Managing a Business/Sir, Pls help for my assignments
QUESTION: 1. Why do you think choosing correct location for a plant is significant? Draft a plan to locate a nuclear power plant.
2. Explain intermittent and continuous operations. Under what type of situation it would be used in automobile industry?
3. Examine the problems encountered by the exporters while exporting herbal products to European countries. Also recommend suitable suggestions to overcome such issues.
4. Discuss the role of ADB and World Bank during financial crisis of a nation.
5. “Project parameters namely time, cost and quality are to be planned carefully for any project. But most of the major projects were not successful. Discuss this statement with a major project.
6. “Project manager is a risk bearer”. Assign yourself as a project manager for metro rail projects in India. List out various feasibility studies to be conducted to avoid risks during the implementation of project.
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1.Why do you think choosing correct location for a plant is significant? Draft a plan to locate a nuclear power plant.
influence the location of a plant with reference to thermal and nuclear power plant.
Why do firms locate where they do? There is no single answer—different firms choose their locations for different reasons. Key determinates of a location decision are a firm's factors of production. For example, a firm that spends a large portion of total costs on unskilled labor will be drawn to locations where labor is relatively inexpensive. A firm with large energy demands will give more weight to locations where energy is relatively inexpensive. In general, firms choose locations they believe will allow them to maximize net revenues: if demand for goods and services is held roughly constant, then revenue maximization is approximated by cost minimization.
The typical categories that describe a firm's production function are:
• Labor. Labor is often and increasingly the most important factor of production. Other things equal, firms want productivity, in other words, labor output per dollar. Productivity can decrease if certain types of labor are in short supply, which increases the costs by requiring either more pay to acquire the labor that is available, the recruiting of labor from other areas, or the use of the less productive labor that is available locally.
• Land. Demand for land depends on the type of firm. Manufacturing firms need more space and tend to prefer suburban locations where land is relatively less expensive and less difficult to develop. Warehousing and distribution firms need to locate close to interstate highways.
• Local Infrastructure. An important role of government is to increase economic capacity by improving quality and efficiency of infrastructure and facilities, such as roads, bridges, water and sewer systems, airport and cargo facilities, energy systems, and telecommunications. @@@@@
• Access to Markets. Though part of infrastructure, transportation merits special attention. Firms need to move their product, either goods or services, to the market, and they rely on access to different modes of transportation to do this. While transportation has become relatively inexpensive compared to other inputs, and transportation costs have become a less important location factor, access to transportation is still critical. That long-run trend, however, could shift because of decreasing funds to highway construction, increasing congestion, and increasing energy prices.
• Materials. Firms producing goods, and even firms producing services, need various materials to develop products that they can sell. Some firms need natural resources: a manufacturing sector like lumber needs trees. Or, farther down the line, firms may need intermediate materials: for example, dimensioned lumber.@@@@@
• Entrepreneurship. This input to production may be thought of as good management, or even more broadly as a spirit of innovation, optimism, and ambition that distinguishes one firm from another even though most of their other factor inputs may be quite similar.
The supply, cost, and quality of any of these factors obviously depend on market factors: on conditions of supply and demand locally, nationally, and even globally.
But they also depend on public policy. In general, public policy can affect them through:
• Regulation. Regulations protect the health and safety of a
community, and help maintain the quality of life. However, simplified bureaucracies and straightforward regulations can help firms react quickly in a competitive marketplace.@@@@@
• Taxes. Firms tend to seek locations where they can optimize their after-tax profits. But tax rates are not a primary location factor, they matter only after corporations have made decisions on labor, transportation, raw materials, and capital costs. Within a region, production factors are likely to be similar, so differences in tax levels across communities are more important in the location decision than are differences in tax levels between regions.
• Financial incentives. Governments offer firms incentives to
encourage growth. Generally, economic research has shown that most types of incentives have had little significant effect on firm location between regions. However, for manufacturing industries with significant equipment costs, property or investment tax credit or abatement incentives can play a significant role in location decisions. Incentives are more effective at redirecting growth within a region than they are at providing a competitive advantage between regions.
Firms locate in a city because of the presence of factors other than direct factors of production. These indirect factors include agglomerative economies, also known industry clusters, location amenities, and innovative capacity.
• Industry Clusters. Firms tend to locate in areas where there is already a concentration of firms like their own. The theory works in practice because firms realize operational savings and have access to a large pool of skilled labor when they congregate in a single location.
• Quality of Life. A region that features many quality amenities, such as good weather, recreational opportunities, culture, low crime, good schools, and a clean environment attracts people simply because it is a nice place to be. A region's quality of life attracts skilled workers, and if the amenities lure enough potential workers to the region, the excess labor supply pushes their wages down so that firms can find skilled labor for a relatively low cost.
• Innovative capacity. Increasing evidence suggests that a culture promoting innovation, creativity, flexibility, and adaptability will be essential to keeping MANY cities economically vital and internationally competitive. Innovation is particularly important in industries that require an educated workforce. High-tech companies need to have access to new ideas typically associated with a university or research institute. Government can be a key part of a community's innovative culture, through the provision of services and regulation of development and business activities that are responsive to the changing needs of business.@@@@@
LOCATION SELECTION TECHNIQUES
Several techniques exist that can be used as part of a location strategy to determine the merits of prospective sites. Location strategists often divide assessment of prospective locations into macro analysis and micro analysis. Macro analysis encompasses the evaluation of different regions and communities, whereas micro analysis includes the evaluation of particular sites. The main macro analysis techniques are factor-rating systems, linear programming, and center of gravity.
Factor-rating systems are among the most commonly used techniques for choosing a location, because they analyze diverse factors in an easily comprehensible manner. Factor-rating systems simply consist of a weighted list of the factors a company considers the most important and a range of values for each factor (see Table 1). A company can rate each site with a value from the range based on the costs and benefits offered by the alternative locations, and multiply this value by the appropriate weight. These numbers are then summed to get an overall "factor rating." Then a company can compare the overall ratings of alternative sites. This technique enables a company to choose a location systematically based on the best rating.
Sample Factor-Rating System
Factor Rating (1-100) Weight Factor-Rating
Energy availability 60 .3 18
Labor availability 80 .2 16
Transportation 40 .2 8
Supplies 90 .1 9
Taxes and regulations 70 .1 7
Infrastructure 70 .1 7
Overall Factor-Rating — — 65
Linear programming provides a method for evaluating the cost of prospective locations within a production/distribution network. This technique uses a matrix of production facilities and warehouses that shows the unit shipping costs from a manufacturing location designated by a variable, such as X, to prospective destinations, such as warehouses designated by other variables— E, F, and G —and the total amount of goods the prospective manufacturer, X, could produce. Other prospective manufacturing locations and the same information for each are also included in the matrix. After computing the total costs for each prospective location, a company can determine which one has lower total costs in terms of the entire production/distribution network.
The center of gravity method is useful for identifying an individual location by considering existing locations, the distances between them, and the volume of products to be shipped. Companies use this method mostly for locating distribution warehouses. To use this technique, companies plot their existing locations on a grid with a coordinate system (the particular coordinate system used does not matter). The idea behind this technique is to identify the relative distances between locations. After the existing locations are placed on the grid, the center of gravity is determined by calculating the X and Y coordinates that would have the lowest transportation costs.
Since service businesses generally must maintain a number of sites to remain close to customers, the location selected should be close to the targeted segment of the market. The market also can influence the number of new locations, as well as their size and features.
A simple technique for determining service locations is to establish a set of minimum criteria for opening new outlets. These criteria should be developed so that the locations selected have strong chances of success. A company could assess the potential of prospective locations based on primary criteria such as:
• The population of the community should more than 100,000.
• The annual per capita income should be more than $35,000.
After selecting locations that satisfy these criteria, a company might further evaluate the potential locations based on a set of criteria that considers the location's industrialization, person/car ratio, labor availability, population density, and infrastructure.
TRENDS IN LOCATION STRATEGY
Globalization and technology have been the biggest drivers of change in the location decision process over the last thirty years. Location activity has been very high in recent decades as a result of technology improvements, economic growth, international expansion and globalization, and corporate restructuring, mergers and acquisitions.
The top five location factors for global companies are costs, infrastructure, labor characteristics, government and political issues, and economy. Key sub-factors are the availability and quality of the labor force, the quality and reliability of modes of transportation, the quality and reliability of utilities, wage rates, worker motivation, telecommunication systems, record of government stability, and industrial relations laws. Other sub-factors—protection of patents, availability of management resources and specific skills, and system and integration costs—are of increasing importance.
Whereas wages and the industrial relations environment are significant factors in multinational location decisions, by far the main determinant is the host country market size. Furthermore, global economic considerations have become paramount in location strategy as companies contemplate the advantages afforded by various locations in terms of positioning in international markets and against competitors.
When companies seek new sites they generally strive to keep operating and start-up costs low, and so they often choose locations in collaboration with economic development groups to achieve these goals. Companies also now expect to move into new facilities more quickly than in the past, so they tend to focus more on leasing facilities than purchasing land and building new facilities. Also, by leasing facilities, companies can relocate every few years if the market requires it.
Technology, especially communications technology, has not only been a driver of change, but has facilitated the site selection process. Managers can obtain initial information on alternative locations via the Internet and promotional software. Site selections agencies increasingly use geographical information system (GIS) technology, and e-mail has become a dominant mode of communication in location research and negotiation.
Location databases have enabled companies to do initial screening themselves, hence reducing their need to rely on economic developers to providing only very specific information and details on locations—such as commuting patterns and workforce characteristics.
Telecommunications technology has created the "virtual office" of employees working from remote locations. The growth of the virtual office has impacted location strategy in that some companies no longer need as much workspace because many employees work from remote sites. When these employees need to work at the office, they can call and reserve office space for themselves. The decrease in facility size can lead to millions of dollars worth of savings each year, while increasing productivity.
THE OTHER FACTORS ARE ---INCLUDING
ECONOMIC [ E ] / NON ECONOMIC [ NE ] FACTORS
1.SHIPPING / TRANSPORTATION COSTS. [E]
2.LAND AVAILABLE FOR EXPANSION.[E]
3.PROXMITY OF SUPPLIERS [E] @@@@@
4.ACCESS TO MARKETS [E]
5.AREA IDENTIFIED WITH YOUR INDUSTRY.[NE]
6.SUPPLY OF TRAINED LABOR [E]
7.FAVOURABLE WAGE RATES [E]
8.PRESERVATION OF THE ENVIRONMENT [ NE ]@@@@@
9.OPPORTUNITY TO EMPLOY MINORITY GROUP [ NE ]
10.PERSONAL PREFERENCES OF TOP MANAGEMENT [NE ]
11.TAX ADVANATGES [ E ]
12.AVAILABLE FACILITIES AT LOW INITIAL COST [E ]
13.LOCAL CRIME RATE [NE]
14.UNION ACTIVITY [NE ]
15.COMMUNITY'S ATTITUDE TOWARDS [NE ]@@@@@
@@@@@ INDICATES THE FACTORS STRONGLY APPLICABLE FOR NUCLEAR / THERMAL PLANTS.
2.Explain intermittent and continuous operations. Under what type of situation it would be used in automobile industry?
The two general types of processes are intermittent operations and continuous operations.
Intermittent operations produce a variety of products in smaller quantities. Since a variety of products are produced, a variety of flows through the process exist. Intermittent operations tend to be labor intensive.
Continuous operations produce few products in larger quantities. Resources are organized into a line flow in continuous operations. Since we are producing few products in large quantities, we can and do invest a lot of money in equipment.
The types of production system are depicted in the following image.
Image credits © Moon Rodriguez.
The types of production system are grouped under two categories viz.,
1. Intermittent production system, and
2. Continuous production system.
Now let's discuss in detail each of the above-mentioned categories.
Intermittent production system
Intermittent means something that starts (initiates) and stops (halts) at irregular (unfixed) intervals (time gaps).
In the intermittent production system, goods are produced based on customer's orders. These goods are produced on a small scale. The flow of production is intermittent (irregular). In other words, the flow of production is not continuous. In this system, large varieties of products are produced. These products are of different sizes. The design of these products goes on changing. It keeps changing according to the design and size of the product. Therefore, this system is very flexible.
Following chart highlights the concept of an intermittent production system.
Following are examples on the intermittent production system. Please refer above chart while reading examples given below.
1. The work of a goldsmith is purely based on the frequency of his customer's orders. The goldsmith makes goods (ornaments) on a small-scale basis as per his customer's requirements. Here, ornaments are not done on a continuous basis.
2. Similarly, the work of a tailor is also based on the number of orders he gets from his customers. The clothes are stitched for every customer independently by the tailor as per one's measurement and size. Goods (stitched clothes) are made on a limited scale and is proportional to the number of orders received from customers. Here, stitching is not done on a continuous basis.
The features of an intermittent production system are depicted below.
The characteristics of an intermittent production system are listed as follows:
1. The flow of production is not continuous. It is intermittent.
2. Wide varieties of products are produced.
3. The volume of production is small.
4. General purpose machines are used. These machines can be used to produce different types of products.
5. The sequence of operation goes on changing as per the design of the product.
6. The quantity, size, shape, design, etc. of the product depends on the customer's orders.
The types of intermittent production system include:
1. Project production flows,
2. Jobbing production flows, and
3. Batch production flows.
Continuous production system
Continuous means something that operates constantly without any irregularities or frequent halts.
In the continuous production system, goods are produced constantly as per demand forecast. Goods are produced on a large scale for stocking and selling. They are not produced on customer's orders. Here, the inputs and outputs are standardized along with the production process and sequence.
Following chart highlights the concept of a continuous production system.
Following are examples on the continuous production system. Please refer above chart while reading examples given below.
1. The production system of a food industry is purely based on the demand forecast. Here, a large-scale production of food takes place. It is also a continuous production.
2. Similarly, the production and processing system of a fuel industry is also purely based on, demand forecast. Crude oil and other raw sources are processed continuously on a large scale to yield usable form of fuel and compensate global energy demand.
The features of a continuous production system are depicted below.
The characteristics of a continuous production system are listed as follows:
1. The flow of production is continuous. It is not intermittent.
2. The products are standardized.
3. The products are produced on predetermined quality standards.
4. The products are produced in anticipation of demand.
5. Standardized routing sheets and schedules are prepared.
The types of continuous production system include:
1. Mass production flows, and
2. Process production flows.
automobile industry operations is a multy type operation
The production process is concerned with transforming a range of inputs into those outputs that are required by the market.
This involves two main sets of resources - the transforming resources, and the transformed resources.
The transforming resources include the buildings, machinery, computers, and people that carry out the transforming processes. The transformed resources are the raw materials and components that are transformed into end products.
Any production process involves a series of links in a production chain. At each stage value is added in the course of production. Adding value involves making a product more desirable to a consumer so that they will pay more for it. Adding value therefore is not just about manufacturing, but includes the marketing process including advertising, promotion and distribution that make the final product more desirable.
It is very important for businesses to identify the processes that add value, so that they can enhance these processes to the ongoing benefit of the business.
There are three main types of process: job, batch and flow production.
Job or 'make complete' production is the creation of single items by either one operative or a team of operative's e.g. the Humber Bridge or a frigate for the navy.
It is possible for a number of identical units to be produced in parallel under job production, e.g. several frigates of a similar type. Smaller projects can also be seen as a form of job production, e.g. hand knitting a sweater, writing a book, rewiring a house, etc.
Job production is unique in the fact that the project is considered to be a single operation, which requires the complete attention of the operative before he or she passes on to the next job. A good example of job production is the work carried out by Portakabin in creating modular buildings such as offices, which it designs, assembles and maintains for clients. Examples from the service industries include cutting hair, and processing a customers' order in a store like Argos.
The benefits of job production are:
1. The job is a unique product, which exactly matches the requirements of the customer, often from as early as the design stage. It will therefore tend to be specific to a customer's order and not in anticipation of a sale. For example, someone doing a customised spray paint job on a motorcycle will first discuss with a customer the sort of design he would like. A detailed sketch would then be produced on a piece of paper. Once the sketch has been approved the back of the sketch will be chalked over and traced on to the relevant piece of the motorbike. The background work is then sprayed on with an airbrush before the fine detail is painted on. The finished work is then inspected by the customer who will pay for a unique product.
2. As the work is concentrated on a specific unit, supervision and inspection of work are relatively simple.
3. Specifications for the job can change during the course of production depending upon the customer's inspection to meet his or her changing needs. For example, when a printing firm like Polestar is asked to produce a catalogue for a grocery chain it is relatively simple to change the prices of some of the goods listed in the catalogue.
4. Working on a single unit job, coping with a variety of tasks and being part of a small team working towards the same aim would provide employees with a greater level of satisfaction. For example, aircrews working for United Airways would treat each flight as a specific job, with passengers requiring individual attention to their specific needs - e.g. for vegetarian dishes, wheelchair access to the flight, etc.
The term batch refers to a specific group of components, which go through a production process together. As one batch finishes, the next one starts.
For example on Monday, Machine A produces a type 1 engine part, on Tuesday it produces a type 2 engine part, on Wednesday a type 3 and so on. All engine parts will then go forward to the final assembly of different categories of engine parts.
Batches are continually processed through each machine before moving on to the next operation. This method is sometimes referred to as 'intermittent' production as different job types are held as work-in-progress between the various stages of production.
The benefits of batch production are:
1. It is particularly suitable for a wide range of almost similar goods, which can use the same machinery on different settings. For example batches of letters can be sent out to customers of an insurance company.
2. It economises upon the range of machinery needed and reduces the need for a flexible workforce.
3. Units can respond quickly to customer orders by moving buffer stocks of work-in-progress or partly completed products through the final production stages.
4. It makes possible economies of scale in techniques of production, bulk purchasing and areas of organisation.
5. It makes costing easy and provides a better information service for management.
Batch production is described as 'intermittent' production and is characterised by irregularity. If the rest period in batch production disappeared it would then become flow production. Flow production is therefore a continuous process of parts and sub-assemblies passing on from one stage to another until completion.
Units are worked upon in each operation and then passed straight on to the next work stage without waiting for the batch to be completed. To make sure that the production line can work smoothly each operation must be of standard lengths and there should be no movements or leakages from the line, i.e. hold-ups to work-in-progress.
For flow production to be successful there needs to be a continuity of demand. If demand varied, this could lead to a constant overstocking of finished goods.
Although with modern robotics it is possible to create variations in products being produced through continuous flow techniques, typically such products will be relatively standardised.
Achieving a smooth flow of production requires considerable pre-production planning to make sure that raw materials are purchased and delivered just-in-time, that sufficient labour is employed and that there is continuous attention to quality throughout the production process.
The benefits of flow production are:
• ease of using just-in-time techniques to eliminate waste and minimise costs
• labour and other production costs will be reduced through detailed planning and the use of robotics and automation
• deviations in the line can be quickly spotted through ongoing quality control techniques
• as there is no rest between operations, work-in-progress levels can be kept low
• the need for storage space is minimal
• the physical handling of items is minimal
• investment in raw materials and parts are quickly converted into sales
• control is easy.
1.Examine the problems encountered by the exporters while exporting herbal products to European countries. Also recommend suitable suggestions to overcome such issues.
In both the EU and the US, India had the greatest number of
rejections of herbs and spices (Tables 30 and 31), accounting
for 24 per cent and 39 per cent of herb and spice rejections,
respectively. Other countries with high numbers of rejections of
herbs and spices included Thailand and Turkey in the EU and
Mexico, Pakistan, Indonesia, China and Vietnam in the US. Note
that herbs and spices as a commodity group includes a great diversity
of products. Thus, the patterns of rejections across countries
very much reflects the types of herb and spice exported
and their associated compliance challenges.11
Of the countries with appreciable exports of herbs and spices
to the EU from 2002 to 2008, Thailand stands out as having by
far the highest unit rejection rate (Table 32) at more than one
rejection per US$1 million of exports in some periods. Other
exporters with high rejection rates included India, Turkey, Morocco,
Egypt and Sri Lanka. Countries with very low unit rejection
11 For example, there are poten ally a range of food safety issues associated
with chilli powder, including microbiological contamina on and
adultera on with ar fi cial colour. Conversely, there are few concerns with
rates included Madagascar, Israel, Brazil, Iran, Kenya, Chile and
Guatemala; some of these countries recorded no rejections over
the period 2002 to 2008.
The unit rejection rate for herbs and spices in the US over the
period 2002 to 2008 was much higher than for any other of
the commodities analysed in this report (Table 33). Indeed, a
number of countries, including India, Mexico, Sri Lanka, Canada
Thailand and Guatemala, had unit rejection rates above one.
Mexico, for example, had almost three rejections per US$1 million
of exports over the period 2006 to 2008. Countries with low
rejection rates included Madagascar, Brazil, Peru, Germany, Israel,
Chile, France and Uganda.
In terms of relative rejection rates, China, Vietnam, Peru, Brazil
and Chile are among the developing countries that had a good
compliance performance with herb and spice exports to both
the EU and the US over the period 2002 to 2008 (Figures 14 and
15), while in both the EU and the US, India, Pakistan and Thailand
were relatively poor performers, accounting for a greater
proportion of rejections of herbs and spices than their share of
imports. In the EU, other notable bad compliance performers included
Turkey, Thailand, Egypt and Ghana.
The main reason for EU rejections of herbs and spices over the
period 2002 to 2008 was unauthorised food additives, accounting
for almost 44 per cent of the total (Table 34). This pattern
reflects on-going problems with adulteration of spices such as
chilli powder with artificial dyes, for example Sudan I.12 In the
US, artificial food additives were only referenced in five per cent
of rejections (Table 35). Microbiological contamination was a
12 Under Decision 2003/460/EC, all hot chilli and hot chilli products imported
to the EU were required to be tested for Sudan I. Under Decision
2004/92/EC, this requirement was extended to Sudan II, III and IV.
significant cause of rejections of herbs and spices in both the
US and EU, being referenced in almost 58 per cent of US rejections
and 24 per cent of EU rejections. In the US, the more generic
category filthy/unsanitary was referenced in 16 per cent
of rejections. Other frequent reasons for rejections included
mycotoxins in the EU and labelling and unregistered process/
manufacturer in the US
5.Discuss the role of ADB and World Bank during financial crisis of a nation.
ADB and the World Bank operate within a broad, evolving, and increasingly complicated global aid architecture.
ADB was established in 1966 “to foster economic growth and co-operation in the region of Asia and the Far East ... and to contribute to the acceleration of the process of economic development of the developing member countries in the region, collectively and individually.” ). Its initial focus was on food and rural development projects but it quickly diversified its operations to include education, health, and infrastructure development. During the 1970s oil crisis, ADB began financing energy projects to increase energy security in the region. ADB financed its first equity investment in the 1980s and was a major player, together with the International Monetary Fund (IMF) and the World Bank, in responding to the Asian financial crisis in the late 1990s by supporting financial sector development and strengthening social safety nets. It was during this period that ADB made poverty reduction its key objective. Starting with 31 members in 1966, ADB now has 67 members, of which 48 are from Asia and the Pacific and 19 are from outside this region (ADB Annual Reports various issues).
The World Bank was created in 1944 to extend finance for the reconstruction of Europe
following the Second World War and subsequently to overcome obstacles facing developing countries trying to access international capital for development purposes. It now consists of five separate entities—the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Center for the Settlement of Investment Disputes (ICSID). IBRD and IDA constitute the core of the World Bank Group and provide financial and technical assistance for development in low- and middle-income countries through a suite of loans and grants across the entire range of development challenges facing poor countries—including health, education, infrastructure, agriculture, public administration, macroeconomic management, institutional development, governance, financial and private-sector development, environmental protection, and natural resource management (World Bank Annual Reports various issues).
Both the World Bank and ADB are actively involved in every low- and middle-income country in Asia and the Pacific, except North Korea and Myanmar—although in Myanmar, the two institutions have begun to assess the economic situation and provide broad policy advice. There is a similar overlap in sectoral involvement.
Coordination is therefore a key issue. At the Group of Twenty (G20) summit in Pittsburgh in September 2009, leaders called for greater coordination and a clearer division of labor between the World Bank and the regional development banks. They further stated that the World Bank and regional development banks take into account their comparative advantage, while improving coordination and efficiency, and minimizing overlap with other international financial institutions and private financial institutions (World Bank 2010).
Notwithstanding their similar objectives and overlapping responsibilities, coordination between the World Bank and ADB in Asia is not a simple matter. ADB has to coordinate country strategies with three different regional vice presidents of the World Bank (East Asia and the Pacific, South Asia, and Europe and Central Asia) as well as the country directors in each country; and coordinate sector strategies with the World Bank’s three major networks—poverty reduction and economic management, sustainable development, and human development. While procedures for coordination are elaborate and institutionalized, the quality of coordination depends on personalities in both institutions and, occasionally, the role of the country authorities.
The recent tripling of ADB’s authorized capital from $55 billion to $165 billion has significantly increased its financial strength (ADB Annual Report 2010). It is now, by far, the largest of the regional development banks and some of its financial indicators are approaching those of the World Bank. ADB’s authorized capital is some 60% of the World Bank’s, its net income in 2010 was two-thirds, and its total assets abut a third (Table 1). The chief difference between the two institutions is that ADB’s sustainable lending is significantly above its current level, while that of the World Bank is trending downward.
Table 1: ADB and the World Bank: Selected Financial Indicators
ADB World Bank b/
Lending in 2010 a/ 8.2 44.2
Disbursements in 2010 a/ 5.3 28.9
Outstanding loans a/ 43.6 129.5
Authorized capital 163.8 278.3
Outstanding debt 51.8 135.2
Total assets 100.2 312.8
Net income. 0.6 0.9
a/ To sovereign borrowers only.
b/ Excludes IFC.
Sources: ADB Annual Report (2010); World Bank Annual Report (2010).
It is more difficult to do a detailed comparison of ADB’s lending indicators with those of the World Bank’s Asian operations. Comparisons could only be made for two variables—commitments and disbursements (Figure 3).4 These show that ADB’s commitments and disbursements declined in 2010 while those of the World Bank increased. But the World Bank’s lending levels are not sustainable and are expected to decline in coming years, while ADB’s commitment levels are likely to remain at about $10 billion a year. This will make ADB the dominant multilateral development bank lender in Asia, barring any further capital increase for the World Bank in the near future (an unlikely proposition).
4. ISSUES AND OPTIONS CONFRONTING THE WORLD BANK AND ADB
Going forward, there are three issues that confront the World Bank and ADB in Asia that are more broadly symptomatic of the role of the World Bank and its relationships to all the regional development banks.
The first is the very fundamental issue of relevance. Given the declining role of official development assistance in overall capital flows to developing countries, and the diminishing role of multilateral development banks within that space, the World Bank and ADB should constantly re-evaluate the value they bring to developing countries through their operations. While there are biting critiques of aid in general, (Easterly 2006; Moyo 2009) within the international aid community, the overall assessment of the World Bank and ADB remains broadly positive.
Nevertheless, the two institutions face competition from two directions. The first is the growing importance of non-traditional donors, some of whom provide resources without the strings that come attached to World Bank and ADB lending. But the two institutions argue that their resources also come packaged with development knowledge and global experience—and this contention is backed by surveys of client countries on the effectiveness of the two institutions.
But this raises the second concern—that the development knowledge space is becoming increasingly crowded with regional and international think tanks and consultancy organizations, academic institutions with centers focused on development issues, specialized agencies, bilateral technical agencies, and organizations such as the OECD–DAC. Although the World Bank and ADB continue to enjoy unique access to policymakers in many Asian developing countries, their comparative advantage is rapidly diminishing—especially in middle-income countries which have less need for their financing (and, therefore, feel less pressure to engage in policy dialogue), and in any case can afford to access the best technical knowledge available in the world wherever it may reside. Sometimes, this knowledge may reside in the World Bank and ADB, but often it does not. Moreover, increasingly Asian policymakers and their staff are just as qualified as their World Bank or ADB counterparts, sometimes more so, and often with more hands-on experience of policy issues and policy implementation.
In Asia, the World Bank and ADB face a particularly challenging situation. The rapid growth of Asian countries has meant that many have moved from low-income to middle-income status and consequently need fewer resources from the World Bank and ADB while demanding more responsive and more sophisticated knowledge inputs. In many instances, policymakers in these countries look to examples and experience of the developed countries, not just in policy formulation but also in policy implementation. But such expertise is less likely to reside in ADB and the World Bank and more likely to be found in government departments and implementing agencies of these countries. True, ADB and the World Bank could act as conveners, matching demand for knowledge with those who have the best expertise available on the subject. But this space is highly contestable too, and other agencies—private and public—are increasingly providing these services, sometimes more efficiently than the World Bank or ADB.
The second key issue confronting both institutions is governance. This is perhaps more keenly felt in the World Bank—where there has been considerable concern that the voting structure does not represent the increasing influence of developing countries. Recent increases in the shares of developing countries, particularly the PRC, has raised the share of developing countries from 42.6% to 44.1% to 47%, still short of parity with the developed (Part I) countries. In addition, African countries were given an additional seat at the World Bank’s Executive Board to bring the total number to 25.
The reality remains, however, that the voting power in the World Bank does not truly reflect the relative importance of member countries in the global economy. To boost its legitimacy, it will need to further revise its voting shares to bring the share of developing countries closer to their contribution to the global gross domestic product (GDP). A study has shown that whether a country has a seat on IBRD’s board of directors appears to be important not just because it confers prestige but also because it increases its normal loan allocation by nearly $60 million on average (Kaja and Werker 2010). The analysis shows that this does not stem from voting rights but could result more from the informal powers that executive directors and their alternate directors exert on the institution’s staff and management. Interestingly, the same result does not hold for IDA, suggesting that less discretionary mechanisms for allocating resources could overcome such governance problems.
Interestingly, ADB seems to have fewer criticisms on account of governance—even though the economy of the largest shareholder of the institution, Japan, is now smaller than that of the PRC, which has much fewer voting rights.
Moreover, in the selection of the heads of the two institutions, the United States has come under considerable criticism for continuing to push for its nominee to become the President of the World Bank even when the United States is both the largest economy in the world and is the World Bank’s largest shareholder. Yet Japan has not been subjected to similar criticism, even though it is no longer the largest economy in Asia and yet remains the largest Asian shareholder, and the President of ADB has always been a Japanese national.6
The third challenge confronting the World Bank and ADB in Asia is their relationship with each other in operational matters and in advising their Asian clients on development policies and strategies. Some would suggest that the comparative advantage of the World Bank and ADB differ. The former has a clear comparative advantage of working on global public goods (climate change, global trade negotiations, global migration, among others). The latter has an advantage in delivering regional public goods—such as the development of the Greater Mekong Subregion, the Chiang Mai Initiative, and support for the formation of the ASEAN Economic Community.
Clearly, the two institutions can and must coordinate on all these issues, in part to reduce the cost of operations and the burdens of Asian clients, and increase their development impact. The G20 made this point in the 2009 Pittsburgh summit. To achieve better coordination, both institutions can leverage off each other, make sure their support for Asian client countries are aligned and reinforce each other, and ensure they don’t duplicate services.
In reality, however, coordination and cooperation between the two institutions masks a hidden and unrecognized subtext of competition. Where the two have coordinated, the results have been impressive—such as when they worked together with the IMF during the 1997–1998 Asian financial crisis. Indeed, in all East Asian countries, ADB and the World Bank have agreed to carve out “areas of primacy” in which one or the other institution takes the lead in crafting a country sector strategy jointly with the client government and the other institution accepts the policy framework in its future operations. But friction remains between the two institutions—especially if they take different positions on the adequacy (or lack thereof) of policy reforms sufficient to meet tranche conditions for budget support operations, or when they have differences on sector strategies. But such differences are healthy if they are acknowledged openly and there are mechanisms in place to resolve them amicably. Unfortunately, there is a tendency to mask such differences in the interest of showing a common front vis-ŕ-vis the client and in ensuring shareholders—most of whom are the same in both institutions—see the two institutions as working closely together.
---------- FOLLOW-UP ----------
QUESTION: 1. “Project parameters namely time, cost and quality are to be planned carefully for any project. But most of the major projects were not successful. Discuss this statement with a major project.
2. “Project manager is a risk bearer”. Assign yourself as a project manager for metro rail projects in India. List out various feasibility studies to be conducted to avoid risks during the implementation of project.
1.“Project parameters namely time, cost and quality are to be planned carefully for any project. But most of the major projects were not successful. Discuss this statement with a major project.
"Managers do things right. Leaders do the right thing
Triangle of Objectives
A Project is a set of activities which achieves a specific objective (quality) through a process of planning and executing tasks (schedule) and the effective use of resources (budget).
A project has distinctive attributes which distinguish it from ongoing work or business process workflow.
While ongoing work is cyclic and repetitive, a project has discreet objectives and is funded only for the project life cycle.
Projects have a finite life span with a clear beginning and specified scope of work, including the desired end-result deliverables, end date and budget/ resource constraints.
Projects can be analyzed into a set of tasks laid out on a timeline. A complex project may have several strands of these timelines with different teams of people coordinating their activity to achieve the required deliverables at the date due.
Projects can be visualized as having milestones which define the required major steps of achievement (or deliverables) along the path toward final project completion. Milestones are important markers of progress that indicate if a project is on time or falling behind schedule.
Project management seeks to gain control over six main variables:
time, cost, quality, scope, risk, and people.
The three basic dimensions of project success are quality (end-results), time (schedule) and cost (budget). These are the issues that project managers are held accountable for:
Quality: fitness of end deliverables for purpose or specification level
Time: target completion date and schedule of tasks
Costs: budget and resource allocation
These three basic parameters are aggregated to define the Scope of Work,
the Risk factors in any project, and the way People are engaged.
Scope of Work: totality of work to complete a project (quality, time, cost). Change in various project parameters typically occurs, but these changes must be carefully managed and must not be so great that the project is covertly redefined. Agreement on scope between sponsor and project manager establishes a boundary within which resources and budget are allocated. Scope can be precisely defined in terms of the work breakdown structure and task analysis. An unknown or changing scope is a moving boundary that constantly redefines the project and the assumptions guiding allocation of resources. When scope cannot be precisely defined, it cannot be managed, and thereby becomes a significant project risk factor.
Risk Factors: potential harm to a project (quality, time, cost) that may arise from a process or a future event. A "risk" is the probability that a threat that will act on a vulnerability to cause an adverse impact. Risk management involves minimizing threats, vulnerabilities and/or impacts.
People: human resource (knowledge, skill and motivation) for implementation of tasks; a project team assembles special and general skills as resources to get the work done (quality, time, cost).
Of all of these components, people are the fundamental key to success because they provide the means to achieve project objectives. Staffing is the most adjustable resource in being able to dynamically respond to quality, cost and timing issues & constraints. In this way, staffing also represents the greatest risk factor — no matter what other budget, resource or time risks may also exist.
The dynamic trade-offs between these values has been humorously but accurately described by a sign at an automotive repair shop:
"We can do GOOD, QUICK and CHEAP work.
You can have any two but not all three.
1. GOOD QUICK work won't be CHEAP.
2. GOOD CHEAP work won't be QUICK.
3. QUICK CHEAP work won't be GOOD."
All project objectives (and tasks) must be SMART:
Specific: expressed clearly and singularly
Measurable: ideally in quantitative terms
Acceptable: to stakeholders
Realistic: in terms of achievement
Time-bound: a timeframe is stated
The power of project management is that it provides the most reliable method to achieve a target objective, on time and within budget.
Project Management is all about vision:
Seeing the end result so clearly and unambiguously at the beginning so that the logistics of production can be planned and the tasks executed
Sharing a plan (using unambiguous visual graphics showing status) constantly among project team and sponsors, so that decisions, approvals, agreements, and forecasts are made in advance of blocks to workflow (i.e., indecision, lack of commitment, lack of approval, lack of resources and budget, misunderstanding what must occur first in the chain of events).
The fundamental management skills that a Project Manager must be able to exhibit are:
1. Quality Control: Project Plan Development, Plan Execution, Integrated Change Control ; Quality Planning, Quality Assurance, Quality Control
2. Budgetary Control: Resource Planning, Cost Estimating, Cost Budgeting, Cost Control; Procurement Planning, Solicitation Planning, Solicitation, Source Selection, Contract Administration, Contract Closeout
3. Scheduling Control: Activity Definition, Activity Sequencing, Activity Duration Estimating, Schedule Development and Schedule Control
4. Scope of Work Control: Initiation, Scope Planning, Scope Definition, Scope Verification and Scope Change Control
5. Risk Control: Risk Management Planning, Risk Identification, Qualitative Risk Analysis, Quantitative Risk Analysis, Risk Response Planning, Risk Monitoring and Control
6. Communication & Leadership: Human Resource Management, Organizational Planning, Staff Acquisition, Team Development; Project Communications Management, Communications Planning, Information Distribution, Performance Reporting, Administrative Closure
Benefits of Project Management
Project Management (PM) provides a workflow system that unites all team members in shared principles and practice — a methodology of planning, control, coordination, communication and execution that provides ground rules for proven teamwork "best practices" and discipline.
PM software provides automated tools for task definition and layout, scheduling, resource allocation, tracking, report generation, and team communication. Project reporting technology has evolved from: (1) paper-based systems which were hard and expensive to keep up to date, (2) desktop software which made tracking and report generation more cost-effective, and (3) now to online web-based systems which provide the enormous benefit of dynamic real-time status reporting.
Using the PM methodology benefits the Project Manager, workgroup members, project sponsors, and the Team as a whole.
Project Management Life Cycle
Project Management is accomplished thorough the use of processes such as initiating, planning, executing, controlling, and closing. These are the fundamental skill sets of a Project Manager. The Project Management process covers all phases within the life cycle of any project. A standard project typically has the following major phases (each with its own agenda of tasks and issues):
Initiate -- process for developing a proposal, and authorizing (including assigning the initial budget allocation for) the project
Plan -- process to define the objectives, methods, timeframe, resources, constraints, and end-deliverables (renegotiation of assignments, authority, and budget will often occur when the fully developed plan is reviewed & signed by the project sponsor)
Execute -- process of coordinating people and resources to carry out the plan
Control -- process to ensure project objectives are met by monitoring, measuring, and reporting progress
Close -- process for formalizing acceptance of the project, final documentation, and bringing about an orderly conclusion
It is important to note that many of the processes within project management are iterative in nature. This is due to the necessity for progressive elaboration of detail decisions, and re-adjustment of resources and schedule throughout the life cycle. So phases in the Project Life Cycle can and will overlap.
The value of the following map is that it identifies key milestones which distinguish each phase. This way of describing the life cycle emphasizes that planning drives execution, and that controlling is interdependent with planning and executing.
In the real world, the Project Management lifecycle phases will almost always overlap. The following graphic more accurately illustrates how the tasks of the Project Manager change over time — in that the proportion of time and energy allocated to a particular role shifts as the life cycle progresses.
Work Breakdown Structure (WBS)
A Project Requirements document is typically used at the initiation of project to communicate to the Project Manager the project mission and scope, and enable the Project Sponsors (often with a signed Executive Committee approval) to allocate a budget and officially indicate acceptance, agreement, and start date. Failure to establish budget, scope and support at the outset will invariably lead to project crisis at a later date.
The Project Manager must then translate the initial "high-level" project definition into an itemized project plan that addresses the lowest levels of implementation details. The method for accomplishing this is the "Work Breakdown Structure" (WBS). A WBS document lists task deliverables and identifies all activities required to produce the final project deliverable(s). This is a critical process (and documentation) as it forms the basis for other management processes such as resource allocation, time scheduling, cost control, and risk management. Failure to conduct WBS basically means that a project management methodology has not been undertaken.
WBS is utilized to:
Break activities into smaller tasks
Identify the phases of activities, including milestone tasks which indicate completion of each phase
Sequence the tasks
Estimate the duration of tasks
Schedule the tasks
Identify the needed resources for each task
Estimate the resource costs
The WBS results in a official Project Plan for review and approval by sponsors. The WBS will ideally use a software instrument, like Microsoft Project, to create an automated Gantt chart. In a Gantt, inter-dependencies of tasks are indicated by cascading arrows (instances where one activity cannot begin until another is completed). Project milestones (time points that indicate a completion of key tasks or phases), and deliverables (defined and tangible outcomes of the project) are also clearly identified.
most of the major projects were not successful. Discuss this statement with a major project.
The current impressive project is the swanky Terminal 2 at the Chhatrapati Shivaji International Airport, Mumbai is all set to open in September this year.
The Terminal 2, or T2 has been built with a state-of-the-art four-level terminal with an area of over 4,39,000 sq. mts.
The new terminal built by Mumbai International Airport Pvt. Ltd. (MIAL), a joint venture between the GVK led consortium (74%) and Airports Authority of India (26%), will have new taxiways and apron areas for aircraft parking designed to cater to 40 million passengers annually
time, ---extended well beyond the planned time.
cost, ---cost was overrun and lack of finance has delayed the project
scope, ---planned scope
risk, -----high risk
People-----lack of talented staff
Which delayed the project further
2.“Project manager is a risk bearer”. Assign yourself as a project manager for metro rail projects in India. List out various feasibility studies to be conducted to avoid risks during the implementation of project.
Project activities risk management model
Activity or project risks are possible events or circumstances that can threaten the planned project course. Risk analysis is the most important tool used by project managers in project risk management.
The risk management processes model includes the following key activities of risk: identification, analysis, mitigation planning, mitigation plan implementation and tracking. The risk reporting matrix is used to determine the level of risk. the risk management process in nine steps.
Analysis of available models and methods of project risk management, supported by experience of project implementation in an industrial environment, led the researchers of the Laboratory for Manufacturing Systems at the Faculty of Mechanical Engineering in Ljubljana to create a project activities risk management model, shown in
Project activities risk management model.
The starting point was a review of the reference model analysis
Comparison of the two models showed the following differences:
• In reference’s model, risk analysis of project activities is carried out in nine steps:
• step 1: establishing the context,
• step 2: preliminary risk analysis,
• step 3: detailed risk identification,
• step 4: detailed risk analysis,
• step 5: detailed risk evaluation,
• step 6: risk treatment (planning),
• step 7: prepare risk management plan,
• step 8: risk monitoring and control,
• step 9: review.
• In the proposed model, risk analysis of project activities is carried out in seven steps, on the basis of guidelines in
• step 1: preliminary analysis of project risk management,
• step 2: project risk identification,
• step 3: activity risk identification,
• step 4: qualitative and quantitative analysis of activity risks,
• step 5: planning risk management measures,
• step 6: monitoring, recording, control and feedback,
• step 7: analysis, evaluation and archiving.
Overview of differences between the treated risk analysis models
• Additionally, the proposed model incorporates the most frequently used work methods that a project team can use to carry out a particular risk analysis step.
Preliminary analysis of project activities risks
The project team holds a creativity workshop in order to identify possible project activity risks in view of strategic, organisational and project goals, and to analyse important project participants and their influence on the risks.
There are project and business risks. Business risks mainly influence the decision on whether it is possible or sensible to carry out the project, while project risks influence decisions on how to carry out a project so that its execution is most effective bearing in mind the objectives and given circumstances.
The project team uses SWOT analysis to carry out this step. SWOT analysis defines strengths, weaknesses, opportunities and threats related to project execution and its risks.
On the basis of the SWOT-analysis results, the project team and the customer can decide either that the risk-level is acceptable (so the project will be carried out), or the risk-level is too high (and the project will not be carried out).
Project risk identification
The project team can select one of the following models for the identification of project risks
• Standard model, in which risk is defined with two parameters: risk event and its influence on the course of the project.
• Simple model, in which risk is defined with one parameter that refers to the risk event and its influence.
• Cascade model, in which risk is defined with risk event consequences and influences on the course of the project.
• Ishikawa model, in which sources of project risks and their corresponding risk events are defined. On the basis of this model, the project team identifies the risk sources and events that have the most influence on project implementation.
Analysis of practical use of the listed models has shown that the Ishikawa model is the most suitable for identification of product/service project risks. The model has the following advantages:
The Ishikawa model for identification of project risks.
• Companies already know the Ishikawa model as an effective tool for total quality management (TQM).
• The model gives a clear presentation of why project risks occur.
• Separated risk events allow preventive measures.
• The model supports the cause-and-effect concept.
Identification of project activities risks
For quantitative analysis of project activities risks, the project team can use data collection and presentation techniques, e.g., risk event – incidence, whereby the findings of previously completed similar projects are used, or a project activity risk breakdown structure
The project risk breakdown structure method is the most suitable for practical use. In it, the standard WBS project structure is extended by risks identified for a particular activity. If it is not possible to identify a risk related to a particular activity, the risk is omitted.
Breakdown structure of project activity risks.
Qualitative and quantitative analysis of project activity risks
Qualitative and quantitative analysis of project activity risks is carried out by evaluating), (Risk management guide for):
• probability that a problem or risk event will occur
• consequences of a problem or risk event
• definition of risk level.
An interval scale with rates from 1 to 5 can be used to estimate the risk event incidence probability (). Another possibility is to use a scale with estimated probability values . A 1-to-5 scale is usually used in practice because of its simplicity.
Probability that a risk event will occur
Estimate of consequences of a risk event
On the basis of the estimated probability that a risk event will occur and on the basis of the estimate of its consequences, project activity risk level is calculated. In two-dimensional analysis, activity risk level is calculated as:
RL2 – activity risk level in two-dimensional analysis of project activity risk
EP – probability that a risk event will occur
EC – estimate of risk event consequences
Data on quantitative and qualitative risk analysis of a particular project activity are entered into a table of critical success factors
Table of critical success factors—two-dimensional analysis
The article deals with risks in cyclically recurring projects, so experience derived from similar past projects can be used for estimating the incidence of risk events.
An example: a company plans the activity of the customer’s confirmation of documentation or product samples. Some time is planned to accomplish this activity. However, the customer often (but not always) exceeds the planned time. In this case there is a recurring risk event.
Estimate of risk event incidence
In three-dimensional analysis, project activity risk level is calculated as:
RL3 – activity risk level in three-dimensional analysis of project activity risk
EP – probability that a risk event will occur
EC – estimate of consequences of a risk event
EI – estimate of recurring risk event incidence
Table of critical success factors—three-dimensional analysis
Planning measures and risk management
After the risk analysis is completed, activity risk is defined as low, medium or high (on the basis of a decision matrix (), (), depending on the estimate of event incidence probability and its consequences.
On the basis of pre-set risk probability limiting values, project activity risk is defined in the proposed three-dimensional risk analysis:
• If RL ≤ 24 (risk probability is up to 20%), the risk is low.
• If 25 ≤ RL ≤ 60 (risk probability is between 20 and 50%), the risk is medium.
• If RL ≥ 61 (risk probability is more than 50%), the risk is high.
If the risk is low, the project team does not specify any measures in advance.
If the risk is medium, the project team prepares preventive measures, focused on the elimination of sources of risk events occurring. If the risk event occurs nevertheless, the project team has to prepare corrective measures immediately.
If the risk is high, the project team prepares both preventive measures to prevent the risk event from occurring (elimination of risk, reduction of possibility of risk realisation, transfer of risk) and corrective measures (active management of risks), which may start processes for alleviation of risk-event consequences.
Supplemented table of critical success factors
Monitoring, recording, control and feedback
The project manager, project team, customer and operators of activities are responsible for project-risk monitoring and for the implementation of measures.
Each risk has its “owner” and his task is to identify the symptom of the occurring risk as soon as possible and to launch the planned measures on time. The sooner the risk is discovered, the smaller are its consequences.
At regular control meetings, the project manager checks the risk status and updates the risk list if necessary. The team must be aware that the risk level changes over time—in some phases one risk is more probable and in other phases other risks are more probable. For better control, it is therefore important that the risks are sorted by size and by their current relevance.
Researchers from the Laboratory for Manufacturing Systems propose several measures for reduction of project risk level:
• active risk management
• removal of risks
• decrease of the probability of a risk occurring
• alleviation of consequences by transferring risk to another organisation
• passive acceptance of risks by providing time and financial reserves.
Active risk management means that an action plan is prepared for if a risk event occurs, and usually time and financial reserves are also foreseen for solving the consequences of realised risks.
Risk can be totally avoided by eliminating or bypassing the cause of a risk occurring. This is possible by changing the project plan, whereby the whole project is changed or just one phase, duration of an activity, the way an activity is carried out, a supplier or operator. The new plan that tries to avoid risk can be defined as an alternative method for achieving key objectives and may cause higher project costs.
Another way of eliminating risk is elimination of some customer requirements that are difficult to achieve and thus represent risks (time, costs, quality). This method of risk elimination requires negotiations with the customer. In the decision-making process, it is necessary to compare risk with yield if customer requirements are fulfilled.
By placing a risk on the risk list, the possibility of the risk event occurring is automatically reduced because of subsequent systematic control. Carefully planned reduction of risk probability can be achieved by additional activities and costs; other possible actions are: using better and more expensive equipment, using better and more expensive manufacturing technology, aid from external experts or simulations made in advance.
When dealing with the reduction of risk consequences, the best solution is to transfer the risk to another organisation. Within the project partners the risk can be transferred to the customer, outsourcer or supplier. Risk transfer details (delays and additional costs) are defined in a contract. Risk bearers want to avoid additional costs and the probability of a risk occurring is thus reduced. Insurance is another way of mitigating consequences. Insurance is the most suitable when the risk is high, its probability is low, but its consequences could be catastrophic.
The more activities there are on the critical path, the more risky is the project, because delays in critical activities directly cause a delay to the whole project. In non-critical activities, time reserves may considerably reduce the risk due to delay of activities.
In practice, MS Project is often used as a tool for project management IT support, so the employees of the Laboratory for Manufacturing Systems of the Faculty of Mechanical Engineering in Ljubljana, together with our partners in companies, decided to build the presented extended project-activity-risk-management methodology into templates. Although it is possible to use a risk-analysis tool in the server version of MS Project, we believe that, from the user’s perspective, the proposed solution is simpler but very effective. This is confirmed by the use of the extended risk analysis in several industrial projects.
Analysis, evaluation and archiving
After a project has been completed, the project team (in addition to other analyses) evaluates the risk management in order to discover which expected risk events actually occurred, what were their consequences, and how efficient were the preventive and corrective measures.
All risk-management-related documents are archived; the risk knowledge base is also updated:
Cost overruns is defined as the excess of actual project costs over budgeted costs. Costs overrun may be caused by underestimation of costs at the planning stages or by the escalation of costs during implementation due to unforeseen events, changes in the scope of the project or by poor management. Costs overruns may not necessarily lead to project failure if the project can obtain sufficient funding to cover its excess costs. However, the economic viability of the project, which was assessed using the erroneously estimated costs, would be different if the risk of cost overruns was built-in the evaluation analysis.
Against this background this paper first analyzes the risk factors, which underlie costs overruns in transportation infrastructure projects. Subsequently, it proposes methods for estimating the overall risk likelihood of costs overruns, given the particular nature of the project. Subsequently, these methods are applied to a real-world database of highway transportation investments. It is shown that the use of such methods can improve the ex ante risk’s analysis of transportation infrastructure projects.
The design of the paper is as follows. In Section 2, we examine various sources of risk in transportation investment projects. Section 3 presents results, reported in the literature of costs overruns in transportation projects. In Section 4 we introduce the methods that we have developed for assessing costs overruns. These include a Distribution Fitting Model (DFM), a regression model and a Monte Carlo simulation model. Empirical application of these models is in Section 5. Section 6 presents a numerical example of the use of these methods for cost overruns assessment. Summary and conclusions are in Section 7.
2. Sources of Risk in Transportation Investment Projects
We define risk of cost overruns as the probability that a given project will experience actual costs, which exceed its projected budget by a given factor. Since the computation of probabilities of future events requires that these would be indeed random events, one might ask about the “randomness” of events in transportation infrastructure investments.
Thus, we first discuss potential causes for costs overrun risks and highlight their random nature, which in turn, provides the rationale for risk analysis of transportation projects. Based on available literature several main categories of cost overruns risk factors are identified ). These are:
Technological risk: It refers to the fact that technology planned for a given project may need to be modified or replaced by a newer one as either the costs or the benefits of the new technology outperform those of the older one. In some situations, there may be a need for the new technology due to unexpected difficulties during construction. Technologies related to burrowing often fall within this category, with substantial impact on the actual costs of a project. In general, disregarding the possibility of dishonesty in the project’s planning phase, technological risks are mainly due to unsystematic random technological complexities.
Construction risks: Large-scale transportation projects quite often are subject to unexpected construction snags, which range from bad weather, unexpected and random geo-technical events, equipment breakdowns, undelivered raw materials, unknown presence of other infrastructures (e.g., sewage lines) or unexpected soil problems. All of these imply construction delays, which in turn, affect the costs of projects.
General economic and financial risks: Unexpected changes in real interest rates, or in exchange rates or in unemployment rates may have considerable impacts on the actual costs of a project. Rising interest rates will affect the debt service cost component of a capital project. Shortages of skilled labor, which often characterize periods of rapid economic growth, are likely to have consequential impacts on labor costs.
Regulatory risks: These risk types stem from unexpected changes in regulation of externalities, for example, changes in emission and other environmental standards, which might take place during project implementation.
Organizational and project management risks: Often unpredictably, projects lose critical staff during the time of construction. In addition, projects may suffer from poor management, which may also yield to external pressure from interest groups to change the project’s scope. As a result, delays appear along with rising costs.
Political risks: Political risk refers to unforeseen circumstances where a new government fails to keep commitments made by a previous one, or due to a budget crisis, it fails to provide already promised capital. Foreign investors in some developing countries may face unfriendly local governments or the risk of potential expropriation. Since large transportation projects often require approval and financial support from local and federal governments, conflicts between and within governments may cause project’s delays, thus additional costs.
Contractual or legal risks: Contract and legal risks arise from inappropriate division of responsibility among contractors. During the project’s planning and implementation periods, issues related to securing the rights of way, payments and other legal disputes
might appear unexpectedly. Issues of contract enforceability and post contractual disagreements may also cause project suspensions and delays with substantial effects on costs.
This categorization serves to show the wide range of risk factors, which underlie costs overruns as well as their random nature. Thus, in what follows we treat costs overruns as a random variable for which we will fit a probability distribution models.
How prevalent is the use of quantitative risk analysis methods in actual project planning and management? A survey by Akintoye (1997), has shown that both contractors and project managers mainly rely on their intuition and subjective judgment to manage risks. About half of the managers surveyed claimed to be familiar with sensitivity analysis, yet few actually have used this technique in practice. By and large, contractors and managers expressed doubts on the usefulness and practicality of quantitative risk analysis techniques.
Similarly, Shapira (1994) found that managers are quite uninterested in using probabilistic techniques to assess project’s outcomes. He also found that under unique, non-repeated decision conditions, managers tend to neglect statistical analysis all too easily. Shapira reasons that this is due to managers’ confidence in their ability to control risk, though as experience shows this kind of behavior many times have led to actual costs significantly exceeds planned budget and at times, to project’s total failure.