Q.1 Explain the importance of business forecasting.

List & explain the

steps in the PERT planning process.

Business forecasting is a process used to estimate or predict future patterns using business data. Some
examples of business forecasting include estimating quarterly sales, product demand, customer lifetime
value and churn potential, inventory and supply-chain reorder timing, workforce attrition, website traffic, and
predicting exposure to fraud and risk. Several powerful estimation functions are commonly used to perform
business forecasting: time series analysis, causal models, and regression analysis. Business forecasting
supports executives, analysts and end users in decision-making using decision support systems such as
business intelligence. It involves predicting the future outcome of various business decisions. This includes
the future of the business as a whole, the future of an existing or proposed product or product line, and the
future of the industry in which the business operates, to name a few. Forecasting is used to answer
important questions, such as:

 How much profit will the business make?

 How much demand will there be for a product or service?

 How much will it cost to produce the product or offer the service?

 How much money will the company need to borrow?

 When and how will borrowed funds be repaid?

Businesses must understand and use forecasting in order to answer these important questions. This helps
the company prepare for the future. It also helps the organization make plans that will lead to becoming a
financially successful business. This article will discuss the reasons financial forecasting is important to an
organization.

Why is Forecasting Important to an Organization?

Financial forecasting is important for several reasons. First, it enables management to change operations at
the right time in order to reap the greatest benefit. It also helps the company prevent losses by making the
proper decisions based on relevant information. Organizations that can create high quality and accurate
forecasts are able to "see what interventions are required to meet their business performance targets"
(Vadasz).

Forecasting is also important when it comes to developing new products or new product lines. It helps
management decide whether the product or product line will be successful. Forecasting prevents the
company from spending time and money developing, manufacturing, and marketing a product that will fail.

Business forecasting has always been one component of running an enterprise. However, forecasting
traditionally was based less on concrete and comprehensive data than on face-to-face meetings and
common sense. In recent years, business forecasting has developed into a much more scientific endeavor,
with a host of theories, methods, and techniques designed for forecasting certain types of data. The
development of information technologies and the Internet propelled this development into overdrive, as
companies not only adopted such technologies into their business practices, but into forecasting schemes
as well. In the 2000s, projecting the optimal levels of goods to buy or products to produce involved
sophisticated software and electronic networks that incorporate mounds of data and advanced
mathematical algorithms tailored to a company's particular market conditions and line of business.
Business forecasting involves a wide range of tools, including simple electronic spreadsheets, enterprise
resource planning (ERP) and electronic data interchange (EDI) networks, advanced supply chain

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management systems, and other Web-enabled technologies. The practice attempts to pinpoint key factors
in business production and extrapolate from given data sets to produce accurate projections for future
costs, revenues, and opportunities. This normally is done with an eye toward adjusting current and near-
future business practices to take maximum advantage of expectations.

In the Internet age, the field of business forecasting was propelled by three interrelated phenomena. First,
the Internet provided a new series of tools to aid the science of business forecasting. Second, business
forecasting had to take the Internet itself into account in trying to construct viable models and make
predictions. Finally, the Internet fostered vastly accelerated transformations in all areas of business that
made the job of business forecasters that much more exacting. By the 2000s, as the Internet and its myriad
functions highlighted the central importance of information in economic activity, more and more companies
came to recognize the value, and often the necessity, of business forecasting techniques and systems.

Business forecasting is indeed big business, with companies investing tremendous resources in systems,
time, and employees aimed at bringing useful projections into the planning process. According to a survey
by the Hudson, Ohio-based Answer Think Consulting Group, which specializes in studies of business
planning, the average U.S. Company spends more than 25,000 person-days on business forecasting and
related activities for every billion dollars of revenue.

Companies have a vast array of business forecasting systems and software from which to choose, but
choosing the correct one for their particular needs requires a good deal of investigation. According to the
Journal of Business Forecasting Methods & Systems, any forecasting system needs to be able to facilitate
data-sharing partnerships between businesses, accept input from several different data sources and
platforms, operate on an open architecture, and feature an array of analysis techniques and approaches.

Forecasting systems draw on several sources for their forecasting input, including databases, e-mails,
documents, and Web sites. After processing data from various sources, sophisticated forecasting systems
integrate all the necessary data into a single spreadsheet, which the company can then manipulate by
entering in various projections—such as different estimates of future sales—that the system will incorporate
into a new readout.

A flexible and sound architecture is crucial, particularly in the fast-paced, rapidly developing Internet
economy. If a system's base is rigid or inadequate, it can be impossible to reconfigure to adjust to changing
market conditions. Along the same lines, according to the Journal of Business Forecasting Methods &
Systems, it's important to invest in systems that will remain useful over the long term, weathering alterations
in the business climate.

Business forecasting systems often work hand-in-hand with supply chain management systems. In such
systems, all partners in the supply chain can electronically oversee all movement of components within that
supply chain and gear the chain toward maximum efficiency. The Internet has proven to be a panacea in
this field, and business forecasting systems allow partners to project the optimal flow of components into
the future so that companies can try to meet optimal levels rather than continually catch up to them.

In integrated supply chain networks, for instance, a single company in the supply chain can enter slight
changes in their own production or purchasing schedules for all parties to see, and the forecasting system
immediately processes the effects of those changes through the entire supply chain, allowing each
company to adjust their own schedules accordingly. With business relationships and supply chains growing
increasingly complex—particularly in the world of e-commerce, with heavy reliance on logistics outsourcing
and just-in-time delivery—such forecasting systems become crucial for companies and networks to remain
efficient.

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 PERT and Steps in the planning process

Complex projects require a series of activities, some of which must be performed sequentially and others
that can be performed in parallel with other activities. This collection of series and parallel tasks can be
modeled as a network.

In 1957 the Critical Path Method (CPM) was developed as a network model for project management. CPM
is a deterministic method that uses a fixed time estimate for each activity. While CPM is easy to understand
and use, it does not consider the time variations that can have a great impact on the completion time of a
complex project.

The Program Evaluation and Review Technique (PERT) is a network model that allows for randomness in
activity completion times. PERT was developed in the late 1950's for the U.S. Navy's Polaris project having
thousands of contractors. It has the potential to reduce both the time and cost required to complete a
project.
The Network Diagram

In a project, an activity is a task that must be performed and an event is a milestone marking the completion
of one or more activities. Before an activity can begin, all of its predecessor activities must be completed.
Project network models represent activities and milestones by arcs and nodes. PERT originally was an
activity on arc network, in which the activities are represented on the lines and milestones on the nodes.
Over time, some people began to use PERT as an activity on node network. For this discussion, we will use
the original form of activity on arc.

The PERT chart may have multiple pages with many sub-tasks. The following is a very simple example of a
PERT diagram:
PERT Chart

The milestones generally are numbered so that the ending node of an activity has a higher number than the
beginning node. Incrementing the numbers by 10 allows for new ones to be inserted without modifying the
numbering of the entire diagram. The activities in the above diagram are labeled with letters along with the
expected time required to complete the activity.
Steps in the PERT Planning Process

PERT planning involves the following steps:

1. Identify the specific activities and milestones.

2. Determine the proper sequence of the activities.
3. Construct a network diagram.
4. Estimate the time required for each activity.
5. Determine the critical path.
6. Update the PERT chart as the project progresses.

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1. Identify Activities and Milestones

The activities are the tasks required to complete the project. The milestones are the events marking the
beginning and end of one or more activities. It is helpful to list the tasks in a table that in later steps can be
expanded to include information on sequence and duration.

2. Determine Activity Sequence

This step may be combined with the activity identification step since the activity sequence is evident for
some tasks. Other tasks may require more analysis to determine the exact order in which they must be
performed.

3. Construct the Network Diagram

Using the activity sequence information, a network diagram can be drawn showing the sequence of the
serial and parallel activities. For the original activity-on-arc model, the activities are depicted by arrowed
lines and milestones are depicted by circles or "bubbles".

If done manually, several drafts may be required to correctly portray the relationships among activities.
Software packages simplify this step by automatically converting tabular activity information into a network
diagram.

4. Estimate Activity Times

Weeks are a commonly used unit of time for activity completion, but any consistent unit of time can be
used.

A distinguishing feature of PERT is its ability to deal with uncertainty in activity completion times. For each
activity, the model usually includes three time estimates:

• Optimistic time - generally the shortest time in which the activity can be completed. It is common
practice to specify optimistic times to be three standard deviations from the mean so that there is
approximately a 1% chance that the activity will be completed within the optimistic time.
• Most likely time - the completion time having the highest probability. Note that this time is different
from the expected time.
• Pessimistic time - the longest time that an activity might require. Three standard deviations from the
mean are commonly used for the pessimistic time.

PERT assumes a beta probability distribution for the time estimates. For a beta distribution, the expected
time for each activity can be approximated using the following weighted average:

Expected time = ( Optimistic + 4 x Most likely + Pessimistic ) / 6

This expected time may be displayed on the network diagram.

To calculate the variance for each activity completion time, if three standard deviation times were selected
for the optimistic and pessimistic times, then there are six standard deviations between them, so the
variance is given by:

[(Pessimistic - Optimistic ) / 6 ]2

5. Determine the Critical Path

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The critical path is determined by adding the times for the activities in each sequence and determining the
longest path in the project. The critical path determines the total calendar time required for the project. If
activities outside the critical path speed up or slow down (within limits), the total project time does not
change. The amount of time that a non-critical path activity can be delayed without delaying the project is
referred to as slack time.

If the critical path is not immediately obvious, it may be helpful to determine the following four quantities for
each activity:

• ES - Earliest Start time

• EF - Earliest Finish time
• LS - Latest Start time
• LF - Latest Finish time

These times are calculated using the expected time for the relevant activities. The earliest start and finish
times of each activity are determined by working forward through the network and determining the earliest
time at which an activity can start and finish considering its predecessor activities. The latest start and finish
times are the latest times that an activity can start and finish without delaying the project. LS and LF are
found by working backward through the network. The difference in the latest and earliest finish of each
activity is that activity's slack. The critical path then is the path through the network in which none of the
activities have slack.

The variance in the project completion time can be calculated by summing the variances in the completion
times of the activities in the critical path. Given this variance, one can calculate the probability that the
project will be completed by a certain date assuming a normal probability distribution for the critical path.
The normal distribution assumption holds if the number of activities in the path is large enough for the
central limit theorem to be applied.

Since the critical path determines the completion date of the project, the project can be accelerated by
adding the resources required to decrease the time for the activities in the critical path. Such a shortening of
the project sometimes is referred to as project crashing.
6. Update as Project Progresses

Make adjustments in the PERT chart as the project progresses. As the project unfolds, the estimated times
can be replaced with actual times. In cases where there are delays, additional resources may be needed to
stay on schedule and the PERT chart may be modified to reflect the new situation.

Benefits of PERT

PERT is useful because it provides the following information:

• Expected project completion time.

• Probability of completion before a specified date.
• The critical path activities that directly impact the completion time.
• The activities that have slack time and that can lend resources to critical path activities.
• Activity start and end dates.
Limitations

The following are some of PERT's weaknesses:

• The activity time estimates are somewhat subjective and depend on judgment. In cases where there
is little experience in performing an activity, the numbers may be only a guess. In other cases, if the
person or group performing the activity estimates the time there may be bias in the estimate.
• Even if the activity times are well-estimated, PERT assumes a beta distribution for these time
estimates, but the actual distribution may be different.

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 • Even if the beta distribution assumption holds, PERT assumes that the probability distribution of the
project completion time is the same as that of the critical path. Because other paths can become the
critical path if their associated activities are delayed, PERT consistently underestimates the expected
project completion time.

The underestimation of the project completion time due to alternate paths becoming critical is perhaps the
most serious of these issues. To overcome this limitation, Monte Carlo simulations can be performed on the
network to eliminate this optimistic bias in the expected project completion time.

Q. 2 Write a short note on MS projects and explain in brief some of the

important terminologies used in MS Project.
Microsoft Project (or MSP or WinProj) is a project management software program developed and sold by
Microsoft which is designed to assist project managers in developing plans, assigning resources to tasks,
tracking progress, managing budgets and analyzing workloads.

The application creates critical path schedules, and critical chain and event chain methodology third-party
add-ons are also available. Schedules can be resource leveled, and chains are visualized in a Gantt chart.
Additionally, Project can recognize different classes of users. These different classes of users can have
differing access levels to projects, views, and other data. Custom objects such as calendars, views, tables,
filters, and fields are stored in an enterprise global which is shared by all users.

Microsoft Project was the company's third Windows-based application, and within a couple of years of its
introduction it became the dominant PC-based project management software.

Although branded as a member of the Microsoft Office family, it has never been included in any of the
Office suites (Like Visio). This was also the case with Office 2010. It is available currently in two editions,
Standard and Professional. MS Project's proprietary file format is .mpp.

Microsoft Project and Microsoft Project Server are the cornerstones of the Microsoft Office Enterprise
Project Management (EPM) product. Microsoft Project 2010 features the Ribbon user interface.
Features

Project creates budgets based on assignment work and resource rates. As resources are assigned to tasks
and assignment work estimated, the program calculates the cost equals the work times the rate, which rolls
up to the task level and then to any summary tasks and finally to the project level. Resource definitions
(people, equipment and materials) can be shared between projects using a shared resource pool. Each
resource can have its own calendar, which defines what days and shifts a resource is available. Resource
rates are used to calculate resource assignment costs which are rolled up and summarized at the resource
level. Each resource can be assigned to multiple tasks in multiple plans and each task can be assigned
multiple resources, and the application schedules task work based on the resource availability as defined in
the resource calendars. All resources can be defined in lable without limit. Therefore it cannot determine
how many finished products can be produced with a given amount of raw materials. This makes MS Project
unsuitable for solving problems of available materials constrained production. Additional software is
necessary to manage a complex facility that produces physical goods.

Project Information… (under menu Project or Project Statistics icon in the Tracking toolbar) presents the
major dimensions of project data:

As the Pareto Principle predicts, 80% of people use only 20% of a product's features. With MSP, that
means using default settings while creating a Gantt chart which reflect dates determined manually. It is
usually not referenced again until a whole new plan is needed. If MSP is not used to track Work hours or
costs (such as using EVM techniques), publish this disclaimer:

6
another page on this site A project plan may be focused only on planned duration (elapsed calendar time)
and target start/finish dates, not actual Work effort nor dollar costs. So project plans may not be resource
leveled to prevent overallocation.

Technically, Microsoft Project uses a "Model View Controller (MVC)" design pattern: data shown at right in a
database (model) are queried by on-line graphic views and printed reports exposing data filtered and
arranged in tables updated using forms for individual tasks, resources, and assignments.

What needs to be done? Deliverables and Tasks

Who is going to do it?
How long will it take?
When must it happen?
When will it happen?
How much will it cost?
Resources and Assignments
Estimates of Duration and Work
Constraints and Dependencies
Start and Finish Dates
Rate * Unit Assignment

The Project Guide toolbar presents these activities:

Tasks

- Define the project - Define general working times - List the tasks in the project - Organize tasks into
phases - Schedule tasks - Link to or attach more task information - Add columns of custom information - Set
deadlines and constrain tasks - Identify risks to the project - Add documents to the project - Publish project
information to the Web

Resources

- Specify people and equipment for the project - Specify the booking types for resources - Define
working times for resources - Assign people and equipment to tasks - Link to or attach more resource
information - Add columns of custom information - Publish project information to the Web

Track

- Save a baseline plan to compare with later versions - Prepare to track the progress of your project -
Incorporate progress information into the project - Check the progress of the project - Make changes to the
project - Track risks and issues associated with this project - Request text-based status reports - Publish
project information to the Web

Report

- Select a view or report - Change the content or order of information in a view - Change the look or
content of the Gantt Chart - Print current view as a report - See the status of multiple projects in
Project Center - Compare progress against baseline work - See the project's critical tasks - See
project risks and issues - See how resources' time is allocated - See project costs - Publish project
information to the Web.

Q.3. Describe the time series forecasting with the help of autoregressive
modeling. What do you understand by managing cash flow?

Time-serie definition
A time-series is a list of dates, each date being a associated to a value (a number). For example, daily
temperature measurement represent a time-series.

Time Value
Jan 1st, 2007 89

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Jan 2nd, 2007 91
Jan 3rd, 2007 90

Time-series are interesting because many business operations are represented through time-series (daily
sales for ex.). Typically, the time-series will represent a set of historical measurements. See below for
further discussion.

Forecasting the time-series

The time-series can be represented as a curve that evolve over time. Forecasting the time-series mean
that we extend the historical values into the future where the measurements are not available yet.

There are some subtleties in the definition a time-series forecast. For example, the historical data might
be daily sales and but you need monthly forecasts. Grouping the values according to a certain period (ex:
month) is called time-series aggregation.

Business benefits
What you do with time-series forecasting depend on your business activity. Here below, we list typical
ways of using time-series forecasting.

Time-series for Retail

The sales history of each product constitutes a time-series to be forecasted. The sales forecasts are used
to optimize the inventory levels. Too much inventory, and your expenses go up. Too few inventory, and
sales opportunities are lost in out-of-stock situations. Learn more about Lokad benefits for retailers.

Time-series for Manufacturers

The production history and/or the inputs consumptions constitute time-series to be forecasted. The inputs
consumptions are forecasted in order to minimize the inventory levels. The production history can be
forecasted and used as an approximation of the future demand. Forecasting the demand enables to
perform efficient capacity planning. Learn more about Lokad benefits for manufacturers.

Time-series for Customer Services

Customer activities can be represented as time-series (ex: hourly volume customer calls in call centers).
Forecasting the customer activity can be used to optimize the staff scheduling. Too much staff, and
money is wasted in paying idle staff. Too few staff, and the customer satisfaction drops

An example of time series forecasting in econometrics is predicting the opening price of a stock based on
its past performance. Time series are very frequently plotted via line charts.

These are a body of techniques which rely primarily on the statistical properties of the data, either in
isolated single series or in groups of series, and do not exploit our understanding of the working of the
economy at all.
The objective is not to build models which are a good representation of the economy with all its complex
interconnections, but rather to build simple models which capture the time series behaviour of the data
and may be used to provide an adequate basis for forecasting alone.
Two basic types of time series models exist, these are autoregressive and moving average models.

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The basic autoregressive model for a series X is,

X t = θ(L) X t -1 + εt
where ε is a white noise error process
and θ(L) X t -1 = θ1 X t -1 + θ2 X t - 2 ... θn X t - n

This would be referred to as an nth order autoregressive process, or AR(n).

The basic moving average models represent X as a function of current and lagged values of a white noise
process.

X t = ζ (L) ωt
where ω is a white noise error process
ζ (L) ωt = ωt + ζ 1 ωt -1 + ...+ ζ q ωt - q

This would be referred to as a qth order moving average process, or MA(q).

ARMA models
A mixture of these two types of model would be referred to as an autoregressive moving average model
(ARMA)n,q, where n is the order of the autoregressive part and q is the order of the moving average term.

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 ∞
xt = ∑ α j ε t - j + d t
j= 0

∞
w h ereα 0 = 1 , ∑ α j < ∞ , E (ε t )=0 ,E (ε t2 )=σ 2
j= 0

a n dE (ε ε )=0 fo rt ≠ s
dt is termed the linearly deterministic part of x while is termed the linearly in deterministic part.
t s
As a general rule, a low order AR process will give rise to a high order MA process and the low order MA
process will give rise to a high order AR process.

x t = λ x t -1 + ε t λ<1
by successively lagging this equation and substituting out the lagged value of x we may rewrite this as,

∞
xt = ∑ λ j ε t- j w h λe rxte-∞ → 0
∞
So the first order AR process has been recast as an infinite order MA one.
j= 1
The Correlogram and partial autocorellation function
Two important tools for diagnosing the time series properties of a series
The correlogram shows the correlation between a variable Xt and a number of past values.

1 T -k
∑
T t= 1
( X t+k - X * ) (X t - X * )
Ci =
1T
∑
T t= 1
( -
Xt X )
* 2

the partial autocorrelation function is given as the coefficients from a simple autoregression of the form,

1T n
h e rXe = ∑function.
∑
*
w autocorrelation Xt
X t = A0 + TPti= X1 t -i + ut
where Pi are the estimates of the partial

For a pure autoregressive process of lag p, the partial autocorrelation function up to lag p will be the
i= 1
autoregressive coefficients while beyond that lag we expect them all to be zero. So in general there will
be a `cut off' at lag p in the partial autocorrelation function. The correlogram on the other hand will decline

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asymptotical towards zero and not exhibit any discreet `cut of' point. An MA process of order q, on the
other hand, will exhibit the reverse property.

Cash Flow Management

Cash flow management is the process of monitoring, analyzing, and adjusting your business' cash flows.

For small businesses, the most important aspect of cash flow management is avoiding extended cash
shortages, caused by having too great a gap between cash inflows and outflows. You won't be able to
stay in business if you can't pay your bills for any extended length of time!

Therefore, you need to perform a cash flow analysis on a regular basis, and use cash flow forecasting so
you can take the steps necessary to head off cash flow problems. Many software accounting programs
have built-in reporting features that make cash flow analysis easy. This is the first step of cash flow
management.

The second step of cash flow management is to develop and use strategies that will maintain an
adequate cash flow for your business. One of the most useful strategies for small businesses is to shorten
your cash flow conversion period so that your business can bring in money faster. You can read five
specific ways to do this in my "Close The Cash Flow Gap" article.

Part of managing cash flows is to understand how to finance operating cash flows. We previously
discussed how to predict cash deficits with forecasting. We now have to understand how to finance our
cash flow deficits. Whenever we use short-term financing to cover cash deficits, we must consider costs,
risks, restrictions imposed upon the organization,financing flexibility, our current financial situation, and
other factors. Some of the questions we
need to ask include:
 How long will we need financing?
 How much cash do we need?
 How will we use the borrowed funds?
 When and how will we repay the borrowed funds?
The first and most practical source of financing is spontaneous financing or trade credit. By lengthening
the disbursement cycle, we obtain additional cash. Once we have exhausted spontaneous sources of
financing, we than use conventional sources of financing, such as bank loans, lines of credit, and asset
based borrowing.

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 SET 2

Q.1 Explain Relationship between PERT & CPM. Also describe the
framework required for PERT & CPM.

Program Evaluation and Review Technique (PERT) is a scheduling method originally designed to plan a
manufacturing project by employing a network of interrelated activities, coordinating optimum cost and
time criteria. PERT emphasizes the relationship between the time each activity takes, the costs
associated with each phase, and the resulting time and cost for the anticipated completion of the entire
project.

PERT is an integrated project management system. These systems were designed to manage the
complexities of major manufacturing projects, the extensive data necessary for such industrial efforts, and
the time deadlines created by defence industry projects. Most of these management systems developed
following World War II, and each has its advantages.

PERT was first developed in 1958 by the U.S. Navy Special Projects Office on the Polaris missile system.
Existing integrated planning on such a large scale was deemed inadequate, so the Navy pulled in the
Lockheed Aircraft Corporation and the management consulting firm of Booz, Allen, and Hamilton.
Traditional techniques such as line of balance, Gantt charts, and other systems were eliminated, and
PERT evolved as a means to deal with the varied time periods it takes to finish the critical activities of an
overall project.

The line of balance (LOB) management control technique collected, measured, and analyzed data to
show the progress, status, and timing of production projects. It was introduced at Goodyear Tire and
Rubber Company in 1941 and fully utilized during World War II in the defence industry. Even older is the
Gantt chart, developed during World War I by Harvey Gantt, a pioneer in the field of scientific
management. It is a visual management system, on which future time is plotted horizontally and work to
be completed is indicated in a vertical line. The critical path method (CPM) evolved parallel to PERT.
CPM is a mathematically ordered network of planning and scheduling project management; it was first
used in 1957 by E.I. du Pont de Nemours & Co. PERT borrows some CPM applications. PERT proved to
be an ideal technique for one-of-a-kind projects, using a time network analysis to manage personnel,
material resources, and financial requirements. The growth of PERT paralleled the rapid expansion in the
defense industry and meteoric developments in the space race. After 1960, all defense contractors
adopted PERT to manage the massive one-time projects associated with the industry. Smaller
businesses, awarded defense related government contracts, found it necessary to use PERT. At the
same time, du Pont developed CPM, which was particularly applied in the construction industry. In the
last 30 years, PERT has spread, as has CPM, as a major technique of integrated project management.

PERT centers on the concept of time and allows flexible scheduling due to variations in the amount of
time it takes to complete one specific part of the project. A typical PERT network consists of activities and
events. An event is the completion of one program component at a particular time. An activity is defined
as the time and resources required to move from one event to another. Therefore, when events and
activities are clearly defined, progress of a program is easily monitored, and the path of the project
proceeds toward termination. PERT mandates that each preceding event be completed before
succeeding events, and thus the final project, can be considered complete.

One key element to PERT's application is that three estimates are required because of the element of
uncertainty and to provide time frames for the PERT network. These three estimates are classed as

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optimistic, most likely, and pessimistic, and are made for each activity of the overall project. Generally, the
optimistic time estimate is the minimum time the activity will take—considering that all goes right the first
time and luck holds for the project. The reverse is the pessimistic estimate, or maximum time estimate for
completing the activity. This estimate takes into account Murphy's law—whatever can go wrong will—and
all possible negative factors are considered when computing the estimate. The third is the most likely
estimate, or the normal or realistic time an activity requires. Two other elements comprise the PERT
network: the path, or critical path, and slack time. The critical path is a combination of events and
activities that will necessitate the greatest expected completion time. Slack time is defined as the
difference between the total expected activity time for the project and the actual time for the entire project.
Slack time is the spare time experienced in the PERT network.

A vital aspect of PERT is the formula used for the calculation of expected project time. The project reads:

where T = expected completion time,

A = optimistic estimate,
M = most likely estimate,
B = pessimistic estimate.

Applying real numbers to the PERT formula, the result is as follows, where A (optimistic time) = 7 weeks;
M (most likely time) = 11 weeks; B (pessimistic time) = 15 weeks:

(or T, expected completion time)

Once the expected time is computed, the critical path is established. The PERT network considers all
potential variables, thus quantifying the scheduling and planning of the project. In a comprehensive view
of PERT, it becomes clear that despite the fact that some steps of the process are independent, the next
step will depend on the successful completion of prior steps.

Another key to PERT is to analyze and revise the data owing to a constant state of flux. Factors
influencing project management take many forms, including personnel, materials, equipment and
facilities, utilities, and environmental conditions. For example, absenteeism, sickness, vacations, and
even strikes can affect personnel supply, or sudden changes in climatic conditions (snow, flooding from
rains, etc.) may have an environmental impact. Various methods have been established to adjust the
PERT network in order to allow for unpredictable situations. In recent years, computers have provided
one major means of network analysis and revision, especially on larger projects. Computers are
significantly useful for computations of the critical path and slack time. Smaller networks can generally be
managed with manual computations and are usually developed, evaluated, and revised without great
difficulty.

The basic difference in PERT and CPM is in how the diagrams are drawn. In PERT, events are placed in
circles (or rectangles) to emphasize a point in time. Tasks are indicated by the lines connecting the
network of events. In CPM the emphasis is on the tasks, which are placed in circles. The circles are then
connected with lines to indicate the relationship between the tasks. CPM use has become more
widespread than the use of PERT applications.

PERT has advantages as well as disadvantages, but time has seemingly not diminished its applicability.
Planning a major network reveals potential problem areas and interdependent events that are not so
obvious in conventional project development methods. One advantage is the three time estimate process,
again useful in identifying difficulties as well as more effective interrelated processes. When utilizing the
latest computer applications to PERT networks, managers have additional benefits with which to plan. A
final advantage is the use of what is termed the management-by-exception principle, whereby data
accumulated and analyzed by various means can be applied to the planning and execution of a major
project. When managers have used PERT in integrated project management, experience gained is
reapplied to future projects, especially in developing bids for project estimates. When appropriate costing
techniques are implemented with PERT networking, the project sponsors realize significant financial
benefits.

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The PERT/cost system was developed to gain tighter control over actual costs of any project. PERT\cost
relates actual costs to project costs. Job cost estimates are established from an activity or a group of
activities on the basis of a time network. Labor and nonlabor estimates are developed for the network
targeting the control of time and costs and identifying potential areas where time and cost can be traded
off—all aimed at more effective, efficient project management.

As with all aspects of business, the Internet has become a powerful tool with respect to PERT. Managers
can now locate PERT applications on the World Wide Web and apply them directly to the appropriate
manufacturing project. In most instances, PERT diagrams are available that eliminate the estimating
process and make PERT a more useful and convenient tool.

Clearly PERT is a manufacturing-based project planning and scheduling network. In many instances,
managers have attempted to apply PERT principles to other types of projects, including hospital planning
for such issues as costs and social security, educational planning and development, various accounting
functions, and even real estate development.

Q.3 what do you understand by a decision tree. Write a short note on

project crashing using network analysis.

A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their
possible consequences, including chance event outcomes, resource costs, and utility. It is one way to
display an algorithm. Decision trees are commonly used in operations research, specifically in decision
analysis, to help identify a strategy most likely to reach a goal. Another use of decision trees is as a
descriptive means for calculating conditional probabilities. When the decisions or consequences are
modelled by computational verb, then we call the decision tree a computational verb decision tree.

Information produced by data mining techniques can be represented in many different ways. Decision
tree structures are a common way to organize classification schemes. In classifying tasks, decision trees
visualize what steps are taken to arrive at a classification. Every decision tree begins with what is termed
a root node, considered to be the "parent" of every other node. Each node in the tree evaluates an
attribute in the data and determines which path it should follow. Typically, the decision test is based on
comparing a value against some constant. Classification using a decision tree is performed by routing
from the root node until arriving at a leaf node.

Decision trees can represent diverse types of data. The simplest and most familiar is numerical data. It is
often desirable to organize nominal data as well. Nominal quantities are formally described by a discrete
set of symbols. For example, weather can be described in either numeric or nominal fashion. We can
quantify the temperature by saying that it is 11 degrees Celsius or 52 degrees Fahrenheit. We could also
say that it is cold, cool, mild, warm or hot. The former is an example of numeric data, and the latter is a
type of nominal data. More accurately, the example of cold, cool, mild, warm and hot is a special type of
nominal data, described as ordinal data. Ordinal data has an implicit assumption of ordered relationships
between the values. Continuing with the weather example, we could also have a purely nominal
description like sunny, overcast and rainy. These values have no relationships or distance measures.

The type of data organized by a tree is important for understanding how the tree works at the node level.
Recalling that each node is effectively a test, numeric data is often evaluated in terms of simple
mathematical inequality. For example, numeric weather data could be tested by finding if it is greater than
10 degrees Fahrenheit. Nominal data is tested in Boolean fashion; in other words, whether or not it has a
particular value. The illustration shows both types of tests. In the weather example, outlook is a nominal
data type. The test simply asks which attribute value is represented and routes accordingly. The humidity
node reflects numeric tests, with an inequality of less than or equal to 70, or greater than 70.

Decision tree induction algorithms function recursively. First, an attribute must be selected as the root
node. In order to create the most efficient (i.e, smallest) tree, the root node must effectively split the data.

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Each split attempts to pare down a set of instances (the actual data) until they all have the same
classification. The best split is the one that provides what is termed the most information gain.

In decision analysis, a "decision tree" — and the closely-related influence diagram — is used as a visual
and analytical decision support tool, where the expected values (or expected utility) of competing
alternatives are calculated.

A decision Tree consists of 3 types of nodes:-

1. Decision nodes - commonly represented by squares

2. Chance nodes - represented by circles
3. End nodes - represented by triangles

Drawn from left to right, a decision tree has only burst nodes (splitting paths) but no sink nodes
(converging paths). Therefore, used manually, they can grow very big and are then often hard to draw
fully by hand.

Analysis can take into account the decision maker's (e.g., the company's) preference or utility function, for
example:

The basic interpretation in this situation is that the company prefers B's risk and payoffs under realistic
risk preference coefficients (greater than $400K -- in that range of risk aversion, the company would need
to model a third strategy, "Neither A nor B").

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Influence diagram

A decision tree can be represented more compactly as an influence diagram, focusing attention on the
issues and relationships between events.

Advantages

Amongst decision support tools, decision trees (and influence diagrams) have several advantages:

Decision trees:

* Are simple to understand and interpret. People are able to understand decision tree models after a
brief explanation.

* Have value even with little hard data. Important insights can be generated based on experts
describing a situation (its alternatives, probabilities, and costs) and their preferences for outcomes.

* Use a white box model. If a given result is provided by a model, the explanation for the result is easily
replicated by simple math.

* Can be combined with other decision techniques. The following example uses Net Present Value
calculations, PERT 3-point estimations (decision #1) and a linear distribution of expected outcomes
(decision #2):

Example

Decision trees can be used to optimize an investment portfolio. The following example shows a portfolio
of 7 investment options (projects). The organization has $10,000,000 available for the total investment.
Bold lines mark the best selection 1, 3, 5, 6, and 7, which will cost $9,750,000 and create a payoff of
16,175,000. All other combinations would either exceed the budget or yield a lower payoff.

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Project crashing using network analysis

Crashing refers to a particular variety of project schedule compression which is performed for the
purposes of decreasing total period of time (also known as the total project schedule duration). The
diminishing of the project duration typically take place after a careful and thorough analysis of all possible
project duration minimization alternatives in which any and all methods to attain the maximum schedule
duration for the least additional cost. There are a number of standard and typical approaches to
attempting to crash a project schedule. One of the most commonly utilized methods of crashing a project
schedule involves minimizing the schedule activity durations while, at the same time, increasing the
assignment of resources on schedule activities. Crashing is something which can be utilized to attempt to
get the most value out of a project assignment. Essentially, it boils down to an attempt to get the most
productivity out of the least time and expense. Crashing is also similar to schedule compression as well
as schedule fast tracking.

Crashing is a process of expediting project schedule by compressing the total project duration. It is
helpful when managers want to avoid incoming bad weather season. However, the downside is that more
resources are needed to speed-up a part of a project, even if resources may be withdrawn from one facet
of the project and used to speed-up the section that is lagging behind. Moreover, that may also depend
on what slack is available in a non-critical activity, thus resources can be reassigned to critical project
activity. Hence, utmost care should be taken to make sure that appropriate activities are being crashed
and that diverted resources are not causing needless risk and project scope integrity. Unit Crashing
means to crash the project duration by one unit (day) instead of crashing it completely. This technique
uses an iterative approach to perform unit crashing until all activities along the critical path are crashed by
desired amount. The output of this method will reduce the cost of project, and is useful at places where
cost is of major consideration. Crashing PERT networks can save a significant amount of money in
crashing and overrun costs of a company. Even if there are no direct costs in the form of penalties for late
completion of projects, there is likely to be intangible costs because of reputation damage.

The diminishing of the project duration typically take place after a careful and thorough analysis of all possible
project duration minimization alternatives in which any and all methods to attain the maximum schedule
duration for the least additional cost The objective of crashing a network is to determine the optimum project
schedule. Crashing may also be required to expedite the execution of a project, irrespective of the increase in
cost. Each phase of the software design consumes some resources and hence has cost associated with it. In
most of the cases cost will vary to some extent with the amount of time consumed by the design of each

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phase .The total cost of project, which is aggregate of the activities costs will also depends upon the project
duration, can be cut down to some extent. The aim is always to strike a balance between the cost and time and
to obtain an optimum software project schedule. An optimum minimum cost project schedule implies lowest
possible cost and the associated time for the software project management

CPM calculates the longest path of planned activities to the end of the project, and the earliest and latest
that each activity can start and finish without making the project longer. This process determines which
activities are "critical" (i.e., on the longest path) and which have "total float" (i.e., can be delayed without
making the project longer). In project management, a critical path is the sequence of project network
activities which add up to the longest overall duration. This determines the shortest time possible to
complete the project. Any delay of an activity on the critical path directly impacts the planned project
completion date (i.e. there is no float on the critical path). A project can have several, parallel, near critical
paths. An additional parallel path through the network with the total durations shorter than the critical path
is called a sub-critical or non-critical path.

These results allow managers to prioritize activities for the effective management of project completion,
and to shorten the planned critical path of a project by pruning critical path activities, by "fast tracking"
(i.e., performing more activities in parallel), and/or by "crashing the critical path" (i.e., shortening the
durations of critical path activities by adding resources).

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