PROJECT MANAGEMENT

Dr. D.T.MANWANISenior Professor(Finance)

Ph.d ( Finance), MBA( Finance), B.E( Mech)

All of mankind’s greatest accomplishments- from building the great pyramid to discovering a cure for polio to putting a man on the moon- began as project.

Module 1

• Introduction to Project • Project Objectives • Project Characteristics• Project Functions• Type of Projects• Project Management & its overview• Importance of Project Management• Project Life Cycle & its Phases• Project alignment with Business Strategy

What is Project?

• In simple terms, Project is a collection of activities that are interrelated with a specific over all purpose.

• It is a temporary endeavor to create a unique product, service or result.

• It is an organized Endeavour to accomplish a specified non- routine and low volume task.

• A project is a complex , non-routine, one time effort limited by time, budget, resources, and performance specifications designed to meet customer needs.

Project Objectives

• Performance - To satisfy specified standards of performance, reliability & safety

• Containment of expenditure within budget• Time Scale- Timely Implementation of project

Project Characteristics

• Project can have a number of starting points but one end.• Complexity• Investment Decision• Focus- Fixed set of objectives/ mission/goal• Time Bound through schedules• Unique• Unity in diversity

Project Characteristics

• Flexibility• Team Spirit• Risk & Uncertainty• Sub contracting• Project Life Cycle• Project feasibility Study

Project Management Institute(PMI)

Project Management Institute(PMI) was founded in 1969 as an international society for project managers. It has more than 2,30,000 members from 125 countries including India. They offer certification courses – CAPM( Certified Associate in Project Management) & PMP( Project Professional Management).

Details of courses are available on www.pmi.org.in

Project Functions

PMI has identified six basic functions:1. Manage the project’s scope to define the goals and the

work to be done in sufficient details to facilitate understanding and correct performance by participants

2. Manage the Human Resources effectively3. Manage communications for smooth running of the

project.4. Managing time by planning and meeting schedules5. Manage Quality so that project results are satisfactory6. Manage Costs to see that project is performed at the

minimum possible cost and within the budget.

Types of Projects

• Construction/Engineering• Research• Reengineering• Procurement• Business Implementation• Science Projects

Project Life Cycle Phases

• Conception Phase – Acceptance of Needs, Project Identification & Identification of Objectives ( SWORT Analysis). Effort Around 2%.

• Definition Phase- Feasibility Report, its appraisal ( Market, Technical, Economic, Managerial and Environmental), Investment Decision, Goals, Specifications, Tasks, Responsibilities. Effort Around 2% .

• Planning & Organizing Phase- Schedules, Budgets, Resources, Risks, Staffing. Effort Around 2%.

Project Life Cycle Phases

• Implementation Phase- Ordering Of Equipment & Contracting, Drawing, civil construction, erection of machinery, Instrumentation, testing & commissioning of plant. Effort around 85%

• Project Clean up Phase- Project Accounts are closed. Drawing, documents & manuals are catalogued & handed over. Outstanding payment is made and dues are collected. Efforts around 3%

Project Management

• It is the application of knowledge , skills, tools and techniques to project objectives to meet stake holders needs and expectations.

• It is planning , monitoring and controlling of all aspects of a project and motivation of all involved to achieve project objectives of safety and within a defined time, cost & performance.

• Project Management is both people and technical oriented. It involve understanding the cause-effect relationship and interactions among socio technical dimensions of projects.

Over View of Project Management

• Planning• Analysis• Selection• Financing• Implementation• Review

Project alignment with Business Strategy

• Strategies involve matching a firm’s strengths & weakness– its distinctive competencies with the opportunities and threats present in external environment. While doing so, internal risks of the company as well external risks to the company must be taken into account.

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Project alignment with Business Strategy

Strategic Planning considers the followings: a. The complementariness and synergies between the

existing assets & growth opportunities. b. The relationship between current growth opportunities

and future growth opportunities( the time series relationship)

c. The impact of new investments on the overall riskiness of the firm.

• Strategic Planning , in essence , lays the framework that helps in identifying valuable investment opportunities which have positive NPV.

Types of Business Strategies

• Concentration• Vertical Integration• Concentric Diversification• Conglomerate Diversification• Stability• Divestment

Tools for Identifying Investment Opportunities

• Porter Model• Industry / Product Life Cycle Approach• Experience Curve

PORTER MODEL

Profit Potential of an industry depends on combined strength of the following five basic competitive forces:

1. Threat of new entrants2. Rivalry among existing forces3. Pressure from substitutes products4. Bargaining Power of Buyers5. Bargaining Power of Sellers

Industry/ Product Life Cycle Approach

• Pioneering Stage - Low Return , Negative NPV• Rapid Growth Stage- High Returns & Positive

NPV• Maturity & Stabilization Stage- Average Return

& NPV Neutral• Decline Stage – Meager Return & Negative

NPV

The Experience Curve

• Investments aimed at reducing costs are essential to the long- term survival and the profitability of the firm. The experience curve is a useful tool for planning such investments.

• The experience curve shows how the cost behaves with respect to the accumulated volume of production. The accumulated volume of production is the total number of the units produced cumulatively from the very beginning.

• In general, the cost per unit declines with the accumulated volume of production. Key factors are learning effects, technological improvements and economies of scale.

The Importance Of Project Management

1. Compression Of Product Life Cycle2. Global Competition3. Knowledge Explosion4. Corporate Down sizing5. Increases Customer Focus6. Small Projects represent Big Problems

Generation & Screening Of Project Ideas

• The search for promising project idea is the first step towards establishing a successful venture.

• Identification of opportunity requires imagination, sensitivity to environment changes and real assessment of what the firm can do.

• The task is partly structured , partly unstructured, partly dependent on convergent thinking, partly requiring objective analysis of quantifiable factors, partly requiring subjective evaluation of qualitative factors, partly amenable to control, partly dependent on fortuitous circumstances.

Generation & Screening Of Project Ideas

To stimulate the flow of investment ideas, the following are helpful:

a. SWORT Analysisb. Clear articulation of objectivesc. Conducive Climate

Business Environment

Six Broad Sectors:1. Economic Sector2. Government Sector3. Technological Sector4. Socio- Demographic Sector5. Competition Sector6. Supplier Sector

Corporate Appraisal

• A realistic appraisal of corporate strengths and weakness is essential for identifying investment opportunities which can be profitability exploited.

• The broad areas of corporate appraisal are: Market & DistributionProductionR& DFinance & Accounting

Scouting for Project Ideas

• Analyze the performance of existing industries• Examine the inputs and outputs of various

industries.• Review imports & exports• Study plan outlays & Govt Guidelines• Look at the suggestions of financial

institutions and development agencies.• Investigate local materials and resources

Scouting for Project Ideas

• Analyze economic & social trends.• Study New Technological Developments• Draw clues from consumption abroad.• Explore the possibility of reviving sick units.• Indentify Unfulfilled Psychological needs.• Attend trade fairs• Stimulate creativity for generating product ideas.

Preliminary Screening

• Compatibility with promoters• Consistent with government priorities• Availability of Inputs• Adequacy of Market• Reasonableness of cost• Acceptability of risk level

Project Rating Index

• Identify factors relevant for project rating.• Assign weights to these factors( Relative

Importance)• Rate the project proposals on various factors,

using a suitable rating scale• For each factor. Multiply the factor rating with

the factor weight to get factor score• Add all the factor scores to get the overall rating

index.

Module 2

Project Appraisal Basic Questions to be answered in a project appraisal

exercise- Can we produce the goods or services? Can we sell the goods or services? Can we earn a satisfactory return on the investment

made in the project?To answer above questions, we do to need a technical

appraisal, a market & demand appraisal and financial appraisal.

Market & Demand Analysis

Key Steps are:i) Situational Analysis & specification of objectivesii) Collection of secondary informationiii) Conduct of Market Surveyiv) Characteristics of the Marketv) Demand Forecasting & Uncertainties in demand

forecastingvi) Marketing Planning For purpose of a market study, information may be

obtained from secondary and /or primary sources

Situational Analysis & Specification of Objectives

• In order to get a feel of the relationship between the product and its market, the project analyst may informally talk to customers, competitors, middlemen and others in the Industry.

• If such a situational analysis generates enough data to measure the market and get a reliable view of projected demand and revenues, a formal study need not be carried out, particularly cost and time considerations so suggest.

• However in most cases, formal study of market & demand is warranted. To carry out such a study , it is necessary to spell out its objectives clearly & comprehensively. Often this means that intuitive and informal goals that guide situational analysis need to be expanded and articulated with greater clarity.

Market & Demand Analysis

• Market & Demand Analysis is carried out on Primary Data & Secondary Data.

• Secondary Data (information) is the information that has been gathered in some other context and is already available .

• While secondary information is available economically , its reliability , accuracy , and relevance for the purpose under consideration must be carefully examined.

• General Sources of Secondary Information are: Census of India, National Sample Survey Reports, Plan Reports, Statistical

Abstract of the Indian Union, India year Book , Statistical Year Book, Economic Survey, Guidelines to Industries, Annual Survey of Industries, Annual Reports of the development wing, ministry of commerce & Industry,

Market & Demand Analysis Secondary Information

• Annual Bulletin of Statistics of exports & imports, Techno- Economic Survey, Industrial potential surveys, The Stock Exchange Directory, Monthly Studies of Production of Selected Industries Monthly Bulletin of RBI, Publications of Advertising Agencies, etc.

• Secondary Information needs to be supplemented with primary information gathered through market survey , specific to the project being appraised, that is likely to be a sample survey.

Market & Demand AnalysisMarket Survey

• The market survey may be a census survey or a sample survey.

• In a census survey, the entire population is covered. Population refers to the totality of all units under consideration in a specific study.

• Census surveys are employed principally for intermediate goods and investment goods, when such goods are used by a small number of firms.

• Census survey is prohibitively costly and may also be infeasible, hence sample survey is practiced.

Market & Demand AnalysisSample Survey- Steps

• Define the target population.• Select the sampling scheme and sample size.• Develop the questionnaire.• Scrutinize the information gathered.• Analyze and interpret the information

collected

Market & Demand AnalysisCharacterization of the Market

• Effective demand in the past & present• Breakdown of Demand- Nature of the product,

Consumer Group, Geographical Division• Price• Methods of Distribution & Sales Promotion• Consumers• Supply & Competition• Government Policy

Market & Demand AnalysisMethods of Demand Forecasting

I Qualitative Methods Jury Of Executive Method Delphi MethodII Time Series Methods Trend Projection Method Exponential Smoothing Method Moving Average MethodIII Causal Methods Chain Ratio Method Consumption Level Method End Use Method Leading Indicator Method Econometric Method

Market & Demand AnalysisUncertainties in Demand Forecasting

Sources of Uncertainty• Inadequacy of data due to lack of standardization,

Few Observation, Influence of abnormal factors• Limitations in methods of forecasting due to inability

to handle unquantifiable factors, unrealistic assumptions ,etc.

• Environmental Changes – Technological, Shift in Govt. Policy, Development on the International Scene, Discovery of New Sources of Raw Material & Vagaries of Monsoon

Market & Demand AnalysisMarketing Planning Components

• Current Marketing Situation• Opportunity & issue analysis• Objectives• Marketing strategy• Action program

MARKET PLANNINGCurrent Marketing Situation

• Market Situation• Competitive Situation• Distribution Situation• Macro Environment

MARKETING ANALYSISMarketing Strategy

• Target Segment• Positioning• Product Line• Price• Distribution• Sales Force• Sales Promotion• Advertising

TECHNICAL ANALYSIS

The broad purpose of technical analysis is to:a. To ensure that the project is technically feasible in

the sense that all the inputs required is technically available

b. To facilitate the most optimal formulation of the project in terms of technology, size, location

TECHNICAL ANALYSIS

Technical Analysis include following:• Manufacturing process/technology• Technical arrangements• Materials & inputs• Product mix• Plant Capacity• Location & site• Machinery & equipments• Structure &civil works

TECHNICAL ANALYSIS

• Environmental aspects• Project charts & layouts• Project implementation schedule• Need for considering alternatives

Financial Appraisal

• Cost of Project• Means of Financing• Estimate of sales & production• Cost of Production• Working Capital requirement & its financing• Profitability projections• Projected cash flow statement• Projected Balance Sheet

Cost of the Project

Cost of the project represents the total of all items of outlay associated with a project which are supported by long- term funds.

It is sum of the outlays on the following :• Land & site development• Buildings & civil works• Plant & Machinery• Technical know-how & engineering fees• Expenses on foreign technicians and training of Indian

technicians abroad.

Cost of the Project

• Miscellaneous fixed costs• Preliminary & capital issues expenses• Pre-operative expenses• Margin money of working capital• Initial Cash losses

Means of Finance

• Share capital• Term Loans• Debenture capital• Deferred credit• Incentive sources• Miscellaneous sources

Planning The Means of Finance

The guidelines & consideration while planning the means of finance are:

Norms of Regulatory Bodies & Financial Institutions

Key Business ConsiderationsCostRiskControlFlexibility

Estimates of Sales & Production

• Starting point for profitability projections is the forecast of sales revenues.

• Sales and production are closely inter-related, hence they must be estimated together.

• A reasonable assumption with respect to capacity utilization :• First year- 40-50%, Second year- 50-80%, & Third year onwards -80-90%.• The selling price considered should be the price realizable by

the company net of excise duty. It shall , however include dealers’ commission ( Sales Expenses).

Cost of Production

Major components of cost of production are:• Material cost• Labour cost• Utilities cost• Factory overhead cost

Working Capital Requirement & its Financing

The working capital requirement consists of the following:

• Raw Materials & Components• Stock of Work in Process• Stocks of finished goods• Debtors• Operating Expenses• Consumables

Sources of Working Capital

1. Working Capital advances from commercial banks. Aggregate permissible bank finance as per lending norms ( Tondon

committee, Chorey committee) Certain Amount of margin against Current Asset to be provided by

the firm.Raw Materials- 10-25%Work in Process- 20-40%Finished Goods- 30-50%Debtors- 30-50%2. Trade Credit3. Accruals & Provisions4. Long Term Sources of Financing

PROFITABILITY PROJECTIONS(ESTIMATE OF WORKING CAPITAL)

The estimates of working results may be prepared along with the following lines:

A. Cost of ProductionB. Total Administrative ExpensesC. Total Sales ExpensesD. Royalty & Know-how payableE. Total cost of production (A+B+C+D)F. Expected SalesG. Gross Profit before interestH. Total Financial ExpensesI. DepreciationJ. Operating Profit ( G-H-I)

PROFITABILITY PROJECTIONS(ESTIMATE OF WORKING CAPITAL

K Other IncomeL Preliminary expenses written offM Profit /loss before taxation( J+k-L)N Provision for taxO Profit after Tax (M-N)Less Dividend on - Preference Capital - Equity CapitalP Retained ProfitQ Net Cash Accrual (P+I+L)

PROJECTED CASH FLOW STATEMENTSources of Funds

1. Share Issue2. Profit before Tax with interest added back3. Depreciation provision for the year4. Development rebate reserve5. Increase in secured medium & long range borrowings for

the project6. Other medium/long- term loans7. Increase in unsecured loans and deposits8. Increase in bank borrowings for working capital9. Increase in liabilities for deferred payment(including

interest) to machinery suppliers

PROJECTED CASH FLOW STATEMENT Sources of Funds

10. Sale of fixed assets11.Sale of investments12. Other IncomeTotal ( A)

PROJECTED CASH FLOW STATEMENT Disposition of Funds

• Capital Expenditure for the project• Other normal capital expenditure• Increase in working capital ( Current Assets other

than cash)- ( Current liabilities other than bank borrowings)

• Decrease in secured medium & long term borrowings

• Decrease in Unsecured loans & deposits• Decrease in bank borrowings for working capital

PROJECTED CASH FLOW STATEMENT Disposition of Funds

• Decrease in liabilities for deferred payments(including interest to machinery suppliers)

• Increase n investments in other companies• Interest on term loans• Interest on bank borrowings for working

capital• Taxation

PROJECTED CASH FLOW STATEMENT Disposition of Funds

• Dividends- Equity & Preferential• Other expenditure( Indicate Details)• Total (B) ----- Opening Balance of cash in hand and at

Bank ------ Net Surplus/ Deficit(A-B) ------- Closing balance of cash in hand & at bank

Assignment On Marketing & Demand Analysis

1.Covering Page• Title of Project• Group Members2. Market & Demand Analysis of

Industry( Project) in India3. Sales Projections for Next Seven Years of the

project selected with the technique decided for demand analysis.