AoN; Investment appraisal; Product life cycle; Prototype; Risk register; Time scale
The example in this chapter shows how all the tools and techniques described so far can be integrated to give a comprehensive project-management system. The project chosen is the design, manufacture and distribution of a prototype motor car, and while the operations and time scales are only indicative and do not purport to represent a real-life situation, the example shows how the techniques follow each other in a logical sequence.
The prototype motor car being produced is illustrated in Fig. 49.1 and the main components of the engine are shown in Fig. 49.2. It can be seen that the letters given to the engine components are the activity identity letters used in planning networks.
An oversight of the main techniques and their most important constituents are discussed as follows.
As with all projects, the first document to be produced is the business case, which should also include the chosen option investigated for the investment appraisal. In this exercise, the questions to be asked (and answered) are shown in Table 49.1.
It is assumed that the project requires an initial investment of £60million and that over a 5-year period, 60,000 cars (units) will be produced at a cost of £5000 per unit. The assumptions are that the discount rate is 8%. There are two options for phasing the manufacture:
1. That the factory performs well for the first 2years but suffers some production problems in the next 3years (option 1).
2. That the factory has teething problems in the first 3years but goes into full production in the last 2 (option 2).
Table 49.1
Business Case
Why do we need a new model?
What model will it replace?
What is the market?
Will it appeal to the young, the middle aged, families, the elderly, women, trendies, yobos?
How many can we sell per year in UK, the USA, EEC and other countries?
What is the competition for this type of car and what is their price?
Will the car rental companies buy it?
What is the max. and min. selling price?
What must be the max. manufacturing cost and in what country will it be built?
What name shall we give it?
Do we have a marketing plan?
Who will handle the publicity and advertising?
Do we have to train the sales force and maintenance mechanics?
What should be the insurance category?
What warranties can be given and for how long?
What are the main specifications regarding:
Safety and theftproofing?
Engine size (cc) or a number of sizes?
Fuel consumption?
Emissions (pollution control)?
Catalytic converter?
Max. speed?
Max. acceleration?
Size and weight?
Styling?
Turning circle and ground clearance?
What ‘extras’ must be fitted as standard?
ABS
Power steering
Air bags
Electric windows and roof
Cruise control
Air conditioning
What percentage can be recycled
Investment Appraisal (Options)
Should it be a saloon, coupé, estate, people carrier, convertible, 4×4 or mini?
Will it have existing or newly designed engine?
Will it have existing or new platform (chassis)?
Do we need a new manufacturing plant or can we build it in an existing one?
Should the engine be cast iron or aluminium?
Should the body be steel, aluminium or fibreglass?
Do we use an existing brand name or devise a new one?
Will it be fuelled on petrol, diesel, electricity or hybrid power unit?
DCF of investment returns, NPV, cash flow?
The discounted cash flow (DCF) calculations can be produced for both options as shown in Tables 49.2 and 49.3.
To obtain the internal rate of return (IRR), an additional discount rate (in this case 20%) must be applied to both options. The resulting calculations are shown in Tables 49.4 and 49.5 and the graph showing both options is shown in Fig. 49.3. This gives an IRR of 20.2% and 15.4%, respectively.
It is now necessary to carry out a cash-flow calculation for the distribution phase of the cars. To line up with the DCF calculations, two options have to be examined. These are shown in Tables 49.6 and 49.7 and the graphs in Figs. 49.4 and 49.5 for options 1 and 2, respectively. An additional option 2a, in which the income in years 2 and 3 is reduced from £65,000K to £55,000K, is shown in the cash-flow curves of Fig. 49.6.
All projects carry an element of risk and it is prudent to carry out a risk analysis at this stage. The types of risks that can be encountered, the possible actual risks and the mitigation strategies are shown in Table 49.8. A risk log (or risk register) for five risks is given in Fig. 49.7.
Once the decision has been made to proceed with the project, a project life cycle diagram can be produced. This is shown in Fig. 49.8 together with the constituents of the seven phases envisaged.
The next stage is the product-breakdown structure (Fig. 49.9), followed by a combined cost-breakdown and organization-breakdown structures (Fig. 49.10). By using these two, the responsibility matrix can be drawn up (Fig. 49.11).
It is now necessary to produce a programme. The first step is to draw an activity list showing the activities and their dependencies and durations. These are shown in the first four columns of Table 49.9. It is now possible to draw the critical path network in either activity on node format (Fig. 49.12), activity on arrow format (Fig. 49.13) or as a Lester diagram (Fig. 49.14).
After analysing the network diagram, the total and free floats of the activities can be listed (Table 49.10).
In addition to the start and finish, there are four milestones (days 8, 16, 24 and 30). These are described and plotted on the milestone slip chart (Fig. 49.15).
The network programme can now be converted into a bar chart (Fig. 49.16) on which the resources (in men per day), as given in the fifth column of Table 49.9, can be added. After summating the resources for every day, it has been noticed that there is a peak requirement of 12 men in days 11 and 12. As this might be more than the available resources, the bar chart can be adjusted by utilizing the available floats to smooth the resources and eliminate the peak demand. This is shown in Fig. 49.17 by delaying the start of activities D and F.
Table 49.2
DCF of Investment Returns (Net Present Value)
Initial Investment £60,000K 5 year period
Total car production 60,000 units @ £5000/Unit
Option 1
Year
Production Units
Income (£K)
Cost (£K)
Net Return (£K)
Discount Rate (%)
Discount Factor
Present Value (£K)
1
15,000
100,000
75,000
25,000
8
0.926
23,150
2
15,000
100,000
75,000
25,000
8
0.857
21,425
3
10,000
65,000
50,000
15,000
8
0.794
11,910
4
10,000
65,000
50,000
15,000
8
0.735
11,025
5
10,000
65,000
50,000
15,000
8
0.681
10,215
Totals
95,000
77,725
Net present value (NPV)=77,725−60,000=£17,725K
Profit=£95,000K−£60,000K=£35,000K
Average rate of return (undiscounted)=£95,000/5=£19,000K per annum
Return on investment=£19,000/£60,000=31.66%
Table 49.3
DCF of Investment Returns (Net Present Value)
Initial Investment £60,000K 5 year period
Total car production 60,000 units @ £5000/Unit
Option 2
Year
Production Units
Income (£K)
Cost (£K)
Net Return (£K)
Discount Rate (%)
Discount Factor
Present Value (£K)
1
10,000
65,000
50,000
15,000
8
0.926
13,890
2
10,000
65,000
50,000
15,000
8
0.857
12,855
3
10,000
65,000
50,000
15,000
8
0.794
11,910
4
15,000
100,000
75,000
25,000
8
0.735
18,375
5
15,000
100,000
75,000
25,000
8
0.681
17,025
Totals
95,000
74,055
Net present value (NPV)=74,055−60,000=£14,055K
Profit=£95,000K−£60,000K=£35000K
Average rate of return (undiscounted)=£95,000/5=£19,000K per annum
Return on investment=£19,000/£60,000=31.66%
Table 49.4
Internal Rate of Return (IRR)
Option 1
Year
Net Return (£K)
Discount Rate (%)
Discount Factor
Present Value (£K)
Discount Rate (%)
Discount Factor
Present Value (£K)
1
25,000
15
0.870
21,750
20
0.833
20,825
2
25,000
15
0.756
18,900
20
0.694
17,350
3
15,000
15
0.658
9870
20
0.579
8685
4
15,000
15
0.572
8580
20
0.482
7230
5
15,000
15
0.497
7455
20
0.402
6030
Totals
60,000
66,555
60,120
Less investment
−60,000
−60,000
Net present value
£6555K
£120K
Internal rate of return (from graph)=20.2%
Table 49.5
Internal Rate of Return (IRR)
Option 2
Year
Net Return (£K)
Discount Rate (%)
Discount Factor
Present Value (£K)
Discount Rate (%)
Discount Factor
Present Value (£K)
1
15,000
15
0.870
13,050
20
0.833
12,495
2
15,000
15
0.756
11,340
20
0.694
10,410
3
15,000
15
0.658
9870
20
0.579
8685
4
25,000
15
0.572
14,300
20
0.482
12,050
5
25,000
15
0.497
12,425
20
0.402
10,050
Totals
60,000
60,985
53,690
Less investment
−60,000
−60,000
Net present value
£985K
−£6310K
Internal rate of return (from graph)=15.4%
In Fig. 49.18, the man days of the unsmoothed bar chart have been multiplied by 8 to convert them into man-hours. This was necessary to carry out earned value analysis. The daily man-hour totals can be shown as a histogram and the cumulative totals are shown as an S-curve. In a similar way, Fig. 49.19 shows the respective histogram and S-curve for the smoothed bar chart.
It is now possible to draw up a table of actual man-hour usage and percent-complete assessment for reporting day nos. 8, 16, 24 and 30. These, together with the earned values for these periods are shown in Table 49.11. Also shown are the efficiency [(cost performance index) CPI], (schedule performance index) SPI, and predicted final-completion costs and times as calculated at each reporting day.
Using the unsmoothed bar chart histogram and S-curve as a planned man-hour base, the actual man-hours and earned value man-hours can be plotted on the graph in Fig. 49.20. This graph also shows the percent complete and percent efficiency at each of the four reporting days.
Finally, Table 49.12 shows the actions required for the closeout procedure.
Need for a new model; what type of car? min./max. price; manufacturing cost; units per year; marketing strategy; what market sector is it aimed at? main specifications; what extras should be standard? name of new model; country of manufacture.
Investment Appraisal
Options: Saloon, coupé, estate, convertible, people carrier, 4×4; existing or new engine; existing or new platform; materials of construction for engine and body; type of fuel; new or existing plant; DCF of returns, NPV and cash flow.
Table 49.9
Activity list of motor car engine manufacture and assembly (10 off), 8hours/day.
Activ. Letter
Description
Dependency
Duration Days
Men Per Day
Man-Hours Per Day
Total Man-Hours
A
Cast block and cylinder head
Start
10
3
24
240
B
Machine block
A
6
2
16
96
C
Machine cylinder head
B
4
2
16
64
D
Forge and mc. flywheel
E
4
2
16
64
E
Forge crankshaft
Start
8
3
24
192
F
Machine crankshaft
E
5
2
16
80
G
Cast pistons
A
2
3
24
48
H
Machine pistons
G
4
2
16
64
J
Fit piston rings
H
1
2
16
16
K
Forge connecting rod
E
2
3
24
48
L
Machine conn. rod
K
2
2
16
32
M
Fit big end shells
L
1
1
8
8
N
Fit little end bush
M
1
1
8
8
O
Assemble engine
B, F, J, N
5
4
32
160
P
Fit flywheel
D, O
2
4
32
64
Q
Fit cylinder head
C, P
2
2
16
32
R
Fit camshaft and valves
Q
4
3
24
96
Total
1312
Table 49.10
Activity floats from CP network.
Activ. Letter
Description
Duration
Total Float
Free Float
A
Cast block and cylinder head
10
0
0
B
Machine block
6
1
0
C
Machine cylinder head
4
4
4
D
Forge and mc. flywheel
4
10
10
E
Forge crankshaft
8
3
0
F
Machine crankshaft
5
4
4
G
Cast pistons
2
0
0
H
Machine pistons
4
0
0
J
Fit piston rings
1
0
0
K
Forge connecting rod
2
3
0
L
Machine conn. rod
2
3
0
M
Fit big end shells
1
3
0
N
Fit little end bush
1
3
3
O
Assemble engine
5
0
0
P
Fit flywheel
2
0
0
Q
Fit cylinder head
2
0
0
R
Fit camshaft and valves
4
0
0
Table 49.11
Man-hour usage of motor car engine manufacture and assembly (10 off) (unsmoothed).
Period
Day 8
Day 16
Day 24
Day 30
Act.
Budget M/H
Actual Cum.
% Complete
EV
Actual Cum.
% Complete
EV
Actual Cum.
% Complete
EV
Actual Cum.
% Complete
EV
A
240
210
80
192
260
100
240
260
100
240
260
100
240
B
96
30
20
19
110
100
96
110
100
96
C
64
70
100
64
70
100
64
D
64
60
50
32
80
100
64
80
100
64
E
192
170
80
154
200
100
192
200
100
192
200
100
192
F
80
70
80
64
90
100
80
90
100
80
G
48
54
100
48
60
100
48
60
100
48
H
64
60
80
51
68
100
64
68
100
64
J
16
16
100
16
16
100
16
K
48
52
100
48
52
100
48
52
100
48
L
32
40
100
32
40
100
32
40
100
32
M
8
6
80
6
8
100
8
8
100
8
N
8
6
80
6
8
100
8
8
100
8
O
160
158
90
144
166
100
160
P
64
80
100
64
Q
32
24
60
19
R
96
52
40
38
Total
1312
380
346
838
738
1220
1104
1384
1241
% complete
26.3
56.2
84.1
94.6
Planned man-hours
384
880
1184
1312
Efficiency (CPI) %
91
88
90
90
Est. Final man-hours
1442
1491
1458
1458
SPI (cost)
0.90
0.84
0.93
0.96
SPI (time)
0.90
0.86
0.92
0.89
Est. completion days
33
36
32
31
Table 49.12
Close-Out
Close-out meeting store standard tools
Sell special tools and drawings to Ruritania
Clear machinery from factory
Sign lease with supermarket that bought the site
Sell spares to dealers
Sell scrap materials
Write report and highlight problems
Press release and photo opportunity for last car
Give away 600,000th production car to special lottery winner
Network diagram, forward and backward pass, floats, critical path, examination for overall time reduction, conversion to bar chart with resource loading, histogram, reduction of resource peaks, cumulative S-curve; milestone slip chart.
Risk Register
Types of risks: manufacturing, sales, marketing, reliability, components failure, maintenance, suppliers, legislation, quality; qualitative and quantitative analysis; probability and impact matrix; risk owner; mitigation strategy and contingency.
Earned Value Analysis
EVA of manufacture and assembly of engine, calculate earned value, CPI, SPI, cost at completion, final-project time, draw curves of budget hours, planned hours, actual hours earned value, percent complete and efficiency over four reporting periods.