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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
a single company in the supply chain can enter slight changes in their own production or purchasing schedules for all parties to see. Forecasting systems draw on several sources for their forecasting input. and employees aimed at bringing useful projections into the planning process. If a system's base is rigid or inadequate. any forecasting system needs to be able to facilitate data-sharing partnerships between businesses. Business forecasting systems often work hand-in-hand with supply chain management systems. A flexible and sound architecture is crucial. all partners in the supply chain can electronically oversee all movement of components within that supply chain and gear the chain toward maximum efficiency. Along the same lines. Business forecasting is indeed big business. the Internet fostered vastly accelerated transformations in all areas of business that made the job of business forecasters that much more exacting.S. but choosing the correct one for their particular needs requires a good deal of investigation. business forecasting had to take the Internet itself into account in trying to construct viable models and make predictions. Second. which specializes in studies of business planning. In such systems. and opportunities. The practice attempts to pinpoint key factors in business production and extrapolate from given data sets to produce accurate projections for future costs. rapidly developing Internet economy. the average U. According to a survey by the Hudson. and the forecasting system immediately processes the effects of those changes through the entire supply chain. With business relationships and supply chains growing increasingly complex—particularly in the world of e-commerce. allowing each company to adjust their own schedules accordingly. as the Internet and its myriad functions highlighted the central importance of information in economic activity. the field of business forecasting was propelled by three interrelated phenomena. Companies have a vast array of business forecasting systems and software from which to choose. This normally is done with an eye toward adjusting current and nearfuture business practices to take maximum advantage of expectations. and feature an array of analysis techniques and approaches. for instance. and Web sites. Ohio-based Answer Think Consulting Group. weathering alterations in the business climate. First. Finally. including databases. of business forecasting techniques and systems. In integrated supply chain networks. it's important to invest in systems that will remain useful over the long term. According to the Journal of Business Forecasting Methods & Systems. sophisticated forecasting systems integrate all the necessary data into a single spreadsheet. it can be impossible to reconfigure to adjust to changing market conditions. with heavy reliance on logistics outsourcing and just-in-time delivery—such forecasting systems become crucial for companies and networks to remain efficient. In the Internet age. 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. accept input from several different data sources and platforms. e-mails. After processing data from various sources. more and more companies came to recognize the value. the Internet provided a new series of tools to aid the science of business forecasting. Company spends more than 25.000 person-days on business forecasting and related activities for every billion dollars of revenue. revenues. time. By the 2000s. documents. and other Web-enabled technologies. The Internet has proven to be a panacea in this field. with companies investing tremendous resources in systems. 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. according to the Journal of Business Forecasting Methods & Systems. and often the necessity.management systems. 2 . operate on an open architecture. particularly in the fast-paced.
Estimate the time required for each activity. The PERT chart may have multiple pages with many sub-tasks. an activity is a task that must be performed and an event is a milestone marking the completion of one or more activities. Over time. PERT was developed in the late 1950's for the U.S. Identify the specific activities and milestones. Incrementing the numbers by 10 allows for new ones to be inserted without modifying the numbering of the entire diagram. Determine the critical path. The Network Diagram In a project. The activities in the above diagram are labeled with letters along with the expected time required to complete the activity. Construct a network diagram. 3 . Steps in the PERT Planning Process PERT planning involves the following steps: 1. 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. Before an activity can begin. it does not consider the time variations that can have a great impact on the completion time of a complex project. all of its predecessor activities must be completed. 2. Project network models represent activities and milestones by arcs and nodes. some people began to use PERT as an activity on node network. 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. 3. While CPM is easy to understand and use. It has the potential to reduce both the time and cost required to complete a project. some of which must be performed sequentially and others that can be performed in parallel with other activities.PERT and Steps in the planning process Complex projects require a series of activities. in which the activities are represented on the lines and milestones on the nodes. Determine the proper sequence of the activities. PERT originally was an activity on arc network. The Program Evaluation and Review Technique (PERT) is a network model that allows for randomness in activity completion times. 4. CPM is a deterministic method that uses a fixed time estimate for each activity. Update the PERT chart as the project progresses. we will use the original form of activity on arc. For this discussion. 6. 5. Navy's Polaris project having thousands of contractors.
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. To calculate the variance for each activity completion time. Three standard deviations from the mean are commonly used for the pessimistic time. several drafts may be required to correctly portray the relationships among activities. Identify Activities and Milestones The activities are the tasks required to complete the project. For a beta distribution. A distinguishing feature of PERT is its ability to deal with uncertainty in activity completion times. Determine Activity Sequence This step may be combined with the activity identification step since the activity sequence is evident for some tasks.the longest time that an activity might require. Other tasks may require more analysis to determine the exact order in which they must be performed. so the variance is given by: [(Pessimistic . Construct the Network Diagram Using the activity sequence information.generally the shortest time in which the activity can be completed. the activities are depicted by arrowed lines and milestones are depicted by circles or "bubbles". Software packages simplify this step by automatically converting tabular activity information into a network diagram. For the original activity-on-arc model. then there are six standard deviations between them. Pessimistic time . Note that this time is different from the expected time. but any consistent unit of time can be used. 3. For each activity. Determine the Critical Path 4 . It is helpful to list the tasks in a table that in later steps can be expanded to include information on sequence and duration.the completion time having the highest probability. 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.Optimistic ) / 6 ]2 5. Most likely time . Estimate Activity Times Weeks are a commonly used unit of time for activity completion. the model usually includes three time estimates: • • Optimistic time . The milestones are the events marking the beginning and end of one or more activities. if three standard deviation times were selected for the optimistic and pessimistic times.1. If done manually. a network diagram can be drawn showing the sequence of the serial and parallel activities. • PERT assumes a beta probability distribution for the time estimates. 4. 2.
PERT assumes a beta distribution for these time estimates. As the project unfolds.Latest Start time LF . 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. but the actual distribution may be different. 6. • Probability of completion before a specified date. 5 .Latest Finish time These times are calculated using the expected time for the relevant activities. Even if the activity times are well-estimated. the total project time does not change. 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. Update as Project Progresses Make adjustments in the PERT chart as the project progresses. In cases where there is little experience in performing an activity. The normal distribution assumption holds if the number of activities in the path is large enough for the central limit theorem to be applied. Such a shortening of the project sometimes is referred to as project crashing. 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. • Activity start and end dates. additional resources may be needed to stay on schedule and the PERT chart may be modified to reflect the new situation. • The activities that have slack time and that can lend resources to critical path activities. the numbers may be only a guess. • The critical path activities that directly impact the completion time. the estimated times can be replaced with actual times. one can calculate the probability that the project will be completed by a certain date assuming a normal probability distribution for the critical path. if the person or group performing the activity estimates the time there may be bias in the estimate.Earliest Start time EF . Benefits of PERT PERT is useful because it provides the following information: • Expected project completion time. it may be helpful to determine the following four quantities for each activity: • • • • ES .The critical path is determined by adding the times for the activities in each sequence and determining the longest path in the project. In cases where there are delays. The difference in the latest and earliest finish of each activity is that activity's slack. The amount of time that a non-critical path activity can be delayed without delaying the project is referred to as slack time. LS and LF are found by working backward through the network. If the critical path is not immediately obvious. In other cases.Earliest Finish time LS . Given this variance. Limitations The following are some of PERT's weaknesses: • • The activity time estimates are somewhat subjective and depend on judgment. If activities outside the critical path speed up or slow down (within limits). The critical path determines the total calendar time required for the project.
Resource definitions (people. It is available currently in two editions. Additional software is necessary to manage a complex facility that produces physical goods. Microsoft Project was the company's third Windows-based application. MS Project's proprietary file format is . If MSP is not used to track Work hours or costs (such as using EVM techniques). 2 Write a short note on MS projects and explain in brief some of the important terminologies used in MS Project. tracking progress. All resources can be defined in lable without limit. 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. Features Project creates budgets based on assignment work and resource rates. The underestimation of the project completion time due to alternate paths becoming critical is perhaps the most serious of these issues. assigning resources to tasks. Monte Carlo simulations can be performed on the network to eliminate this optimistic bias in the expected project completion time. PERT assumes that the probability distribution of the project completion time is the same as that of the critical path. and within a couple of years of its introduction it became the dominant PC-based project management software. filters. PERT consistently underestimates the expected project completion time. and the application schedules task work based on the resource availability as defined in the resource calendars. Standard and Professional. the program calculates the cost equals the work times the rate. Q. These different classes of users can have differing access levels to projects. Each resource can have its own calendar. Therefore it cannot determine how many finished products can be produced with a given amount of raw materials. Additionally. 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. Microsoft Project and Microsoft Project Server are the cornerstones of the Microsoft Office Enterprise Project Management (EPM) product. Schedules can be resource leveled. and other data. As resources are assigned to tasks and assignment work estimated. This was also the case with Office 2010. and chains are visualized in a Gantt chart. views. Microsoft Project 2010 features the Ribbon user interface. views.mpp. Custom objects such as calendars.• Even if the beta distribution assumption holds. Project can recognize different classes of users. managing budgets and analyzing workloads. Although branded as a member of the Microsoft Office family. which rolls up to the task level and then to any summary tasks and finally to the project level. equipment and materials) can be shared between projects using a shared resource pool. that means using default settings while creating a Gantt chart which reflect dates determined manually. which defines what days and shifts a resource is available. it has never been included in any of the Office suites (Like Visio). tables. publish this disclaimer: 6 . and critical chain and event chain methodology third-party add-ons are also available. and fields are stored in an enterprise global which is shared by all users. Resource rates are used to calculate resource assignment costs which are rolled up and summarized at the resource level. It is usually not referenced again until a whole new plan is needed. 80% of people use only 20% of a product's features. With MSP. The application creates critical path schedules. Each resource can be assigned to multiple tasks in multiple plans and each task can be assigned multiple resources. To overcome this limitation. Because other paths can become the critical path if their associated activities are delayed. This makes MS Project unsuitable for solving problems of available materials constrained production.
Prepare to track the progress of your project Incorporate progress information into the project . resources.Change the look or content of the Gantt Chart .Link to or attach more resource information .3.See the project's critical tasks .Specify the booking types for resources .another page on this site A project plan may be focused only on planned duration (elapsed calendar time) and target start/finish dates.See the status of multiple projects in Project Center . each date being a associated to a value (a number).Print current view as a report .Define the project . and assignments.Add columns of custom information .Publish project information to the Web Track .Publish project information to the Web Resources .Identify risks to the project .Add documents to the project . daily temperature measurement represent a time-series.Compare progress against baseline work . What do you understand by managing cash flow? Time-serie definition A time-series is a list of dates.Save a baseline plan to compare with later versions .Set deadlines and constrain tasks .Define working times for resources .Publish project information to the Web.Schedule tasks .Organize tasks into phases .Request text-based status reports .Add columns of custom information .Assign people and equipment to tasks . 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. 2007 89 7 .Track risks and issues associated with this project .Define general working times .Link to or attach more task information . What needs to be done? Who is going to do it? How long will it take? When must it happen? When will it happen? How much will it cost? Deliverables and Tasks 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 . For example. not actual Work effort nor dollar costs.List the tasks in the project .Check the progress of the project . Time Value Jan 1st.See project costs .See project risks and issues . Describe the time series forecasting with the help of autoregressive modeling. Q. Technically.Make changes to the project .See how resources' time is allocated . So project plans may not be resource leveled to prevent overallocation.Publish project information to the Web Report - Select a view or report .Change the content or order of information in a view .Specify people and equipment for the project .
Forecasting the time-series The time-series can be represented as a curve that evolve over time. Too few staff. Forecasting the time-series mean that we extend the historical values into the future where the measurements are not available yet. The inputs consumptions are forecasted in order to minimize the inventory levels. There are some subtleties in the definition a time-series forecast. The production history can be forecasted and used as an approximation of the future demand. Too much staff. 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. Forecasting the customer activity can be used to optimize the staff scheduling. See below for further discussion. For example. Forecasting the demand enables to perform efficient capacity planning. we list typical ways of using time-series forecasting. Grouping the values according to a certain period (ex: month) is called time-series aggregation. and do not exploit our understanding of the working of the economy at all. the historical data might be daily sales and but you need monthly forecasts. Here below. The objective is not to build models which are a good representation of the economy with all its complex interconnections. Too few inventory. Time-series for Manufacturers The production history and/or the inputs consumptions constitute time-series to be forecasted. 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 for Customer Services Customer activities can be represented as time-series (ex: hourly volume customer calls in call centers). Time series are very frequently plotted via line charts. 2007 90 Time-series are interesting because many business operations are represented through time-series (daily sales for ex. Learn more about Lokad benefits for manufacturers. Time-series for Retail The sales history of each product constitutes a time-series to be forecasted.Jan 2nd. Learn more about Lokad benefits for retailers. 2007 91 Jan 3rd. The sales forecasts are used to optimize the inventory levels. and money is wasted in paying idle staff. These are a body of techniques which rely primarily on the statistical properties of the data. 8 . Too much inventory. and your expenses go up. these are autoregressive and moving average models. the time-series will represent a set of historical measurements.). either in isolated single series or in groups of series. and sales opportunities are lost in out-of-stock situations. Two basic types of time series models exist. Typically. Business benefits What you do with time-series forecasting depend on your business activity.
9 .. X t = ζ (L) ωt where ω is a white noise error process ζ (L) ωt = ωt + ζ 2 t -2 .. + X t = θ(L) X t -2 εt where ε is a white noise error process and θ(L) X t -2 θ2X t -2 θ2X t .The basic autoregressive model for a series X is.+ ζ q ωt .n = + This would be referred to as an nth order autoregressive process.q.q ω + This would be referred to as a qth order moving average process.. ARMA models A mixture of these two types of model would be referred to as an autoregressive moving average model (ARMA)n.2.. θn X t . where n is the order of the autoregressive part and q is the order of the moving average term. or AR(n). The basic moving average models represent X as a function of current and lagged values of a white noise process. or MA(q).
j w h λe rxte-∞ → 2 j =2 ∞ 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. 2T w h e rXe = ∑ X t where Pi are the estimates of the partial autocorrelation function. So in general there will be a `cut off' at lag p in the partial autocorrelation function. So the first order AR process has been recast as an infinite order MA one.j + d t j=2 ∞ w h ere 2= 2 ∑ α j < ∞ .X * ) (X t . t s a n dE (ε ε )=2fo rt ≠ s λ<2 As a general rule.X * ) T = Ci 2T ( X t . 2T -k ∑t=2( X t+k . ∞ xt = ∑ λ j ε t. 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 * )2 ∑ T t=2 the partial autocorrelation function is given as the coefficients from a simple autoregression of the form. . X t = A2+ TPti=2 t -i + ut X n * For a pure autoregressive process of lag p. E (ε t )=2E (ε t2)=σ 2 . + x t = λ x t -2 ε t by successively lagging this equation and substituting out the lagged value of x we may rewrite this as. the partial autocorrelation function up to lag p will be the autoregressive coefficients while beyond that lag we expect them all to be zero. The correlogram on the other hand will decline ∑ i=2 10 . α j=2 ∞ dt is termed the linearly deterministic part of x while is termed the linearly in deterministic part.xt = ∑ α j ε t .
Once we have exhausted spontaneous sources of financing. You can read five specific ways to do this in my "Close The Cash Flow Gap" article. restrictions imposed upon the organization. we than use conventional sources of financing. will exhibit the reverse property. We previously discussed how to predict cash deficits with forecasting. The second step of cash flow management is to develop and use strategies that will maintain an adequate cash flow for your business. Whenever we use short-term financing to cover cash deficits. You won't be able to stay in business if you can't pay your bills for any extended length of time! Therefore. on the other hand. Many software accounting programs have built-in reporting features that make cash flow analysis easy. risks.asymptotical towards zero and not exhibit any discreet `cut of' point. such as bank loans. This is the first step of cash flow management. 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. Cash Flow Management Cash flow management is the process of monitoring. you need to perform a cash flow analysis on a regular basis. analyzing. caused by having too great a gap between cash inflows and outflows. and other factors. lines of credit. we obtain additional cash. 11 .financing flexibility. For small businesses. We now have to understand how to finance our cash flow deficits. and adjusting your business' cash flows. and asset based borrowing. By lengthening the disbursement cycle. An MA process of order q. we must consider costs. and use cash flow forecasting so you can take the steps necessary to head off cash flow problems. 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. our current financial situation. the most important aspect of cash flow management is avoiding extended cash shortages. Part of managing cash flows is to understand how to finance operating cash flows.
The line of balance (LOB) management control technique collected. and other systems were eliminated. which was particularly applied in the construction industry. it was first used in 1957 by E. At the same time. In the last 30 years. using a time network analysis to manage personnel.S. Smaller businesses. du Pont developed CPM. on which future time is plotted horizontally and work to be completed is indicated in a vertical line. can be considered complete. and the time deadlines created by defence industry projects. and financial requirements. PERT emphasizes the relationship between the time each activity takes. 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. PERT is an integrated project management system. awarded defense related government contracts. a pioneer in the field of scientific management. all defense contractors adopted PERT to manage the massive one-time projects associated with the industry. measured.I. These systems were designed to manage the complexities of major manufacturing projects. PERT mandates that each preceding event be completed before succeeding events. It was introduced at Goodyear Tire and Rubber Company in 1941 and fully utilized during World War II in the defence industry. status. and Hamilton. It is a visual management system. Gantt charts. and thus the final project. as has CPM.SET 2 Q. and the resulting time and cost for the anticipated completion of the entire project. Traditional techniques such as line of balance. so the Navy pulled in the Lockheed Aircraft Corporation and the management consulting firm of Booz. coordinating optimum cost and time criteria. PERT borrows some CPM applications. Existing integrated planning on such a large scale was deemed inadequate. A typical PERT network consists of activities and events. After 1960. Even older is the Gantt chart. the extensive data necessary for such industrial efforts. material resources. as a major technique of integrated project management. du Pont de Nemours & Co. Also describe the framework required for PERT & CPM. 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. PERT has spread. and each has its advantages. These three estimates are classed as 12 . found it necessary to use PERT. The critical path method (CPM) evolved parallel to PERT. Therefore. Most of these management systems developed following World War II. Program Evaluation and Review Technique (PERT) is a scheduling method originally designed to plan a manufacturing project by employing a network of interrelated activities. and the path of the project proceeds toward termination. An activity is defined as the time and resources required to move from one event to another. An event is the completion of one program component at a particular time.1 Explain Relationship between PERT & CPM. developed during World War I by Harvey Gantt. the costs associated with each phase. CPM is a mathematically ordered network of planning and scheduling project management. 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 growth of PERT paralleled the rapid expansion in the defense industry and meteoric developments in the space race. and analyzed data to show the progress. and timing of production projects. Navy Special Projects Office on the Polaris missile system. when events and activities are clearly defined. PERT proved to be an ideal technique for one-of-a-kind projects. Allen. progress of a program is easily monitored. PERT was first developed in 1958 by the U.
B = pessimistic estimate. where A (optimistic time) = 7 weeks. and even strikes can affect personnel supply. the critical path is established. but time has seemingly not diminished its applicability. M = most likely estimate. The basic difference in PERT and CPM is in how the diagrams are drawn. Two other elements comprise the PERT network: the path. PERT has advantages as well as disadvantages. Smaller networks can generally be managed with manual computations and are usually developed. The project reads: where T = expected completion time.optimistic. it becomes clear that despite the fact that some steps of the process are independent. One advantage is the three time estimate process. and are made for each activity of the overall project. materials. Applying real numbers to the PERT formula. or the normal or realistic time an activity requires. or maximum time estimate for completing the activity. Factors influencing project management take many forms. Various methods have been established to adjust the PERT network in order to allow for unpredictable situations. computers have provided one major means of network analysis and revision. The circles are then connected with lines to indicate the relationship between the tasks. Planning a major network reveals potential problem areas and interdependent events that are not so obvious in conventional project development methods.) may have an environmental impact. experience gained is reapplied to future projects. In recent years. events are placed in circles (or rectangles) to emphasize a point in time. Generally. M (most likely time) = 11 weeks. and revised without great difficulty. Another key to PERT is to analyze and revise the data owing to a constant state of flux. whereby data accumulated and analyzed by various means can be applied to the planning and execution of a major project. Slack time is defined as the difference between the total expected activity time for the project and the actual time for the entire project. or critical path. 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. In a comprehensive view of PERT. including personnel. the project sponsors realize significant financial benefits. 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 reverse is the pessimistic estimate. or sudden changes in climatic conditions (snow. CPM use has become more widespread than the use of PERT applications. the result is as follows. Tasks are indicated by the lines connecting the network of events. thus quantifying the scheduling and planning of the project. the next step will depend on the successful completion of prior steps. The third is the most likely estimate. When utilizing the latest computer applications to PERT networks. The critical path is a combination of events and activities that will necessitate the greatest expected completion time. In PERT. utilities. expected completion time) Once the expected time is computed. For example. The PERT network considers all potential variables. vacations. especially in developing bids for project estimates. In CPM the emphasis is on the tasks. and environmental conditions. and pessimistic. 13 . and slack time. A final advantage is the use of what is termed the management-by-exception principle. again useful in identifying difficulties as well as more effective interrelated processes. When appropriate costing techniques are implemented with PERT networking. When managers have used PERT in integrated project management. flooding from rains. especially on larger projects. A vital aspect of PERT is the formula used for the calculation of expected project time. sickness. B (pessimistic time) = 15 weeks: (or T. Computers are significantly useful for computations of the critical path and slack time. managers have additional benefits with which to plan. evaluated. etc. equipment and facilities. absenteeism. which are placed in circles. most likely. Slack time is the spare time experienced in the PERT network. A = optimistic estimate.
and utility. including hospital planning for such issues as costs and social security. For example. Nominal data is tested in Boolean fashion. Continuing with the weather example. and even real estate development. In many instances. We could also say that it is cold. Each node in the tree evaluates an attribute in the data and determines which path it should follow. numeric weather data could be tested by finding if it is greater than 10 degrees Fahrenheit. the decision test is based on comparing a value against some constant. cool. resource costs. or greater than 70. PERT diagrams are available that eliminate the estimating process and make PERT a more useful and convenient tool. educational planning and development. 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. First. the root node must effectively split the data. We can quantify the temperature by saying that it is 11 degrees Celsius or 52 degrees Fahrenheit. Typically. Write a short note on project crashing using network analysis.3 what do you understand by a decision tree. including chance event outcomes. decision trees visualize what steps are taken to arrive at a classification. Job cost estimates are established from an activity or a group of activities on the basis of a time network. to help identify a strategy most likely to reach a goal. then we call the decision tree a computational verb decision tree. considered to be the "parent" of every other node. In the weather example. More accurately. PERT\cost relates actual costs to project costs. various accounting functions. Information produced by data mining techniques can be represented in many different ways. warm or hot. Another use of decision trees is as a descriptive means for calculating conditional probabilities. managers have attempted to apply PERT principles to other types of projects. In classifying tasks. Decision trees can represent diverse types of data. specifically in decision analysis. efficient project management. Q.e. The type of data organized by a tree is important for understanding how the tree works at the node level. an attribute must be selected as the root node. and the latter is a type of nominal data. In most instances. Recalling that each node is effectively a test. the example of cold. smallest) tree. 14 . As with all aspects of business.The PERT/cost system was developed to gain tighter control over actual costs of any project. Managers can now locate PERT applications on the World Wide Web and apply them directly to the appropriate manufacturing project. The humidity node reflects numeric tests. mild. The former is an example of numeric data. Decision tree structures are a common way to organize classification schemes. outlook is a nominal data type. Decision trees are commonly used in operations research. These values have no relationships or distance measures. Classification using a decision tree is performed by routing from the root node until arriving at a leaf node. Ordinal data has an implicit assumption of ordered relationships between the values. cool. overcast and rainy. It is one way to display an algorithm. It is often desirable to organize nominal data as well. The illustration shows both types of tests. The test simply asks which attribute value is represented and routes accordingly. mild. described as ordinal data. whether or not it has a particular value. When the decisions or consequences are modelled by computational verb. Clearly PERT is a manufacturing-based project planning and scheduling network. warm and hot is a special type of nominal data. Every decision tree begins with what is termed a root node. Nominal quantities are formally described by a discrete set of symbols. with an inequality of less than or equal to 70. The simplest and most familiar is numerical data. In order to create the most efficient (i. the Internet has become a powerful tool with respect to PERT. we could also have a purely nominal description like sunny. A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences. numeric data is often evaluated in terms of simple mathematical inequality. weather can be described in either numeric or nominal fashion. For example. Decision tree induction algorithms function recursively. in other words.
represented by circles 3.Each split attempts to pare down a set of instances (the actual data) until they all have the same classification. used manually. Chance nodes .commonly represented by squares 2. In decision analysis. "Neither A nor B"). Therefore. they can grow very big and are then often hard to draw fully by hand.. A decision Tree consists of 3 types of nodes:1. a decision tree has only burst nodes (splitting paths) but no sink nodes (converging paths). the company's) preference or utility function. the company would need to model a third strategy. 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 -. End nodes . 15 .g. The best split is the one that provides what is termed the most information gain. Analysis can take into account the decision maker's (e. a "decision tree" — and the closely-related influence diagram — is used as a visual and analytical decision support tool.in that range of risk aversion. where the expected values (or expected utility) of competing alternatives are calculated.represented by triangles Drawn from left to right. Decision nodes .
Bold lines mark the best selection 1. The following example uses Net Present Value calculations. The organization has $10. * Have value even with little hard data. and 7. People are able to understand decision tree models after a brief explanation. Important insights can be generated based on experts describing a situation (its alternatives. and costs) and their preferences for outcomes. 3. If a given result is provided by a model.Influence diagram A decision tree can be represented more compactly as an influence diagram. 6.750. The following example shows a portfolio of 7 investment options (projects).000. 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. probabilities.000 and create a payoff of 16. All other combinations would either exceed the budget or yield a lower payoff. decision trees (and influence diagrams) have several advantages: Decision trees: * Are simple to understand and interpret. which will cost $9. the explanation for the result is easily replicated by simple math. focusing attention on the issues and relationships between events. * Can be combined with other decision techniques.175. 16 .000. Advantages Amongst decision support tools. * Use a white box model.000 available for the total investment. 5.
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. Crashing may also be required to expedite the execution of a project. 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. 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. One of the most commonly utilized methods of crashing a project schedule involves minimizing the schedule activity durations while. at the same time. thus resources can be reassigned to critical project activity. increasing the assignment of resources on schedule activities. 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. 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. However. Each phase of the software design consumes some resources and hence has cost associated with it. irrespective of the increase in cost. Unit Crashing means to crash the project duration by one unit (day) instead of crashing it completely. It is helpful when managers want to avoid incoming bad weather season. Hence. In most of the cases cost will vary to some extent with the amount of time consumed by the design of each 17 . Even if there are no direct costs in the form of penalties for late completion of projects. Crashing PERT networks can save a significant amount of money in crashing and overrun costs of a company. There are a number of standard and typical approaches to attempting to crash a project schedule. 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. it boils down to an attempt to get the most productivity out of the least time and expense. and is useful at places where cost is of major consideration. that may also depend on what slack is available in a non-critical activity.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). Crashing is something which can be utilized to attempt to get the most value out of a project assignment. Essentially.
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. A project can have several.e. These results allow managers to prioritize activities for the effective management of project completion. which is aggregate of the activities costs will also depends upon the project duration. This determines the shortest time possible to complete the project. 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.phase .The total cost of project. 18 .e. and to shorten the planned critical path of a project by pruning critical path activities. This process determines which activities are "critical" (i.. and/or by "crashing the critical path" (i. on the longest path) and which have "total float" (i. Any delay of an activity on the critical path directly impacts the planned project completion date (i. performing more activities in parallel). there is no float on the critical path). The aim is always to strike a balance between the cost and time and to obtain an optimum software project schedule. can be cut down to some extent. In project management. by "fast tracking" (i.e. and the earliest and latest that each activity can start and finish without making the project longer.e.. shortening the durations of critical path activities by adding resources).. near critical paths. can be delayed without making the project longer)..e. parallel. a critical path is the sequence of project network activities which add up to the longest overall duration.
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