial equivalent to the quality circle (QC) groups used in
production environments. Review meetings can be informal and scheduled weekly, or
formal and scheduled whenever needed or according to particular phases of the project.
Most large projects require both kinds of reviews.

Informal reviews
Informal reviews are held frequently and regularly, and involve a small number of
people. They also are referred to as “peer reviews” because the people involved are
usually members of the project team. These reviews focus on project status, special
problems, emerging issues and the performance of the project with regard to
requirements, budgets and schedules.

Formal reviews
Besides these periodic, informal reviews, formal reviews scheduled in advance are held at
critical stages or project milestones. Among the most common formal reviews conducted
during project definition and execution phases are the following.
1. Preliminary Design Review - The functional design is reviewed to determine
whether the concept and planned implementation fits the basic operational
requirements.
2. Critical design review - For high-volume products or mass-produced goods, tests
are performed on the first, or early, items to evaluate the efficacy of the
manufacturing process.
3. Functional Readiness Review - For high-volume products or mass-produced
goods, tests are performed on the first, or early, items to evaluate the efficacy of
the manufacturing process.
4. Product Readiness Review - Manufactured products are compared to
specifications and requirements to ensure that the controlling design
documentation produces items that meet requirements.

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Reporting
Company management must be kept apprised of the status, progress and performance of
all ongoing and upcoming projects. Problems affecting profits, schedules or budgets, as
well as their expected impacts and recommended actions should be reported promptly.
The customer also should be periodically updated about project status and notified
whenever major problems arise. Consideration also should be given to providing status
report to other stake holders.

Reports to Top Management and the office of projects

Top management should be sent monthly progress reports summarizing project status.
Suggested reports include
1. A brief statement summarizing the project status.
2. Red flag items where corrective actions have or should be taken.
3. Accomplishments to date, changes to schedule and projections for schedule and
cost at completion.
4. Current and potential problem areas and actions required.
5. Current cost situation and cost performance,
6. Manpower plan and limitations.
Reports must also be sent to Project and Program Managers, Functional Managers and
Customers/Users.

Terminating the project

Projects by definition are activities of limited duration. All projects come to an end.
When this happens, it is the project manager who ensures that all project-related work has
been completed and formally closed out by a specified date. It is the project manager‟s
responsibility to put an end to the project. As with earlier stages of work, the project
manager is responsible for planning, monitoring and controlling activities at project
termination. Some of these responsibilities are
a. Planning, Scheduling, and monitoring completion activities
b. Find close out activities
c. Customer acceptance, obligation and payment activities

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Project Summary evaluation
One of the final tasks of the project team, after the project has been terminated and the
system is made operational is to perform a formal evaluation. This frequently overlooked
task is an essential, valuable learning component of project management. With out a
complete formal review of project, there is a tendency to mentally suppress problems
encountered and to understate the impact of past errors or misjudgments.
Summary evaluation is important regardless of the outcome of project
termination, even those regrettable cases where the project was ended without having
achieved its goals. For project and company management to learn from past experience, it
is as important to review mistakes as it is successes.

Post Completion Project Review

The post completion project review is a summary review and assessment of the project. It
should be conducted after the end-item system has been implemented and project closed
out; early enough so project team members remain available to participate and retain
fresh memories of their experiences. It is important task that should be included in the
project‟s work breakdown, budget and schedule. The post Completion review process
should
1. Review initial project objectives in terms of technical performance, schedule and
cost; and review the soundness of the objectives in view of the problem that the
system was to resolve.
2. Review the evolution of objectives through the end to determine how well the
project team performed with respect to them; and review the reasons for changes,
noting which changes were avoidable and which were not.
3. Review the activities and relationships of the project team throughout the project
life cycle including review of the interfaces, performance and effective ness of
project management; the relationship among top management, the project team, the
functional organization and the client; the cause and process of termination;
customer reactions and satisfaction.
4. Review the involvement and performance of all stakeholders, including sub-
contractors and vendors, the client and outside supporting group.

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 5. Review the expenditures, sources of costs, and profitability; identify the
organizational benefits, project extensions and marketable innovations.
6. Identify areas of the project where performance was particularly good, noting
reasons for success and identifying processes that worked well.
7. Identify problems, mistakes, oversights, and areas of poor performance and causes.
8. Summarize the lessons learned from the project and give recommendations for
incorporating them in to future projects.

Abandonment Analysis
Capital expenditure management is a dynamic process. A capital investment cannot be
regarded as a commitment till the end of the project life. As time rolls on, changes occur
which can alter the attractiveness of project or even entire divisions. Hence capital
investments must be reappraised periodically to determine whether they should be
continued or terminated or divested. The techniques used to analyse a new project can
also be used to analyse whether an existing project should be continued or terminated.
However, there are some differences between an existing project and a new project.
Most of the investment in a new project is still to be made and hence is a relevant
cash outflow. By contrast much of the investment in an existing project represents
a sunk cost, which is not relevant for project analysis.
In case of a new project, the estimates of cash flows are likely to be more
uncertain. On the other hand, thanks to the experience that the firm has with an
existing project, the estimates of its future cash flows are likely to be more
precise.
The discount rate to be used for reappraising an existing project is likely to be
different from that used to analyses the same project when it was initiated.
Once you estimate the incremental cash flows on an existing project and establish an
appropriate discount rate, you can decide whether the project should be continued,
terminated or divested. To illustrate, assume that you are analyzing an 8-year project
three years to its life.
Ct = forecast of cash flow for period t in the initial analysis (t=0...8)
At = actual cash flow in period t (t=0...3)

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 NCn = new forecast of cash flow in period n assessed at the end of year 3 (n =
1…5)
To decide whether the project should be continued, terminated or divested, the
following information is required.
Present Value of the expected cash flows (PCVF) this defined as:
m
PVCF = ∑ (NCn)/(1+r)n
n=1
Where m is the balance life of the project at the time of review and r is the
appropriate discount rate.
Salvage value (SV) - This is the value expected to be realized from terminating
the project and selling its assets.
Direct value (DV) - This is the price offered by a third party to buy the project.
Given the values of PVCF, SV and DV, the following are decision rules:

If Action
PVCF<SV<DV Divest
PVCF<DV<SV Terminate
SV<DV<PVCF Continue
SV<PVCF<DV Divest
DV<SV<PVCF Continue
DV<PVCF<SV Terminate

BEHAVIOURAL ISSUES IN PROJECT MANAGEMENT

Projects must be abandoned where it is not progressing the way it is expected to perform.
A basic rule of capital budgeting says that investment decisions should be guided by the
net present value criterion. Applied to project continuation versus abandonment decision,
this rule says the project must be abandoned if the net present value associated with
abandonment is greater than the net present value associated with continuation. By the
same logic, the project should be continued if the present value associated with
continuation is greater than the net present value associated with abandonment.

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The project managers have a tendency to get entrapped in to losing projects and in their
attempts to rescue them, throw good money after bad. It happens mainly because sunk
costs, which are irrelevant for economic accounting, are often not ignored in mental
accounting.
To illustrate the difference between economic accounting and mental accounting,
consider the example of a person who has already lost Rs.20, 000 in a business venture is
confronted with a choice between two alternatives A and B. Alternative A would yield a
certain gain of Rs 10,000 whereas alternative B akin to gamble, has two equiprobable
accounts. The first contains a loss of Rs 20,000 and it is closed. The second involves a
choice between A and B, in which he would obviously choose A. Put Differently, a
person who employs economic accounting will ignore sunk costs. If he is guided by
mental accounting he sees only one account that is open with an existing loss of Rs
20,000. Put in other words, he doesn‟t ignore sunk costs. Hence he views alternatives A
and B as follows:
Closing the account with a loss of Rs.10, 000.
Closing the account with a loss of 20,000 or a loss of nil.

Overcoming Resistance
Since net present value prescription is clear, there is no intellectual difficulty in
distinguishing projects where commitment is worthwhile from projects where it is not.
The difficulty seems to arise because of a „self control‟ problem. While the rational
internal principal may understand the benefits of terminating a losing project, it may find
it difficult to persuade the internal agent to take the desired action because termination
means that mental account has to be closed and the accompanying loss realized. To
overcome this tendency the following measures may be used.
Managing Divestments
Since Divestments are becoming common place, corporate should approach them
systematically and rationally. Here are some basic guidelines for managing divestments.
Regard Divestments as a Normal Part of Business Life
Consider Divestment as one of the many responses to a situation.
Approach Divestments Positively

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 MODULE 4

Quality - It is the fitness of a product or service for meeting or exceeding its

intended use as required by the customer. The three aspects of quality are as
shown:

Quality

Quality of
conformance

Quality of Quality of
Design Performance

Quality of Design

Three aspects are usually associated with the definition of quality: Quality of design,
Quality of conformance and Quality of performance.
Quality of design deals with the stringent conditions that the product
or service must minimally possess to satisfy the requirements of the customer. It
implies that the product or service must be designed to meet at least minimally the
needs of the consumer. The design should be simple and least expensive. QOD is
influenced by factors as type of the product, cost, profit policy of the firm, demand
for product, availability of raw materials and product safety. The effect of an increase
in the designed quality level is to increase cost at an exponential rate. The value of
the product increases at a decreasing rate, with rate of increase approaching zero
beyond a certain designed quality level.
For e.g.: the quality level of the yield strength of steel cables desired by the
customer is 100kg/cm2. When designing such a cable the design parameters that

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influence yield strength would be selected so as to satisfy the requirements at least
minimally.

Quality of Conformance

It implies that the manufactured product or service rendered must meet the
standards selected in the design phase. This phase is concerned with the deg ree to
which quality is controlled from the procurement of raw materials to the shipment of
finished goods. It consists of three areas:
1. Defect prevention - deals with means to deter the occurrence of defects and is
achieved using statistical process control techniques.
2. Defect finding - conducted through inspection, test and statistical analysis of data
from the process.
3. Defect analysis and rectification.-causes behind the presence of defects are
investigated and corrective actions are taken.
Figure shows how the three aspects influence the quality of a product or
service. The Quality of Design has an impact on Quality of conformance. One must
be able to produce what was designed. The Question is to how to design the tools,
equipment, and operations such that the manufactured product will meet the design
specifications. If a production system is not capable of producing according to the
design, then the design phase will be affected and the product should be redesigned.
So there should be a constant exchange of information between the design and
manufacturing phases.

Quality of Performance

It is concerned with how well the product functions or service performs when put to
use. It measures the degree to which the product satisfies t he customer. It is a
function of both quality of design and quality of conformance. If a product does not
function well enough to meet customer expectations or if a service does not live up
to customer standards, then adjustments should be made in the design or
conformance phase.

Total Quality System - The collective plans, activities and events that are provided,
to ensure that, a product, process or service will satisfy given needs. The system

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approach to quality integrates the various functions and res ponsibilities of different
units and provides a mechanism to ensure that organization goals are met through
coordination of goals of individual units.

The elements of TQS are:

1. Policy, Planning, Organization and Administration - A Quality policy is
essential for developing consistency in the company‟s goals. Once a plan is
developed, an organization must be set up for achievement of the plan. Quality
manual should be created. Procedures for administering the plans in practice should
be detailed and costs should be identified.

2. Product Design Assurance, specification development and control - With

customer‟s requirement, a product design is formulated. Through prototype
development and testing, design will undergo modification until it satisfactorily meets
all requirements.

3. Control of purchased material and component parts - Production of a Quality

product is very much influenced by the quality of raw materials and components
used. Procedures must be developed to evaluate capability and performance of
vendors. Some companies require vendors to demonstrate use of statistical quality
control methods before they are selected. Quality, cost and ability to meet due dates
should be considered in choosing vendors. Corrective actions for controlling
purchased materials should be developed if nonconformance occurs.

4. Production Quality control - It involves determining process specifications,

selecting equipment, training personnel, designing forms and charts, collecting and
analyzing process data to determine whether it is under control. It is also important
to determine process capability, to conduct experiments on improving the process
and to perform final inspection. Preventive maintenance and feed-forward structures
are useful in production and process control.

5. User contact and field performance - A system must exist to collect

information from the consumer and to determine the level of performance of the
product or service. Poor field performance may necessitate changes in design.

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Feedback on produc t failure has implications on the type of warranties to be offered
and should dictate the procedures for handling product liability issues.

6. Corrective action - Timely corrective action is the key to creating and

maintaining a quality system. Problems need to be detected, categorized and
systematically documented. A structure whose task is to detect problems and take
corrective actions needs to be created.

7. Employee selection, training and motivation - Employee is the corner stone

in the success of TQS. This means every employee – from the operator to CEO.
Guidelines should be set to select people for particular jobs, a task that involve job
analyses and identification of skill of available pool of personnel. Job manuals are
created. There must be a clear demonstration by management of their commitment
to help select, train and motivate employees to produce a better quality product.

8. Legal requirements - This includes product liability and user safety. Failure of
product within the warranty period and hazardous effects of malfunction are of grave
concern to the manufacturer. Liability suits can be an enormous expense. The rule of
strict liability states that manufacturer as well as seller must respond immediately to
unsatisfactory quality. Response may take place through product service, repair or
replacement.

9. Sampling and other statistical techniques - This segment of TQS is composed

of analytical tools and techniques. Statistical methods are there for determining
whether a process is capable of producing items that conform to a standard.

Total Quality management (TQM)

TQM is a management philosophy that seeks to integrate all organizational functions
(marketing, finance, design, engineering, and production, customer service, etc.) to
focus on meeting customer needs and organizational objectives. It refers to a
comprehensive approach to improving quality. It is both a philosophy and set of
guiding principles that comprise the foundation of a continuously improving
organization.

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 Difference between
Customer needs customer expectations
and expectations and satisfaction

Customer

Company vision and mission

Management
commitment

Process People

Organizational
culture

Empowerment
Self-directed Process
Cross functional teams analysis Integration Open channels
and continuous of vendors of
improvement communication

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 QUALITY FUNCTION DEPLOYMENT

Quality Function Deployment (QFD) is a planning tool used to fulfill customer

expectations. It is a disciplined approach to product design, engineering and
production and provides in-depth evaluation of a product. An organization that
correctly implements QFD can improve engineering knowledge, productivity and
quality and reduce costs, product development time and engineering changes.
QFD focuses on customer expectations or requirements. It is employed to
translate c ustomer expectations, into directions and actions, in terms of engineering
or technical characteristics, that can be deployed through:
Product planning
Part development
Process planning
Production planning
Services industries
QFD is a team-based management tool in which customer expectations are used to
drive the product development process. Conflicting characteristics or requirements
are identified early in the QFD process and can be resolved before production.

The QFD Team

When an organization decides to implement QFD, the project manager and team
members need to be able to commit a significant amount of time to it, especially in
the early stages. The priorities of the projects need to be identified and told to all
departments within the organization so t eam members can budget their time
accordingly. Also, the scope of the project must be clearly defined so questions about
why the team was formed do not arise. One of the most important tools in the QFD
process is communication.
There are two types of teams – designing a new product or improving an
existing product. Teams are composed of members from marketing, design, quality,
finance and production. The existing product team usually has fewer members,
because the QFD process will only need to be modified. Time and inter-team
communication are two very important things that each team must utilize to their
fullest potential.
Team meetings are very important in the QFD process. The team leaders
need to ensure that the meetings are run in the most efficient manner and that the

SlipNotes.in
members are kept informed. The meeting format should have some way of
measuring how well the QFD process is working at each meeting and should be
flexible, depending on certain situations. The duration of meeting will rely on where
the team members are coming from and what needs to be accomplished.

Benefits of QFD
QFD was originally implemented to reduce start -up costs. The benefits of QFD are:
Improves Customer Satisfaction
Reduces Implementation Time
Promotes Teamwork
Provides Documentation
Improves Customer satisfaction – QFD looks past the usual customer response
and attempts to define the requirements in a set of basic needs, which are compared
to all competitive information. All competitors are evaluated equally from customer
and technical perspectives. This information can then be prioritized using a Pareto
diagram. Management can then place resources where they will be most beneficial in
improving quality. Also, QFD takes the experience and information that are available
within an organization and puts them together as a structured format that is easy to
assimilate. This is important when an organization‟s employee leaves a particular
project and a new employee is hired.
Reduces Implementation Time – Fewer engineering changes are needed when
using QFD, and when used properly, all conflicting design requirements can be
identified in a reduction in retooling, operator training and changes in traditional
quality control measures. By using QFD, critical items are identified and can be
monitored from product inception to production.
Promotes Teamwork – QFD forces a horizontal deployment of communication
channels. Inputs are required from all facets of an organization, from marketing to
production sales, thus ensuring that the voice of the customer is being heard and
that each department knows what the other is doing. This activity avoids
misinterpretation, opinions and miscues. Efficiency and productivity always increase
with enhanced teamwork.
Provides Documentation – A database for future design or process improvements
is created. Data that are historically scattered within operations, frequently lost and
often referenced out of context, are now saved in an orderly manner to serve future
needs. This database also serves as a training tool for new engineers. QFD is also

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very flexible when new information is introduced or things have to be changed on the
QFD matrix.

Creates focus on customer requirements

Uses competitive information effectively
Improves
Prioritizes resources
Customer
Identifies items that can be acted upon
Satisfaction Structures resident experience/information

Decreases midstream design changes

Reduces Limits post introduction problems

Implementation Avoids future development redundancies

Time Identifies future application opportunities

Surfaces missing assumptions

Based on consensus
Promotes Creates communication at interfaces

Teamwork Identifies actions at interfaces

Creates global view out of details

Documents rationale for design

Is easy to assimilate
Provides Adds structure to the information

Documentation Adapts to changes

Provides framework for sensitivity analysis

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House of Quality
The house of quality converts the customer requirements into design requirements
that meet specific target values and matches that against how an organization will
meet those requirements.

Interrelationship
between technical
descriptors

Technical Descriptors (Voice of the organization) -

HOWs
(Voice of the Customer)
Customer Requirements

Prioritized Customer
Requirements
WHATs

Relationship between requirements and

descriptors

Prioritized Technical Descriptors

Constructing a house of quality

Step-by-step approach makes the construction of house of quality simple.

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Step 1: List Customer Requirement (WHATs) – The initial steps in forming the
House of Quality includes determining, clarifying, and specifying the customers‟
needs. These steps lay the foundation for a clearly defined venture and will ensure a
project or process is well thought out prior to any further development. Customer
requirements can be classified into primary, secondary and tertiary requirements.

Clarifying Customer Needs

Customers buy benefits and producers offer features. This seems like a relativ ely
simple notion; however, unless customers and producers are perfectly in tune with
one another, it may be very difficult to anticipate these features, or each underlying
benefit from each producer. Some of theses features include

Parts Costs Functions

Quality Character and

Processes Tasks
Reliability
Figure 1: Examples of Customer Needs

Specifying the Customer Needs

After determining what items are most important to the customer, organizations
must translate them into particulate specifications. Nothing can be produced,
serviced or maintained without detailed specifications or some set of given
standards. Each aspect of the desired item must be clearly defined: Measurements
must be defined, heights specified, torques stated, and weights targeted. These
values can be derived from several locations. Organizations can use known data from
market research, or conduct new studies to gather necessary information. In any
event, the needs, which were clarified and then explicitly stated, should be satisfied
to the best of that organization‟s ability. In addition, regulatory standards and
requirements dictated by management must be identified.

Step 2: List Technical Descriptors (HOWs) – Once all requirements are identified
it is important to answer what must be done to the product design to fulfill the
necessary requirements. Figure 2 explains how to use a requirement chart to help
the design process. Thus the second step involves the description of manufacturing

SlipNotes.in
of the product to meet the customer requirements. What technology must be used
and cost of all these things will be presented in this section.

Requirements
What

A list of requirements from customers, An expanded list of what needs to be done

management and regulatory standards to the product to fulfill the requirements

Figure 2: Requirement Chart

Step 3: Develop a Relationship Matrix between WHATs and HOWs

(Interrelationship Matrix) – In this matrix each item of WHATs will be related to
HOWs. This matrix is called interrelationship matrix and is a standard two
dimensional matrix with cells that relate to combinations of individual customer and
technical requirements. The interrelationship matrix forms the body of HOQ.
It is the task of QFD team to identify where these interrelationships
are significant. Each combination of customer and technical requirement is
considered in turn by the QFD team. The level of interrelationship discerned is
weighted usually on a four point scale (high, medium, low, none) and a symbol
representing this level of interrelationship is entered into the matrix cell. Each level
of interrelationship weighting is assigned a score which the team should understand
and agree to before completing this matrix. E.g. High – 9, Medium – 3, Low – 1,
None – 0.

Step 4: Develop an interrelationship Matrix between HOWs (Correlation

Matrix) – This is a correlation matrix which represents the relative importance of
each technical descriptor. This matrix forms the roof of HOQ. For each cell of this
matrix, the question is asked: “Does improving one requirement causes a
deterioration or improvement in the other technical requirement?” Where the answer
is a deterioration, an engineering trade-off exists and a symbol (-) is entered into the
cell to represent this. Where improving one requirement automatically leads to an
improvement in the other requirement, an alternative symbol (+) is entered into the
cell. Weightages are given as strong negative (-9), negative (-3), positive (+3),
strong positive (+9).

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Step 5: Competitive Assessments – Competitive assessments are a pair of
weighted tables that depute item for how competitive products compare with current
products. It can be customer assessment and technical assessment. Values are given
from 1 to 5 for converting the assessments into numbers.

Step 6: Develop prioritized customer requirements (Planning matrix) – This

step involves the development of planning matrix. This matrix quantifies the
customers‟ requirement priorities and their perceptions of the performance of the
existing products. It also allows these priorities to be adjusted based on the issues
that concern the design team.

Step 7: Develop prioritized technical descriptors – Degree of difficulty in

manufacturing is given weightages and absolute weight is calculated.

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 BENCHMARKING

HISTORY
The idea of benchmarking was first proposed by Dr. Robert Camp in the year
1983.
It was first implemented at the Xerox Company which helped the company to
come up from the crisis situation it was facing then.

DEFINITION
Benchmarking is based on the theory that, for a company‟s success or failure in
operations, there will be a certain CRITICAL PROCESS holding the
responsibility. These critical processes can radically change or govern the
outcome of a company.
Benchmarking believes in a transition from “AS-IS” to “TO-BE” by means of
comparison of the company‟s present level performance with a superior
performer in the industry.
It focuses on the critical processes governing the outcome and not simply on
blind hardship to get the final output.

PROCESS OF BENCHMARKING
In a classic example of implementation of benchmarking at the Xerox
Company by Dr. Robert Camp, the process had five phases. The following are the
five phases of benchmarking:

Planning Phase

Analysis Phase

Integration Phase

Action Phase

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 Maturity Phase
Planning Phase
In the planning phase, the following things are coming into c oncern:
Establishing a reason for benchmarking: That is, we have to prove that the
company‟s performance is low in certain areas.
Decide “what has to be benchmarked?” This is actually identifying the earlier
mentioned critical process which is crucial in determining companies‟
outcome, but is presently exhibiting poor performance.
Decide on “Against what has to be benchmarked?” This is the process of
finding the superior performer in the industry which exhibits processes which
are good enough to be considered as a reference or standard.
Process of collection of data: In the benchmarking process, reliable, valid data
on account of performance and activities of superior performers are
important. So such activities would constitute the step of data collection. It is
of great relevance as far as the further proceedings are concerned.

Analysis phase
In the analysis phase the following are the steps performed:
Make an idea of present level of performance: Company‟s present level of
performance is being understood and recorded to make the AS-IS model. This
gives an idea about company‟s performance for different processes.
Make a projected idea of performance: This step would be setting up of a goal
which surpasses the performance of “The best in class”. This would basically
help to identify the individual benchmark gaps. This would actually make a
TO-BE model of the organization.

Integration phase
In the integration phase, there are two things happening. They are as follows:
The integration of the identified benchmark gaps: This is to combine together
the various inferences made during analysis phase. This gives an idea of how
totally far is the company from best performance.
Communication within the company: Communication ensures that, the
employees of the organizat ion are informed about the performance gap at
which the company is standing at, and that, measures would be taken to
meet with it.

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Action Phase
The action phase consists of three major steps. They are as follows:
Forming an action plan: In this process, a plan is made according to which,
the company is to further work forward so as to compensate the benchmark
gap. Different ideas to improve the performance of the company are made.
Implementation of the action plan: The formed ideas are put into
implementation during this phase. The different plans and ideas proposed will
be the guidelines to implement the best performance.
Recalibration of benchmark: As the company‟s performance improves, the
benchmark has to be revised to newer higher standards to keep improving
the performance of the company.

Maturity Phase
When the company has become stable in its performance after several levels of
benchmarking, the organization is said to have become mature in its performance.
Once the company reaches this phase, it can even be considered as the Standard of
Reference.

TOTAL PRODUCTIVE MAINTENANCE

Good maintenance is fundamental to a productive manufacturing system. TPM is

keeping the current plant and equipment at its highest productive level through
cooperation of all areas of the organization. First, break down the barriers between
maintenance and production personnel. When individuals are working together, the
common objective is peak performance or total productivity.

Predictive and preventive maintenance is the f oundation for TPM environment.

Predictive Maintenance is the process of using data to determine when a piece of
equipment will fail. Preventive Maintenance is the process of periodically performing
activities such as lubrication on the equipment to keep it running. TPM should be
directed towards elimination of equipment and plant Maintenance. Its objective is to
produce a system that does not require Maintenance during normally scheduled run
times.

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Analyzing TPM into 3 words:
Total - Encompassing all, maintenance and production personnel working together.
Productive - production of goods and services that meet or exceed customer
requirements.
Maintenance - Keeping equipment and plant in as good as or better than original
condition.

Overall goals of TPM are:

1. Maintaining and improving equipment capacity

2. Maintaining equipment for life
3. Using support from all areas.
4. Encouraging input from all employees.
5. Using teams for continuous improvement.

The Plan - First activity is to determine the current operat ing parameters. What
system do we have and how do they work? What is the current condition of plant
and equipment?

Seven basic steps are there to get an organization started towards TPM.

1. Management learns the new philosophy - One of the most difficult things to
deal is change. They need to learn about TPM and how will it affect their operations.
Benchmarking will provide valuable information. TPM is trying to tap into an unused
resource, brainpower and problem solving ability of all the organization‟s employees.
Many organizations have flavor-of –the-month approach to changing management.
This has credibility problem with employees. Management is changed and new
person does not build on past accomplishments, but a new system is brought. Lack
of ownership c auses low morale and dissatisfaction with management. Ownership
should be based on what is good for customers and employees and also emphasize
employee well-being and empowerment.

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2. Promoting the philosophy - Senior management in promoting the system
must spend time. They must sell the idea and let the employees know that they are
totally committed. If belief and commitment are not there, positive results will not
happen. Belief - new system will solve immediate problem and lead to an immediate
return on investment. A long term commitment is required.
Management will need to lead the way by practicing the new philosophy. Best
way to implement it is to start doing it. Start giving the Maintenance and production
personnel more autonomy. Management must first build credibility and best way to
accomplish that task is to change first and lead the way .

3. Training is funded and developed for everyone in the organization - Teach

philosophy to managers at all levels. Begin with senior management and work dow n
to first line supervisors. Senior management must spend time learning about and
understanding the effects of applying it to the organization. Some management need
to be replaced or take early retirement because they don‟t change, those who readily
respond to new philosophy should be identified.
Middle management must learn how to deal with team approach and how
small autonomous work groups function. This level has the greatest difficulty with
this type of change. Downsizing is always at the expe nse of middle managers. The
philosophy of TPM and TQM lead to flatter management structures. First line
supervisors need to learn about their role on the new environment. Employees need
to learn about the various tools used in performing their tasks as part of an
autonomous work group.

4. Areas of needed improvement are identified - Some machines are on the

verge of breaking down or require an excessive amount of Maintenance. Employees
who work with equipment on a daily basis are better able to identify these
conditions. A good first step- let operators and Maintenance technicians tell
management which machines and system need attention. An implementation team
to coordination is essential. This will build credibility and start the organization
toward TPM. Six major loss areas need to be measured and tracked.
1. Down Time Losses
I. Planned a) Start ups b) shift changes c) coffee and lunch breaks d) planned
maintenance shutdowns.
II. Unplanned a) equipment breakdown b) Changeovers c) lack of material

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2. Reduced speed losses
3. Idling and minor stoppages
4. Poor Quality losses
5. Process nonconformities
6. Scrap

These can be quantified into 3 and summarized into one equipment effectiveness
metric.
Downtime losses are measured by equipment availability.
A= T/P* 100
A-Availability, T- Operation time (P-D), P-Planned operating time, D- Downtime.

Reduced Speed losses are measured by performance efficiency

E= (C*N)/T*100
E-performance efficiency C-theoretical cycle time N-processed amount (quantity)

Poor Quality losses are measured by rate of quality products produced

R= (N-Q)/N*100
R- Rate of quality products produced Q- nonconformities.

Equipment effectiveness is the product of decimal equivalent of previous metrics.

EE- A*E*R
Target for improvement – 85% EE

5. Goals are formulated – Set a time frame completing the changes for the first
identified problems through discussions. This discussion will start the functioning
smoother.

6. An implementation plan is developed – Training plan must be drawn first.

Autonomous groups must be formed during the training period based on the
response of individuals.

7. Autonomous work groups are established - Make the operator responsible

for the equipment and level of maintenance that he is capable of performing. Next
stage is to identify the maintenance personnel who are working in certain areas or

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having certain skill levels. Operators and maintenance personnel are brought
together for the better performance. This is the natural way of forming autonomous
work group. These work groups must have the authority to make decisions about
keeping the equipment in first -class running order. The structure of autonomous
work group will vary based on application and type of industry. The autonomous
work group also will change over time.

This seven step plan provides framework to establish TPM. An effective total
productive maintenance program will lead to improved quality and productivity.

ISI

Bureau of Indian Standards (BIS)

The Bureau of Indian Standards (BIS) as the National Standards Body of India has
been successfully promoting and nurturing the standardization movement in the
country since 1947. BIS has initiated several steps towards enhancing the efficiency
of its operations and upgrading of services.
1. Standards
Standards Formulation – For formulation of standards, BIS functions through a
cooperative mechanism in terms of sectional committees set up by respective
Division Council, Subcommittees set up by Sectional Committees for dealing with
specific group of subjects and panels set up for undertaking a focused item towards
formulation of standard. The Sectional Committees, Subcommittees and panels
comprise of representatives from the industry, government, research and
development organizations, consumers and individual experts. A proposal for
formulation of Indian Standards may be submitted by any Ministry of the Central
Government, State Government, Union Territory Administration, Consumer
Organization, Industrial Unit etc. The proposal when approved by Division Council is
forwarded to an appropriate technical committee for formulation of Indian Standards.
Standards Promotion
Educational Utilization of Indian Standards (EUS) – The students and faculty of
technical institutions need to be trained in the subjects of standardization and quality
systems, so that they are well equipped to introduce quality in goods and services

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delivered by them. Recognizing this, BIS has been regularly conducting programs on
Educational Utilizations of Standards with the specific aim to propagate the message
of standardization and to create awareness about the latest Indian Standards in
various fields.
Industry Awareness programs – The basic aim of the Industry Awareness
Program is to propagate the concept of standardization and quality systems among
small scale industries. Such programs organized by BIS consist of lectures,
discussions and video film shows, where the participants are exposed to the concept
of standardization, quality systems, product certification and other BIS activities.
State Level Committees (SLCs) – In order to have a permanent mechanism at the
state level to ensure effective implementation of standards and to propagate the
message of standardization and quality systems all over the country, SLCs for
Standardization and Quality Systems have been set up in almost all States/Union
Territories.
Rajiv Gandhi National Quality Award - Rajiv Gandhi National Quality Award was
instituted by the Bureau of Indian Standards in 1991 with a view to give special
recognition to the best industries. This award is intended to generate interest and
involvement of Indian industry in quality programs, drive Indian products to higher
levels of quality and better equip Indian organizations to meet the challenges of
domestic and International markets.
Information and SSI Facilitation Cell - Information and SSI Facilitation Cell
operating at BIS Headquarters since 1997 continued to serve small and medium
scale entrepreneurs for their various queries. This Facilitation Cell provides
assistance in the following areas of BIS activities – national as well as international:
Standards
Product Certification Marks Scheme
Quality System Certification Scheme (ISO 9000)
Environmental Management System Certification Scheme (ISO 14000)
Hazard Analysis and Critical Control Point (HACCP)
ECO Mark Certification Scheme
Hallmarking Scheme for Gold Jewellery
Certification Scheme for Foreign manufacturers and for imported products
Library Services
Awareness and Training Program
Laboratory and calibration Services

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 Miscellaneous Information

Product Certification
The Bureau operates a Product Certification Scheme, which is governed by the
Bureau of Indian Standards Act, 1986 and Rules and Regulations f ramed there
under. Presence of Standard Mark (popularly known as ISI Mark) on product
indicates conformity to the relevant Indian Standard. Before granting license to any
manufacturer, BIS ascertains the availability of the required infrastructure and
capability of the manufacturer to produce and test the product conforming to the
relevant Indian Standard on a continuous basis. Samples are also drawn from the
production line as well as from market and got tested in independent laboratories to
ensure their c onformance to the relevant Indian Standard. The Certification scheme
is basically voluntary in nature but for a number of items affecting health and safety
of the consumer and those of mass consumption, it has been made mandatory by
the Government through various statutory measures such as Prevention of Food
Adulteration Act, Mines Act, and Indian Gas Cylinders Rules besides BIS Act.

Management System Certification

Quality System Certification – BIS Quality System Certification was launched in
September 1991 under the provision of the Bureau of Indian Standards Act, 1986.
The Scheme is being operated in accordance with ISO/IEC Guide 62 – General
requirements for bodies operating assessment and certification/registration of quality
systems.

Accreditation of BIS QSCS – BIS Quality Systems Certification Scheme has been
accredited by Raad voor Accreditate (RvA), Netherlands for 23 major economic
activities. The scheme is regularly audited by RvA to confirm compliance to the laid
down requirements.

Hazard Analysis and Critical Control Point - Hazard Analysis and Critical Control Point
(HACCP) is a process control system designed to identify and prevent microbial and
other hazards in food production. HACCP can be applied throughout the food chain
from primary producer to final consumer and the scheme is based on IS 15000:1998
„Food Hygiene – HACCP Systems and Guidelines‟ which is technically equivalent to
the Codex Alimentarious Standard ALINORM – 97/13A.

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Environmental Management System Certification – Environmental Management
System (EMS) Certification Scheme launched by BIS as per IS/ISO 14001:1996, is
also popular.

Occupational Health and Safety Management System Certification (OHSMS) – BIS

launched OHSMS certification as per IS 18001:2000 in January 2003, which
essentially enables an organization to define plan and mange a policy and objectives,
taking into account legislative requirements and information about significant
hazards and risks, which the organization can control and over which it can be
expected to have an influence, to protect its employees and others, whose health
and safety may be affected by the activities of the organization.

2. Laboratory Services
For effective monitoring of quality system, the laboratories have revised, updated
and implemented the documents of quality system for facing surveillance/renewal
Audits of National Accreditation Board for Laboratories (NABL).

3. Vigilance Activities
Scope and Nature of Vigilance Activities in BIS – Vigilance Department of BIS is
headed by two Vigilance Officers and is entrusted for carrying out vigilance activities.
This department functions in close coordination with other agencies such as the
„Central Vigilance Commission‟ and the „Ministry of Consumer Affairs, Food & Public
Distribution‟ and the „Department of Personnel and Training‟. The activities of
Vigilance Department are organized in accordance with an Annual Action Plan. The
work undertaken by Vigilance Department is as follows:
Scrutinize/examine the Annual Property returns and final transactions in
movable and immovable properties.
Grant vigilance clearances for considering promotions and forward
applications of BIS employees for outside posts as requested by
department/employee.
Examine complaints received in Vigilance Department and conduct thorough
investigations and in case, it is called for, initiate disciplinary proceedings.

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 In order to appraise BIS employees about various provisions of the Conduct
Rules, CCS (CCA) Rules and various other related Rules/Regulations and
Manuals are in operation.
Organize Training programs at BIS Headquarters, Regional and Branch Offices
on vigilance matters for imparting training to BIS officials.
Conduct vigilance audits of various work areas of the Bureau and its different
organs and Branch and Regional Offices as part of prevalent preventive
vigilance.
Organize meetings with BIS licensees for receiving direct feedback relating to
instances of corruption, if any, and elicit suggestions for introducing
systematic improvements and greater transparency.

4. Information Services
Technical Information Service Centre – Technical Information Services are provided
to industry, exporters, individuals and government agencies in response to their
enquiries. Bulletins are also published to keep them updated about the latest
information on standards, technical regulations and certification systems applicable
in international trade.

WTO/TBT Enquiry Point – BIS continued to function as the WTO/TBT Enquiry Point as
designated by the Ministry of Commerce. Close interaction with Ministry of
Commerce and Industry in various issues of national interest under WTO/TBT
Agreement was maintained. BIS participated in a National Seminar on WTO
Agreement on Technical Barriers to Trade organized by Ministry of Commerce with
WTO.

Issue of World Manufacturer Identifier (WMI-ISO 3780) – In coordination with

Society of Automotive Engineers (SAE), USA, BIS fulfils the responsibility of issuing
the WMI Codes as per ISO 3780 to the automobile manufacturers in India.

5. Training Services
Training Institute – Bureau of Indian Standards has set up National Institute of
Training for Standardization (NITS) in the year 1995 to meet the training needs of
Industry, Government and Service sector. This Institute has shifted to its new

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premises in May 2003 at Noida and started its activities with full fledged hostel
facilities.

Programs for industry:

Enhancing MR skills for ISO 9001:2000
ISO 9001:2000 Internal Quality Audit
Documentation as per ISO 9001:2000
ISO 9001 Awareness for Aerospace Industry
ISO 14000 Awareness Program
ISO 9000 Lead Auditors Course
ISO 14000 Lead Auditors Course
Lead Auditors course on Occupational Health and Safety Management
Systems
ISO 14001 Internal EMS Auditing
IS 18001/OHSAS 18001 Awareness

Programs for BIS Employees:

Programs for BIS employees were also organized by NITS. The topic covered
included:
Awareness Program on Occupational Health & Safety Management Systems
as per IS 18001/OHSAS 18001.
Management System Activities for Staff posted in Management System
Certification Departments at Regional Offices.
Enhancing Auditing Skills as per ISO 19011/ISO Guide 62/63 for Management
System Certification Officers at Regional Offices.

6. Consumer Related Activities

Consumer Awareness Program – BIS promotes consumer awareness regarding BIS
activities by conducting awareness programs and by participation in
seminars/conferences and exhibitions organized by consumer organizations through
its network of regional and branch offices. During these programs, participants were
informed about various quality control orders, penalties for misuse of BIS Standard
Mark, Consumer Protection Act, and Consumer Grievances Redressal Mechanism.

7. International Activities

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Development in ISO was organized by BIS in collaboration with ISO DEVCO. The
objective of this program was to assist developing countries which are holding the
Secretariats of ISO Technical Committees (TCs), Subcommittees (SCs) and Working
Group (WGs) to handle their functions in an efficient manner and in turn support the
work of technical committees with increased effectiveness.

Bilateral Cooperation Programs

BIS also continued to work towards closer bilateral cooperation with neighboring
countries such as Sri Lanka, Bangladesh and Nepal in close association with Ministry
of Commerce and Ministry of External Affairs.

ISO 9000 SERIES

The ISO 9000 family is primarily concerned with "quality management". This
means what the organization does to fulfill the customer's quality requirements, and
applicable regulatory requirements, while aiming to enhance customer satisfaction,
and achieve continual improvement of its performance in pursuit of these objectives.
ISO 9000:2000 series are based on eight quality management principles.

Principle 1 – Customer focus

Organizations depend on their customers and therefore should understand current

and future customer needs, should meet customer requirements and strive to exceed
customer expectations.

Key benefits:

Increased revenue and market share obtained through flexible and fast
responses to market opportunities.
Increased effectiveness in the use of the organization's resources to enhance
customer satisfaction.
Improved customer loyalty leading to repeat business.

Applying the principle of customer focus typically leads to:

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 Researching and understanding customer needs and expectations.
Ensuring that the objectives of the organization are linked to customer needs
and expectations.
Communicating customer needs and expectations throughout the
organization.
Measuring customer satisfaction and acting on the results.
Systematically managing customer relationships.
Ensuring a balanced approach between satisfying customers and other
interested parties (such as owners, employees, suppliers, financiers, local
communities and society as a whole).

Principle 2 - Leadership Leaders establish unity of purpose and direction of the

organization. They should create and maintain the internal environment in which
people can become fully involved in achieving the organization's objectives

Key benefits:

People will understand and be motivated towards the organization's goals and
objectives.
Activities are evaluated, aligned and implemented in a unified way.
Miscommunication between levels of an organization will be minimized.

Applying the principle of leadership typically leads to:

Considering the needs of all interested parties including customers, owners,

employees, suppliers, financiers, local communities and society as a whole.
Establishing a clear vision of the organization's future.
Setting challenging goals and targets.
Creating and sustaining shared values, fairness and ethical role models at all
levels of the organization.
Establishing trust and eliminating fear.
Providing people with the required resources, training and freedom to act with
responsibility and accountability.
Inspiring, encouraging and recognizing people's contributions.

Principle 3 - Involvement of people

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People at all levels are the essence of an organization and their full involvement
enables their abilities to be used for the organization's benefit.

Key benefits:

Motivated, committed and involved people within the organization.

Innovation and creativity in furthering the organization's objectives.
People being accountable for their own performance.
People eager to participate in and contribute to continual improvement.

Applying the principle of involvement of people typically leads to:

People understanding the importance of their contribution and role in the

organization.
People identifying constraints to their performance.
People accepting ownership of problems and their responsibility for solving
them.
People evaluating their performance against their personal goals and
objectives.
People actively seeking opportunities to enhance their competence,
knowledge and experience.
People freely sharing knowledge and experience.
People openly discussing problems and issues.

Principle 4 - Process approach

A desired result is achieved more efficiently when activities and related resources are
managed as a process.

Key benefits:

Lower costs and shorter cycle times through effective use of resources.
Improved, consistent and predictable results.
Focused and prioritized improvement opportunities.

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Applying the principle of process approach typically leads to:

Systematically defining the activities necessary to obtain a desired result.

Establishing clear responsibility and accountability for managing key activities.
Analyzing and measuring of the capability of key activities.
Identifying the interfaces of key activities within and between the functions of
the organization.
Focusing on the factors such as resources, methods, and materials that will
improve key activities of the organization.
Evaluating risks, consequences and impacts of activities on customers,
suppliers and other interested parties.

Principle 5 - System approach to management

Identifying, understanding and managing interrelated processes as a system

contributes to the organization's effectiveness and efficiency in achieving its
objectives.

Key benefits:
Integration and alignment of the processes that will best achieve the desired
results.
Ability to focus effort on the key processes.
Providing confidence to interested parties as to the consistency, effectiveness
and efficiency of the organization.

Applying the principle of system approach to management typically leads to:

Structuring a system to achieve the organization's objectives in the most

effective and efficient way.
Understanding the interdependencies between the processes of the system.
Structured approaches that harmonize and integrate processes.
Providing a better understanding of the roles and responsibilities necessary
for achieving common objectives and thereby reducing cross-functional
barriers.
Understanding organizational capabilities and establishing resource
constraints prior to action.
Targeting and defining how specific activities within a system should operate.

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 Continually improving the system through measurement and evaluation.

Principle 6 - Continual improvement

Continual improvement of the organization's overall performance should be a

permanent objective of the organization.

Key benefits:

Performance advantage through improved organizational capabilities.

Alignment of improvement activities at all levels to an organization's strategic
intent.
Flexibility to react quickly to opportunities.

Applying the principle of continual improvement typically leads to:

Employing a consistent organization-wide approach to continual improvement

of the organization's performance.
Providing people with training in the methods and tools of continual
improvement.
Making continual improvement of products, processes and systems an
objective for every individual in the organization.
Establishing goals to guide, and measures to track, continual improvement.
Recognizing and acknowledging improvements.

Principle 7 - Factual approach to decision making

Effective decisions are based on the analysis of data and information

Key benefits:

Informed decisions.
An increased ability to demonstrate the effectiveness of past decisions
through reference to factual records.
Increased ability to review, challenge and change opinions and decisions.

Applying the principle of factual approach to decision making typically leads to:

Ensuring that data and information are sufficiently accurate and reliable.
Making data accessible to those who need it.

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 Analyzing data and information using valid methods.
Making decisions and taking action based on factual analysis, balanced with
experience and intuition.

Principle 8 - Mutually beneficial supplier relationships

An organization and its suppliers are interdependent and a mutually beneficial

relationship enhances the ability of both to create value.

Key benefits:

Increased ability to create value for both parties.

Flexibility and speed of joint responses to changing market or customer needs
and expectations.
Optimization of costs and resources.

Applying the principles of mutually beneficial supplier relationships typically leads to:

Establishing relationships that balance short -term gains with long-term

considerations.
Pooling of expertise and resources with partners.
Identifying and selecting key suppliers.
Clear and open communication.
Sharing information and future plans.
Establishing joint development and improvement activities.
Inspiring, encouraging and recognizing improvements and achievements by
suppliers.

Steps to get ISO 9000

1) Orient the management of the company towards developing the quality

system.
2) Prepare a support group who will be responsible for implementing ISO 9000.
It is this group with the participation of the top management decides on the
selection of particular standard most appropriate for the business

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 3) Ensure the practice of various clauses. A checklist should be prepared from
each of the clauses of the standard. The elements which are practiced and
requires necessary change should be done accordingly.
4) Develop a quality manual. It is the central part of the qualit y manual
5) Apply to the certification agency

ISO 9000 SERIES OF STANDARDS

The ISO series of standards is generic in scope. By design the series can be tailored
to fit any organization‟s needs whether it is large or small, a manufacturer or a
service organization. In very simplified terms, the standards require an organization
to say what it is doing to ensure quality, then to do what it says, and finally
document or prove that it has done what it said.

The five standards of the series are:

1. ISO 9000,”Quality Management and Quality Assurance Standards Guidelines for

selection and use,” explains fundamental quality concepts, defines key terms, and
provides guidelines for selecting, using and tailoring the ISO9001, 9002, and 9003
standards.

2. ISO 9001,”Quality Systems – Model for Quality Assurance in Design,

Development, Production Installation and Servicing” is the most comprehensive
standard in the series. It contains 20 elements covering the need for an effective
quality system from the receipt of a contract through the design stage, and finally
the service required after delivery.

3. ISO 9002, “Quality Systems –Model for Quality Assurance in Production,

Installation and Servicing,” addresses the prevention detection and correction of
problems during production and installation

4. ISO 9003, “Quality Systems –Model for Quality Assurance in final Inspection
and Test,” is the least comprehensive of the standards. It is not a quality control
system. ISO9003 addresses only those requirements for the detection and control of
problems found during final inspection and testing.

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5. ISO 9004-1, “Quality Management and Quality System Elements –Guidelines,”
provides guidance for a supplier to use in developing and implementing a quality
system. It examines each of the elements in a greater detail.

IMPLEMENTATION

There are a number of steps that are necessary to implement a quality management
system.

1. Senior management commitment - The most important step in implementing a

quality system that will meet or exceed an ISO 9000 standard is to acquire the full
support of upper management. The chief executive officer (CEO) must be willing to
commit the resources necessary to achieve certification. This is critical to the success
of the project. Without the CEO‟s support, the process may continuously run into
unnecessary roadblocks or even be doomed to failure.

2. Appoint the Management Representative - Once the commitment has been

made, the process can proceed by adopting a project team approach and treating it
the same as any other business undertaking. The next step is the appointment of a
management representative. This person is responsible for coordinating the
implementation and maintenance of the quality system and is the contact person for
all parties involved in the process, both internal and external. It is important to note
that the quality manager does not have to be the representative. The
implementation of the quality system should involve everyone in the organization.
The standard requires the management representative be a person who is able to
ensure that the quality system is effectively implemented and maintained
irrespective of other responsibilities.

3. Awareness - This step requires an awareness program. Because the process is

going to affect members of the organization as well as require their input, it stands
to reason that every one should understand the quality system. They should know
how it would affect day-to-day operations and the potential benefits. This
information can be relayed through short, one-hour awareness training sessions.

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4. Appoint an Implementation Team - After everyone has been informed of the
organization‟s intentions to develop the quality system, an implementation team
should be assembled. This team should be drawn from all levels and areas of the
organizations.

5. Training - The implementation team, supervisors, and internal audit team should
be trained. This activity can be accomplished by sending team leaders for training
and having them train the other team members or by bringing the training in house
for all team members through a one or two day seminar.

6. Time schedule - This activity develops a time schedule for the implementation
and registration of the system. This time frame will vary, depending on the size and
type of organization and the extent of its existing quality system. Most organizations
can complete the entire process in less than 1.5 years.

7. Select Element Owners - The implementation team selects owners for each of
the system elements. Many of these owners will be members of the implementation
team. Owners may be assigned more than one element. Each owner has the option
of selecting a team to assist in the process.

8. Review the Present System - Perform a review of the present quality syst em.
Copies of all the quality manuals, procedures, work instructions, and forms presently
in use are obtained. These documents are sorted into the system elements to
determine what is available and what is needed to complete the system. This activity
is a gap analysis and can be performed by the element owners and their reams or by
an external consultant.

9. Write the Documents - Prepare written quality policy and procedure manuals.
They can be combined into one document. Write appropriate work instructions to
maintain the quality of specific functions. This process should involve every
employee, because the best person to write a work instruction is the one who
performs the job on a regular basis.

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10. Install the New System - Integrate the policies, procedures, and work
instructions into the day to day workings of the organization and documents what is
being done. It is not necessary for all elements to be implemented at the same time.

11. Internal Audit - Conduct an internal audit of the quality system. This step is
necessary to ensure that the system is working effectively and to provide
management with information for the comprehensive management review. Minor
corrections to the system are made as they occur.

12. Management Review - Conduct a management review. The management

review is used to determine the effectiveness of the system in achieving the stated
quality goals. The system is revised as needed.

13. Preassessment - This step is optional. If a good job has been done on the
previous steps, preassessment is not necessary.

14. Registration - This step requires three parts: choosing a registrar, submitting
an application, and conducting the registrar‟s system audit. Considerations in
choosing a registrar include cost, lead-time, and your customer‟s acceptance of the
registrar, the registrar‟s accreditation and familiarity with your industry. The
application for registration should also include supplying the registrar with the policy
and procedure manuals for their review. The time involved in the registrar‟s system
audit will vary depending on the size and complexity of the organization and the
number of auditors involved. It is usually one to three days and will consist of an
opening meeting to describe the process the auditors will follow, the audit itself, and
a closing meeting to discuss the findings of the audit.

ISO 14000 SERIES

ISO 14000 is a series of international standards on environmental management. It

provides a framework for the development of an environmental management system
and the supporting audit programme. ISO 14000 exists to ensure a product has the
lowest possible environmental impact. ISO 14000 is similar to ISO 9000 in that both
pertain to the process of how a product is produced, rather than to the product itself.
The basis of ISO 14000 was the US Environmental Protection Agency pioneering use

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of pathway analysis to determine the likely human health impact of environmental
ills.
Environmental impact analysis is conducted to determine the likely
human environmental health impact, risk to ecological health and changes to
nature's services that a proposed or ongoing project may bring, or is bringing. The
US Environmental Protection Agency pioneered the use of pathway analysis to
determine the likely human healt h impact of environmental ills. It and the Natural
Step definitions later became the basis of the global ISO 14000 series of
environmental management standards and the more recent ISO 19011 accounting
standard. After an analysis, Precautionary Principle and Polluter Pays may be applied
to prevent, limit, or require strict liability or insurance coverage to a project, based
on its likely harms. Environmental impact analysis is often controversial and rarely
uncontested.

ISO 14001

Environmental management systems - Specification with guidance for use

Scope: This International Standard specifies requirements for an environmental

management system, to enable an organization to formulate a policy and objectives
taking into account legislative requirements and information about significant
environmental impacts. It applies to those environmental aspects which the
organization can control and over which it can be expected to have an influence. It
does not itself state specific environmental performance criteria. T his International
Standard is applicable to any organization that wishes to implement, maintain and
improve an environmental management system; assure itself of its conformance with
its stated environmental policy; demonstrate such conformance to others; s eek
certification/registration of its environmental management system by an external
organization; make a self-determination and self-declaration of conformance with
this International Standard. All the requirements in this International Standard are
intended to be incorporated into any environmental management system. The extent
of the application will depend on such factors as the environmental policy of the
organization, the nature of its activities and the conditions in which it operates

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ISO 14004

Environmental management systems - General guidelines on principles, systems and

supporting techniques

Scope: This International Standard provides guidance on the development and

implementation of environmental management systems and principles, and their
coordination with other management systems. The guidelines in this International
Standard are applicable to any organization, regardless of size, type or level of
maturity that is interested in developing, implementing and/or improving an
environmental management system. The guidelines are intended for use as a
voluntary, internal management tool and are not intended to be used as EMS
certification/registration criteria.

Environmental Auditing
ISO 14010
Guidelines for environmental auditing - General principles
Scope: This International Standard provides the general principles of environmental
auditing that are applicable to all types of environmental audits. Any activity defined
as an environmental audit in accordance with this International Standard should
satisfy the recommendations given in it.

ISO 14011

Guidelines for environmental auditing - Audit procedures - Auditing of environmental

management systems
Scope: This International Standard establishes audit procedures that provide for the
planning and conduct of an audit of an EMS to determine conformance with EMS
audit criteria.

ISO 14012

Guidelines for environmental auditing - Qualification criteria for environmental

auditors
Scope: This International Standard provides guidance on qualification criteria for
environmental auditors and lead auditors and is applicable to both internal and

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external auditors. Criteria for the selection and composition of audit teams are not
included; reference is made to ISO 14011 for information on these subjects.

ISO/DIS 14015

Environmental management - Environmental assessment of sites and organizations

(EASO)
Scope: This International Standard provides guidance on how to conduct an EASO of
through a systematic process of identifying environmental aspects and
environmental issues and determining, if appropriate, their business consequences.
This International Standard covers the roles and responsibilities of the parties to the
assessment (the client, the assessor and the representative of the assessee), and
the phases of the assessment process (planning, information gathering and
validation, evaluation and reporting). This International Standard does not provide
guidance on how to conduct other types of environmental assessments, such as:

a) Initial environmental reviews;

b) Environmental audits (including EMS and regulatory compliance audits);

c) Environmental impact assessments; or

d) Environmental performance evaluations.

Intrusive investigations and site remediation, as well as the decision to proceed with
them, are outside the scope of this International Standard. This International
Standard is not intended for use as a specification standard for certification or
registration purposes or for the establishment of environmental system
requirements. Use of this International Standard does not imply that other standards
and legislation may be imposed on the client

Environmental labeling
ISO 14020
Environmental labels and declarations - General principles
Scope: This International Standard establishes guiding principles for the
development and use of environmental labels and declarations. It is intended that
other applicable standards in the ISO 14020 series be used in conjunction with this
International Standard. Where other International Standards provide more specific

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requirements than ISO 14020, such specific requirements take precedence. This
International Standard is not intended for use as a specification for certification and
registration purposes.

ISO 14021

Environmental labels and declarations - Self-declared environmental claims

(Type II environmental labeling)
Scope: This International Standard specifies requirements for self -declared
environmental claims, including symbols, regarding products. It further describes
selected terms commonly used in environmental claims and gives qualifications for
their use. This standard also describes a general evaluation and verification
methodology for self-declared environmental claims and specific evaluation and
verification methods for the selected claims in this standard. The standard does not
preclude, override, or in any way change, legally required environmental
information, claims or labeling, or any other applicable legal requirements.

ISO 14024

Environmental labels and declarations - Environmental labeling Type 1 - Guiding

principles and procedures
Scope: This International Standard contains guiding principles and practices, criteria
procedures and guidance for certification procedures for the development of multiple
criteria-based, third party environmental labeling programs (Type 1). It is intended
to provide practitioners and stakeholders with a reference document ensuring the
credibility and nondiscriminatory nature of the program. This International Standard
aims at reducing environmental burden by promoting market-driven demand for and
supply of product meeting a multiple-criteria based environmental labeling program,
verified by a third party.

ISO/TR 14025

Environmental labels and declarations - Type III environmental declarations

Scope: This Technical Report identifies and describes elements and issues
concerning Type III environmental declarations and corresponding programs,
including technical considerations, declaration format and communication, and

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administrative considerations for developing and/or issuing a Type III environmental
declaration.

Environmental Performance Evaluation

ISO 14031

Environmental management - Environmental performance evaluation - Guidelines

Scope: This International Standard gives guidance on the design and use of
environmental performance evaluation within an organization. It is applicable to all
organizations, regardless of type, size, location and complexity. This International
Standard does not establish environmental performance levels. It is not intended for
use as a specification standard for certification or registration purposes or for the
establishment of any other environmental management system conformance
requirements.

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