Production and Operations Management

Chapter 7
Project Management
Learning Goals

1. Explain the major activities associated with defining and

organizing a project.
2. Describe the procedure for constructing a project
network.
3. Develop the schedule of a project.
4. Analyze cost-time trade-offs in a project network.
5. Assess the risk of missing a project deadline.
6. Identify the options available to monitor and control
projects.
What is a Project?

• Project
– An interrelated set of activities with a definite starting
and ending point, which results in a unique outcome
for a specific allocation of resources.
Project Management

• Project Management
– A systemized, phased approach to defining,
organizing, planning, monitoring, and controlling
projects.
• Program
– An interdependent set of projects that have a
common strategic purpose.
Defining and Organizing Projects

• Defining the Scope and Objectives of a Project

• Selecting the Project Manager and Team
• Recognizing Organizational Structure
Constructing Project Networks

• Defining the Work Breakdown Structure

• Diagramming the Network
• Developing the Project Schedule
• Analyzing Cost-Time Trade-offs
• Assessing and Analyzing Risks
Defining the Work Breakdown Structure

• Work Breakdown Structure (WBS)

– A statement of all work that has to be completed.
• Activity
– The smallest unit of work effort consuming both time
and resources that the project manager can schedule
and control.
Work Breakdown Structure
Work Breakdown Structure for the St. John’s Hospital Project
Diagramming the Network (1 of 4)

• Network Diagram – A visual display designed to depict

the relationships between activities, that consist of nodes
(circles) and arcs (arrows)
– Program Evaluation and Review Technique (PERT)
– Critical Path Method (CPM)
Diagramming the Network (2 of 4)

• Precedence relationship
– A relationship that determines a sequence for
undertaking activities; it specifies that one activity
cannot start until a preceding activity has been
completed.
• Estimating Activity Times
– Statistical methods
– Learning curve models
– Managerial opinions
Diagramming the Network (3 of 4)

AON Activity Relationships

T
T and U cannot
S begin until S has
U been completed.

S U U and V can’t begin

until both S and T
have been completed.
T V
Diagramming the Network (4 of 4)

AON Activity Relationships

S T U S precedes T, which
precedes U.

S S and T must be
U completed before U
can be started.
T
Example 1 (1 of 3)

Judy Kramer, the project manager for the St. John’s

Hospital project, divided the project into two major
modules. She assigned John Stewart the overall
responsibility for the Organizing and Site Preparation
module and Sarah Walker the responsibility for the Physical
Facilities and Infrastructure module. Using the WBS shown
in Figure, the project team developed the precedence
relationships, activity time estimates, and activity
responsibilities shown in the following table.
Example 1 (2 of 3)
Immediate Activity Times
Activity Predecessors (wks) Responsibility
St. John’s Hospital Project blank blank Kramer
Start blank 0 blank
Organizing and Site Preparation blank blank Stewart
A. Select administrative staff Start 12 Johnson
B. Select site and survey Start 9 Taylor
C. Select medical equipment A 10 Adams
D. Prepare final construction plans B 10 Taylor
E. Bring utilities to site B 24 Burton
F. Interview applicants for nursing and support staff A 10 Johnson
Physical Facilities and Infrastructure blank blank Walke
G. Purchase and deliver equipment C 35 Sampson
H. Construct hospital D 40 Casey
I. Develop information system A 15 Murphy
J. Install medical equipment E,G,H 4 Pike
K. Train nurses and support staff F, I, J 6 Ashton
Finish K 0 blank
Example 1 (3 of 3)
Network Showing Activity Times for the St. John’s Hospital
Project
Developing the Project Schedule

• Path
– The sequence of activities between a project’s start
and finish.
• Critical Path
– The sequence of activities between a project’s start
and finish that takes the longest time to complete.
Developing the Schedule (1 of 2)
• Earliest start time (ES) - The earliest finish time of the
immediately preceding activity.
• Earliest finish time (EF) - An activity’s earliest start time plus its
estimated duration (t) of EF = ES + t
• Latest finish time (LF) - The latest start time of the activity that
immediately follows.
• Latest start time (LS) - The latest finish time minus its
estimated duration (t) of LS = LF − t
• Activity Slack - The maximum length of time that an activity
can be delayed without delaying the entire project
S = LS − ES or S = LF − EF
Developing the Schedule (2 of 2)
Example 2 (1 of 6)

Calculate the ES, EF, LS, and LF times for each activity in
the hospital activity project. Which activity should Kramer
start immediately? Figure contains the activity times.
Example 2 (2 of 6)

Paths are the sequence of activities between a project’s

start and finish.

Path Time (wks)

A-I-K 33
A-F-K 28
A-C-G-J-K 67
B-D-H-J-K 69
B-E-J-K 43
Example 2 (3 of 6)
Network Diagram Showing Start and Finish Times and Activity
Slack
Example 2 (4 of 6)
[continued]
Example 2 (5 of 6)
[continued]
Example 2 (6 of 6)
[continued]
Developing a Schedule
MS Project Gantt Chart for the St. John’s Hospital Project
Schedule
Analyzing Cost-Time Trade-Offs (1 of 4)

• Project Crashing
– Shortening (or expediting) some activities within a
project to reduce overall project completion time and
total project costs
• Project Costs
– Direct Costs: include labor, materials, and any other
costs directly related to project activities
– Indirect Costs: include administration, financial, and
other variable
– Penalty Costs
Analyzing Cost-Time Trade-Offs (2 of 4)

• Project Costs
– Normal time (NT) is the time necessary to complete
an activity under normal conditions.
– Normal cost (NC) is the activity cost associated with
the normal time.
– Crash time (CT) is the shortest possible time to
complete an activity.
– Crash cost (CC) is the activity cost associated with
the crash time.
CC  NC
Cost to crash per period 
NT  CT
 28

Analyzing Cost-Time Trade-Offs (3 of 4)

Determining the Minimum Cost Schedule:

1. Determine the project’s critical path(s).
2. Find the activity or activities on the critical path(s) with
the lowest cost of crashing per week.
3. Reduce the time for this activity until…
a. It cannot be further reduced or
b. Another path becomes critical, or
 29

Analyzing Cost-Time Trade-Offs (4 of 4)

c. The increase in direct costs exceeds the indirect and

penalty cost savings that result from shortening the
project. If more than one path is critical, the time or an
activity on each path may have to be reduced
simultaneously
4. Repeat this procedure until the increase in direct costs
is larger than the savings generated by shortening the
project.
Example 3 (1 of 13)

Determine the minimum-cost schedule for the St. John’s

Hospital project.
Suppose that the project indirect costs are $8,000 per
week. Suppose also that, after week 65, the Regional
Hospital Board imposes a penalty cost of $20,000 per
week.
Example 3 (2 of 13)
Direct Cost and Time Data for The St. John’s Hospital Project
Cost of
Crashing
Normal Time (NT) Normal Cost Crash Time Crash Cost Maximum Time per Week
Activity (weeks) (NC)($) (CT)(weeks) (CC)($) Reduction (week) ($)
A 12 $12,000 11 $13,000 1 1,000
B 9 50,000 7 64,000 2 7,000
C 10 4,000 5 7,000 5 600
D 10 16,000 8 20,000 2 2,000
E 24 120,000 14 200,000 10 8,000
F 10 10,000 6 16,000 4 1,500
G 35 500,000 25 530,000 10 3,000
H 40 1,200,000 35 1,260,000 5 12,000
I 15 40,000 10 52,500 5 2,500
J 4 10,000 1 13,000 3 1,000
K 6 30,000 5 34,000 1 4,000
blank Totals $1,992,000 blank $2,209,500 blank blank
 32

Example 3 (3 of 13)

Project completion time = 69 weeks

Project cost = $2,624,000
Direct = $1,992,000
Indirect = 69  $8,000   $552,000
Penalty =  69  65  $20,000   $80,000

A–I–K 33 weeks
A–F–K 28 weeks
A–C–G–J–K 67 weeks
B–D–H–J–K 69 weeks
B–E–J–K 43 weeks
Example 3 (4 of 13)
Stage 1
Step 1. The critical path is B–D–H–J–K.
Step 2. The cheapest activity to crash per week is J at $1,000, which is
much less than the savings in indirect and penalty costs of $28,000 per
week.
Step 3. Crash activity J by its limit of three weeks because the critical
path remains unchanged. The new expected path times are
A–C–G–J–K: 64 weeks
B–D–H–J–K: 66 weeks
The net savings are 3  $28,000   3  $1,000   $81,000.
The total project costs are now $2,624,000 − $81,000 = $2,543,000.
Example 3 (5 of 13)
Example 3 (6 of 13)

Stage 2
Step 1. The critical path is still B–D–H–J–K.
Step 2. The cheapest activity to crash per week is now D at
$2,000.
Step 3. Crash D by two weeks.
• The first week of reduction in activity D saves $28,000
because it eliminates 1 week of penalty costs, as well as
indirect costs.
Example 3 (7 of 13)

• Crashing D by a second week saves only $8,000 in

indirect costs because, after week 65, no more penalty
costs are incurred.
• Updated path times are
A–C–G–J–K: 64 weeks and B–D–H–J–K: 64 weeks
• The net savings are $28,000  $8,000  2  $2,000   $32,000.

• Total project costs are now $2,543,000 − $32,000 =

$2,511,000.
Example 3 (8 of 13)
 38

Example 3 (9 of 13)
Stage 3
Step 1. The critical paths are B–D–H–J–K and A–C–G–J–K
Step 2. Activities eligible to be crashed:
(A, B); (A, H); (C, B); (C, H); (G, B); (G, H)—or to crash Activity K

• We consider only those alternatives for which the costs of crashing are less
than the potential savings of $8,000 per week.

• We choose activity K to crash 1 week at $4,000 per week.

Step 3.

• Updated path times are: A–C–G–J–K: 63 weeks and B–D–H–J–K: 63 weeks

• Net savings are $8,000 − $4,000 = $4,000.

• Total project costs are $2,511,000 − $4,000 = $2,507,000.

Example 3 (10 of 13)
Example 3 (11 of 13)
Stage 4
Step 1. The critical paths are still B–D–H–J–K and A–C–G–J–K.
Step 2. Activities eligible to be crashed: (B,C) @ $7,600 per
week.
Step 3. Crash activities B and C by two weeks.
• Updated path times are
A–C–G–J–K: 61 weeks and B–D–H–J–K: 61 weeks
• The net savings are 2  $8,000   2  $7,600   $800. Total
project costs are now $2,507,000 − $800 = $2,506,200.
Example 3 (12 of 13)
Example 3 (13 of 13)

Project
Crash Total Total Total
Time Resulting Project Direct
Crash Cost Indirect Penalty Project
Stage Reduction Critical Duration Costs,
Activity Added Costs Costs Costs
(weeks) Path(s) (weeks) Last Trial
($000) ($000) ($000) ($000)
($000)
0 — — B–D–H–J–K 69 1,992.0 — 552.0 80.0 2,624.0
1 J 3 B–D–H–J–K 66 1,992.0 3.0 528.0 20.0 2,543.0
2 D 2 B–D–H–J–K 64 1,995.0 4.0 512.0 0.0 2,511.0
A–C–G–J–K
3 K 1 B–D–H–J–K 63 1,999.0 4.0 504.0 0.0 2,507.0
A–C–G–J–K
4 B, C 2 B–D–H–J–K 61 2,003.0 15.2 488.0 0.0 2,506.2
A–C–G–J–K
Assessing Risks

• When uncertainty is present, simulation can be used to

estimate the project completion time
• Statistical Analysis analysis requires three reasonable
estimates of activity times:
– Optimistic time (a)
– Most likely time (m)
– Pessimistic time (b)
Statistical Analysis (2 of 2)

• The mean of the beta distribution can be estimated by

a + 4m + b
te 
6

• The variance of the beta distribution for each activity is

2
ab
 
2

 6 
Example 4 (1 of 3)

Suppose that the project team has arrived at the following

time estimates for activity B (site selection and survey) of
the St. John’s Hospital project:
a = 7 weeks, m = 8 weeks, and b = 15 weeks
a. Calculate the expected time and variance for activity B.
b. Calculate the expected time and variance for the other
activities in the project.
 46

Example 4 (2 of 3)

a. The expected time for activity B is

7 + 4(8) + 15 54
te    9 weeks
6 6

The variance for activity B is

2 2
 15  7  8
 
2
     1.78
 6  6
Example 4 (3 of 3)

b. The following table shows expected activity times and

variances for this project.
Time Estimates Time Estimates Time Estimates Activity
Activity Statistics Statistics
Activity (week) (week) (week)
Optimistic (a) Most Likely (m) Pessimistic (b)
Expected Time (te) Variance σ  open
2
parentheses sigma squared end
parentheses

A 11 12 13 12 0.11
B 7 8 15 9 1.78
C 5 10 15 10 2.78
D 8 9 16 10 1.78
E 14 25 30 24 7.11
F 6 9 18 10 4.00
G 25 36 41 35 7.11
H 35 40 45 40 2.78
I 10 13 28 15 9.00
J 1 2 15 4 5.44
K 5 6 7 6 0.11
Analyzing Probabilities

• Because the central limit theorem can be applied, the

mean of the distribution is the earliest expected finish
time for the project
 Expected activity times 
TE      Mean of normal distribution
 on the critical path 
• Because the activity times are independent
 p2  (Variances of activities on the critical path)

• Using the z-transformation

T  TE
z where T = due date for the project
p
Example 5 (1 of 3)

Calculate the probability that St. John’s Hospital will

become operational in 72 weeks, using (a) the critical path
and (b) path A–C–G–J–K.
a. The critical path B–D–H–J–K has a length of 69
weeks. From the table in Example 7.4 see slide 48, we
obtain the variance of path B–D–H–J–K:
σ p2  1.78  1.78  2.78  5.44  0.11  11.89 Next, we
calculate the z-value:

72  69
3
z   0.87
11.89 3.45
Example 5 (2 of 3)
Using the Normal Distribution appendix, we find a value of
0.8078. Thus the probability is about 0.81 the length of path B–
D–H–J–K will be no greater than 72 weeks.
Because this is the Probability of Completing the St. John’s
critical path, there is a 19 Hospital Project on Schedule
percent probability that
the project will take
longer than 72 weeks.
Example 5 (3 of 3)
b. The sum of the expected activity times on path A–C–G–J–K
is 67 weeks and that σ p2  0.11  2.78  7.11  5.44  0.11  15.55

The z-value is

72  67 5
z   1.27
15.55 3.94

The probability is about 0.90 that the length of path A–C–G–J–K

will be no greater than 72 weeks.
 52

Monitoring and Controlling Projects (1 of 2)

• Monitoring Project Project Life Cycle

Status
– Open Issues and
Risks
– Schedule Status
• Monitoring Project
Resources
Monitoring and Controlling Projects (2 of 2)

• Controlling Projects
– Closeout – An activity that includes writing final
reports, completing remaining deliverables, and
compiling the team’s recommendations for improving
the project process.