Engineering Management

Course Code: EMG

Instructor: Engr. Cesar Amante Ting

Included in this material are citations from the book Engineering
Management Principles and Economics custom edition for Concordia
University.
DEFINITION OF PROJECT & ITS DIFFERENCE WITH
BUSINESS OPERATION OR PROCESS:

PROJECT - it is a unique venture with beginning and end,

conducted by people to meet established goals with
parameters of cost, schedule and quality.
- a temporary endeavor undertaken to create unique
product or services.

OPERATION OR PROCESS - refers to on-going, day to day

activity in which an organization engages while
producing goods or services. It uses existing systems,
properties and capabilities in a continuous, fairly
repetitive manner.

A project can be considered to be any series of activities and tasks

that:

1. Have a specific objective to be completed within certain

specifications.
2. Have defined start and end dates.
3. Have funding limits.
4. Consume human and non-human resources (such as money
people and equipment).
5. Includes multi-functional activities.

ELEMENTS OF A PROJECT:

1. Projects are complex, one-time processes.

2. Projects are limited by budget, schedule and resources.
3. Projects are developed to resolve a clear goal or set of goals.
4. Projects are customer-focused.

GENERAL PROJECT CHARACTERISTICS:

1. Project endeavors with a clear life cycle.

2. Projects are building blocks of in the design and execution of
organizational strategies.
3. Projects are responsible for the newest and most improved
 products, services and organizational processes.
4. Projects provide the philosophy and strategy for the manage-
ment of change.
5. Project management entails cross functional and organiza-
tioal boundaries.
6. The traditional management functions of planning, organizing,
motivation, directing and control apply to project
management.
7. The principal outcomes of a project are the satisfaction of cus-
tomer requirements within the constraints of technical, cost
and schedule objectives.
8. Projects are terminated upon the successful completion of
performance objectives.
DIFFERENCES BETWEEN PROCESS & PROJECT:
REASONS WHY THE PROJECTS ARE IMPORTANT:

1. Shortened product life cycles.

2. Narrow product launch windows.
3. Increasingly complex and technical products.
4. Emergence of global markets.
5. An economic period marked by low inflation.

PROJECT LIFE CYCLE:

PROJECT LIFE CYCLE:

1. Conceptualization - it refers to the development of the initial

goal and technical specifications for the project. The
scope of work is determined, necessary resources
(people, money, physical plant) identified, and impor-
tant organizational contributors or stakeholder signed
on.
2. Planning - it is the stage in which all detailed specifications,
schematics, schedules and other plans are developed.
The individual pieces of the project often called work
packages are broken down, individual assignments
are made, and the process of completion clearly de-
lineated.
3. Execution - it is where the actual work for the project is per-
formed, the system developed, or the product is crea-
ted and fabricated. It is during the execution phase
that the bulk of project team labor is performed.
4. Termination - it occurs when the completed is transferred to
the customer, its resources re-assigned, and the pro-
ject formally closed out.
PROJECT LIFE CYCLE & THEIR EFFECTS:

The project life cycle is also a useful means of visualizing the

activities required and challenges to be faced during the life of a
project. The following graph indicates some of these characteris-
tics as they evolve during the course of completing the project.
PROJECT LIFE CYCLE & THEIR EFFECTS:

1. Client Interest - the level of enthusiasm or concern expressed

by the project's intended customer. Clients can be inter-
nal or external to the organization.
2. Project Stake - the amount of corporate investment in the pro-
ject. The longer the life of the project, the longer the
investment.
3. Resources - the commitment of financial, human, and tech-
nical resources over the life of the project.
4. Creativity - the degree of innovation required by the project,
especially during certain development phases.
5. Uncertainty - the degree of risk associated with the project.
Riskiness reflect the number of unknowns, including
technical challenges that the project is likely to face.
Uncertainty is highest at the beginning because many
challenges have yet to be identified.
DETERMINANTS OF PROJECT SUCCESS:
QUADRUPLE CONSTRAINT:
1. Time: The project must meet the specified time frame during
which they must be completed.
2. Budget: The project must meet budgeted allowances in order
to use resources as efficiently as possible.
3. Performance: The project must be developed in order to adhere
initially determined technical specifications.
4. Client Acceptance: The project must satisfy the customer's
need.
PROJECT MANAGEMENT KNOWLEDGE AREAS:
END OF PRESENTATION
 ORGANIZATIONAL
STRUCTURE, STRATEGY &
CULTURE
PROJECTS & ORGANIZATIONAL STRATEGY:

Strategic Management - it is the science of formulating, imple-

menting, and evaluating cross-functional decisions that
enable the organization to achieve its objectives.

ELEMENTS OF STRATEGIC MANAGEMENT:

1. Developing vision and mission statements.

2. Formulating, implementing and evaluating.
3. Making cross-functional decisions.
4. Achieving objectives.

Project Stakeholders - it is defined as all individuals or groups

who have an active stake in the project and can potentially
impact, either positively or negatively, its development.
These includes the top management, functional managers,
project team members, clients, competitors, suppliers, etc.
WAYS ON HOW PROJECTS REFLECT STRATEGY:
EXAMPLE:
STAKEHOLDER MANAGEMENT:

Project Stakeholders - it is defined as all individuals or groups

who have an active stake in the project and can potentially
impact, either positively or negatively, its development.
These includes the top management, functional managers,
project team members, clients, competitors, suppliers, etc.

Stakeholder Analysis - it is a useful tool for demonstrating

some of the seemingly irresolvable conflicts that occur
through planned creation and introduction of any new
project.

Common project stakeholders involve:

1. Internal
a. Top management
b. Accounting
c. Other functional managers
d. Project team members
Common project stakeholders involve:

2. External
a. Clients
b. Competitors
c. Suppliers
d. Environmental, political, consumer, and other
intervenor groups

Project Stakeholder
Relationships
PROJECT STAKEHOLDER MANAGEMENT CYCLE:
ORGANIZATIONAL STRUCTURE:

People who work in an organization are grouped so that their

efforts can be channeled for maximum efficiency. Organizational
structure consists of three key elements:

1. Organizational structure designates formal reporting relation-

ships, including the number of levels in the hierarchy and the
span of control of managers and supervisors.
2. Organizational structures identifies the grouping together of
individuals into departments and departments into total or-
ganization.
3. Organizational structure includes the design of systems to
ensure effective communication, coordination, and integration
of effort across departments.
FORMS OF ORGANIZATIONAL STRUCTURE:

1. Functional Organizations - companies are structured by

grouping people performing similar activities into
departments.
2. Project Organizations - companies are structured by
grouping people into project teams on temporary
assignments.
3. Matrix Organizations - companies are structured by creating
a dual hierarchy in which functions and projects have
equal prominence.
AN EXAMPLE OF FUNCTIONAL ORGANIZATION:
AN EXAMPLE OF PROJECT ORGANIZATION:
AN EXAMPLE OF MATRIX ORGANIZATION:
ORGANIZATIONAL CULTURE:

It refers to unwritten rules of behavior, or norms, that are used

to shape and guide behavior, that are shared by subset of
organizational members, and that are taught to all new members
of the company.

(discuss the definition further with aid of the book on page 56 and
also with the other book in Project Management)

SUPPLEMENTARY TOPICS:

1. 5 Levels of Leadership
2. The difference of a Leader and a Boss
END OF PRESENTATION
PROJECT PROFITABILITY
EVALUATION & PROJECT
COMPARISON METHODS
INTRODUCTION:

Engineering Economy - it is the application of economic principles

in the analysis of engineering decisions.
- it also studies the behavior of individuals
and firms in making decisions regarding
the allocation of limited resources.

Time value of money - an amount of money earned today has

greater worth than the same amount of
money earned in the future.

Inflation Rate - it is the rate of decrease of the value of

money due to increasing cost of
commodity.

Cash Flow Diagram - it is a graph that summarizes the timing

and magnitude of cash flows (inflow and
outflow) as they occur over time of a certain
entity.
 EXAMPLE OF CASH FLOW DIAGRAM:

Cost-benefit Analysis - it is a way of evaluating project alternatives

by its cost incurred and benefits to be
received in the future expressed in monetary
value, considering time value of money or
not, to make a more profitable decision.
DEFINITION OF TERMS:
INTEREST (I)

- it is the money paid by the debtor for the use of money.

- from the investor's standpoint, interest is income from
invested capital.
- from the debtor's standpoint, interest is money paid for the
use of money.

PRINCIPAL (P)

- it is the capital originally invested in a transaction.

- it can also be referred to as present value or present worth
of money.

AMOUNT (F)

- it is the sum of principal and interest

- it can also be referred to as future value or future worth
of money.
INTEREST RATE (r):

- it is the ratio or percentage of interest earned per unit time

(commonly per year) to the principal.

COMPOUND INTEREST (I):

- it is the total interest earned after a certain period of time given

that the original principal is being compounded by the periodic
interest due. That is, the gained interest per period is being added
to the original principal and that will be the new principal which
is subjected to interest for the succeeding period/s.

COMPOUND AMOUNT (F):

- it is the original principal plus the compound interest.

- it can also be referred to as future value at compounded interest.

CONVERSION PERIOD:

- it is the time between successive conversions of interest into

principal
COMPOUND INTEREST FORMULA:

Given that I = F – P and the compound amount formula;

Then;

where;

F = compound amount or future value Show example on page 165

P = principal or present value (175/406 of Eng’g Management
i = interest rate per year e-book)
N = no. of years invested
PROJECT PROFITABILITY EVALUATION METHODS:

1. NET PRESENT VALUE (NPV):

- it is the difference between the present value of cash inflows and the
present value of cash outflows.
- it is used in capital budgeting to analyze the profitability of a projected
investment or project.

FORMULA:

where:
Ct = net cash inflow during the period t
Co = total initial investment cost
r = discount rate (or can be defined as the interest rate if the money will be
invested elsewhere or MARR)
t = number of time periods (usually in years)
MARR (Minimum Acceptable Rate of Return)
It is the minimum interest rate that the investor wish to achieve given the
use of capital.

NPV Rules:

1. An investment with positive net present value will be profitable since it

indicates that the projected earnings generated by the investment (or
project) exceeds the incurred and anticipated cost considering MARR.
2. An investment with negative net present value will result in a net loss.
3. This rule dictates that the investments that should be made are those
with positive NPV.
Example 1:
Given example #1, suppose that the earnings of the business were
planned to have reduction of $400.00 each year, starting the end of 2nd
year to 5th year, due to anticipated increase in supply cost. Compute for
NPV. Is it still profitable?

(Will be solved by the class)

Example 2:
Given example #2, suppose that the cost savings of using the materials
handling equipment were planned to have reduction of $350.00 each
year, starting the end of 4th year to 10th year, due to anticipated
combined increase in labor, power and maintenance cost. Compute for
NPV. Is it still profitable?

(Will be solved by the class)

Seatwork: Solve some problems on page 233 (243/406 of e-book).

PROJECT PROFITABILITY EVALUATION METHODS:

2. INTERNAL RATE OF RETURN (IRR):

- it is the interest rate at which the project will break even, that is where
cash inflow is equal to cash outflow and NPV is equal to zero, conside-
ring only the cash flows due to the investment.
- the interest rate can also be treated as the discount rate of the projected
earnings or cash inflows due to time value of money.

FORMULA:
IRR Rules:

1. An investment with positive internal rate of return will generate a net

income since the sum of cash inflows is greater than the sum of cash
outflows (or maybe a single cash outflow). Though it will generate an
income, we cannot immediately conclude that it is profitable since we
need to consider the cost of capital (the discount rate). The cost of capital
is the interest paid to the investor for the use of money or an effective
interest rate that can be get if the money is invested elsewhere (such as in
a bank).
2. If IRR > Cost of Capital, the investment or project is profitable.
3. If IRR < Cost of Capital, the investment or project is not profitable.
4. If IRR is negative, the investment or project is losing money.

Note: 386-406 / 406 of e-book for tables

Example 3:
Example 4:
To find the IRR using Excel, compute the net cash flow for each period, and
then apply the IRR function to the range of cells containing cash flows, as
shown in the table:
PROJECT PROFITABILITY EVALUATION METHODS:

3. PAYBACK PERIOD:

- it is a rough measure of the time it takes for an investment to pay for

itself.
- it is the number of years it takes for an investment to be recouped when
the interest rate is assumed to be zero.
- it is the simplest method for judging the economic viability of projects.

FORMULA:

Note: Use this formula given that the annual savings is constant. If not, just
simply take the cumulative total of cash inflows (earnings) until it become
equal or greater than the first cost. The number of years that it will take to
make the cumulative cash inflows equal or greater than the first cost, that
is the payback period.
Example 5:

Example 6:
PROJECT PROFITABILITY EVALUATION METHODS:

4. DISCOUNTED PAYBACK PERIOD:

COMPARISON OF NPV & ORDINARY PAYBACK PERIOD :
COMPARISON OF NPV & ORDINARY PAYBACK PERIOD :
SEATWORK:

Determine the best and least preferred among alternatives

considering both NPV and payback period as project profitability
comparison methods.
END OF PRESENTATION