Chapter 8: Project Management

Dr. Angela de Oliveira

RES EC 313
QUANTITATIVE METHODS

HOUSEKEEPING
You will get exams back on Thursday

Where we are in the term:
Exam 1: Linear and Nonlinear programming. Some of our
most powerful analytical tools!
New Material: We will cover a number of popular ways
numbers help managers to make better decisions.
Our 1
st
way: Project management using networks.
TODAYS GAME PLAN
The Elements of Project Management
CPM/PERT
Probabilistic Activity Times
Project Crashing and Time-Cost Trade-Off
Formulating the CPM/PERT Network as a Linear
Programming Model


Network representation is useful for project analysis.
Networks show how project activities are organized and are used
to determine time duration of projects.
Network techniques used are:
CPM (Critical Path Method)
PERT (Project Evaluation and Review Technique)
Now called CPM/PERT
Developed independently during late 1950s.
Build upon the Gantt Chart
Overview
Elements of Project Management
Management is generally perceived as concerned with
planning, organizing, and control of an ongoing process
or activity.

Project management is concerned with control of an
important activity for a relatively short period of time
after which management effort ends.
Elements of Project Management
Project Planning
Objectives
Project scope
Contract requirements
Schedules
Resources
Personnel
Control
Risk and problem analysis
Elements of Project Management
Project Planning
Objectives
Detailed project statement
Include what will be accomplished
How it feeds into the strategic plan
Time, cost, and return estimates
Project scope
Contract requirements
Schedules
Resources
Personnel
Control
Risk and problem analysis
Elements of Project Management
Project Planning
Objectives
Project scope
Approach to the project
Project justification & benchmark for success
Technological and resource feasibility
Major tasks and schedule
Contract requirements
Schedules
Resources
Personnel
Control
Risk and problem analysis
Elements of Project Management
Project Planning
Objectives
Project scope
Contract requirements
Structure of managerial, reporting, & performance
responsibilities
Include staff, suppliers, subcontractors,
Include projected organizational structure
Schedules
Resources
Personnel
Control
Risk and problem analysis
Elements of Project Management
Project Planning
Objectives
Project scope
Contract requirements
Schedules
List of all major tasks, events and subschedulesuse to make a
master schedule
Resources
Personnel
Control
Risk and problem analysis
Elements of Project Management
Project Planning
Objectives
Project scope
Contract requirements
Schedules
Resources
Project budget
Procedures for budget control
Personnel
Control
Risk and problem analysis
Elements of Project Management
Project Planning
Objectives
Project scope
Contract requirements
Schedules
Resources
Personnel
Identify and recruit project team
Be sure to list special skills and training needed
Control
Risk and problem analysis
Elements of Project Management
Project Planning
Objectives
Project scope
Contract requirements
Schedules
Resources
Personnel
Control
Procedures for monitoring and evaluating progress and
performance
Include schedules and cost
Risk and problem analysis
Elements of Project Management
Project Planning
Objectives
Project scope
Contract requirements
Schedules
Resources
Personnel
Control
Risk and problem analysis
Anticipate uncertainties, potential problems
Project Return
Lots of projects could be chosen.
They are often selected based on ROI
Return on investment (ROI) is a measure used to evaluate
projects calculated by dividing the dollar gain minus the
dollar cost by the dollar cost.
gain from project - cost of project
ROI
cost of project
=
ROI can be used to rank projects

Caution: Not all project benefits can be measured in dollars
Project team typically consists of a group of individuals from various
areas in an organization and often includes outside consultants.
Project team may include workers.
Members of engineering staff often assigned to project work.

Most important member of project team is the project manager.
Project manager is often under great pressure because of
uncertainty inherent in project activities and possibility of failure.
Potential rewards, however, can be substantial.
Project manager must be able to coordinate various skills of team
members into a single focused effort.
The Project Team
Scope Statement
Scope Statement
Document providing common understanding of project.

Justification describing the factors giving rise to need for
project.

Expected results and what constitutes success.

List of necessary documents and planning reports.

Statement of work (SOW)
Planning document for individuals, team members, groups,
departments, subcontractors and suppliers
Describes what is required for successful, on time
completion.

ELEMENTS OF PROJECT MANAGEMENT
WORK BREAKDOWN STRUCTURE (WBS)
Organizational chart
WBS breaks down project into major components (modules).
Modules are further broken down into activities and, finally, into
individual tasks.
Identifies activities, tasks, resource requirements and relationships
between modules and activities.
Helps avoid duplication of effort.
Basis for project development, management, schedule, resources and
modifications.

Approaches for WBS development:
1. Top down process
What components constitute this level?
2. Brainstorm entire project
Put everything on sticky notes and then organize.
Sample Work Breakdown Structure
Responsibility Assignment Matrix

WBS is very big. It gives you the big picture, but not very
manageable.

Use an organizational breakdown structure (OBS).
OBS is a table or a chart showing which organizational units
are responsible for work items.
OBS leads to the responsibility assignment matrix (RAM)

RAM helps organize smaller elements
RAM shows who is responsible for doing the necessary work in
the project
This can include overall responsibility, who actually does the
work, and who acts in a support capacity
Project manager assigns work elements to organizational units,
departments, groups, individuals or subcontractors.
Sample Responsibility Assignment Matrix

Project Scheduling
Project schedule evolves from planning documents, with focus on
timely completion.

Critical element in project management source of most conflicts and
problems.

Schedule development steps:
1. Define activities,
2. Sequence activities,
3. Estimate activity times,
4. Develop schedule.

Gantt chart and CPM/PERT techniques can be useful.

Computer software packages available, e.g. Microsoft Project.
Gantt Chart
Popular, traditional technique, also known as a bar chart -developed
by Henry Gantt (1914).

A visual display of project schedule showing activity start and finish
times and where extra time is available.

Suitable for projects with few activities and precedence
relationships.

Drawback: precedence relationships are not always discernible
which limits charts use to smaller projects
Sample Gantt Chart
Takes 3 months. Nothing else can happen until completed.
Start at same time
Slack
Project Control
Process of ensuring progress toward successful completion.

Monitoring project to minimize deviations from project plan and
schedule.
Corrective actions necessary if deviations occur.
Key elements of project control
Time management frequent monitoring and updates
Cost management some cost estimates are wrong. May have
extra costs if behind schedule
Performance management monitoring progress and
developing status updates
Earned value analysis (EVA) standard for numerically
measuring a projects progress
There are two main presentation styles:
1
st
Presentation style: Activity-on-Arc (AOA) Network
2
nd
Presentation style: Activity-on-Node (AON) Network

I will follow the conventions used in your text
BUT even with just these two styles, you can see these networks
drawn a LOT of different ways.
They will all contain the same pieces of information
But they may look very different from each other
CPM/PERT
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall
1
st
Presentation style: Activity-on-Arc (AOA) Network
A branch reflects an activity of a project.
A node represents the beginning and end of activities, referred to as
events.
Branches in the network indicate precedence relationships.
When an activity is completed at a node, it has been realized.
The Project Network
CPM/PERT
EXAMPLE PROJECT NETWORK:
HOUSE BUILDING PROJECT
Number Activity Predecessor Duration
1 Design house and obtain financing -- 3 months
2 Lay foundation 1 2 months
3 Order and receive materials 1 1 month
4 Build house 2,3 3 months
5 Select paint 2, 3 1 month
6 Select carpet 5 1 month
7 Finish work 4, 6 1 month
Activities can occur at the same time (concurrently).
Network aids in planning and scheduling.
Time duration of activities shown on branches.
Activity-on-Arc (AOA) : The Project Network
Activities are located on
the arrows, known as
branches
Time
The nodes are events
They indicate the beginning and
end of activities
Dummy activities are
placeholders: see next slide
Two or more activities cannot share the same start and end nodes.
So, how do you handle two separate activities that start and end at
the same time??
Use a dummy activity
A dummy activity shows a precedence relationship but reflects
no passage of time.
It is represented on the network with a dashed line.

Dummy Activities
Activity-on-Node (AON) - Project Network
for the House Building Project
2
nd
Presentation style: Activity-on-Node (AON) Network

A node represents an activity, with its label and time shown
on the node

The branches show the precedence relationships

Convention used in Microsoft Project software
Activity-on-Node (AON) - Project Network
for the House Building Project
Everything is on the node: Branches (arrows) only show precedence
Label,
Not always included
Activity number
from the table
Time
needed
This says that activity 5, which is to
select paint, can begin after both
activity 2&3 are finished. It will take
1 period.


The Project Network
Paths Through a Network
Path Events
A 1247
B 12567
C 1347
D 13567
We need to identify the paths through the network
Helps figure out how long the project will take
Also identify the most crucial activities to finishing on time
What to do:
Trace out all of the ways you can get from start to finish
Then, figure out how long it takes (next slide).

Add up the times (the bottom number on each node) along the path
The critical path is the longest path through the network; the
minimum time needed to complete the network.

Path A: 1 2 4 7 3 + 2 + 3 + 1 = 9 months ***
Path B: 1 2 5 6 7 3 + 2 + 1 + 1 + 1= 8 months
Path C: 1 3 4 7 3 + 1 + 3 + 1 = 8 months
Path D: 1 3 5 6 7 3 + 1 + 1 + 1 + 1 = 7 months
The Project Network
The Critical Path
ACTIVITY SCHEDULING IN ACTIVITY-ON-NODE
CONFIGURATION
This part is
what we had
before:
This is new:
Helps with overall planning
ES (Earliest start) is the earliest time an activity can start:

(Earliest finish) is the earliest start time plus the activity time:

The Project Network
Activity Scheduling : Earliest Times
EF ES t = +
{ } ES Maximum EF immediate predecessors =
ES=0 since this is the
1
st
activity
EF = 0 + 3 = 3
ES=3 since that is EF of
activity 1
EF = 3 + 1 = 4
ES = 5 because that is the longest EF
time of the activities before this one (2
& 3)
EF = 5 + 3 = 8
Work BACKWARDS
LS is the latest time an activity can start without delaying
critical path time:
LF is the latest finish time:

The Project Network
Activity Scheduling : Latest Times
LS LF t =
{ } LF Minimum LS following activities =
LF=9, no later
activities.
LS = 9-1 = 8
LF = min{8} = 8
LS = 8-1 = 7
LF = min{8} = 8
LS = 8-3 = 5
LF = min{5, 6} = 5
LS = 5-2 = 3
On the critical path, the
ES & LS times will be
the same!
Slack is the amount of time an activity can be delayed without
delaying the project: S = LS ES = LF - EF
Slack Time exists for those activities not on the critical path for
which the earliest and latest start times are not equal.
Shared Slack is slack available for a sequence of activities.
The Project Network
Activity Slack Time (1 of 2)
*Critical path
Activity LS ES LF EF Slack, S
*1 0 0 3 3 0
*2 3 3 5 5 0
3 4 3 5 4 1
*4 5 5 8 8 0
5 6 5 7 6 1
6 7 6 8 7 1
*7 8 8 9 9 0
Activity time estimates usually cannot be made with certaintyhow
to we account for this?
PERT used for probabilistic activity times.
In PERT, three time estimates are used:
most likely time (m), the optimistic time (a), and the pessimistic
time (b).
You will write out the nodes of your network with all 3 times
instead of 1 time (next slide)

Probabilistic Activity Times
Probabilistic Activity Times:
Southern Textile Company example
Activity #
3 Activity
times
To get mean and variance, we need a distribution: Beta distribution.
1
st
reason: convention
2
nd
reason: can approximate mean and variance with only 3
estimates
3
rd
reason: continuous distribution but no predetermined shape
(takes on shape of our estimates)
Recall: most likely (m), optimistic (a), & pessimistic (b).
To estimate the mean and variance of a Beta PERT
distribution:
Mean (expected time):
Variance:


a 4m b
t
6
+ +
=
2
b - a
6
v
| |
|
|
|
\ .
=
Probabilistic Activity Times

Calculating Probabilistic Activity Times
=(6 + (4*8) + 10)/6
=(3 + (4*6) + 9)/6
=((5-3)/6)
2

= (2/6)
2

= (1/3)
2
= 1/9
=((7-1)/6)
2

= (6/6)
2

= (1)
2
= 1
Probabilistic Activity Times
Activity #
MEAN time
ES & EF
LS & LF
Indicates slack
EXPECTED completion time
Expected project time is the sum of the expected times of the
critical path activities.
Project variance is the sum of the critical path activities variances
This assumes activity times are statistically independent
The expected project time is assumed to be normally distributed
(based on central limit theorem: caution warranted here).
For our example, expected project time (t
p
) and variance (v
p
)
interpreted as the mean () and variance (o
2
) of a normal
distribution:
= 25 weeks
o
2
= 62/9
= 6.9 weeks
2
Probabilistic Activity Times
Expected Project Time and Variance
We can use this information to figure out our chances of
finishing within a specified timeframe
Use the normal distribution
probabilities are determined by computing the number
of standard deviations (Z) a value is from the mean.
A standard deviation, o, is the square root of variance
You get the Z by: =

The Z value is used to find the corresponding
probability in Table A.1, Appendix A.
This should be VERY familiar from stats!! Here is one
way it is useful for managers!
Probability Analysis of a Project Network
We will use the table to find this part.
Then, add them together to get our answer.
Example 1: What is the probability that the
network will be completed in 30 weeks or less
This is p = 0.5000
What is the probability that the new order processing
system will be ready by 30 weeks?



Probability Analysis of a Project Network
Example 1
2
25
6.9
6.9 2.63
30 25
1.90
2.63
weeks
x
Z
Z

o
o

o
=
=
= =

= =
Z value of 1.90 corresponds to
probability of .4713 in Table A.1,
Appendix A.
Go down to the 1.9 row and over
to the 0.00 column

The probability of completing
project in 30 weeks or less:
(.5000 + .4713) = .9713.

Example 2: What is the probability the network
will be completed in 22 weeks or less?

This is p = 0.5000
The table tells us this probability.
So, take 0.5000 the probability in the table
A customer will trade elsewhere if the new ordering system is not
working within 22 weeks. What is the probability that she will be
retained?
First, convert the problem to a Z:
=

Z = (22 - 25)/2.63 = -1.14

Z value of 1.14 (ignore negative) corresponds to probability of .3729
in Table A.1, Appendix A.
1.1 row, 0.04 column
Probability that customer will be retained is .1271 = .5000 - .3729

Probability Analysis of a Project Network
Example 2
What if you are in a hurry?
Project duration can be reduced by assigning more
resources to project activities.
However, doing this increases project cost.
Decision is based on analysis of trade-off between time
and cost.
Project crashing is a method for shortening project
duration by reducing one or more critical activities to a
time less than normal activity time.
Project Crashing and
Time-Cost Trade-Off Overview
Project Crashing and Time-Cost Trade-Off
Example: Building a House (from start of lecture)
Activity #
Time in weeks
Lets assume that activity 1 costs $3000 for a 12 week completion time
It can be completed in 7 weeks (crash time) for $5000 (crash cost).
So, 5 weeks costs us $2000.
Project Crashing and Time-Cost Trade-Off
$2000
$400 /
5
Total Crash Cost
week
Total Crash Time weeks
= =
12 7 = 5
5000 3000 = 2000
Project Crashing and Time-Cost Trade-Off:
You can do the same thing for each activity
You get these estimates from a contractor, someone else
=12-7
=2000/5
Network with normal activity times and weekly
crashing costs
As activities are crashed, the critical path may change and several paths
may become critical.
Here we can crash activity 1 without changing the path because all paths
will be equally affected.
This is normally done using a computer.
Project Crashing and Time-Cost Trade-Off
General Relationship of Time and Cost (1 of 2)
Another reason to crash a project is to lower indirect
costs
Project crashing costs and indirect costs have an inverse
relationship.
Crashing costs are highest when the project is
shortened.
Indirect costs increase as the project duration
increases.
The optimal project time is at the minimum point on the
total cost curve.
General Relationship of Time and Cost
General linear
programming model
with AOA convention

Lets look at an
example
The objective is to minimize the project duration (critical path time).
The CPM/PERT Network
Formulating as a Linear Programming Model
minimize
subject to
, for all activities
, 0
earliest event time of node
earliest event time of node
time of activity
i
i
j i ij
i j
i
j
ij
Z x
x x t i j
x x
where
x i
x j
t i j
=
>
>
=
=
=

Example Problem Formulation and Data

AOA Network
Recall: The activity is on the arc (arrow/branch)
Activity 1 2: The activity starting at 1 and ending at 2
ET: Earliest Event Time. The earliest a node can be realized.
We know ET of last node equals critical path time
Let x
i
be the ET at each node. Then, set up the LPM.

ET = max(12 + 4, 12 + 8)
=max(16, 20) = 20
ET = max(20 + 12, 24 + 4)
=max(32, 28) = 32
ET = 32 + 4 = 36
Minimize Z = x
1
+ x
2
+ x
3
+ x
4
+ x
5
+ x
6
+ x
7

subject to:
x
2
- x
1
> 12
x
3
- x
2
> 8
x
4
- x
2
> 4
x
4
- x
3
> 0
x
5
- x
4
> 4
x
6
- x
4
> 12
x
6
- x
5
> 4
x
7
- x
6
> 4
x
i
, x
j
> 0
The CPM/PERT Network
Example Problem Formulation and Data (2 of 2)
This is the sum of all the earliest event times
It does not have a useful interpretation
It is used because it will give us the earliest event
time at each node, which is what we want.
We have a minimum time for each activity
Look at Activity 12
ET at node 2, x
2
= 12
ET at node 1, x
1
= 0 (it is the beginning)
Minimum time for 12 = x
2
x
1
= 12 - 0 = 12
To formulate the constraint, we realize that it is
possible to go over time, but not under time.
Do the same thing for each activity, including
dummy activities
Dont forget to include the non-negativity
constraints
You can then use solver or QM for Windows
Exhibit 8.10: Example Problem Solution with
Excel
B6:B12
=B7-B6
Decision variables,
B6:B12
Exhibit 8.11
The CPM/PERT Network
Example Problem Solution with Excel (2 of 4)
Set dummy activities = 0
The CPM/PERT Network
Example Problem Solution with Excel (3 of 4)
This is the total project duration
The CPM/PERT Network
Example Problem Solution with Excel (4 of 4)
A shadow price of 1 indicates an activity is on the
critical path: Just refer back to the referenced cells
to get the activities

FOR THURSDAY
Read Chapter 8
NOTE ON VARIANCE:
Variance for the Beta PERT distribution is based on the
statistical concept that there are +-3 standard deviations
from the mean, or 6 standard deviations
Since b=most pessimistic and a = most optimistic, b-a is =
6 standard deviations
So, (b-a)/6 is one standard deviation
Then, just square it to get the variance
v = ((b-a)/6)^2