PROE 11-Project

Management
[Link].,
Department of Production Engineering,
National Institute of Technology,
Tiruchirappalli

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PROE 11-Project Management

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Syllabus

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 COURSE OUTCOMES:

• Understand the Method for Project

Identification & appraisal.

• Develop & Analyze quantitative models for

Project selection & Scheduling.

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 Unit-1
• Introduction - Project Management: An Overview – Types,
Characteristics of Projects – Project life cycle.
Identification of investment opportunities - Screening and
Selection, Project Appraisal

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 Definition of project
• A project is an endeavor to accomplish a specific
objective through a unique set of interrelated
activities and the effective utilization of resources.

• The Project Management Institute defines a project

as
“a temporary endeavor undertaken to create a
unique product or service”

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 The following are some examples of
projects:
• Staging a theatrical production
• Developing and introducing a new product
• Developing a set of apps for mobile business transactions
• Planning a wedding
• Modernizing a factory
• Organizing and hosting a conference
• Designing and producing a brochure
• Executing an environmental cleanup of a contaminated site
• Holding a high school reunion
• Building a shopping mall
• Performing a series of surgeries on an accident victim
• Organizing a community festival
• Consolidating two manufacturing plants
• Rebuilding a town after a natural disaster
• Hosting a dinner for 20 relatives
• Designing a business internship program for high school students 7
 What is Project Management?
• The purpose of project management is to manage a
system of tasks, resources, people, and organizations
to accomplish the project goal; this is what makes it
approach to management.

• Project management also relies upon elements of the

classical and behavioral viewpoints.

• It is, in fact, a good example of the contingency

approach because it is a management philosophy and
methodology oriented toward accomplishment of just
one type of undertaking projects.
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Factors constraining project success

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Three Dimensional Project Goal

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Project Examples

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 CHARACTERISTICS OF PROJECT

(1) Objectives : A project has a set of objectives or a mission. Once the

objectives are achieved the project is treated as completed.
(2) Life cycle : A project has a life cycle. The life cycle consists of five
stages i.e. conception stage, definition stage, planning & organising
stage, implementation stage and commissioning stage.
(3) Uniqueness : Every project is unique and no two projects are
similar. Setting up a cement plant and construction of a highway are
two different projects having unique features.
(4) Team Work : Project is a team work and it normally consists of
diverse areas. There will be personnel specialized in their respective
areas and co-ordination among the diverse areas calls for team work.
(5) Complexity : A project is a complex set of activities relating to
diverse areas. 13
(6) Risk and uncertainty : Risk and uncertainty go hand in hand with
project. A risk-free, it only means that the element is not apparently
visible on the surface and it will be hidden underneath.
(7) Customer specific nature : A project is always customer specific.
It is the customer who decides upon the product to be produced or
services to be offered and hence it is the responsibility of any
organization to go for projects/services that are suited to customer
needs.
(8) Change : Changes occur through out the life span of a project as a
natural outcome of many environmental factors. The changes may very
from minor changes, which may have very little impact on the project,
to major changes which may have a big impact or even may change the
very nature of the project.
(9) Optimality : A project is always aimed at optimum utilization of
resources for the overall development of the economy.
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(10) Sub-contracting : A high level of work in a project is done
through contractors. The more the complexity of the project, the
more will be the extent of contracting.

(11) Unity in diversity : A project is a complex set of thousands of

varieties. The varieties are in terms of technology, equipment and
materials, machinery and people, work, culture and others.

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 CLASSIFICATION OF PROJECTS
The location, type, technology, size, scope and speed are normally the
factors which determine the effort needed in executing a project.
Project can be classified under different heads, some of which are
shown in figure

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 Types of projects
• A project is considered to be Short Term if it could be concluded
during a year; and Long Term if it could take more than a year.

Examples of short term projects Examples of Long term projects

•Running a political
• Bridge Demolition movement/election campaign
•Relief Aid to Natural •Construction of Mega
Disaster Areas, or for wounded Structures/Dams/bridges/Sky
soldiers Scrapers/Cities e.g. Sydney
•Rob a bank Opera (Jan 1970-Okt 1973)
•Shooting a Documentary •Development of Complex
or a Photo-shoot Medicines’ Formulae/
•Buying/ selling a Car/ Pharmaceuticals
house

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Large, Medium and small projects

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Classification of Projects by Type and
Area

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 Sequential vs. Parallel Projects
• There are two main types according to the workflow management of the projects.
• Sequential projects: Task should be done in a specific order.
• Parallel projects: Tasks can be done in any order.

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Internal an External project

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PROJECT MANAGEMENT: THE PERSON,
THE TEAM, THE METHODOLOGY
• The Person: The most important feature about
project management is the role of the project
manager.
• Overall responsibility to plan , direct , and
integrate the efforts of all stakeholders to
achieve project goals lies with a single person,
the project manager.

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• The Team: Project management is bringing
together individuals and groups to form a
single, cohesive team working toward a
common goal.
• Perhaps more than any other human endeavor,
project work is teamwork.

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The Methodology:

• The project manager and the project team

utilize a “ project management methodology.”
•
• This methodology is composed of organization
structure, information processing, and
practices and procedures that permit
integration of all project elements—tasks,
resources, information, stakeholders, etc.

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 Project Manager
• A Project Manager is a professional in the field of project
management.

• Project managers can have the responsibility of the planning,

execution and closing of any project, typically relating to
construction industry, architecture, aerospace and defense,
computer networking, telecommunication or software
development.

• They are organized, passionate and goal oriented, who

understand what projects have in common, and their strategic
role in how organizations succeed, learn and change.
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FUNCTIONS
OF PROJECT
MANAGER

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 Responsibilities of a project manager
1. The project manager is the person responsible for managing the project.
2. The project manager is the person responsible for accomplishing the project
objectives within the constraints of the project. He is responsible for the
outcome of the project.
3. The project manager is involved with the Planning, Controlling and
monitoring, also managing and directing the assigned project resources to
best meet project objectives
4. The project manager controls and monitors project scope, time and cost and
managing project requirements.
5. The project manager examines the organizational culture and determines
whether project management is recognized as a valid as role with
accountability and authority for managing the project.
6. The project manager is responsible for identifying, monitoring and
responding to risk
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Functions of Management

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 Project Management Process
1. Establish project objective.
2. Define scope. (customer requirements, a statement of work, as
well as a list of deliverables and associated acceptance criteria)
3. Create a work breakdown structure. (Subdivide the project scope
into pieces or work packages)
4. Assign responsibility.
5. Define specific activities.
6. Sequence activities. (Network diagram)
7. Estimate activity resources.
8. Estimate activity durations.
9. Develop project schedule.
10. Estimate activity costs.
11. Determine budget.

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 Project Life Cycle
• Project life cycle is a series of phases of a project from initiation to
completion.
• The life cycle gives a practical approach to problem solving applied to all
aspects of a project
• The generic project life cycle has four phases:
• Initiating
• Planning
• Performing and
• Closing the project.

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Project Life Cycle

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 Project Initiation
• Identification of need and sponsor.
• Once projects are selected, they are formally authorized using a
document referred to as a project charter.
• The charter may include the rationale or justification for the
project; project objective and expected benefits; general
requirements and conditions such as amount of funds authorized,
required completion date, major deliverables, and required
reviews and approvals; and key assumptions.
• If the organization decides to use external resources (a
contractor) to perform the project, the organization will prepare
a document called a request for proposal (RFP)
• Evaluating the competent proposals and select the contractor
and agreement is signed.
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 Planning
• Preparation of roadmap or game plan, that shows how the project
scope will be accomplished within budget and on schedule.

• It is important to plan the work and then work the plan.

• The planning involves determining what needs to be done

(scope, deliverables), how it will get done (activities, sequence),
who will do it (resources, responsibility), how long it will take
(durations, schedule), how much it will cost (budget), and
what the risks are.

• The result of this effort is a baseline plan that is a set of integrated

documents that shows how the project scope will be accomplished
within budget and on schedule and is used as a benchmark to
which actual performance can be compared.
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Planning
 Performing
• The project team, led by the project manager, will execute the
plan and perform the activities to produce all the deliverables
and to accomplish the project objective.

• This phase results in the accomplishment of the project

objective, leaving the customer satisfied that the full scope of
the work and deliverables were completed according to
specifications, within budget, and on time.

• While the project work is being performed, it is necessary to

monitor and control the progress of the project work to
ensure that everything is going according to plan and the project
objective will be accomplished.

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Performing

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 Closing
• The process of closing the project involves various actions,
including collecting and making final payments, evaluating
and recognizing staff, conducting a post-project evaluation,
documenting lessons learned, and archiving project
documents.
• An important task during this phase is evaluating
performance of the project. The project team should identify
lessons learned and make recommendations for improving
performance on future projects.
• Feedback should also be obtained from the sponsor or
customer to determine whether the anticipated benefits from
the project were achieved, assess the level of customer
satisfaction, and obtain any feedback that would be helpful in
future business relationships with this customer or other
customers.
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Project Life Cycle

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 Reasons for Project Failure

1. Poor project and program management discipline

2. Lack of executive-level support
3. No linkage to the business strategy
4. Wrong team members
5. No measures for evaluating the success of the project
6. No risk management
7. Inability to manage change

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 Project selection

• Project selection is the process of evaluating individual

projects or groups of projects, and then choosing to implement
some set of them so that the objectives of the parent
organization will be achieved.

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The process of project selection consists of following
stages :
• Idea generation
• Environment appraisal.
• Corporate appraisal
• Scouting for project ideas.
• Preliminary screening.
• Project rating index
• Sources of positive Net Present Value.
• Entrepreneur qualities.

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Idea Generation :- Project selection process starts with the generation
of a project idea. Ideas are based on technological breakthroughs and
most of the project ideas are variants of present products or services.
To stimulate the flow of ideas, the following are helpful:

SWOT Analysis :- SWOT is an acronym for strengths, weaknesses,

opportunities and threats.
SWOT analysis represents conscious, deliberate and systematic effort
by an organisation to identify opportunities that can be profitably
exploited by it. Periodic SWOT analysis facilitates the generation of
ideas.
Operational objectives of a firm may be one or more of the following.
• Cost reduction.
• Productivity improvement.
• Increase in capacity utilisation.
• Improvement in contribution margin.
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Fostering a conducive climate :- To tap the creativity of people
and to harness their entrepreneurial skills, a conducive organisation
climate has to be fostered.
The project ideas can be generated from various internal and external
sources. These are :-
• Knowledge of market, products, and services.
• Knowledge of potential customer choice.
• Emerging trends in demand for particular product.
• Scope for producing substitute product.
• Market survey & research.
• Going through Professional magazines.
• Making visits to trade and exhibitions.
• Government guidelines & policy.
• Ideas given by the experienced person.
• Ideas by own experience.
• SWOT analysis.
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Environment appraisal :- An entrepreneur or a firm
systematically appraise the environment and assess its competitive
abilities.

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Corporate Appraisal :- A realistic appraisal of corporate strengths
and weaknesses is essential for identifying investment opportunities
which can be profitably exploited.

The broad areas of corporate appraisal and the important aspects to be

considered under them are as follow
• Marketing and Distribution
• Production and Operations
• Research and Development
• Corporate Resources and Personnel
• Finance and Accounting

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Strategic Planning and Portfolio
Alignment

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 Strategic Analysis: PEST Analysis
• PEST analysis is a business measurement tool.

• An acronym for Political, Economic, Social and Technological

factors.

• This type of analysis is used to gauge external factors that

could impact the profitability of a company.

• Generally, it is more effective with larger organizations that

are more likely to experience the effects of macro events.

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 SWOT Analysis
• SWOT is an acronym for Strengths, Weakness, Opportunities
and Threats.
• Strengths are positive internal factors that a company can use
to accomplish its mission, goals, and objectives. e.g., brand
image, experienced sales force, patents, special knowledge
• Weaknesses are negative internal factors that inhibit a
company’s ability to accomplish its mission, goals, and
objectives. e.g., lack of capital, inferior location
• Opportunities are positive external options that a firm can
exploit to accomplish its mission, goals and objectives.
• Threats are negative external forces that inhibit a company’s
ability to achieve its mission, goals and objectives.
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 PORTER’S FIVE FORCES MODEL
• Porter five forces analysis is a framework for industry
analysis and business strategy development.
• It draws upon industrial organization economics to derive
five forces that determine the competitive intensity and
therefore attractiveness of a market.
• Attractiveness in this context refers to the overall industry
profitability.
• Supplier Power
• Buyer Power
• Competitive Rivalry
• Threat of Substitution
• Threat of New Entry
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The Five Forces

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 Guiding Principles
• The vision describes the future of the organization
• “vivid description of a preferred future”
• The mission statement provides a mechanism for achieving
the vision
• “organization’s core purpose, core values”, beliefs, culture,
primary business, primary customers

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 Strategic Objectives
• Means of achieving the vision and mission.
• Objective setting occurs annually.
• Describe short term and long-term results.
• Describe measures of achievement.
• Effective objectives are SMART
• Specific
• Measurable
• Achievable
• Results-based
• Time-specific
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 Portfolio Alignment
• Assess organization’s ability to perform projects
• Portfolios
• Programs
• Projects and subprojects

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Criteria for Project Selection Models
• Realism - reality of manager’s decision.
• Capability- able to simulate different scenarios and optimize
the decision.
• Flexibility - provide valid results within the range of
conditions.
• Ease of Use - reasonably convenient, easy execution, and
easily understood.
• Cost - Data gathering and modeling costs should be low
relative to the cost of the project.
• Easy Computerization - must be easy and convenient to
gather, store and manipulate data in the model.

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 Project selection models
2 Basic Types of Models
• Non-numeric
• Numeric

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 Nonnumeric Models
• Sacred Cow - project is suggested by a senior and powerful
official in the organization.
• Operating Necessity - the project is required to keep the system
running.
• Competitive Necessity - project is necessary to sustain a
competitive position.
• Product Line Extension - projects are judged on how they fit
with current product line, fill a gap, strengthen a weak link, or
extend the line in a new desirable way.
• Comparative Benefit Model - several projects are considered and
the one with the most benefit to the firm is selected.

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 Unweighted 0-1 Factor Model
• A set of relevant factors is selected by management & then listed in a
preprinted form. One or more raters score the project on each factor,
whether it qualifies for an individual criterion.

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 Unweighted factor scoring model
• The earlier model had the drawback of considering all criteria
equally important & involves no gradation of the degree to
which a specific project meets the various criteria.

• This model addresses the second drawback by constructing a

simple linear measure of the degree to which the project being
evaluated meets each of the criteria contained in the list.

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UNWEIGHTED FACTOR SCORING
MODEL

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Weighted factor scoring model
• Numeric weights reflecting the relative importance of each individual
factor are added.
• It is the sum of products of scores and weights on each criterion.
• It is also useful for improvement of the project.

The weight may be generated by any of the following techniques:

1. Delphi technique (developing numerical values which
are equivalent to subjective , verbal measures of relative
value.)
2. Analytical hierarchy process
3. Successive comparison / pair wise comparisons

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 Weighted factor scoring model
• Use a weighted scoring model to chose an automobile. The performance
measures and scores, as also the relative weights of each criterion are
shown in the following table.

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WEIGHTED FACTOR SCORING MODEL

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WEIGHTED FACTOR SCORING
MODEL

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 Payback period

• It is the no. of years required for the project to repay the initial fixed
investment.
• The faster the investment recovered, the less the risk.

For example, if the investment required for a project is Rs. 20,000 and
it is likely to generate cash flow of Rs. 10,000 for 5 years. Pay back
Period will be 2 years. It means that investment will be recovered in
first 2 years of the project.

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 Average Rate of Return
• This method is also called average rate of return method.
• This method is based on accounting information rather than cash flows.
• Does not take into account the time value of money.

PROBLEM:
• Initial fixed investment=Rs. 5,00,000
• Annual net cash inflow=Rs. 1,00,000
• Average annual profits=Rs. 70,000
• Calculate the payback period & Average Rate of return.

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 Discounted Cash flow/NPV
• Under these methods the projected future cash flows are discounted by
a certain rate called cost of capital.
• The second main feature of these methods is that they take into account
all the benefits and costs accruing during the life time of the project.
• Determines the NPV of all cash flows by discounting them by required
rate of return.
• Higher the NPV, the values are better.

– Ft=net cash flow in period t

– k=required rate of return
– I0=Initial cash investment

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 Internal Rate of Return (IRR)
• IRR=discount rate that equates the present values of the cash inflows and
outflows.
• IRR is simply the rate of return that the firm earns on its capital budgeting
projects.

• CFt = Cash flow for time ‘t’

• I0=Initial cash investment

• Project with higher IRR value is preferred.

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 Profitability index

• Profitability index is the ratio of payoff to investment of a

proposed project.

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 Practice
• Consider the following 2 projects

Which model will you chose to evaluate the 2 projects. Why?

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 Project Appraisal
Definition: Project appraisal is the analysis of costs and benefits of a
proposed project with a goal of assuring a rational allocation of limited
financial resources amongst alternate investment opportunities with the
objective of achieving specific goals.

• Appraisal of a proposed project includes the following analyses :

1. Economic analysis
2. Financial analysis
3. Market analysis
4. Technical analysis
5. Managerial competence
6. Ecological analysis
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 Economic Analysis
Under economic analysis the aspects highlighted include
• Requirements for raw material
• Level of capacity utilization
• Anticipated sales
• Anticipated expenses
• Proposed profits
• Estimated demand

It is said that a business should have always a volume of profit clearly

in view which will govern other economic variable like sales, purchase and
expenses alike.

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 Financial Analysis
• It is finance only that facilitates an entrepreneur to bring together the
labour, machines and raw materials to combine them to produce goods. In
order to adjudge the financial viability of the project, the following aspects
need to be carefully analyzed :
• Cost of capital
• Means of finance
• Estimates of sales and production
• Cost of production
• Working capital requirement and its financing
• Estimates of working results
• Break-even point
• Projected cash flow
• Projected balance sheet.

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 Market Analysis
• Before the production actually starts, the entrepreneur needs to
anticipate the possible market for the product.
• He has to anticipate who will be the possible customer for his product
and where his product will be sold. This is because production has no
value for the producer unless it is sold. In fact, the potential of the
market constitutes the determinant of possible reward from
entrepreneurial career.
• The commonly used methods to estimate the demand for a product are
as follows.
• 1. Opinion polling method
• 2. Life Cycle Segmentation Analysis

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 Technical Analysis
• Technical analysis implies the adequacy of the proposed plant
and equipment to prescribed norms. It should be ensured
whether the required know how is available with the
entrepreneur. The following inputs concerned in the project
should also be taken into consideration.
• Availability of Land and site.
• Availability of Water Power, transport, communication facilities.
• Availability of servicing facilities like machine shop, electric
repair shop etc.
• Coping with anti pollution law.
• Availability of work force.
• Availability of required raw material as per quantity and quality.

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 Management Competence
• Management ability or competence plays an important role in
making an enterprise a success. In the absence of Managerial
Competence the project which are otherwise feasible may fail.
• On the contrary, even a poor project may become a successful
one with good managerial ability.
• Hence, while doing project appraisal, the managerial
competence or talent of the promoter should be taken into
consideration.

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 Ecological Analysis
• In recent years, environmental concerns have assumed great
deal of significance.
• Ecological analysis should also be done particularly for major
projects which have significant implication like power plant
and irrigation schemes, and environmental pollution industries
like bulk-drugs, chemical and leather processing.
• The key factors considered for ecological analysis are :
[Link] damage
[Link] measure

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Recap

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 Syllabus

• Market and demand analysis- market survey-

demand forecasting methods - Technical
analysis – manufacturing process, materials-
product mix, plant location-project charts and
layouts.
 Key Step in Market & Demand
Analysis and their Inter-relationship
 SITUATIONAL ANALYSIS AND
SPECIFICATIONS OF OBJECTIVES
❑ Get a “feel” for the relationship between the product and it’s market, the
project analyst may informally talk to customers, competitors, middlemen
and other in the industry.
❑ Look at the experience of the company to learn about the purchasing
power of customer, action & strategies of competitors.
❑ The objectives of market & Demand analysis, to answer the
following question : (for air coolers)
✓ Who are the buyers of air cooler?
✓ What is the total current demand for air coolers?
✓ What price will the customer be willing to pay for the improved air cooler.
✓ What price & warranty will ensure its acceptance?
✓ What are the prospects of immediate sales? etc.
 Collection of Secondary
Information
❑ Secondary Information is information that has been gathered
in some other context and is already available.
❑ Secondary information provides the base and starting point for the market
& Demand analysis.
✓ General Sources of Secondary Information
✓ Industry Specific Sources of Secondary Information
✓ Evaluation of Secondary Information
 Sources of Secondary Information
• Census survey
• National sample survey reports
• 5 years plans
• India year book
• Economic survey reports
• Political survey reports
• Annual survey of industries
• Annual bulletin of export and import
• Stock exchange directory
• Monthly bulletins of RBI
• Publications of advertising agencies
• Industry potential surveys
 Evaluation of secondary information
While secondary information is available economically and readily its
reliability, accuracy, and relevance for the purpose under consideration must
be carefully examined.
The market analyst should seek to know
(i) Who gathered the information? What was the objective?
ii) When was information gathered? When was it published?
(iii) How representative was the period for which information was
gathered?
(iv) Have the terms in the study been carefully and unambiguously
gathered?
(v) What was the target population?
(vi) How was the sample chosen?
(vii) How representative was the sample?
(viii) How satisfactory was the process of information gathering?
(ix) What was the degree of sampling bias and non-response
bias in the information gathered?
(x) How properly was the information by respondents?
(xi) Was statistical analysis properly applied?
 Conduct of Market Survey
❑ The market survey may be a census survey or a sample survey.
❑ Census survey are employed principally for intermediate goods &
investment goods when such goods are used by a small number of
firms.
(i) Total demand and rate of growth of demand;
(ii) Demand in different segments of the market;
(iii) Income and price elasticity of demand;
(iv) Motives for buying;
(v) Purchasing plans and intentions;
(vi) Satisfaction with existing products;
(vii) Unsatisfied needs;
(viii) Attitudes toward various products
(ix) Distributive trade practices and preferences;
(x) Socio-economic characteristics of buyers.
 Steps in a Sample Survey
– Define the Target Population.
– Select the Sampling Scheme and Sample Size.
– Develop the Questionnaire.
– Recruit and Train the Field Investigators.
– Obtain Information as Per the Questionnaire from the Sample of
Respondents.
– Scrutinizes the Information Gathered.
– Analyze and interpret the Information.
 Characterization of the Market
❑ Effective Demand in the Past and Present
• Production + Imports – Exports – Change in stock level
❑ Breakdown of Demand
– Nature of Product
– Consumer Groups
– Geographical Division
❑ Price
❑ Methods of Distribution and Sales Promotion
❑ Types of Consumers
❑ Listing of Supply and Competition
❑ Government Policy
 Demand Forecasting
❑ After Collecting the information from primary and secondary source , estimate the
future demand

❑ Predicting the future

❑ Qualitative forecast methods
– subjective
❑ Quantitative forecast methods
– based on mathematical formulas
❑ Depend on
– time frame
– demand behavior
– causes of behavior
 Forecasting
Forecasting methods may be broadly divided into three categories i.e.

• Qualitative methods,

• Time series projection methods and

• Causal methods
 Demand Forecasting
❑ Qualitative Methods
– These methods rely essentially on the judgment of experts to translate
qualitative information into quantitative estimates
– Used to generate forecasts if historical data are not available (e.g.,
introduction of new product)
– The important qualitative methods are:
• Jury of Executive Method
• Delphi Method
 Jury of Executive Opinion Method
❑ Rationale
– Upper-level management has best information on latest product
developments and future product launches.
❑ Approach
– Small group of upper-level managers collectively develop forecasts –
Opinion of Group.
❑ Main advantages
– Combine knowledge and expertise from various functional
areas.
– People who have best information on future developments generate the
forecasts.(economic climate , competitive environment, consumer
preference, technology development..etc.,)
 Jury of Executive Opinion Method
❑ Main drawbacks

– No individual responsibility for forecast

– Risk that few people dominate the group

– The biases underlying Subjective estimates cannot be unearthed easily.

– Reliability is questionable
 Delphi Method
❑ Rationale

– Eliciting the opinions of a group of experts with the help of mail

survey.
– Anonymous written responses encourage honesty and avoid that a
group of experts are dominated by only a few members.
Delphi Method
 Delphi Method
❑ Main advantages
– Generate consensus
– Can forecast long-term trend without availability of historical data
❑ Main drawbacks
– Slow process
– Experts are not accountable for their responses
– Little evidence that reliable long-term forecasts can be generated with
Delphi or other methods
❑ Typical application
– Long-term forecasting
– Technology forecasting
 Time Series Projection Methods
• These methods generate forecasts on the basis of an analysis of the
historical time series.
• Assume that what has occurred in the past will continue to occur in
the future
• Relate the forecast to only one factor - time

• The important time series projection methods are:

– Trend Projection Method
– Exponential Smoothing Method
– Moving Average Method
 Time Series Projection Methods
Advantages
• It uses all observations
• The straight line is derived by statistical procedure
• A measure of goodness fit is available

Disadvantages
• More complicated
• The results are valid only when certain conditions are satisfied
 Trend Projection Method
It involves
(a) Determining the trend of consumption by analysing past
consumption statistics.
(b) Projecting future consumption by extrapolating the trend.

The most commonly used relationship is linear relationship.

This relationship may be estimated by using one of the following

methods: (i) visual curve fitting method, and (ii) least squares
method.
 Exponential Smoothing
• Exponential smoothing, forecasts are modified in the light of
observed errors.
• If the forecast value for year t, Ft, is less than the actual value for
year t, St, the forecast for the year t+1, Ft + 1 ..
Exponential Smoothing Example
 Practice problem
• In general exponential smoothing method the forecast for t+1 is
, smoothing parameters is 0.2 ,F1= 29, Forecost the
period of 2 to 11.
t St
1 28
2 29
3 28.5
4 31
5 34.2
6 32.7
7 33.5
8 31.8
9 31.9
10 34.3
11 35.2
 Moving Average
The forecast for the next period is equal to the average of the sales of preceding periods

❑ Naive forecast
– demand in current period is used as next period’s forecast
❑ Simple moving average
– uses average demand for a fixed sequence of periods
– stable demand with no pronounced behavioral patterns
❑ Weighted moving average
– weights are assigned to most recent data
❑ According to the moving average method
Weighted Moving Average
Weighted Moving Average
Example
 Causal Methods
• Causal methods seek to develop forecasts on the basis
of cause-effects relationships specified in an explicit
and quantitative manner.
– Chain Ratio Method
– Consumption Level Method
– End Use Method
– Leading Indicator Method
– Econometric Method
 Chain Ratio Methods
The potential sales of a product may be estimated by applying a series
of factors to a measure of aggregated demand

Market Potential for heated coats in the U.S.:

– Population (U) = 280,000,000
– Proportion of U that are age over 16 (A) = 75%
– Proportion of A that are men (M) = 50%
– Proportion of M that have incomes over $65k (I) = 50%
– Proportion of I that live in cold states (C) = 50%
– Proportion of C that ski regularly (S) = 10%
– Proportion of S that are fashion conscious (F) = 30%
– Proportion of F that are early adopters (E) = 10%
– Average number of ski coats purchased per year (Y) = .5 coats
– Average price per coat (P) = $ 200
 Chain Ratio Methods
• Market Potential for heated coats in the U.S.:

• Market Sales Potential = U x A x M x I x C x S x F x E x Y = 280 Million x

0.75 x 0.50 x 0.50 x 0.50 x 0.10 x 0.30 x 0.10 x200

= $7.88 Million
 Consumption Level Method
Useful for a product which is directly consumed, this method estimates
consumption level on the basis of elasticity coefficients, the important
ones being the income elasticity of demand and the price elasticity of
demand.

Income Elasticity of demand: This reflects the responsiveness of

demand to variations in income. It is calculated as:
 Consumption Level Method
Price Elasticity of demand : This reflects the responsiveness of demand to
variations in price. It is calculated as:
Example— The following information is available on
quantity demanded and income level: Q1 = 50, Q2 = 55, I1 =
1,000, and I2 = 1,020. What is the income elasticity of
demand?

Example— The following information is available about a

certain product: P1 = Rs. 600, Q1 = 10,000, P2 = Rs. 800, Q2 =
9,000. What is the price elasticity of demand?
 End Use Method
Suitable for estimating the demand for intermediate products.
(Milk, Water, Cement,etc)
• Also called as consumption coefficient method.
Steps
1. Identify the possible uses of the products.
2. Define the consumption coefficient of the product for various
uses.
3. Project the output levels for the consuming industries.
4. Derive the demand for the project.
 End Use Method

More important, the consumption coefficients may vary from one period
to another in the wake of technological changes and improvements in the
methods of manufacturing. Hence, the end-use method should be used
judiciously.
 Leading Indicator Method
• Leading indicators are variables which change ahead of other
variables, the lagging variables. Hence, observed changes in
leading indicators may be used to predict the changes in
lagging variables.
Two basic steps:
1. Identify the appropriate leading indicator(s)
2. Establish the relationship between the leading indicator(s) and
the variable to forecast.
 Econometric Method
An advanced forecasting tool, it is a mathematical expression of
economic relationships derived from economic theory.

• It forecast the future behaviour of the economic variables

incorporated in the model
Econometric Method
 Econometric Method
Advantages
• The process sharpens the understanding of complex cause –
effect relationships.
• This method provides basis for testing assumptions.
Disadvantages
• It is expensive and data demanding.
• To forecast the behavior of dependant variable, one needs the
projected values of independent variables.
 Uncertainties in Demand
Forecasting
The analysis of past and present market, which serves as the
springboard for the projection exercise, may be vitiated by the
following inadequacies of data:

Data about past and present markets.

– Lack of standardization:- product, price, quantity, cost,
income….
– Few observations
– Influence of abnormal factors:- war, natural calamity
Methods of forecasting
– Inability to handle unquantifiable factors
– Unrealistic assumptions
– Excessive data requirement
 Uncertainties in Demand
Forecasting
Environmental changes
– Technological changes
– Shift in government policy
– Developments on the international scene
– Discovery of new source of raw material
– Vagaries of monsoon
 Coping With Uncertainties
• The uncertainties in demand forecasting, adequate efforts, along the
following lines may be made to cope with uncertainties.
– 1. Conduct analysis with data based on uniform and standard
definitions.
– 2. In identifying trends, coefficients, and relationships, ignore the
abnormal or out-of-the-ordinary observations.
– 3. Critically evaluate the assumptions of the forecasting methods and
choose a method which is appropriate to the situation.
– 4. Adjust the projections derived from quantitative analysis in the light
of a due consideration of unquantifiable, but significant influences.
– 5. Monitor the environment imaginatively to identify important
changes.
– 6. Consider likely alternative scenarios and their impact on market and
competition.
– 7. Conduct sensitivity analysis to assess the impact on the size of
demand for unfavourable and favourable variations of the determining
factors from their most likely levels.
 Market planning
Current marketing situation
- Market, Competition, Distribution, PEST.
Opportunity and issue analysis - SWOT
Objectives- Break even, % market share…
• Marketing strategy- target segment, positioning, 4 Ps (Product, Price,
Place and Promotion)
Action program- Quarter 1, Q2, Q3….
Market planning
 Technical Analysis
• Analysis of technical and engineering aspects is done continuously when a
project is being examined and formulated.

The purpose of the technical analysis is :

• To ensure that the project is technically feasible, that all inputs required
for the project are available.

• To facilitate the most optimal formulation of the project in terms of

technology, size, location and so on.
 Technical Analysis
• Technical analysis would cover the following:
1. Manufacturing Process / Technology
2. Technical arrangements
3. Material inputs and utilities
4. Plant capacity
5. Location and site
6. Machineries and equipment
7. Environmental aspects
8. Project charts and layouts
9. Schedule of project implementation
10. Work schedule
11. Need for considering alternatives
 Technical Analysis
1. Manufacturing Process / Technology
Choice of Technology
Plant capacity
Principle inputs
Investment outlay and production cost
Use by other units
Product mix
Latest developments
Ease of absorption
Appropriateness of technology: These would refer to those
methods of production which are suitable to local economics, social
and cultural conditions. Whether the technology protects
ecological balance?
Product Mix
 Technical Analysis
2. Technical arrangements:

• Satisfactory arrangements must be made to obtain technical know how

needed for the proposed manufacturing process. When collaboration is
sought the following aspects must be worked out:

Nature of support from collaborators during each stage of the project.

Process and performance guarantees in terms of plant capacity, product

quality and consumption of raw materials and utilities.

License and royalty fee

Benefit of collection agreement and manner of sharing management control.

 Technical Analysis
3. Material inputs and utilities:
Technical analysis must define the materials ands utilities required,
specifying their properties and setting up their supply Programme.

Material inputs may be classified into 4 broad categories:

Raw materials classified into:( Agricultural products, Mineral products,

Livestock forest products, and Marine products)

Processed industrial materials and components. (Represent important inputs

and Analysis should cover the total requirement, sources, prices etc.)

Auxiliary materials and factory supplies chemicals, packing materials, oils,

grease etc.

Utilities power, water, fuel, steam etc

 Technical Analysis
4. Plant capacity:
Plant capacity is the production capacity or volume of units that can be
produced during a given period of time. It may be
Feasible Normal Capacity – (FNC) Capacity attainable under normal
working conditions calculated on the basis of installed capacity,
technical conditions of plant, shift pattern, down time for maintenance and
holidays.
Nominal Maximum Capacity (NMC) - Capacity that is technically
attainable, corresponds to the installed capacity guaranteed by the supplier
of the plant.
Factors affecting plant capacity decisions are: Technology requirement,
input constraints, investment cost, market conditions, resources of the firm,
and government policy.
 Technical Analysis
5. Location and site:
Location refers to Broad area like city, industrial zone and
Site refers to Specific area or piece of land where the project would
be set up.
The choice of location would depend on:
• Proximity to raw materials.
• Proximity to market
• Availability of infrastructure power, transportation, water,
communication
• Labour availability
• Governmental policies
• Other factors (Climate, Living conditions, Pollution, Ancillary
units)
The site selection would depend on the cost of site. Two or three
alternative sites must be considered and evaluated with respect to
cost of land and cost of site preparation and development.
 Technical Analysis
6. Machineries and equipment
The requirement of machinery and equipment depends on production
technology and plant capacity and also the type of project. To determine the
kinds of machinery required the following procedure may be followed:
– Estimate the likely levels of production overtime
– Define various machining and other operations
– Calculate machine hours for each type of operation
– Select machineries and equipment for each function.
The equipment required may be classified into the following types: Process,
Mechanical, Instruments, Control, Internal transportation, Others
Constraints in selecting machineries and equipments may be:
• Limited availability of power
• Difficulty in transport
• Workers not able to operate
 Technical Analysis
7. Environmental aspects:
A project may cause environmental pollution in various ways hence these
aspects must be properly examined.
8. Project charts and layouts:
Once the data is available on the principle dimensions of the project, charts
and lay out must be prepared. The important charts and lay outs drawings
are:
General functional layouts
Material flow diagram
Production line diagram
Transport layout
Communication layout
Plant layout
Functional layout
Material
flow
diagram
Transport layout
Plant layout
 Technical Analysis
9. Schedule of project implementation:
As part of the technical analysis a project implementation is also prepared.
Following information is required for this:
• List of all possible activities from project planning to commencement of
production.
• Sequence in which various activities have to be performed.
• Time required for each activity.
• Resources required.
• Implication of putting more resources or less resource than normally
required.
 Technical Analysis
• 10. Work schedule:
The work schedule reflects the plan of work concerning installation as well
as initial operation.
11. Need for considering alternatives:
There are alternative ways of transforming an idea into a concrete project.
These alternates may differ in one or more of the following aspects:
• Nature of project
• Production process
• Product quality
• Scale of operation and time phasing
• Location