Project Management

Project Compression

Accelerating Project Completion Compressing a Project

Why is this Topic Important? • My project is late and I NEED to finish earlier. o Early Finish is December o Need to finish in October • What can I do? • How can I shorten the project? o I need to SAVE some time. § SS lags can shorten a project. § But I STILL NEED to shorten the project further. • Which tasks can I shorten? (reduce the task duration)

• Let’s learn how to compress a project to make it shorter?

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Problem: • Project is running late. • Finish date is too late. • Must finish earlier than currently scheduled. Solution Approach • Need to Accelerate the Project

• • •

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Lag +2

o Crash (not used in air transport industry) 8 o Compress Lags can shorten, but limited. Use compression techniques to shorten time (reduction in task duration) Pay for higher capacity, i.e., increasing your capacity o More powerful machines New machine finishes earlier o Purchase more labor Compress task time with more people o Pay for higher expertise Expert can finish more quickly o Pay for more time, such s overtime shifts. Same people, more work per day o Additional sub-contractors New people, parallel activity o Outsourcing to a 3rd party New resources, parallel activity

Overall Idea • Assumptions o Normal time assumes low-cost, normal efficient work o Must spend money and pay a higher cost to accomplish in shorter time. o No longer most efficient. You pay to get it done sooner! Think of the comparison of regular postal mail 4-5 day time vs. DHL or FEDEX overnight time. Normal Total Project Cost • DIRECT COSTS: Variable costs that vary with time quantity of task work effort. • Assumes low-cost, normal efficient work times. They can be billed directly to a specific task. I work on a task. I bill for that task. Paying for work effort directly associated with a task. o Labor o Materials o Equipment •

INDIRECT COSTS: Fixed costs that do not vary by task, but are spread over entire project. Each day has the same fixed cost associated with the project, but not a specific task Cost is spread over a period of time, not for particular task work effort. Therefore, this cost is only indirectly part of the project cost, not a particular task cost. o o o o

Rentals (buildings, hammock equipment, etc.) Supervision, administrative costs (office) Interest on money (short-term loans) Consulting fees

Crashing Changes Project Cost Structure • Direct costs will no longer be low-cost and efficient. • Direct Cost will increase for shorter time period. • Indirect cost will reduce directly (linearly) with time.

(ex: (ex: (ex: (ex:

$500/day) $1,000/day) $x% per day) $500/day)

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Total cost = direct cost + indirect cost

Total Cost Optimum Cost-Time Point

Direct Cost Indirect Cost

Note: It is possible to save money on the project by spending money on accelerating tasks, i.e., indirect cost reduction may be greater than the increase in direct cost for particular periods of time.

3. Crash Cost Graph (Slope)

$400

Crash

Slope = Rise / Run = (400 – 200) / (10 – 5) = 200 / 5 = $40 per unit of time

Normal

$200 0

5

10

Normal Cost/Time assumes efficient low cost to complete the task. Crash Cost/Time is the greatest amount of cost for the least time to complete the task. Example: • $400 represents the crash cost to complete in least time of 5 days. • $200 represents the normal cost to complete in normal time of 10 days. What are the Two Steps to Reduce the Project Duration (compress the project)? 1. Identify the critical path. Off-CP activities will not change the project finish date. 2. Select task with least crash cost. Examine tasks with least crash slope, representing the least cost to compress one time period. The low slope value is the low crash cost to a shorten task one time period.

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Problem #1. Exercise 9-2 Assume the network and data that follow. Compute the total direct cost for each project duration. If the indirect costs for each project duration are $400 (19 time units), $350 (18), $300 (17), and $250 (16), compute the total project cost for each duration. Plot the total direct, indirect, and project costs for each of these durations on a cost-time graph. What is this cost? What is the optimum cost-time schedule for the project? The normal cost of $50 is the total cost for the normal time of 3 weeks. The “crash cost” is the simple add-on cost added to the normal cost (for each week’s reduction).

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Possible Interpretations The minimum (optimal) total project costs are at $840, i.e., could be $8.4 million. 1. Promise 18 weeks and possibly finish early at 17 weeks. a. Cost is the same as at 17 weeks, i.e., $840. b. Customer would be very happy with early finish, will contract with your company again. c. But, IF CANNOT finish at 17, i. Nothing lost or no penalty ii. Still completing project as expected at 18 weeks. d. Risk to competitive strategy: Maybe 18 weeks would not win the contract.

2. Promise 17 weeks a. Cost is the same as at 18, $840. b. Risk is the possibility of being late at 18, even though cost could remain the same. i. Same cost, but NOW project is LATE. ii. May affect company reputation for completing projects on time. c. 17 may be necessary to compete with a “lowest bid” against competitors. Summary Review of Project Costs (from WBS planning to minimum total project cost) • $840 is the calculated total project cost (direct variable labor and indirect fixed overhead costs). • The direct variable labor costs originated from the WBS planning stage of the project life cycle. • WBS planning stage involves project rollup costs • Final rollup cost is the “expected” and calculated INITIAL labor cost for all tasks (cost accounts). • Rollup costs result from accumulating time-phased task budgets (to produce sub-deliverables)

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The following situation is fairly typical in performing projects in a company: Problem  #2.    A  project  starts,  begins  to  fall  behind  schedule,  and  you  want  to  bring  it  back  to  its  original  time.    

Complete the table and determine the costs to bring the project back to 32 days from 35 days. $____152_______ Total Project Cost after getting back on schedule $____________Estimated project cost at 35 days (after the delay in completing Task A) $____________Additional cost to compress and bring back on schedule

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Problem #3. Complete the table and determine the optimal project time (due to compressing the project) and the total cost to complete the project in 11 days.

Optimal project duration: ________ Wks Total Project Cost

$ _________

Compression Analysis: Let’s do a quick comparison of this project with the one in Problem #1, Exercise 9.2.

Exercise 9.2: • •

The question in Ex. 9.2 was, which optimal time to choose 17 or 18 weeks at same cost of $840. Two possible objectives: minimal time competitive bid, or lower risk of finishing late.

• •

Optimal project duration is at $930 for 13 weeks (assume means $9.3 million project) Would you spend $600,000 more (9.3M à 9.6M)to complete 2 weeks earlier (11 weeks)? o Assume getting to market 2 weeks earlier than Samsung is 5M additional sales. § 5M * $500 = $2,500 M § Additional cost is $0.6M Decision: GO FOR IT! o Sales are approximately 4x the cost of additional compression.

The exercise above:

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Using the results from compression to make business decisions Refer to the Graph below Results from the first project (Ex 9.2) show two lowest project total costs (direct and indirect) at $840 (could represent $8.4 million or $840,000. Which do you advise your upper management in your company to select? Assumption is that your company makes bids for contracts as its model of business. Assume we have the following results from compressing a project. We know the following as a result of the compression analysis: • The project Early Finish at 16 months is not the best duration in terms of achieving the lowest project cost. • Month 13 is the “optimal” time/cost tradeoff point, namely, $1,760 dollar units of cost is the lowest cost to complete the project. o These costs are based on direct costs that increase as we try to shorten the time duration. o The indirect costs are decreasing as we shorten the time duration. Normally, the most economic decision would be to use the optimal time duration to set the finish date for the project, i.e., at the end of the 13th week. But, would there ever be a situation or time that it would make sense to pay more and attempt to schedule the project for an earlier completion date, such as at the end of the 11th or 10th month?

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Business Decisions using the Results from Compression Analysis The business decision that we will be generally looking at will be the basic idea of comparing expected revenues with expenses. A straightforward example would be the cost tradeoff about getting a product to market: • Pay $1,760 to finish the project (designing and testing the product) and launch the product in 13 months o This option will cost less, but o will take longer to get to market with the new product. • Pay $2,080 to finish the project and launch the product in 10 months. o This option will cost more, but o will get the product to market 3 months earlier. This is the first-mover advantage decision. What are you willing to pay to get your product to market sooner, and hopefully have the first mover advantage of developing brand recognition and advantage before any of your other competitors? An example is Apple products, such as the iPod, iPhone, and iPad. All represent product innovations. Getting them to market first established Apple as a product innovation leader. But there is a cost associated with finishing our product launch project 3 months earlier than the “optimal.” If the numbers represent millions of dollar, then the difference if $2,080 - $1,760 = $320 or an 18% increase in cost from the optimal amount of $1,760. If this were a project where the numbers represent units of $10,000, we would be talking about $20,800,000 - $17,600,000 ---------------$ 3,200,000 or 3 million “plus” dollar difference. This analysis tells us that we can launch the product (iPhone for example) in 10 months, instead of 13 months, if we are willing to spend an addition $3.2 million dollars. The expenses of our accelerated project completion have increased significantly. On the revenues side, can we generate profits that will exceed the $3.2 million dollars? And if we did just break even, would it be worth the “pressure” to finish early for that much extra cost? Again, here is a brief perspective on the revenues, expenses, and worthiness of finishing in 10 months compared to 13 months: • 13-month duration. o Later to market. This could be ok if nobody else finds out about what we are planning to do. o No first-mover advantage. Competitor may be working on such a product innovation, also. We may be just one of many companies, launching at the “same time” and there would be no apparent product differentiation and/or first to the market advantage. o Save Money. We would save $3.2 million dollars by not compressing (“rushing”) the product launch. •

10-month duration o Earlier to market. We get out product out there first. This can be a big advantage if it is a truly innovative and “insanely” new product (As Steve Jobs used to describe new apple products). o First Mover Advantage. Getting out to market early can potentially establish our product as a brand that is radically innovative and the standard for the competitors to imitate. Their product would be offered as a substitute product to our product in the competitive market. o Cost more money. We will spend $3.2 million dollars MORE by finishing 3 months earlier, and not waiting the 13 months (at the optimal point).

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Expected Higher Sales. We are expecting much higher (more) sales of our product than if we wait for the 13 months: § The difference is between launching a computer product in June/July compared to October/November. It is the difference in making the new computer available before the fall semester begins, rather than offering it one to two months after the semester begins and students have already purchased a competitor computer anyway. § Launching the iPhone two months before the Christmas and holiday season so that consumers can think about purchasing this product as a Christmas present to family, etc. So, let’s bring this to a conclusion. Project management is about planning and implementing projects. This example has been about planning and implementing the development and sales of an innovative product. The business decision is to decide when to launch the sales of the innovative product: • Project Manager. The PM can perform the compression analysis to show marketing and operations management the cost tradeoffs with time in terms of when the product launch can be initiated. I.e., the PM can say to management, “Provide me the money for the increased project budget, and I can schedule and manage the project to accommodate the new [accelerated] completion date.” • Business Manager. I understand the business side of my new product launch. I understand the cost differences presented by the project manager in terms of a time/cost tradeoff to launch the project. I know from my own business analysis the profitability by waiting for 10 months and for 13 months. o

Ultimately, the project management and the related project compression techniques and analysis of time/cost tradeoffs can serve a higher-level purpose in our own company. Also, this compression analysis could possibly assist our external customer by providing valuable input information into the business decision on how to compete more strategically in the customer’s industry. Managers need information to make business decisions. They engage in a what-ifthen-impact kinds of analysis: • What-If I want to do this and that. • Then I will have these particular times and costs that I can expect. • The impact will be the following on my expenses and eventually on my profitability.

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Additional Problem Exercises using Compression Analysis and Techniques Problem #4: Exercise 9-4 If the indirect costs for each duration are $1200 for 16 weeks, $1130 for 15 weeks, $1000 for 14 weeks, $900 for 13 weeks, $860 for 12 weeks, $820 for 11 weeks and $790 for 10 weeks, compute the total costs for each duration. Plot these costs on a graph. What is the optimum cost-time schedule?

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Problem #5: Exercise 9-4 with Table Style (short version, not long version) Refer back to Problem #4 (Exercise 9-4). Set up this problem in the same style with boxes as Problem #3, on page 110. Try to work through your problem again and come up with a solution without looking back at the original problem.

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ANSWERS Problem #1: Exercise 9-2

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Project Management Problem #2:

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Project Management Problem #3:

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Project Management Problem #4: Exercise 9-4:

Project Compression ANSWER

Authors skipped time periods 15, 14, 13. Work through a solution and you should get: 15: H for $40 /// 14: B for $70 /// 13: B for $70 /// 12: D and E for $70 …

The indirect costs come from the accounting department in a company. For this course, they will be given to you by the instructor and at the beginning of the exercise explanation (see very first part of this problem exercise).

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Problem #5: Exercise 9-4 with Table Style (short version, not long version)

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ANSWER Problem #5: Exercise 9-4 with Table Style (short version, not long version)

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