PERT AND CPM

Dummy Activities are used in network

to satisfy precedence requirements.

In PERT and CPM dummy activities

neither consumes resources nor time.

The critical path of a network is the path

that takes the longest time.

In critical path – Zero Total Slack

 PERT AND CPM
The variance of the completion time for a project
is the sum of variance of critical activity times.

There can be more than one critical path in PERT

network.

In CPM project duration can be reduced by

crashing one or more critical activities only.

In PERT, the distribution of activities is assumed

to be BETA distribution.
 PERT AND CPM
• PERT
• Probabilistic model
• Event oriented technique
• Three time estimates
• CPM
• Deterministic model
• Activity oriented technique
• One time estimates
 PERT AND CPM

• The three time estimates of a PERT activity are

optimistic time(to), most likely time (tm) and
pessimistic time (tp).

• Expected time of the activity

(te) = (to+4tm+ tp)/6

• In PERT analysis, a critical activity has Zero

float.
 PERT AND CPM

• Problem : The three time estimates of a PERT

activity are : optimistic time = 8 minutes, most
likely time = 10 minutes, and pessimistic time
= 14 minutes. Find the expected time of the
activity.

• Expected time (te) = (to+4tm+ tp)/6

= {(8+4*10)+14}/6
= 10.33 minutes.
 PERT AND CPM
• Do the problem :
• For an activity, optimistic time = 2 minutes,
• Pessimistic time = 8 minutes,
• Most likely time = 5 minutes
• Find the expected time .

• Expected time = 5 minutes

 PERT AND CPM
• Common terms in Network Analysis

• NETWORK: It is a graphical representation of a

project plan showing inter relationship of the various
activities.

• PROJECT: It is a combination of inter related

activities, all of which must be executed in a certain
order to achieve a set goal.

• ACTIVITY: An activity is any portion of a project

which consumes time or resources and has a
definable beginning and ending.
 PERT AND CPM
• EVENT: The beginning and ending points of
activities are called events. An event is an
instantaneous point in time. The event are shown by
nodes. There are three types of events namely burst
event, merge events and dual events.

• ES- Early Start, LS- Latest Start, EF- Early Finish,

ES- Early Start

• TF- Total Float, FF- Free Float, IF- Independent Float

 PERT AND CPM

• Total Float
• TF = (Lf – Ef) or (TF = Ls-Es)
• Free Float
• (FF = Total float – Head event slack)
• Independence Float
• (IF = Free float – Tail event slack)
Break Even Analysis
 Break Even Analysis
• The Breakeven point is the point where gains
equal the losses.

• The point where equals total costs equal total

revenues.

• There is no profit made or loss incurred at the

break even point.
 Break Even Analysis
• Uses of Break Even Analysis

• To aid forecasting and planning

• To calculate the minimum amount of sales

required in order to be able to break even.

• To see how much changes in output, selling

price will affect profit levels.
 Break Even Analysis
• Cost : Anything incurred during the production
of good or service to get the output into the
hands of the customer
• Types of Costs

• Fixed Costs

• Variable Costs
 Break Even Analysis
• Variable Cost

• Fixed Cost

• Total Cost = Fixed Cost + Variable Cost *

Units
 Break Even Analysis
• Fixed Cost
• Fixed Cost is a cost which does not change in
total for a given time period despite wide
fluctuations in output or volume of activity
• Variable Cost
• Variable Costs changes as activity level
increases.
 Break Even Analysis
• Problem
• A component can be produced by any one of the
four processes, I,II,III and IV. Process I has fixed cost
of Rs.20 and variable cost of Rs.3 per piece. Process II
has a fixed cost of Rs.50 and variable cost of Re.1 per
piece. Process III has a fixed cost of Rs.40 and
variable cost of Rs.2 per piece. Process IV has fixed
cost of Rs.10 and variable cost Rs. 4 per piece. If
company wishes to produce 100 pieces of the
component, from economic point of view it should
choose
 Break Even Analysis
• No. of pieces produced, N = 100
• Total Cost = Fixed cost + Variable Cost * Units
• For Process I, Total Cost = 20 + 3*100 = 320
• Process II, Total Cost = 50 + 1*100 = 150
• Process III, Total Cost = 40 + 2*100 = 240
• Process IV, Total Cost = 10 + 4*100 = 410

• Process II – Total Cost Minimum

 Contract Management
• Sequence of events resulting in a Business
Contract are :
Enquiry

• Offer

Acceptance

Agreement

Contract
 Contract Management
• Contract – Agreement between two or more
parties in writing, to do or not to do certain
things.

• Business contracts are those agreements which

are enforceable at law.
 Contract Management
• 3 R’s of contracting are

• Responsibility

• Reimbursement

• Risk
 Contract Management

• Two important aspects in contract management

process

• Key Performance Indicators (KPI)

• Service Level Agreements (SLA)

 AREAS OF CONTRACT MANAGEMENT

• Authorizing and negotiation

• Baseline management
• Commitment management
• Communication management.
• Contract visibility and awareness
• Document management
• Growth (for Sales-side contracts)
• Contract compliance/governance
 Purchase Vs Procurement
• Purchase

• Receive to purchase requisitions

• Raise and process purchase orders

• Receive goods/services and warehouse

management

• Process and organise payment with supplier

 Purchase Vs Procurement
• Procurement

• Identify needs and requirements

• Negotiate terms, conditions and contracts

• Build and manage supplier relationships

• Perform cost savings and profit margin analysis

 Purchase Vs Procurement
• Three important documents in the purchasing
process (Three Way Match)

• Purchase Order

• Order Receipt / Packing Slips

• Invoice
 Purchase Cycle
The Need
Financial Authority
RFP
Invite Tenders
PQQ
Tenders
Qualifying
Evaluation
Negotiation
Contract Award
Manage Contract
Approval And Payment
Sign Off
Update Of Records

•
 Make or Buy Decision
• It is the determination whether to produce a
component internally or to buy it from outside
the supplier

• The decision is based on the cost

• The cost for both the alternatives should be

calculated and the alternative with less cost is
to be chosen.
 Make or Buy Decision
• Criteria for make
The product can be made cheaper by the firm.

The finished product is being manufactured only

by limited farms.

The part needs extremely quality control.

 Make or Buy Decision
Criteria for Buy
High Investments required for making

Skilled workers not available.

Demand is temporary / seasonal.

 Make or Buy Decision
• Approaches for Make or Buy Decision

• 1. Simple Cost Analysis

• 2. Economic Analysis

• 3. Breakeven Analysis
 Problems
• There are three alternatives available to meet the demand
of a particular product. They are as follows:
• Manufacturing the product by using process A and B,
buying the product. The annual demand of the product is
8,000 units. Should the company make the product using
process A or Process B or buy it?
Manufacturing by Manufacturing by the
Cost Element Buy
the Process A Process B
Fixed Cost/year (Rs) 500,000 600,000
Variable /Unit (Rs) 175 150
Purchase price/Unit(Rs) 125
 Solution
• Data Given:
• Fixed cost for Process A = Rs.5,00,000
• Fixed cost for Process B = Rs.6,00,000
• Variable cost for Process A = Rs.175/unit
• Variable cost for Process B = Rs.150/unit
• Purchase cost = Rs.125/unit
Annual Demand = 8000 units
 Solution
• Total Cost for Process A
• = Fixed Cost + Variable Cost
• = 5,00,000 + 175* 8000
• = Rs.19,00,000
• Total Cost for Process B
• = Fixed Cost + Variable Cost
• = 6,00,000 + 150*8000
• = Rs.18,00,000
 Solution
• Purchase Cost
• = 8000*125
• = Rs.10,00,000
• The Total cost is low for purchase compared to
process A and Process B.

• So, the company should buy the product.

 Pay Back Period

• Payback period is the time in which the initial

outlay of an investment is expected to be
recovered through the cash inflows generated
by the investment.

• It is one of the simplest investment

appraisal techniques.
 Pay Back Period
• Formula
• The formula to calculate the payback period of
an investment depends on whether the periodic
cash inflows from the project are even or
uneven.
• If the cash inflows are even, the formula to
calculate payback period is:
Payback Period =Initial Investment / Net Cash
Flow per Period
 Pay Back Period
• When cash inflows are uneven, we need to
calculate the cumulative net cash flow for each
period and then use the following formula:
• Payback Period =A + (B / C) Where,
A is the last period number with a negative
cumulative cash flow;
B is the absolute value (i.e. value without negative
sign) of cumulative net cash flow at the end of the
period A; and
C is the total cash inflow during the period
following period A
 Pay Back Period
• Problem

• Company C is planning to undertake a project

requiring initial investment of $105 million.
The project is expected to generate $25 million
per year in net cash flows for 7 years.
Calculate the payback period of the project.
 Pay Back Period
• Solution

• Payback Period
= Initial Investment ÷ Annual Cash Flow
= $105M ÷ $25M
= 4.2 years