project management: crashing and risk...

Project Management: Crashing and Risk

ManagementAMAT 167

CRASHING: Addressing Time-Cost Trade-offs

uCrash means shortening activity durations.uWe may reduce the length of a project by

injecting additional resources uExample: add personnel or more efficient

equipment

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Chapter Seventeen Project Management 769

Totalcost

Cumulativecost of crashing

Expectedprojectcosts

ShortenShorten

CRASH

Shorten

Optimum Project length0

Cost

FIGURE 17.11 Crashing activities *

* Crashing activities reduce indirect project costs and increase direct costs; the opti-mum amount of crashing results in minimiz-ing the sum of these two types of costs.

SCREENCAM TUTORIAL

a. Determine which activities are on the critical path, its length, and the length of the other path:

Path Length

a-b-f 18c-d-e-f 20 (critical path)

b. Rank the critical path activities in order of lowest crashing cost, and determine the num-ber of days each can be crashed.

ActivityCost per Day

to CrashAvailable

Days

c $300 1e 600 2d 700 3f 800 1

S O L U T I O N

Using the following information, develop the optimal time–cost solution. Project costs are $1,000 per day.

ActivityNormal

TimeCrash Time

Cost per Day to Crash

a 6 6 —b 10 8 $500c 5 4 300d 4 1 700e 9 7 600f 2 1 800

4d

9e

5c

10b

6a

2f

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Information needed:uRegular time and crash time estimates for

each activity.uRegular cost and crash cost estimates for

each activity.uA list of activities that are on the critical

path (activities on the critical path are potential candidates for crashing).


The general procedure for crashing is1. Crash the project one period at a time.

2. Crash the least expensive activity that is on the critical path.


The general procedure for crashing is3. When there are multiple critical paths,

find the sum of crashing the least expensive activity on each critical path. If two or more critical paths share common activities, compare the least expensive cost of crashing a common activity shared by critical paths with the sum for the separate critical paths.


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Totalcost

Cumulativecost of crashing

Expectedprojectcosts

ShortenShorten

CRASH

Shorten

Optimum Project length0

Cost

FIGURE 17.11 Crashing activities *

* Crashing activities reduce indirect project costs and increase direct costs; the opti-mum amount of crashing results in minimiz-ing the sum of these two types of costs.

SCREENCAM TUTORIAL

a. Determine which activities are on the critical path, its length, and the length of the other path:

Path Length

a-b-f 18c-d-e-f 20 (critical path)

b. Rank the critical path activities in order of lowest crashing cost, and determine the num-ber of days each can be crashed.

ActivityCost per Day

to CrashAvailable

Days

c $300 1e 600 2d 700 3f 800 1

S O L U T I O N

Using the following information, develop the optimal time–cost solution. Project costs are $1,000 per day.

ActivityNormal

TimeCrash Time

Cost per Day to Crash

a 6 6 —b 10 8 $500c 5 4 300d 4 1 700e 9 7 600f 2 1 800

4d

9e

5c

10b

6a

2f

E X A M P L E 7 e celx

www.mhhe.com/stevenson11e


CRASHING: Exercise

Project costs are $1,000 per day

RISK MANAGEMENT

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RISK MANAGEMENT Risks are inherent in projects. They relate to the occurrence of events that can have undesir-able consequences, such as delays, increased costs, and an inability to meet technical specifi-cations. In some instances, there is the risk that events will occur that will cause a project to be terminated. Although careful planning can reduce risks, no amount of planning can eliminate chance events due to unforeseen, or uncontrollable, circumstances.

The probability of occurrence of risk events is highest near the beginning of a project and lowest near the end. However, the cost associated with risk events tends to be lowest near the beginning of a project and highest near the end. (See Figure 17.12 .)

Good risk management entails identifying as many potential risks as possible, analyzing and assessing those risks, working to minimize the probability of their occurrence, and estab-lishing contingency plans (and funds) for dealing with any that do occur. Much of this takes place before the start of a project, although it is not unusual for this process to be repeated during the project as experience grows and new information becomes available.

Project life cycle

Cost to overcomeoccurrence of risk event

Probability of occurrenceof a risk event

High

Low

FIGURE 17.12 Risk event probability and cost

Source: Adapted from Clifford Gray and Erik W. Larson, Project Management: The Managerial Process, 4th ed., p. 198. Copy-right © 2008 McGraw-Hill Companies, Inc. Used with permission.

OPERATIONS STRATEGY Projects can present both strategic opportunities and strategic risks, so it is critical for man-agement to devote adequate attention and resources to projects.

Projects are often used in situations that have some degree of uncertainty, which can result in delays, budget overruns, and failure to meet technical requirements. To minimize the impact of these possibilities, management must ensure that careful planning, wise selection of project managers and team members, and monitoring of the project occur.

Computer software and tools such as PERT can greatly assist project management. How-ever, care must be taken to avoid focusing exclusively on the critical path. The obvious reason is that as the project progresses, other paths may become critical. But another, less obvious, reason is that key risk events may not be on the critical path. Even so, if they occur, they can have a major impact on the project.

It is not uncommon for projects to fail, either completely or partially. When that happens, it can be beneficial to examine the probable reasons for the failure, and decide what possible decisions or actions, if any, might have contributed to the failure. These become “lessons learned” that may be applicable to future projects to decrease the likelihood of failure.

One thing to keep in mind is that project management is more than choosing the right software. There is much that a project manager must do. Recall the key decisions that were discussed early in the chapter.


RISK MANAGEMENT:Risk Matrix

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774 Chapter Seventeen Project Management

The first step is to identify the risks. Typically, there are numerous sources of risks, although the more experience an organization has with a particular type of work, the fewer and more iden-tifiable the risks. Everyone associated with the project should have responsibility for the task of identifying risks. Brainstorming sessions and questionnaires can be useful in this regard.

Once risks have been identified, each risk must be evaluated to determine its probability of occurrence and the potential consequences if it does occur. Both quantitative and qualitative approaches have merit. Managers and workers can contribute to this effort, and experts might be called on. Experience with previous projects can be useful. Many tools might be applied, including scenario analysis, simulation, and PERT (described earlier in the chapter).

Risk reduction can take a number of forms. Much depends on the nature and scope of a project. “Redundant” (backup) systems can sometimes be used to reduce the risk of failure. For example, an emergency generator could supply power in the event of an electrical failure. Another approach is frequent monitoring of critical project dimensions with the goal of catch-ing and eliminating problems in their early stages, before they cause extensive damage. Risks can sometimes be transferred, say by outsourcing a particular component of a project. Risk-sharing is another possibility. This might involve partnering, which can spread risks among partners; this approach may also reduce risk by enlarging the sphere of sources of ideas for reducing the risk.

A project leader may have to contend with multiple risks that have different costs and dif-ferent probabilities of occurring. A simple matrix such as the one illustrated in Figure 17.13 can be used to put the risks into perspective.

Events in the upper right-hand quadrant (events 3 and 4) have the highest probability of occurring, and also high costs. They should be given the greatest attention. Conversely, events in the lower left-hand quadrant (events 2 and 5) have relatively low probabilities and low costs, so they should be given the least attention. Events in the other two quadrants (events 6 and 1) should get moderate attention due either to high cost (event 6) or high probability of occurrence (event 1).

FIGURE 17.13 A risk matrix

1.0000

25

50

75

$100

3

5

66

112

4

Probability of occurring

Cost

Event Probability Cost

1 .85 $182 .30 203 .55 684 .85 775 .10 306 .30 87

Projects are composed of a unique set of activities established to realize a given set of objectives in a limited time span. Projects go through a life cycle that involves definition, planning, execution, and delivery/termination. The nonroutine nature of project activities places a set of demands on the project manager that are different in many respects from those the manager of more routine operations activities experiences, both in planning and coordinating the work and in the human problems encountered. Ethi-cal conduct and risk management are among the key issues project managers must deal with.

PERT and CPM are two commonly used techniques for developing and monitoring projects. Although each technique was developed independently and for expressly different purposes, time and practice have erased most of the original differences, so that now there is little distinction between the two. Either provides the manager with a rational approach to project planning and a graphical display of project activities. Both depict the sequential relationships that exist among activities and reveal to managers which activities must be completed on time to achieve timely project completion. Managers can use that information to direct their attention toward the most critical activities.

SUMMARY


Methods: scenario analysis, simulation, PERT, etc.

Should be given high attention

uHave redundant or backup to reduce the risk of failure.

uDo frequent monitoring of critical project dimensions with the goal of catching and eliminating problems in their early stages, before they cause extensive damage. But of course, without forgetting non-critical paths.

RISK MANAGEMENT:Risk Reduction

uTransfer risks (e.g., by outsourcing a particular component of a project); or share the risks (e.g., by partnering)

RISK MANAGEMENT:Risk Reduction

EXAMPLE OF PROJECT MANAGEMENT SOFTWARE:

project management: crashing and risk...

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