pinto_pm4_inppt_03-pr.pptProject Planning, Scheduling, and Controlling

PowerPoint presentation to accompany
Heizer, Render, Munson
Operations Management, Twelfth Edition
Principles of Operations Management, Tenth Edition

PowerPoint slides by Jeff Heyl

1. PROJECT SELECTION AND
PORTFOLIO MANAGEMENT
Chapter 3
Copyright ©2016 Pearson Education, Ltd.

2. CHAPTER 3
LEARNING OBJECTIVES
After completing this chapter, students will be able to:
1.Explain six criteria for a useful project
selection/screening model.
2.Understand how to employ checklists and simple scoring
models to select projects.
3.Use more sophisticated scoring models, such as the
Analytical Hierarchy Process.
4.Learn how to use financial concepts, such as the efficient
frontier and risk/return models.
3-2Copyright ©2016 Pearson Education, Ltd.

3. CHAPTER 3
LEARNING OBJECTIVES
After completing this chapter, students will be able to:
5.Employ financial analyses and options analysis to
evaluate the potential for new project investments.
6.Recognize the challenges that arise in maintaining an
optimal project portfolio for an organization.
7.Understand the three keys to successful project portfolio
management.
3-3Copyright ©2016 Pearson Education, Ltd.

4. PMBOK CORE CONCEPTS
Project Management Body of Knowledge (PMBoK) covered
in this chapter includes:
Portfolio Management (PMBoK1.4.2)
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5. PROJECT SELECTION
Screening models help managers pick winners from a pool of
projects. Screening models are numericor nonnumericand
should have:
Realism
Capability
Flexibility
Ease of use
Cost effectiveness
Comparability
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6. Copyright ©2016 Pearson Education, Ltd. 6
Realism:Aneffectivemodelmustreflectorganizational
objectives,includingafirm’sstrategicgoalsandmission.
Capability:Amodelshouldbeflexibleenoughtorespondto
changesintheconditionsunderwhichprojectsarecarriedout.
Flexibility:Themodelshouldbeeasilymodifiediftrialapplications
requirechanges.
Easeofuse:Amodelmustbesimpleenoughtobeusedbypeople
inallareasoftheorganization,boththoseinspecificproject
rolesandthoseinrelatedfunctionalpositions.
Cost:Thescreeningmodelshouldbecost-effective
Comparability:Themodelmustbebroadenoughtobeappliedto
multipleprojects.Ifamodelistoonarrowlyfocused,itmaybe
uselessincomparingpotentialprojectsorfosterbiasestoward
someoverothers.Ausefulmodelmustsupportgeneral
comparisonsofprojectalternatives.

7. SCREENING & SELECTION ISSUES
1.Risk–unpredictability to the firm
a.Technical
b.Financial
c.Safety
d.Quality
e.Legal exposure
2.Commercial–market potential
a.Expected return on investment
b.Payback period
c.Potential market share
d.Long-term market dominance
e.Initial cash outlay
f.Ability to generate future business/new markets
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8. SCREENING & SELECTION ISSUES
3.Internal operating –changes in firm operations
a.Need to develop/train employees
b.Change in workforce size or composition
c.Change in physical environment
d.Change in manufacturing or service operations
4.Additional
a.Patent protection
b.Impact on company’s image
c.Strategic fit
All modelsonly partially reflect realityand have both
objective and subjectivefactors imbedded.
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9. APPROACHES TO
PROJECT SCREENING
Checklist model
Simplified scoring models
Analytic hierarchy process
Profile models
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10. CHECKLIST MODEL
A checklist is a list of criteria applied to possible
projects.
Requires agreement on criteria
Assumes all criteria are equally important
Checklists are valuable for recording opinions
and stimulating discussion.
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11. Copyright ©2016 Pearson Education, Ltd. 11

12. SIMPLIFIED SCORING MODELS
Each project receives a score that is the weighted
sum of its grade on a list of criteria. Scoring
models require:
agreement on criteria
agreement on weightsfor criteria
a score assigned for each criteria
Relative scores can be misleading!()Score Weight Score
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13. Copyright ©2016 Pearson Education, Ltd. 13

14. ANALYTIC HIERARCHY PROCESS
The AHP is a four step process:
1.Construct a hierarchy of criteria and subcriteria.
2.Allocate weightsto criteria.
3.Assign numerical valuesto evaluation dimensions.
4.Determine scores by summing the products of
numeric evaluations and weights.
Unlike the simple scoring model, these scores can
be compared!
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15. Copyright ©2016 Pearson Education, Ltd.
SAMPLE AHP WITH RANKINGS
FOR SALIENT SELECTION CRITERIA
(FIGURE 3.1)
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17. Copyright ©2016 Pearson Education, Ltd.
PROFILE MODELS
(FIGURE 3.4)
Criteria
selection as
axes
Ratingeach
project on
criteria
Risk
Return
Maximum
Desired Risk
Minimum
Desired Return
X
1
X
4
X
2
X
3
X
6
X
5
Efficient Frontier
X
7
3-17

18. FINANCIAL MODELS
Payback period
Net present value
Discounted payback period
Internal rate of return
Options models
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19. PAYBACK PERIOD
Cash flowsshould be discounted.
Lowernumbers are better(faster payback).

Investment
Payback Period
Annual Cash Savings

Determines how longit takes for a project to
reach a breakeven point
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20. Copyright ©2016 Pearson Education, Ltd.
PAYBACK PERIOD EXAMPLE
(TABLE 3.5)
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21. Copyright ©2016 Pearson Education, Ltd.
PAYBACK PERIOD EXAMPLE
(TABLE 3.6)
Divide the
cumulative amount
by the cash flow
amount in the third
year and subtract
from 3 to find out
the moment the
project breaks even.
3 -50,000= 2.857
350,000
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22. Copyright ©2016 Pearson Education, Ltd.
PAYBACK PERIOD EXAMPLE
(TABLE 3.6)
Divide the
cumulative amount
by the cash flow
amount in the third
year and subtract
from 5 to find out
the moment the
project breaks even.
5 –875,000= 4.028
900,000
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23. NET PRESENT VALUE
Projects the change in the firm’s stock value if a
project is undertaken.(1 )




t
o t
t
t
t
F
NPV I
rp
where
F = net cash flow for period t
R = required rate of return
I = initial cash investment
P = inflation rate during period t



Higher NPV
values are better!
3-23Copyright ©2016 Pearson Education, Ltd.
Discount factor=
(1/(1 + r + p)t)

24. EXAMPLE
Assume that you are considering whether or not to invest in a
project that will cost $100,000 in initial investment.
Your company requires a rate of return of 10%, and you
expect inflation to remain relatively constant at 4%.
You anticipate a useful life of four years for the project and
have projected future cash flows as follows:
Year 1: $20,000
Year 2: $50,000
Year 3: $50,000
Year 4: $25,000
24

25. Copyright ©2016 Pearson Education, Ltd.
NET PRESENT VALUE EXAMPLE
(TABLE 3.8)
The NPV
column total
is positive,
so invest!
(table 3.6)
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26. INTERNAL RATE OF RETURN
A project must meet a minimum rate of returnbefore
it is worthy of consideration.1(1 )

t
t
n
t
ACF
IO
IRR t
where
ACF = annual after tax cash flow for time period t
IO = initial cash outlay
n = project's expected life
IRR = the project's internal rate of return




Higher IRR
values are
better!
3-26Copyright ©2016 Pearson Education, Ltd.

27. EXAMPLE
Suppose that a project required an initial cash
investment of $5,000 and was expected to
generate inflows of $2,500, $2,000, and $2,000 for
the next three years.
Further, assume that our company’s required rate
of return for new projects is 10%. The question is:
Is this project worth funding?
27

28. Copyright ©2016 Pearson Education, Ltd.
INTERNAL RATE OF RETURN
EXAMPLE
This table
has been
calculated
using a
discount
rate of 15%.
The project does meet our 15% requirement and
should be considered further.
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29. PROJECT PORTFOLIO
MANAGEMENT
The systematic process of selecting, supporting, and
managing the firm’s collection of projects.
Portfolio management objectives and initiatives
require:
decision making
prioritization
review
realignment
reprioritization of a firm’s projects
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30. Copyright ©2016 Pearson Education, Ltd.
PROACTIVE PORTFOLIO MATRIX
(FIGURE 3.8)
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Bread and butter projects are those with a high probability of
technical feasibility and a modest likelihood for commercial
profitability. These projects are typically evolutionary improvements to
existing product lines or modest extensions to existing technology. A
new release of a software product or “new and improved” laundry
detergent are examples of bread and butter projects.
Pearlsare projects that offer a strong commercial potential and are
technically feasible. These projects can be used to gain strategic
advantage in the marketplace. Pearls involve revolutionary commercial
applications that have the potential to revolutionize a field while
relying on well-known or understood technology. Examples of pearls
are projects that involve new applications of existing technology, such
as sonar imaging systems to detect deep-water oil reserves.

32. Copyright ©2016 Pearson Education, Ltd. 32
•Oysters are early-stage projects that have the potential to unleash
significant strategic and commercial advantages for the company
that can solve the technical challenges. Because oyster projects
involve unknown or revolutionary technologies, they are still at the
early stages of possible success. If these technical challenges can
be overcome, the company stands to make a great deal of money.
An example of an oyster project is developing viable fusion power
generation or extended life batteries for electric cars.
•White elephant projects are a combination of low technical
feasibility coupled with low commercial impact. The question could
be asked: Why would a firm select white elephant projects that
combine the worst of profitability and technical feasibility? The
answer is that they do not deliberately select projects of this sort.
Most white elephants start life as bread and butter projects or
oysters that never live up to their potential.

33. KEYS TO SUCCESSFUL
PROJECT PORTFOLIO MANAGEMENT
Flexible structureand freedom of communication
Low-costenvironmental scanning
Time-pacedtransition
3-33Copyright ©2016 Pearson Education, Ltd.

34. PROBLEMS IN IMPLEMENTING
PORTFOLIO MANAGEMENT
Conservative technical communities
Out-of-sync projects and portfolios
Unpromising projects
Scarce resources
3-34Copyright ©2016 Pearson Education, Ltd.

35. SUMMARY
1.Explain six criteria for a useful project selection/
screening model.
2.Understand how to employ checklists and
simple scoring models to select projects.
3.Use more sophisticated scoring models, such as
the Analytical Hierarchy Process.
4.Learn how to use financial concepts, such as the
efficient frontier and risk/return models.
3-35Copyright ©2016 Pearson Education, Ltd.

36. SUMMARY
5.Employ financial analyses and options analysis
to evaluate the potential for new project
investments.
6.Recognize the challenges that arise in
maintaining an optimal project portfolio for an
organization.
7.Understand the three keys to successful project
portfolio management.
3-36Copyright ©2016 Pearson Education, Ltd.