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CHAPTER

15

Managing Six SigmaProjects*

The dictionary de¢nes the word project as follows:1. A plan or proposal; a scheme. See synonyms at plan.2. An undertaking requiring concerted e¡ort.Under the synonym plan we find:1. A scheme, program, or method worked out beforehand for the accom-

plishment of an objective: a plan of attack.2. A proposed or tentative project or course of action.3. A systematic arrangement of important parts.Although truly dramatic improvement in quality often requires transform-

ing the management philosophy and organization culture, the fact is that,sooner or later, projects must be undertaken to make things happen. Projectsare the means through which things are systematically changed, projects arethe bridge between the planning and the doing.

Frank Gryna makes the following observations about projects (Juran andGryna, 1988, pp. 22.18^22.19):

. An agreed-upon project is also a legitimate project. This legitimacy putsthe project on the o⁄cial priority list. It helps to secure the needed bud-

*Some of the material in this chapter is from The Six Sigma Project Planner, by Thomas Pyzdek.# 2003 by McGraw-Hill.

gets, facilities, and personnel. It also helps those guiding the project tosecure attendance at scheduled meetings, to acquire requested data, tosecure permission to conduct experiments, etc.

. The project provides a forum of converting an atmosphere of defensive-ness or blame into one of constructive action.

. Participation in a project increases the likelihood that the participant willact on the ¢ndings.

. All breakthrough is achieved project by project, and in no other way.

The last item represents both good news and bad news. The bad news is thatfew projects are truly successful; the good news is that companies can and dobecome proficient at implementing projects without the need for mysticalpowers. What is needed is effective project management.

USEFUL PROJECT MANAGEMENT TOOLS ANDTECHNIQUES

Project management is a system for planning and implementing change thatwill produce the desired result most efficiently. There are a number of toolsand techniques that have been found useful in project management. Briefdescriptions of the major project management methods are provided here.Techniques specific to project management are covered in greater detail else-where in this chapter. Many of these tools are used in a wide variety of qualityimprovement and quality control situations in addition to project management;additional information on each of these more general techniques is found else-where in this book; consult the index for details.

Project plan�The project plan shows the ‘‘why’’ and the ‘‘how’’ of a project.A good project plan will include a statement of the goal, a cost/ benefit analysis,a feasibility analysis, a listing of themajor steps to be taken, a timetable for com-pletion, and a description of the resources required (including humanresources) to carry out the project. The plan will also identify objective mea-sures of success that will be used to evaluate the effectiveness of the proposedchanges; these are sometimes called the ‘‘deliverables’’ of the project.

Gantt chart�A Gantt chart shows the relationships among the projecttasks, along with time constraints. See below for a discussion of Gantt charts.

Milestone charts�A Gantt chart modified to provide additional informa-tion on project status. See below for a discussion of milestone charts.

Pareto analysis�Pareto analysis is a technique that helps one to rankopportunities to determine which of many potential projects should be pursuedfirst. It can also be used sequentially to determine which step to take next. The

Useful project management tools and techniques 535

Pareto principle has been described by Juran as separating the ‘‘vital few’’ fromthe ‘‘trivial many.’’ It is the ‘‘why’’ and the ‘‘benefit’’ of the project plan. SeeChapter 8 for additional discussion.

Budget�A budget is an itemized summary of estimated or intended expen-ditures for a given project along with proposals for financing them. Project bud-gets present management with a systematic plan for the expenditure of theorganization’s resources, such as money or time, during the course of the pro-ject. The resources spent include time of personnel, money, equipment utiliza-tion and so on. The budget is the ‘‘cost’’ portion of the project plan. Also seebelow.

Process decision program chart (PDPC)�The PDPC technique is used todevelop contingency plans. It is modeled after reliability engineering methodssuch as failure mode, effects, and criticality analysis (FMECA) and fault treeanalysis (FTA). The emphasis of PDPC is the impact of problems on projectplans. PDPCs are accompanied by specific actions to be taken should the pro-blems occur to mitigate the impact of the problems. PDPCs are useful in theplanning of projects in developing a project plan with a minimum chance ofencountering serious problems. Also see Chapter 8.

Quality function deployment (QFD)�Traditionally, QFD is a system fordesign of a product or service based on customer demands, a system thatmoves methodically from customer requirements to requirements for theproducts or services. QFDprovides the documentation for the decision-makingprocess. QFD can also be used to show the ‘‘whats’’ and ‘‘hows’’ of a project.Used in this way QFD becomes a powerful project planning tool. Also seeChapter 3.

Matrix chart�A matrix chart is a simplified application of QFD (or, per-haps, QFD is an elaborate application of matrix charts). This chart is con-structed to systematically analyze the correlations between two groups ofideas.When applied to project management the two ideas might be, for example1) what is to be done? 2) who is to do it? Also see Chapter 8.

Arrow diagrams�Arrow diagrams are simple network representations ofproject flows. They show which tasks must be completed in the project andthe order in which the tasks must be completed. See Chapter 8. Arrow diagramsare a simplification of PERT-type systems (see below).

PROJECT PLANNINGThere are several reasons why one should plan carefully before starting a

project (Ruskin and Estes, 1995, p. 44):1. The plan is a simulation of prospective project work, which allows £aws

to be identi¢ed in time to be corrected.

536 MANAGING SIX SIGMA PROJECTS

2. The plan is a vehicle for discussing each person’s role and responsibil-ities, thereby helping direct and control the work of the project.

3. The plan shows how the parts ¢t together, which is essential for coordi-nating related activities.

4. The plan is a point of reference for any changes of scope, thereby helpingproject managers deal with their customers.

5. The plan helps everyone know when the objectives have been reachedand therefore when to stop.

The project plan shows the ‘‘why’’ and the ‘‘how’’ of a project. A good projectplan will include the following elements:

. statement of the goal

. cost/bene¢t analysis

. feasibility analysis

. listing of the major steps to be taken

. timetable for completion

. description of the resources required (including human resources) tocarry out the project

The plan will also identify objective measures of success that will be used toevaluate the effectiveness of the proposed changes; these are sometimes calledthe ‘‘deliverables’’ of the project.

PROJECTDECOMPOSITIONMost projects important enough to have a significant impact on quality

are too large to tackle all at once. Instead, large projects must be brokendown into smaller projects and, in turn, into specific work elements andtasks. The process of going from project objectives to tasks is called decom-position. Project decomposition begins with the preparation of a preliminaryplan. A preliminary project plan will identify, in broad high-level terms, theobjectives of the project and constraints in terms of time and resources.The work to be performed should be described and precedence relation-ships should be sketched out. Preliminary budgets and schedules will bedeveloped. Finally, subplans will be developed for each subproject for thefollowing:

. Control plans^ Quality control plans^ Cost control plans^ Schedule control plans

Project planning 537

. Sta⁄ng plans

. Material plans

. Reporting plans

. Other plans as deemed necessary

These subplans are developed in parallel for the various subprojects.

INTEGRATEDQUALITY INITIATIVESAlso see cross-functional collaboration, below.Projects should be selected consistent with the organization’s overall

strategy and mission. Because of this global perspective most projectsinvolve the efforts of several different functional areas. Not only do indivi-dual quality projects tend to cut across organizational boundaries, differentprojects are often related to one another. To effectively manage this com-plexity it is necessary to integrate the planning and execution of projectsorganization-wide.

(For additional details on teams see Chapter 5.)Teams are chartered by senior leadership, generally the only group with the

necessary authority to designate cross-functional responsibilities and allowaccess to interdepartmental resources. The team facilitator should ask seniorleadership to put the problem statement in writing. The problem statementshould be specific enough to help the team identify the scope of the projectand themajor stakeholders. Problems of gargantuan proportions should be sub-divided into smaller projects.

There are six steps in the chartering process:1. Obtaining a problem statement2. Identifying the principal stakeholders3. Creating a macro £ow chart of the process4. Selecting the team members5. Training the team6. Selecting the team leader

PROJECT CHARTERThe official authorization for the project should be summarized in a docu-

ment like that shown in the Six Sigma project charter below.


Several problems with projects appear repeatedly:. Projects have little or no impact on the organization’s success, even if suc-

cessful, no one will really care.. Missions overlap the missions of other teams. E.g., Team A’s mission is to

reduce solder rejects, Team B’s mission is to reduce wave solder rejects,Team C’s mission is to reduce circuit board assembly problems.

. Projects improve processes that are scheduled for extensive redesign ordiscontinuation. For example, working on improving work £ow for a pro-duction process that is to be relocated to another factory.

. Studying a huge system (‘‘patient admitting’’), rather than a manageableprocess (‘‘outpatient surgery preadmission’’).

. Studying symptoms (‘‘touch-up of defective solder joints’’) rather thanroot causes (‘‘wave solder defects’’)

. Project deliverables are unde¢ned. E.g., ‘‘Study TQM’’ rather than‘‘Reduce waiting time in Urgent Care.’’

WORK BREAKDOWN STRUCTURESRuskin and Estes (1995) define work breakdown structures (WBS) as a pro-

cess for defining the final and intermediate products of a project and their rela-tionships. Defining project tasks is typically complex and accomplished by aseries of decompositions followed by a series of aggregations. For example, asoftware project to develop an SPC software application would disaggregatethe customer requirements into very specific analytic requirements (e.g., thecustomer’s requirement that the product create X-bar charts would be decom-posed into analytic requirements such as subroutines for computing subgroupmeans and ranges, plotting data points, drawing lines, etc.). Aggregation wouldinvolve linking the various modules to produce an X-bar chart displayed onthe screen.

The WBS can be represented in a tree diagram, as shown in Figure 15.1.Preliminary requirements WBS�is a statement of the overall require-

ments for the project as expressed by the customer (e.g., the deliverables or‘‘product’’), and subsidiary requirements as expressed by management (e.g.,billing, reports required).

Detailed plan WBS�breaks down the product into subproducts.Requirements are listed for each subproduct (e.g., tooling, staff). The sub-products are, in turn, broken down into their subproducts, etc., until a rea-sonable limit is reached. All work begins at the lowest level. Detailed plans foreach subsystem include control plans for quality, cost and schedule, staffingplans, materials plans, reporting plans, contingency plans, and work author-ization plans. In addition, the overall detailed plan covers objectives, con-

Project charter 541

straints, precedence relationships, timetables, budgets, and review and report-ing criteria.

Typical subsystem WBS�are created, i.e., the process just described isperformed for each subsystem. Subsystems are then built.

Integration WBS�detail how the various subsystems will be assembledinto the product deliverables. This usually involves integrating into larger sub-systems, then still larger subsystems, etc., to the highest level of integration.

ValidationWBS�plans explain how the various system integrations will bemeasured and tested to assure that the final requirements will be met.


Figure 15.1.WBS of a spacecraft system.From Ruskin, A.M. and Estes, W.E.What Every Engineer Should Know About Project

Management, Second Edition. Copyright# 1995 by Marcel Dekker, Inc.Reprinted with permission.

FEEDBACK LOOPSThe project plan is itself an important feedback tool. It provides details on

the tasks that are to be performed, when they are to be performed, and howmuch resource is to be consumed. The plan should also include explicit provi-sions for feedback. Typical forms of feedback are:

. Status reports�Formal, periodic written reports, often with a standard-ized format, telling what the project is based on, and where it is supposedto be relative to the plan. Where project performance does not matchplanned performance, the reports include additional information as tothe cause of the problem and what is being done to bring the project intoalignment with the plan. Remedial action may, at times, involve revisingthe plan. When the project is not meeting the plan due to obstacles whichthe project team cannot overcome, the status report will request seniormanagement intervention.

. Management reviews�These are meetings, scheduled in advance, wherethe project leader will have the opportunity to interact with key membersof the management team. The chief responsibility for these meetings ismanagement’s. The purpose is to brief management on the status of theproject, review the project charter and project team mission, discussthose management activities likely to have an impact on the progress ofthe team, etc. This is the appropriate forum for addressing systems bar-riers encountered by the team: while the team must work within existingsystems, management has the authority to change the systems. At times aminor system change can dramatically enhance the ability of the team toprogress.

. Budget reviews�While budget reports are included in each status report,a budget review is a formal evaluation of actual resource utilization withrespect to budgeted utilization. Budget review may also involve revisingbudgets, either upward or downward, based on developments since theoriginal budget approval. Among those unschooled in the science of statis-tics there is an unfortunate tendency to react to every random tick in bud-get variances as if they were due to a special cause of variation. Six Sigmamanagers should coach ¢nance and management personnel on the princi-ples of variation to preclude tampering with the budgeting process (alsosee below).

. Customer audits�The ‘‘customer’’ in this context means the principalstakeholder in the project. This person is the ‘‘owner’’ of the processbeing modi¢ed by the project. The project deliverables are designed tomeet the objectives of this customer, and the customer should play anactive role in keeping the project on track to the stated goals.

Feedback loops 543

. Updating plans and timetables�The purpose of feedback is to provideinformation to form a basis for modifying future behavior. Since thatbehavior is documented in the project plans and schedules, these docu-ments must be modi¢ed to ensure that the appropriate action is taken.Remember, in the PDCA cycle, plans change ¢rst.

. Resource redirection�The modi¢cations made to the plans and time-tables will result in increasing or decreasing resource allocation to theproject, or accelerating or decelerating the timetable for resourceutilization. The impact of these resource redirections on other projectsshould be evaluated by management in view of the organization’s overallobjectives.

PERFORMANCE MEASURESThere are a wide variety of tools and techniques available to help the project

manager develop a realistic project timetable, to use the timetable to time theallocation of resources, and to track progress during the implementation of theproject plan. We will review two of the most common here: Gantt charts andPERT-type systems.

Gantt chartsGantt chart�A Gantt chart shows the relationships among the project

tasks, along with time constraints. The horizontal axis of a Gantt chart showsthe units of time (days, weeks, months, etc.). The vertical axis shows the activ-ities to be completed. Bars show the estimated start time and duration of thevarious activities. Figure 15.2 illustrates a simple Gantt chart.


Figure 15.2.Gantt chart.

Milestone charts�Gantt charts are often modified in a variety of ways toprovide additional information. One common variation is shown in Figure15.3. The milestone symbol represents an event rather than an activity; it doesnot consume time or resources. When Gantt charts are modified in this waythey are sometimes called ‘‘milestone charts.’’

Gantt charts and milestone charts can be modified to show additional infor-mation, such as who is responsible for a task, why a task is behind schedule,remedial action planned or already taken, etc.

Typical DMAIC project tasks and responsibilitiesAlthough every project is unique, most Six Sigma projects which use the

DMAIC framework have many tasks in common, at least at a general level.Many people find it helpful if they have a generic ‘‘template’’ they can use toplan their project activities. This is especially true when the Black Belt orGreen Belt is new and has limited project management experience. Table 15.1can be used as a planning tool by Six Sigma teams. It shows typical tasks, respon-sibilities and tools for each major phase of a typical Six Sigma project.

PERT-CPM-type project management systemsWhile useful, Gantt charts and their derivatives provide limited project sche-

dule analysis capabilities. The successful management of large-scale projectsrequires more rigorous planning, scheduling and coordinating of numerousinterrelated activities. To aid in these tasks, formal procedures based on the

Performance measures 545

Figure 15.3. Enhanced Gantt chart (milestone chart).


Table 15.1. Typical DMAIC project tasks and responsibilities.

TASK RESPONSIBILITY

Charter Project

& Identify opportunity for improvement Black Belt

& Identify sponsor Black Belt

& Estimate savings Black Belt

&Draft project charter Black Belt, sponsor

& Sponsor project review (weekly) Sponsor, Black Belt

De¢ne

& Team selection Sponsor, Black Belt

&Complete project charter Black Belt

& Team training Black Belt, Green Belt

&Review existing process documentation Team member, process expert

&De¢ne project objectives and plan Team

& Present objectives and plan to management Green Belt

&De¢ne and map as-is process Team, process expert

&Review and re-de¢ne problem, if necessary Team

& Sponsor

Measure

& Identify CTQs Green Belt, Black Belt

&Collect data on subtasks and cycle time Team

&Validate measurement system Black Belt, process operator

Analyze

& Prepare baseline graphs on subtasks/cycle time Black Belt, Green Belt

&Analyze impacts, e.g., subtasks, Pareto . . . Black Belt, Green Belt

&Use subteams to analyze time and value, riskmanagement

Team

& Benchmark other companies Team member

Continued next page . . .

use of networks and network techniques were developed beginning in the late1950s. The most prominent of these procedures have been PERT (ProgramEvaluation and Review Technique) and CPM (Critical PathMethod). The twoapproaches are usually referred to as PERT-type project management systems.The most important difference between PERT and CPM is that originally thetime estimates for the activities were assumed deterministic in CPM and wereprobabilistic in PERT. Today, PERT and CPM actually comprise one tech-nique and the differences are mainly historical.

Project scheduling by PERT-CPM consists of four basic phases: planning,scheduling, improvement, and controlling The planning phase involves break-


&Discuss subteams’ preliminary ¢ndings Team

&Consolidate subteams’ analyses/¢ndings Team

Improve

& Present recommendations to process owners andoperators

Sponsor, team

&Review recommendations/formulate pilot Team, Black Belt

& Prepare for improved process pilot Team, process owner

& Test improved process (run pilot) Process operator

&Analyze pilot and results Black Belt, Green Belt

&Develop implementation plan Team, process owner

& Prepare ¢nal presentation Team

& Present ¢nal recommendations to management team Green Belt

Control

&De¢ne control metrics Black Belt, Green Belt, processexpert

&Develop metrics collection tool Black Belt

&Roll-out improved process Process owner

&Roll-out control metrics Process owner

&Monitor process monthly using control metrics Process owner, Black Belt

Table 15.1�Continued.

ing the project into distinct activities. The time estimates for these activities arethen determined and a network (or arrow) diagram is constructed with eachactivity being represented by an arrow.

PERT-type systems are used to:. Aid in planning and control of projects. Determine the feasibility of meeting speci¢ed deadlines. Identify the most likely bottlenecks in a project. Evaluate the e¡ects of changes in the project requirements or schedule. Evaluate the e¡ects of deviating from schedule. Evaluate the e¡ect of diverting resources from the project, or redirecting

additional resources to the project.The ultimate objective of the scheduling phase is to construct a time chart

showing the start and finish times for each activity as well as its relationshipto other activities in the project. The schedule must identify activities that are‘‘critical’’ in the sense that they must be completed on time to keep the projecton schedule.

It is vital not to merely accept the schedule as a given. The informationobtained in preparing the schedule can be used to improve the project schedule.Activities that the analysis indicates to be critical are candidates for improve-ment. Pareto analysis can be used to identify those critical elements that aremost likely to lead to significant improvement in overall project completiontime. Cost data can be used to supplement the time data, and the combinedtime/cost information analyzed using Pareto analysis.

The final phase in PERT-CPM project management is project control. Thisincludes the use of the network diagram and Gantt chart for making periodicprogress assessments

EXAMPLEOF PERTThe following is based on an example from Hillier and Lieberman (1980).

Let’s say that we wish to use PERT on a project for constructing a house. Theactivities involved, and their estimated completion times, are presented inTable 15.2.

Now, it is important that certain of these activities be done in a particularorder. For example, one cannot put on the roof until the walls are built. This iscalled a precedence relationship, i.e., the walls must precede the roof. The net-work diagram graphically displays the precedence relationships involved in con-structing a house. A PERT network for constructing a house is shown inFigure 15.4 (incidentally, the figure is also an arrow diagram).


FINDINGTHECRITICAL PATHThere are two time-values of interest for each event: its earliest time of com-

pletion and its latest time of completion. The earliest time for a given event isthe estimated time at which the event will occur if the preceding activities arestarted as early as possible. The latest time for an event is the estimated timethe event can occur without delaying the completion of the project beyond itsearliest time. Earliest times of events are found by starting at the initial eventand working forward, successively calculating the time at which each eventwill occur if each immediately preceding event occurs at its earliest time andeach intervening activity uses only its estimated time.

Slack time for an event is the difference between the latest and earliest timesfor a given event. Thus, assuming everything else remains on schedule, theslack for an event indicates how much delay in reaching the event can be tol-erated without delaying the project completion.

Events and activities with slack times of zero are said to lie on the critical pathfor the project. A critical path for a project is defined as a path through the net-work such that the activities on this path have zero slack. All activities andevents having zero slack must lie on a critical path, but no others can. Figure15.5 shows the activities on the critical path for the housing construction projectas thick lines.


Table 15.2. Activities involved in constructing a house.

ACTIVITY TIME TOCOMPLETE (DAYS)Excavate 2Foundation 4Rough wall 10Rough electrical work 7Rough exterior plumbing 4Rough interior plumbing 5Wall board 5Flooring 4Interior painting 5Interior ¢xtures 6Roof 6Exterior siding 7Exterior painting 9Exterior ¢xtures 2

CONTROLANDPREVENTIONOF SCHEDULESLIPPAGE

Projectmanagers can use the network and the information obtained from thenetwork analysis in a variety of ways to help them manage their projects. Oneway is, of course, to pay close attention to the activities that lie on the criticalpath. Any delay in these activities will result in a delay for the project.However, the manager should also consider assembling a team to review thenetwork with an eye towards modifying the project plan to reduce the total


Figure 15.4. Project network for constructing a house.Source: Based on Introduction to Operations Research, 3rd Edition, Hillier and Lieberman.

Copyright# 1980 by Holden-Day, Inc., San Francisco, California.

time needed to complete the project. The manager should also be aware that thenetwork times are based on estimates. In fact, it is likely that the completiontimes will vary. When this occurs it often happens that a new critical pathappears. Thus, the network should be viewed as a dynamic entity which shouldbe revised as conditions change.

Primary causes of slippage include poor planning and poor management ofthe project. Outside forces beyond the control of the project manager willoften play a role. However, it isn’t enough to be able to simply identify ‘‘outsideforces’’ as the cause and beg forgiveness. Astute project managers will anticipateas many such possibilities as possible and prepare contingency plans to dealwith them. The PDPC technique is useful in this endeavor. Schedule slippageshould also be addressed rigorously in the schedule control plan, which wasmentioned earlier as a primary deliverable from the project planning process.


Figure 15.5.Critical path for house construction example.

The control plan should make provision for reviews conducted at intervals fre-quent enough to assure that any unanticipated problems are identified beforeschedule slippage becomes a problem.

ResourcesResources are those assets of the firm, including the time of employees, that

are used to accomplish the objectives of the project. The project manager shoulddefine, negotiate, and secure resource commitments for the personnel, equip-ment, facilities, and services needed for the project. Resource commitmentsshould be as specific as possible. Generally, resource utilization is specified inthe project budget (see below).

The following items should be defined and negotiated:. What will be furnished?. By whom?. When?. How will it be delivered?. Howmuch will it cost?

^ Who will pay?^ When will payment be made?

Resource conflictsOf course, there are always other opportunities for utilizing resources. On

large projects, conflicts over resource allocation are inevitable. It is best ifresource conflicts can be resolved between those managers directly involved.However, in some cases, resource conflicts must be addressed by higher levelsof management. Senior managers should view resource conflicts as potentialindications that the management system for allocating resources must be modi-fied or redesigned. Often, such conflicts create ill will among managers andlead to lack of support, or even active resistance to the project. Too many suchconflicts can lead to resentment towards quality improvement efforts in gen-eral.

MethodologyCOSTCONSIDERATIONS IN PROJECT SCHEDULING

Most project schedules can be compressed, if one is willing to pay the addi-tional costs. For the analysis here, costs are defined to include direct elementsonly. Indirect costs (administration, overhead, etc.) will be considered in thefinal analysis. Assume that a straight-line relationship exists between the cost


of performing an activity on a normal schedule, and the cost of performing theactivity on a crash schedule. Also assume that there is a crash time beyondwhich no further time saving is possible, regardless of cost. Figure 15.6 illus-trates these concepts.

For a given activity the cost-per-unit-of-time saved is found as

crash cost� normal cost

normal time� crash timeð15:1Þ

When deciding which activity on the critical path to improve, one shouldbeginwith the activity that has the smallest cost-per-unit-of-time saved. The pro-ject manager should be aware that once an activity time has been reduced theremay be a new critical path. If so, the analysis should proceed using the updatedinformation, i.e., activities on the new critical path should be analyzed.

The data for the house construction example are shown in Table 15.3, withadditional data for costs and crash schedule times for each activity.

Activities shown in bold are on the critical path; only critical path activitiesare being considered since only they can produce an improvement in overallproject duration. Thus, the first activity to consider improving would be foun-dation work, which costs $800 per day saved on the schedule (identified with


Figure 15.6 Cost-time relationship for an activity.

an asterisk [*] in Table 15.3). If additional resources could be directed towardsthis activity it would produce the best ‘‘bang for the buck’’ in terms of reducingthe total time of the project. Next, assuming the critical path doesn’t change,would be excavation, then exterior painting, etc.

As activities are addressed one by one, the time it takes to complete the pro-ject will decline, while the direct costs of completing the project will increase.Figure 15.7 illustrates the cost-duration relationship graphically.

Conversely, indirect costs such as overhead, etc., are expected to increase asprojects take longer to complete. When the indirect costs are added to the directcosts, total costs will generally follow a pattern similar to that shown in Figure15.8.

To optimize resource utilization, the project manager will seek to develop aproject plan that produces the minimum cost schedule. Of course, the organ-ization will likely have multiple projects being conducted simultaneously,which places additional constraints on resource allocation.


Table 15.3. Schedule costs for activities involved in constructing a house.

Normal Schedule Crash Schedule

ACTIVITY Time (days) Cost Time (days) Cost Slope

Excavate 2 1000 1 2000 1000

Foundation 4 1600 3 2400 800*

Rough wall 10 7500 6 14000 1625

Rough electrical work 7 7000 4 14000 2333

Rough exterior plumbing 4 4400 3 6000 1600

Rough interior plumbing 5 3750 3 7500 1875

Wall board 5 3500 3 7000 1750

Flooring 4 3200 2 5600 1200

Interior painting 5 3000 3 5500 1250

Interior ¢xtures 6 4800 2 11000 1550

Roof 6 4900 2 12000 1775

Exterior siding 7 5600 3 12000 1600

Exterior painting 9 4500 5 9000 1125

Exterior ¢xtures 2 1800 1 3200 1400

OTHER PERFORMANCEMEASUREMENTMETHODOLOGY

Project information should be collected on an ongoing basis as the projectprogresses. Information obtained should be communicated in a timely fash-ion to interested parties and decision-makers. The people who receive theinformation can often help the project manager to maintain or recover theschedule. There are two types of communication involved: feedback and


Figure 15.7.Direct costs as a function of project duration.

Figure 15.8. Total costs as a function of project duration.

BudgetingIn this section we will provide an overview of budgeting as it applies to pro-

ject management.The project manager must know where he stands in terms of expenditures.

Once he is informed that a given amount of future expense is allocated to himfor a particular project, it is his job to run the project so that this allowance isnot exceeded. The process of allocating resources to be expended in the futureis called budgeting. Budgets should be viewed as forecasts of future events, inthis case the events are expenditures. A listing of these expenditures, brokenout into specific categories, is called the budget.

TYPESOF PROJECT BUDGETSRuskin and Estes (1995) list the following types of project-related budgets:Direct labor budgets are usually prepared for each work element in the pro-

ject plan, then aggregated for the project as a whole. Control is usually main-tained at the work element level to assure the aggregate budget allowance isnot exceeded. Budgets may be in terms of dollars or some other measure ofvalue, such as direct labor hours expended.

Support services budgets need to be prepared because, without budgets, sup-port services tend to charge based on actual costs, without allowances for errors,rework, etc. The discipline imposed by making budget estimates and beingheld to them often leads to improved efficiency and higher quality.

Purchased items budgets cover purchased materials, equipment, and services.The budgets can be based on negotiated or market prices. The issues mentionedfor support services also apply here.

TYPESOF BUDGETREPORTSBudgets allocate resources to be used in the future. No one can predict the

future with certainty. Thus, an important element in the budgeting process istracking actual expenditures after the budgets have been prepared. The fol-lowing techniques are useful inmonitoring actual expenditures versus budgetedexpenditures.

Expenditure reports which compare actual expenditures to budgeted expen-ditures are periodically submitted to the budget authority, e.g., finance, sponsor.

Expenditure audits are conducted to verify that charges to the project arelegitimate and that the work charged was actually performed. In most largeorganizations with multiple projects in work at any given time it is possible to


find projects being charged for work done on other projects, for work not yetdone, etc.While these charges are often inadvertent, theymust still be identified.

Variance reporting compares actual expenditures directly to budgeted expen-ditures. The term ‘‘variance’’ is used here in the accounting sense, not the statis-tical sense. In accounting, a variance is simply a comparison of a plannedamount with an actual amount. An accounting variance may or may not indi-cate a special cause of variation; statistical techniques are required to make thisdetermination. The timing of variance reporting varies depending on the needfor control. The timing of variance reports should be determined in advanceand written into the project plan.

Variance tables: Variance reports can appear in a variety of formats. Mostcommon are simple tables that show the actual/budgeted/variances by budgetitem, overall for the current period, and cumulatively for the project. Since it isunlikely that variances will be zero, an allowance is usually made, e.g., 5% overor under is allowed without the need for explanations. For longer projects,historical data can be plotted on control charts and used to set allowances.

Variance graphs: When only tables are used it is difficult to spot patterns. Toremedy this tables are often supplemented with graphs. Graphs generally showthe budget variances in a time-ordered sequence on a line chart. The allowancelines can be drawn on the graph to provide a visual guide to the eye.

ANALYSISOF BUDGETREPORTSThe project manager should review the variance data for patterns which

contain useful information. Ideally, the pattern will be a mixture of positiveand negative but minor variances. Assuming that this pattern is accompaniedby an on-schedule project, this indicates a reasonably good budget, i.e., anaccurate forecasting of expenditures. Variances should be evaluated separatelyfor each type of budget (direct labor, materials, etc.). However, the variancereport for the entire project is the primary source of information concerningthe status of the project in terms of resource utilization. Reports are receivedand analyzed periodically. For most quality improvement projects, monthlyor weekly reports are adequate. Budget variance analysis* should include thefollowing:

Trends: Occasional departures from budget are to be expected. Of greaterconcern is a pattern that indicates a fundamental problem with the budget.Trends are easier to detect from graphic reports.


*This is not to be confused with the statistical technique Analysis of Variance (ANOVA).

Overspending: Since budgeted resources are generally scarce, overspendingrepresents a serious threat to the project and, perhaps, to the organization itself.When a project overspends its budget, it depletes the resources available forother activities and projects. The project team and team leader and sponsorsshould design monitoring systems to detect and correct overspending before itthreatens the project or the organization. Overspending is often a symptom ofother problems with the project, e.g., paying extra in an attempt to ‘‘catch up’’after falling behind schedule, additional expenses for rework, etc.

Underspending is potentially as serious as overspending. If the project budgetwas prepared properly then the expenses reflect a given schedule and qualitylevel. Underspending may reflect ‘‘cutting corners’’ or allowing suppliers anallowance for slower delivery. The reasons for any significant departure fromthe plan should be explained.

PROJECT MANAGEMENT IMPLEMENTATIONManagement support and organizationalroadblocksINTERNALROADBLOCKS

Most organizations still have a hierarchical, command-and-control organi-zational structure, sometimes called ‘‘smoke stacks’’ or ‘‘silos.’’ The functionalspecialists in charge of each smoke stack tend to focus on optimizing their ownfunctional area, often to the detriment of the organization as a whole. In addi-tion, the hierarchy gives these managers a monopoly on the authority to act onmatters related to their functional specialty. The combined effect is both adesire to resist change and the authority to resist change, which often createsinsurmountable roadblocks to quality improvement projects.

It is important to realize that organizational rules are, by their nature, a bar-rier to change. The formal rules take the form of written standard operating pro-cedures (SOPs). The very purpose of SOPs is to standardize behavior. Thequality profession has (in this author’s opinion) historically overemphasizedformal documentation, and it continues to do so by advocating such approachesas ISO 9000 and ISO 14000. Formal rules are often responses to past problemsand they often continue to exist long after the reason for their existence haspassed. In an organization that is serious about its written rules even seniorleaders find themselves helpless to act without submitting to a burdensomerule-changing process. The true power in such an organization is the bureau-cracy that controls the procedures. If the organization falls into the trap of creat-ing written rules for too many things, it can find itself moribund in a fast-changing external environment. This is a recipe for disaster.


Tom

Line

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