Planing

‫وما توفيقي إال باهلل‬
EMPC 01
Strategic Planning & Change Management for Engineers
‫التخطيط االستراتيجي وإدارة التغيير للمهندسين‬
Our
Vision Success
A journey of a
thousand miles
occurs one step
X
Start
at a time.
Dr. Attia Gomaa

Industrial Engineering Professor & Consultant
Engineering and Science Services - American University in Cairo
Process
Strategic Planning & Change Management for Engineers
Contents:
1. Business Process Overview
2. Process Management
3. Strategic Planning
4. Strategic Objectives & KPIs
5. Feasibility Study
6. Cost Analysis
7. Value Analysis
8. Financial Analysis
9. Risk Management
10. Risk Analysis Tools
Process Strategic Planning and Change Management for Engineers 2
Process Overview

• Process: Converting Inputs to Outputs
INPUT PROCESS OUTPUT
FEEDBACK

Process Description
Management
Customer
Supplier Resources Final Product
Manpower Scope of work
Materials Quality
Methods Process
Delivery Time
Machines
Price
 Money

Process Types
Productive Supportive
Process Process
• Production Lines • Material Handling
• Productive Machines • Maintenance
• Assembly • Safety
• • Water System
• Power System
•

Process
Parameters
Scope Others
Capacity Cost
Quality Resources
Time
Safety
Process Inspection
OK Final
Inputs Operation Inspect
Product
Rework NOT
OK
Scrap

Inspection/Testing Points
• Receiving inspection
• In-process inspection
• Final inspection
Inspection Levels:
• Spot check procedures
• 100 percent inspection
• Acceptance sampling
Process
9
Strategic Planning and Change Management for Engineers 9
Brain Storming Group Size 2 to 3
Process Inspection System

Inputs Process Outputs
Inspection
Tools
Parameters - - -
Frequency - - -
QA/QC Forms: - - -

Process Map
SIPOC & Measurement Instruments
Requirements Requirements Requirements
Input Boundary Output Boundary
S I P O C
Suppliers Inputs Process Outputs Customers
Measures Measures
Measures

SIPOC Chart
Suppliers Inputs Process Outputs Customers
• Production • Work Order • Products • Storage

Planning • Process Sheet • Right Quantity • Market
Department • Right Quality
• Drawings • Customer
• Raw Materials • Right Time
Process map
• Tools
(flow Chart)
Preparation of
Quality Control
Receive Shop drawings
Submittal to
W/O & Drawings
the Engineer
Drawings Checking
for Approval
Quantity Completion of
Survey the W/o
Elements
Detailed Procurement of
Planning Resources Execution
of Works

Process Management

Right
Right Scope of Work
Price
Customer
Satisfaction
Right
Right
Time
Quality

Customer Satisfaction
Service Customer Customer Market

Profit
Performance Satisfaction Retention Share
 Which criteria matter most to the customers?

 What determines customers’ overall satisfaction
 What is critical to consumer (Six sigma Approach)

Material
Method
Productivity
Productivity
Resource
Productivity
Manpower
Machine
Productivity
Productivity
Optimize the Business Assets

 Value of things used in the business
Process Management?
PM is a systematic approach to Optimize:
Customer Resource
Satisfaction Productivity
• Right Scope of Work Right Resources:

• Right Quality • Right Material
• Right Time • Right Machines
• Right Cost • Right Manpower
• Right Method
• Right Money
Long Term Continuous Improvement

The Critical Balance in PM
Customer Resource
Satisfaction Productivity

Basic Framework for Process Management
• Objectives (6 Rights)
– Right Products, at the
– Right Time, in the
– Right Quantities, at the
– Right Quality, at the
– Right (Minimum) Cost
– Right Customer
• Achieved in an Integrated, Rationalized System

Process Management:
Suppliers Customers
Management
Inputs ( I ) Outputs ( O )
Resources Products
Services
O
I
Productivity Analysis
Performance Management
Various types of processes Departments in the organization

Customer
Product Management
Needs
Scope of
Work
Product
Design
Materials
Selection
Manufacturing
(Value added)
Marketing

Customer
Product Management
Needs
Scope of
Work
Product
Design
Materials
Selection
Manufacturing
(Value added)
Defect Root Marketing

Causes
Right Product Management
Customer
Needs
Right
Scope of
Work
Right
Product
Design
Right
Materials
Selection
Right
Manufacturing
(Value added)
TQM Right
Marketing
(6 Rights)
Long Term Continuous Improvements
Organization Structure
Key persons Managers
Top
Middle
Operational
Site
Organization Enterprise Chairman
Structure
Top / Senior
Management
Middle
Management
Operational
Management
Site  Implement
Top Organization Structure
Functional Organization
Managers
Supervisors
Engineers
Technicians Process Approach
1. Scope of Work
2. Organization Structure (Key persons)
3. Job Description
4. Reporting System Forms / Reports
5. Information Flow Matrix
Reporting System
# ID Form/report Reference Responsibility
1 Scope of work Contract Project Manager
2 Design Standard X Design Manager
3 Master Plan Contract Planning Manager
4 Work Order Master Plan Site Manager
10

Information Flow Matrix
To (1) (2) (3) (4) (5) (6) (7)
From Project Design Resource Cost Planning Site Quality
Manager Mang. Mang. Mang. Manager Manager Control
(1)
Project
Manager
(2)
Design
Manager
(3)
Resource
Manager
(4)
Cost
Manager
(5) Schedule
Planning
Manager
(6) Site
Manager
(7) Quality
Control

The Key to Business Management Success

Process Management
It is a philosophy for long term continuous Improvement
It is a systemic approach for total productivity improvement

How to achieve the targets and overcome the constraints?
Current Situation
Gap Analysis
(1)
(6) Benchmarking (2)
Control Goals & Targets
Management
(5) (3)
Leading Planning
(4)
Organization

‫‪Current Situation‬‬
‫دراسة وتحليل الوضع الحالي‬
‫‪Gap Analysis‬‬
‫)‪(1‬‬
‫‪Benchmarking‬‬
‫مثال يحتذي به (قدوة)‬
‫)‪(6‬‬ ‫(مقارنة مرجعية)‬ ‫)‪(2‬‬
‫‪Control‬‬ ‫(أداء جيد سبق حدوثه‬ ‫‪Goals  Targets‬‬
‫)‪(Actual / Planned‬‬ ‫داخلي – خارجي)‬ ‫األهداف‬
‫التحكم‬ ‫(المستهدف تحقيقه‬
‫(المراقبة والتقويم)‬ ‫في المدي البعيد والمتوسط)‬
‫‪Management‬‬
‫العملية االدارية‬
‫)‪(5‬‬ ‫)‪(3‬‬
‫‪Leading‬‬ ‫‪Planning‬‬
‫التوجيه‬ ‫التخطيط‬
‫(المتابعة المستمرة‬ ‫(المخططات الزمنية لألنشطة‬
‫)‪(4‬‬ ‫والموارد والتكاليف)‬
‫وتوجيه األداء)‬ ‫‪Organization‬‬
‫التنظيم‬
‫(الهيكل التنظيمي والمسئوليات)‬
‫‪Process‬‬ ‫‪Strategic Planning and Change Management for Engineers‬‬ ‫‪32‬‬
Process Management Cycle
Status Analysis
Benchmaking
Reporting
SMART
Objectives
Control Planning
Implementation

Benchmarking
Best of the best
External
Benchmarking
Internal
Benchmarking
Target Best
Practices,
Processes &
Current
Products
―Until you take the first step, it will not be possible to see the next step‖
Benchmarking Enterprise Chairman
Top 
External
Benchmarking
Middle 
Internal Benchmarking
Operational 
Downstream Internal Benchmarking
Site  Implement
Benchmarking
Labor Productivity
External
Benchmarking = 8 Next Year
Internal
Benchmarking = 6 Next Quarter
Target  5 , Next month
Current = 4 Unit/man-day
―Until you take the first step, it will not be possible to see the next
Process step‖ Management for Engineers
Strategic Planning and Change 36
Benchmarking
Production Rate
External
Internal
Target  12, Next month
Current = 10 Unit/hour
Benchmarking
Defect Ratio
External
Benchmarking = 3% Next Year
Internal
Benchmarking = 6% Next Quarter
Target  8%, Next month
Current = 10%
Benchmarking
# Customer
External
Internal
Target  120, Next month
Current = 100
Benchmarking
Profit ratio
External
Benchmarking = 25% Next Year
Internal
Benchmarking = 18% Next Quarter
Target  15%, Next month
Current = 12%
Brainstorming:
Leadership & Team Work
Process
Leader
Design Quality
Team size
"Never cut what you can untie",
Joseph Joubert
9±3
© 1995 Corel Corp.
Brainstorming is useful for generating
innovative ideas topic . this tool helps
encourage every team member to
participate and contribute ideas during
team meetings . successful brainstorming
sessions follow these guidelines.
Quality Circles
• Group of 6-12 employees from same work area
• Meet regularly to solve work-related problems
– 4 hours/month
• Facilitator trains & helps with meetings
© 1995 Corel Corp.

SMART Objectives  Goals & Targets
Plan Your Road Map
Writing down your goals creates the

roadmap to your success.

Goals should be SMART
Specific Measurable Applicable
Reliable Timely

SMART Objectives
Targets = Medium Term (<= year) SMART Objectives
Goals = Long Term (> year) SMART Objectives
SMART  Main 5 Parameters

S = Specific
(Scope of Work, Bill of Quantity, Quality, Performance, Cost, Tech. Standard, etc.)
M = Measurable
(Certain value, range, parameters, indicators, Specs., etc.)
A = Applicable
(Achievable, Flexible, Most likely, Working condition etc.)
(should be customized)
R = Reliable
(Reference, Accuracy, Assurance, Trust, Risk assessment, Positive, Convince, etc.)
T = Time frame
(Certain duration: Week, Month, Annual, 2 years)
(Certain date: Start date, Finish date)
Planning Levels Environmental
Forecasting
Long term – Medium term – Short term
Long range
Medium range Strategic Planning
Short
range
Very
Short
range
Management
Action
Now 2 months 1 Year 5 Year
Forecast Accuracy
Risk Tolerance (Most Likely, Most Common) Risk
 0 to 3%  3 to 5%  5 to 10%  10 to 25%
Day to week Week to 3 M 6 M to 1 Y 2 Y to 5 Y

Planning Levels
Management Environmental
Action Targets Goals Forecasting
Short Term Long Term

>= 3 Month <= 2 Year Years
Day
Medium Term
(6 to 12) Month
Operational Tactical Strategic

Planning Planning Planning
Levels of Planning & Control:
Strategic Control Top Strategic Planning
Middle
Tactical Control Tactical Planning
Operational Control Operational Operational Planning

Action Plan
What
Should be
done?
Activities When?
Scope
Specific Schedule How?
Measurable Duration
Start Resources: Where?
Finish - Manpower
- Machines Location Responsibility?
- Materials Indoor
Outdoor Leader
- Method
Contractor Department
- Money
Manager
Engineer

Planning:
Inputs: Scope of work & BOQ
Normal
Planned Performance Plan
Constraints  a) Limited Res. b) Limited Time c) Limited Budget

Target
Plan
Planning:
Scope of work = 30,000 m3 Execution
Eq. Perf. 30 m3/hr

10 day 10 hr/day
10 + 20% = 12 Eq.
Normal
Plan
Eq. rate 1000 LE/day Planned Performance
10*12*1000 = 120,000 LE
Target
Constraints  a) 8 Eq. b) 8 day c) 100,000 LE Plan
Project Planning:
Scope of work:
Activity: Execution BOQ = 30,000 m3
Time Schedule:
Duration: 10 day
Resource Schedule:
Equipment Perf. 30 m3/hr Working condition: 10 hr/day
Number of Equipment = 10 + 20% = 12 Eq
Cost Schedule:
Equipment cost rate 1000 LE/day
Total Cost = 10*12*1000 = 120,000 LE
Constraints:
a) 8 Eq. b) 8 day c) 100,000 LE
Target Plan
Activity: Excavation BOQ= 30,000
Duration: 10 day Overtime: 3 hours
No. of Eq.: 8 Excavator
Total Cost: 100,000 LE
Project Planning:
Scope of work:
Activity: Execution BOQ = 30,000 m3
Time Schedule:
Duration: 10 day
Resource Schedule:
Equipment Perf. 30 m3/hr Working condition: 10 hr/day
Number of Equipment = 10 + 20% = 12 Eq
Cost Schedule:
Equipment cost rate 1000 LE/day
Total Cost = 10*12*1000 = 120,000 LE
Constraints:
a) 8 Eq. b) 8 day c) 100,000 LE
Target Plan
Activity: Excavation BOQ= 30,000
Duration: 8 day Overtime: 5 hours
No. of Eq.: 8 Excavator
Total Cost: 100,000 LE
Multi-Project Planning:
Scope of work: Design for 3 Projects (A, B & C)
A  500 man-hour B 600 man-hour C 800 man-hour
Time Schedule:
A  3 month Start: 1/5/2010 Finish: 30/7/2010
Resource Schedule:
Design Engineer  180 man-hour/month
Resource profile ???
Cost Schedule:
Labor cost rate = $10/man-hour for in-source & 15 for out-source
Labor Cost profile ???
Constraints:
Available No. of Engineers = 10 Outsourcing = ??
Target Plan

Leading

Control:
Actual Target
Performance Performance

Control:
Information Collection
Measure
Performance
Evaluate
Performance
Take Corrective
Action

Control Cycle

Responsibilities of Operations Managers
Planning: Organizing:
 Capacity  Organization Structure
 Location  Leaders & Responsibility
 Products and services  Degree of Centralization
 Make or buy  Subcontracting
 Layout
 Projects Staffing:
 Scheduling  Teamwork building
 Standard rates
Controlling:  Hiring/laying off
 Inventory control  Use of overtime
 Quality control
 Cost control Directing:
 Incentive plans
 Issuance of work orders
 Job assignments

Pricing for Profit
Average Production Quantity
Price
Value Added (Revenue)
Variable
Break-even
Costs
Fixed Total cost

Costs
Profit

Pricing for Profit
Average Production Quantity
Price
Value Added (Revenue)
External
Break-even
Costs
Internal Total cost

Costs
Profit

Pricing for Profit
Average Production Quantity = 1750 ton/day
Value Added Revenue

1,600,000 2,100,000
LE/day
Break-even External
1250 ton/day 500,000
Internal Total cost = 1,500,000

1,000,000
Profit
600,000

Strategic Planning
Dr. Attia Gomaa

2011

Strategic Management
(2) Strategic
(1) Benchmarking Planning
Mission
Vision
Values
(3) Implementation

Strategic Planning
A Systematic Methodology to design the business future.
Present
Situation Strategic Vision
Where the
Plan
A B organisation wants
to go in the future?
B Vision
Based on
Future
A Present Situation Thinking
Strategic Management
Top Middle Management Operational Management
Change Management
Vision, Values
and Mission
Analysis
Strategic Control
Objectives
Strategy Implementation
Action
Plans
Strategic Strategic
Planning Control
Main Pillars For Change Management:
1. Strong Leadership
2. Unified Teamwork
3. Consistent Benchmark
4. Right Information
5. Effective Brainstorming
Strategic Planning Process
Future Reason for
intent Attitudes existence
and policies
Vision Values Mission
Company Integration Management
SWOT Analysis
Analysis (Environmental assessment)
GAP Analysis
Strategic Objectives
SMART Goals
Strategies
Action Plans

Organization Upstream
Enterprise Chairman
Structure Vision, Values
& Mission
Top 
KPIs Report Analysis
Policy
Middle 
Strategy
Control Strategic Planning
Action Plans
Operational 
Feedback Day-to-Day Work Orders Data
Site  Implement
Downstream
Vision, Values and Mission
Vision
is a clear statement for future image (long term direction) across the business
What we are looking for future? Where the organization is headed?
Vision Should be:
Future oriented, Ambitious, SMART, Very short & To the point
Values: Attitudes and policies

What we believe in? A Guide for good behavior.
How we treat each other? How we treat the customer?
Values Should be:
Change Management, Behavior Skills, Terms, (5 to 8)
Mission:
How to reach the vision? Why we exist? What is the core purpose?
Mission Should be:
Market focused, Inspiring, Short
Example, ABC Steel Company
Our Vision is to be
one of the best steel companies in Egypt & Middle East.
Values:
We believe that strong leadership, unified teamwork, highly skilled manpower,
customer satisfaction and customer relationship are the key to achieve our
goals.
Mission:
ABC’s core mission is to produce and supply the highest quality products to our
customers up to international standards in steel industry.
Comment:

Example, XYZ Consultant Company
Our Vision is to be
the number one consultant company in the construction projects
in Egypt & Middle East.
Values:
Strong leadership, Effective communications, Quality, Integrity, Customer
Service, Customer satisfaction, and Problem solving.
XYZ Mission
to provide high quality consultant services to our clients up to international
standards in construction projects.
Comment:

Brainstorming!
Discuss the following:
Vision:
We are a Center of Excellence providing the best
integrated business services and solutions to the
Federal Government.
Mission:
We deliver products and services that enable
our customers to excel in managing the business
of government.
Oracle E-Business
For Example;
Organization Structure
Enterprise
Company #
Design Procurement Construction Quality

Enterprise Upstream Enterprise
Strategic Vision, Values
Planning and Mission
Company Strategic
Planning Company
Vision, Values
and Mission

Strategic Strategic Strategic Strategic
Planning Planning Planning Planning
Design
Quality
Vision, Values
Vision, Values
and Mission
and Mission
Financial
Process Skills
Market
Total View

SWOT Analysis
Future Reason for
intent Attitudes existence
and policies
Vision Values Mission
SWOT Analysis
Analysis (Environmental assessment)
Positive (Beneficial) Negative (Harmful)

Internal External
Strengths Weaknesses
Opportunities Threats

SWOT Analysis Making sure you see the big picture

Internal
External
Internal  We can control

External  We can not control & We can impact
Main Strategic Directions
Financial
Process Skills
Market

Internal External

SWOT Analysis – Integration is key
SWOTs need Integrating

Company SWOT Analysis – Integration is key

Project SWOT Analysis – Integration is key

Effort is required to create ‗one version of the truth‘
Multiple SWOT‘s Integrated SWOT

(across all areas) Filter (One version of the truth)
Integration P
Effort
• Item Classification
• Important / Not Important & Urgent / Not Urgent
• Top Priorities / Critical / Important / Urgent items
• Apply common-sense ‗filter‘
• Ensure the integrated position is people centric
• It‘s the people that make service happen!

SWOT Analysis
Company: XXX Scope of work: Car assembly

Internal
• Strong leadership • Incomplete documentation

• Technical Resources • Customer service
• Experience & Skills
External
• New markets • More competition
• Online market • New Technology
Conclusion:
Positive Negative Total
Internal 3 2 5 (56%)
External 2 2 4 (44%)
Total 5 (56%) 4 (44%) 9 (100%)

Financial
Process Skills
Market
Business Objectives drive the Strategic Action Plan

Financial
Process Skills
Market
KPIs for each Discipline
KPI Report for Top Management

Enterprise Upstream Enterprise
Strategic KPIs
Objectives
Company Strategic
Objectives Company
KPIs

Strategic Strategic Strategic Strategic
Objectives Objectives Objectives Objectives
Design
Quality
KPIs
KPIs

Key Performance Indicators (KPIs)
Finance Financial KPIs
Customer Market KPIs
Internal Processes Process KPIs
Manpower Skills
Manpower KPIs

Cause / Effect Relationship in scorecard
Profitability Revenue
Finance
Market Share
Customer # Customer
Internal Processes Quality Performance

Rate Rate
Manpower Skills
Labor Attendance
Productivity %

Calculations of Strategic Objectives
Perspective Key Indicators Equation Comment

Finance Revenue = Total Incomes
Profit Ratio = (Revenue – Total Cost) / Total
Customer Market Share = Sales Quantity/Market Q.
# Customer = Total Customers
Process Quality Rate = Accepted Q. / Total Q.
Performance Rate = Total Q. / Working hours
Skills Labor Productivity = Total Q. / man-hours
Attendance % = Actual Direct Workers /

Planned Direct Workers
Standard Data Sheet  Data Forms

Perspective Key Actual Current Internal External
Indicators 2010 2011 Benchmark Benchmark
Finance Revenue 9 10 12 18
Profitability 14% 15% 20% 30%
Customer Market Share 23% 22% 28% 35%
# Customer 95 100 120 150
Process Quality Rate 93% 92% 94% 98%
Performance 155 160 180 220
Rate Effective
Capacity
Skills Labor 1.29 1.45 1.6 2.0
Productivity
Attendance 86.5 82.0 95 99.0
%
Goals & Targets
Key Indicators Current Target Goal Goal Goal

2011 2012 2013 2014 2015
Revenue 10 12 14 16 18
Profitability 15% 20% 24 28 30%
Market Share 22% 26% 28 30 35%
# Customer 100 115 130 140 150
Quality Rate 92% 94% 95 96 98%
Performance Rate 160 180 200 210 220
Labor Productivity 1.45 1.6 1.7 1.8 2.0
Attendance % 82.0 88.0 90.0 95.0 99.0

Strategic Objectives:
Perspective Strategy Measurement Targets Initiatives
(Objectives)
Main What the How performance The level of Key action programs
Dimension strategy is trying is measured against performance or required to achieve
to achieve objectives rate of targets
improvement
needed
Financial - Increase the Revenue 20% +/yr - Market Motivation
revenue program
- Increase the Profitability 15% +/yr - Cost Reduction
profit program
Customer - More - # Customers 15% +/yr - Customer Relationship
Customers - Market Share 10% +/yr - Quality management
Process - Improve Performance Rate 15 % improve - Lean Six sigma
Production Rate Quality Rate 10% improve program
Skills - Improve % Labor 5 % improve - Training program
Manpower skills productivity
Attendance % 2 % improve - Motivation Policy
Action Plans
Action Plan
What
Should be
done?
Activities When?
Scope
Specific Schedule How?
Measurable Duration
Start Resources: Where?
Finish - Manpower
- Machines Location Responsibility?
- Materials Indoor
Outdoor Leader
- Method
Contractor Department
- Money
Manager
Engineer

Action Plan:
Main Main Main Budget Duration Start Finish Responsible
Objective Items Activities

Market Strategic Plan:

Process Strategic Plan:

Quality Strategic Plan:

HR Strategic Plan:

Development Cycle for Hoshin Planning
Core
Vision/ Competencies
Values
Market
Analysis
Mission
Statement
Budget /
Capital
Strategic Plan
Key
Business Plan
Indicators
One Year
Customer Kaizen Plan
Survey Objectives

Strategic Objectives & KPIs
Dr. Attia Gomaa

2011

Strategic Objectives & KPIs
Financial
Process Skills
Market
KPIs for each Discipline (4 to 8 indicators)
KPI Report for Top Management (6 to 12 indicators)

Company: Service:
Financial KPIs: Market KPIs:
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
6. 6.
Process KPIs: Skills KPIs:

1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
6. 6.
KPI Report for Top Management (Top 2 KPIs for each discipline)
1. 1.
2. 2.
Data: Data:
• •
• •
• •

1. 1.
2. 2.
Data: Data:
• •
• •
• •
Company: Steel Company Service: Steel Products

1. Revenue 1. Market Share
2. Profitability 2. # Customer
3. Value Added 3. Claim Ratio
4. Inventory Turnover 4. On Time Delivery
5. Cost of Poor Quality 5. Market Value Added (MVA)
6. Economic Value Added (EVA) 6. Customer Satisfaction Level

1. Performance Rate 1. Attendance %
2. Quality Rate 2. Labor Productivity
3. Material Yield 3. Employee Turnover
4. Process Utilization 4. Injury Rate
5. Availability 5. Illness rate
6. Sigma Level 6. Quality of Training
Company: Steel Company Service: Steel Products
KPI Report for Top Management (Top 2 KPIs for each discipline)
1. Revenue 1. Market Share
2. Profitability 2. # Customer
Data: Data:
• Total Incomes • Total Number of Customer
• Total Cost • Sales Quantity
• • Market Quantity

1. Performance Rate 1. Attendance %
2. Quality Rate 2. Labor Productivity
Data: Data:
• Total Working Hours • Planned Direct Workers
• Total Production Quantity • Actual Direct Workers
• Accepted Quantity •
Cause / Effect Relationship in scorecard
Profitability Revenue
Finance
Market Share
Customer # Customer
Internal Processes Quality Performance

Rate Rate
Manpower Skills
Labor Attendance
Productivity %

Calculations of Strategic Objectives
Perspective Key Indicators Equation Comment

Finance Revenue = Total Incomes
Profit Ratio = (Revenue – Total Cost) / Total
Customer Market Share = Sales Quantity/Market Q.
# Customer = Total Customers
Process Quality Rate = Accepted Q. / Total Q.
Performance Rate = Total Q. / Working hours
Skills Labor Productivity = Total Q. / man-hours
Attendance % = Actual Direct Workers /

Planned Direct Workers
Standard Data Sheet  Data Forms

Current Situation Analysis
Item Unit Actual Current Respon- Comment
2010 2011 sibility
Revenue LE-M Financial
Total Cost LE-M Financial
Sales Quality Ton Market
Market Quantity Ton Market
# Customer # Market
Working Days Day Process
Total Quantity Ton Process
Rejected Quantity Ton Process
Planned Direct Labor Man-day HR
Actual Direct Labor Man-day HR

KPIs Report – One Page Management
Key Performance Indicators for decision making process

KPIs Reflect The Targets & Must be SMART:
Global / Applicable / Flexible / Measurable / Continuous process
• Introduction (Scope of work & Short description)

• Body (Evidence)  Change Management
• Global & SMART Indicators (total view)
• Strength points (Top 5 or 3 points)
• Weakness points (Bottom 5 or 3 points)
Documentation
• Area of concern (Why-Why  Hot area & root cause)
• Conclusion & Recommendations (Action:- Reactive or Proactive):

Case Study: The Annual Information for X Company is as follows:

2010 2011 sibility
Revenue LE-M 9M 10 M Financial
Total Cost LE-M 7.74 8.5 Financial
Sales Quality Ton 35000 37000 Market
Market Quantity Ton 150000 170000 Market
# Customer # 95 100 Market
Working Days Day 300 310 Process
Total Quantity Ton 46500 49600 Process
Rejected Quantity Ton 3255 3968 Process
Planned Direct Labor Man-day 41600 41600 HR
Actual Direct Labor Man-day 36000 34100 HR
Based on this information, discuss briefly the KPIs & Strategic Objectives.

Road map for Key Performance Indicators (KPIs)
1. Revenue 1. Sales Quantity
2. Total Cost 2. Market Quantity
3. Profit Ratio % 3. # Customer
4. 4.
5. 5.
6. 6.

1. Working Days 1. Planned Direct Labor
2. Total Quantity 2. Actual Direct Labor
3. Rejected Quantity 3. Labor Productivity
4. Quality Rate % 4. Attendance Ratio
5. Performance Rate 5.
6. 6.
2010 2011 sibility
Profit Ratio % 14% 15% Financial
Sales Quality Ton 35000 37000 Market
Market Share % 23.3% 21.8% Market
# Customer # 95 100 Market
Working Days Day 300 310 Process
Quality Rate % 93% 92% Process
Performance Rate Ton/day 155 160 Process
Labor Productivity Ton/man-day 1.29 1.45 HR
Attendance % % 86.5 82.0 HR

Item Unit Actual Current Respon- Variance
2010 2011 sibility %
Revenue LE-M 9M 10 M Financial + 11.1
Profit Ratio % 14% 15% Financial + 7.1
Market Share % 23.3% 21.8% Market - 6.5
# Customer # 95 100 Market + 5.2
Quality Rate % 93% 92% Process - 1.1
Performance Rate Unit/day 155 160 Process + 3.2
Labor Productivity Unit/man-day 1.29 1.45 HR + 12.4
Attendance % % 86.5 82.0 HR - 5.3

Perspective Key Actual Current Internal External
Indicators 2010 2011 Benchmark Benchmark
Finance Revenue 9 10 12 18
Profitability 14% 15% 20% 30%
Customer Market Share 23% 22% 28% 35%
# Customer 95 100 120 150
Process Quality Rate 93% 92% 94% 98%
Performance 155 160 180 220
Rate Effective
Capacity
Skills Labor 1.29 1.45 1.6 2.0
Productivity
Attendance 86.5 82.0 95 99.0
%
Goals & Targets
Key Indicators Current Target Goal Goal Goal

2011 2012 2013 2014 2015
Revenue 10 12 14 16 18
Profitability 15% 20% 24 28 30%
Market Share 22% 26% 28 30 35%
# Customer 100 115 130 140 150
Quality Rate 92% 94% 95 96 98%
Performance Rate 160 180 200 210 220
Labor Productivity 1.45 1.6 1.7 1.8 2.0
Attendance % 82.0 88.0 90.0 95.0 99.0

KPI Report 2011/2010
KPIs For Current Situation 2011:
Revenue: 10 MLE Profit Ratio: 14% Market Share: 21.8%
Performance Rate: 160 unit/day Labor Productivity : 1.45 Unit/man-day
Losses Weakness Points:

27.3 %
Total 1 – Market Share (- 6.5%)
Performance
2 – Quality Rate (- 1.1%)
72.7 %
3 – Direct Worker Attendance (-5.3%)
Recommendations:
Strength Points: 1 – Market Motivation
1 – Revenue (+ 11.1 %) 2 – QA/QC Improvement
2 – Profit (+ 7.1%) 3 – Training Plan Improvement
3 – Labor Productivity (+12.4%) 4- Manpower Motivation
Improvement Plan (Strategic Plan or Action Plan)
Main Objective Main Activities Budget Duration Start Finish Responsible
1 – Advanced -
Training Plan -
-
-
2 – Motivation
Program

Case Study: The Annual Information for X Company is as follows:
Item Unit Actual Current Source Comment
2010 2011
Total Labor Cost LE-M 1.50 1.80 Financial
Average inventory value LE-M 1M 0.8 M Financial
External Resource Cost LE-M 3.00 3.5 Financial
Sales Quantity Ton 35000 37000 Market
# Orders # 95 100 Market
# Claims # 15 10 Market
Planned Working Days Day 320 320 Process
Actual Working Days Day 300 310 Process
Effective Capacity Rate Ton/day 220 220 Process
Based on this information, discuss briefly the KPIs & Strategic Objectives.
3. Total Labor Cost 3. # Orders
4. Average inventory value 4. # Claims
5. External Resource Cost 5.
6. 6.
7. 7.
8. 8.
9. 9.
10. 10.
1. Planned Working Days 1. Planned Direct Labor
2. Actual Working Days 2. Actual Direct Labor
3. Effective Capacity Rate 3.
4. Total Quantity 4.
5. Rejected Quantity 5.
6. 6.
7. 7.
8. 8.
9. 9.
10. 10.


3. Average inventory value 3. # Orders
4. External Resource Cost 4. Market Share %
5. Total Labor Cost 5. Claims Ratio
6. Profit Ratio % 6. Sales Ratio
7. Value Added Ratio % 7.
8. Labor Productivity (LE Revenue / LE Labor) 8.
9. Inventory Turnover (turns/year) 9.
10. CAPEX Ratio % 10.
3. Effective Capacity Rate 3. Labor Productivity (Unit/man-day)
4. Total Quantity 4. Attendance Ratio (Actual m-d/Planned)
6. Quality Rate % 6.
7. Availability Ratio % (Actual Time / Planned) 7.
8. Performance Ratio % (Actual / Planned) 8.
9. Overall Equipment Effectiveness (OEE) % 9.
10. 10.

KPIs & Strategic Objectives
# Key Indicators Actual Current Variance Target Goal
2010 2011 % 2012 2013
1 Profit Ratio %
2 Inventory Turnover
3 CAPEX Ratio %
4 Market Share %
5 Claims Ratio
6 Sales Ratio
7 Performance Ratio %
8 OEE %
9 Labor Productivity %
10 Attendance Ratio %
11
12

KPI Report 2011/2010
KPIs For Current Situation 2011:
Revenue: Profit Ratio: Market Share:
Labor Productivity : Inventory Turnover:
Losses Weakness Points:

%
Total 1–
Performance
2–
%
3–
Recommendations:
Strength Points: 1 – Advanced Training Plan
1– 2 – Motivation Program
2– 3–
3– 4-
Improvement Plan (Strategic Plan or Action Plan)
Main Objective Main Activities Budget Duration Start Finish Responsible
1 – Advanced -
Training Plan -
-
-
2 – Motivation
Program

4. External Resource Cost
4. Market Share %
5. Total Labor Cost
5. Claims Ratio
6. Profit Ratio
6.
7. Value Added Ratio
7.
8. Labor Productivity (LE Revenue / LE Labor)
8.
9. Inventory Turnover (turns/year)
9.
10.
4. Total Quantity 4. Attendance Ratio
6. Quality Rate 6.
7. Actual Capacity Rate 7.
8. Availability Ratio 8.
9. Performance Ratio 9.
10. Overall Equipment Effectiveness (OEE) 10.
4. External Resource Cost
4. Market Share %
5. Total Labor Cost
5. Claims Ratio
6. Unit Cost & Unit Price
6.
7. Profit Ratio
7.
8. Value Added Ratio
8.
9. Labor Productivity (LE Revenue / LE Labor)
9.
10. Inventory Turnover (turns/year)
10.
4. Total Quantity 4. Average Manpower
5. Rejected Quantity 5. Attendance Ratio
6. Quality Rate 6.
7. Actual Capacity Rate 7.
8. Availability Ratio 8.
9. Performance Ratio 9.
10. Overall Equipment Effectiveness (OEE)
Strategic Profit Model

Reliability Overall satisfaction
Product and Customer
service quality On-time delivery satisfaction Customer retention
Error/defects Complaints
Leadership for Market share

continuous Competitiveness
improvement Profits
Costs
Quality systems and
Cycle time
employee involvement Organization Turnover
benefits Satisfaction
Safety & health
Productivity

Feasibility Study
Dr. Attia Gomaa

2011

Feasibility Study
A feasibility study is a study made before committing to a
project.
A feasibility study leads to a decision:
• Go ahead
• Do not go ahead
• Think again
In production projects, the feasibility study often leads to
a budget request.
In research, a feasibility study is often in the form of a
proposal.
Feasibility analysis is the process by which feasibility is
measured.

System Engineering
Needs
Feasibility Study
Requirements
Planning
System Analysis Design
System Design Development
Cutover
Development
Testing
Implementation
Maintenance

Information System Engineering

Project / Product Design Steps.
STOP
Market
Competitors Research Process
Clients/Users Planning
Suppliers
Feasible
New Product
Development. Feasibility Preliminar Detailed Process Process
General Specs Analysis Design Design Design Analysis
R+D Prototyping
Technical Market Test
Sales Evaluation
Operations
(source: Monks, 1982)

Estimation accuracy
High Risk Low Risk

Incomplete information Detailed information
Pre-Feasibility Total Contract Project

Study Feasibility Management Management
Study
Error ± 20% ± 15% ± 10% ± 5%
Conducting a Feasibility Study
• Planning the study
• Collecting the data
• Analyzing the data
• Writing the report
• Presenting the report

Feasibility study outline
for a water station project
1- Market study: 3- Environmental study:

• Customers types • Environmental needs
• Customers needs
• Water quality 4- Economical and financial study:
• Quantity rates • Cost Elements
• Water supply • Economic analysis
• Price rates • Sensitivity Analysis
• Risk analysis
2- Technical study:
• Engineering design 5- Product Management:
• Equipment types • Project target plans
• International standards • Basic design, .. etc
• Cost estimation • Improvements recommendations

Cost-Benefit Analysis Techniques
• Brake-Even Analysis
• Payback Period Analysis
• Cash-Flow Analysis
• Net Present Value (NPV)
• Return-on-Investment (ROI) Analysis

Assets
• The economic resources owned by a business that can be used
for future operations
Fixed Assets
• Land
• Building
• Equipment
Current Assets
• Cash
• Accounts Receivable
• Inventories
• Raw Materials
• Supplies

Total Feasibility Study Leader & Team work
Accuracy: ± (5 to 10%)
(1 At least 100)
(1)
Project (2)
(10)
Overview Location
Conclusion
Study (3)
(9) Marketing
How to
Management? Feasibility Study
(4)
(8) Study Report Technical
Risk Study
Study (5)
(7)
Financial (6) Environmental
Study Economical Study
Study
Data source for every Item
Case Study
(1) Project (or product) Overview
# Main items Data source
1-1- Project (product) description
Product Pre-feasibility study
overview Vision, Mission, Targets
1-2- Main parameters

Product
Specs
1-3- Quality levels
Product
quality

(2) Location Study
2-1- • Select location in industrial area
Location • Location accessibility
Overview
2-2- • Infrastructure availability

Location • Customer availability
selection • Manpower availability
parameter • Transportation availability
s
• Price
2-3- 6th October city
Proposed Why?:
location

(3) Marketing Study
3-1- Customers types
Target Oxygen  Hospitals, Steel companies, Glass companies
Customers Nitrogen  Food companies, Petroleum service, Air
Analysis conditioning companies
Argon  Welding processes
3-2- Market size
Current Customers needs
Situation
Analysis
3-3- Competition levels
Competition Competition policy
Analysis

(3) Marketing Study
3-4- Demand History
Demand
analysis
3-5- Long term demand forecasting
Demand
forecasting
3-6- Long term Gab forecasting
Gab
analysis
3-7- Long term capacity plan
Capacity
Analysis
3-8- Quality rates
Estimated Price rates
price

(4) Technical Study
4-1- Engineering design & product structure
Process design Process sheet & Material flow diagram
Process Layout
International standards
4-2- Process & Production Equipment
Productive Equipment types & Equipment supply
systems Cost estimation
4-3- Utilities Equipment (Power system, Water system,
Supportive Air condition, Material handing system, … etc.)
systems Equipment types & Equipment supply
Cost  (15 to 30)% Productive Systems Cost
4-4- Total Space
Area & Buildings Project Layout
specs Productive area %

(4) Technical Study
4-5- Material List
Materials Supplier List
Requirements Critical Materials
Analysis Material Plans
4-6- Labor List
Manpower Labor supply
Requirements Critical Labor
Analysis Manpower Plans
4-7- Working & Nonworking days
Calendar Number of Shifts
Standard working hours/day
4-8- Quality Assurance Plan
Quality Plan International standards
4-9- Safety Plan
Safety Plan International standards

(5) Environmental (or HSE) Study
5-1- Environmental needs
Environmental Hazard parameters
conditions Noise level
5-2- Effect:
Health effect & Analysis:
Remedy Remedy:
5-3- Effect:
Safety effect & Analysis:
Remedy Remedy:
5-4-
Others

(6) Economical Study  Cost indicators
6-1- Cost classification Matrix
Cost elements (Direct Indirect Fixed Variable)
6-2- Total direct cost analysis

Direct cost
6-3- Total indirect cost analysis

Indirect cost
6-4- Total fixed cost analysis
Fixed cost
6-5- Total variable cost analysis
Variable cost

(6) Economical Study  Cost indicators
6-6- Total technical overhead analysis
Technical overhead
6-7- Total office overhead analysis

Office overhead
6-8- Total cost analysis

Total cost analysis
6-9- Price estimation analysis
Estimated price
6-10- Profit +
Estimated profit (Value added, Margin factor, or Markup ration.)
6-11- Capital expenses ratio  CAPEX ratio
CAPEX/OPEX Operating expenses ratio  OPEX ratio
analysis

(7) Financial Study  Long term analysis
7-1- Design capacity analysis
Long term Effective capacity analysis
capacity analysis Planned capacity analysis
7-2- CAPEX & OPEX Analysis
Cash out
analysis
7-3- Revenue Analysis
Cash in
analysis
7-4- Cash flow diagram, S-Curve
Cash flow IRR, NPV, … etc.
analysis
7-5-
others

(8) Risk Study (Safety & Financial)
8-1- Sensitivity Analysis
Risk estimation SWOT Analysis
Internal factors  Strength – Weakness
External factors  Opportunities – Threats
8-2- Safety effect:
Risk Process effect:
consequence Financial effect:
8-3- Proactive policy
Risk assessment Remedy Plans
Strategic Plans

(9) Management Study
9-1- Key persons  Labor
Organization
structure
9-2- Key persons  Labor
Job description
9-3- Information Cycle
Information flow
matrix
9-4- Planning tools
Target Plans Project target plans
Improvements recommendations

Master Plan
Year 2010 Year 2011 Year 2012 Year 2013 Year 2014
Phase

(10) Conclusion  One Page Management
10-1-
Project
overview
10-2-
Global
trends
10-3-
Strength
points
10-4
Weakness
points
10-5-
Conclusion

Conclusion: ―One Page Management‖
1) Subject Description:
2) Analysis:
Description
Strength
points
Weakness
points
3) Recommendation:

Case Study: Feasibility Study for CNC Spare Parts Workshop
Suppose you intend to construct a new spare parts workshop, the
feasibility study information is as follows:
Bank interest rate= i % MARR = I % Project duration= n years
Item Unit Year #1 Year #2 Year #3 …. Year #n
Market Information:
Investment Information:
Technical Information:
Cost Elements Information:
Others Information:
Based on the given information discuss the following:
• Technical study
(daily working hours, daily production, machine utilization,
quality policy, material handling, storages, space layout, etc)
• Economical study
(unit cost, unit price, profit %, CAPEX %, OPEX %,
Value added %, Margin factor %, etc)
• Financial study
(salvage value, cash flow, payback period, NPV, profitability index, IRR, etc)
• Risk study
(break even point, annual demand change ±10%, unit price change ±10%,
material cost change ±10%, profit range, etc).
• Environmental & Safety study

(safety policy, safety tools & equipment, etc)
• Management Study
(vision, values, mission, organization structure, KPI report, etc).
Suppose you intend to construct a new spare parts workshop, the
feasibility study information is as follows:
Bank interest rate= 10 % MARR = 25 % Project duration= 3 years
Item Unit Year #1 Year #2 Year #3

Market Information:
Annual market demand 1000 Unit 100 140 120
Market unit price $/unit 30 32 34
Annual site rent 1000$/year 80 90 100
Investment Information:
Number of machines CNC M/c 4 2 -
Machine investment $1000/Mc 50 55 -
Annual machine depreciation % book v. 35% 30% 25%
Utilities & infrastructure inv. $1000 100 40 10

Technical Information:
Average machine capacity unit/hr/Mc 8.0 7.0 6.0
Machine space m2 3 m * 2 m Per M/c
Total space m2 20 m * 20 m
Annual working days day/year 300 300 300
Max. daily working hours hour/day 14 14 14
Cost Elements Information:

Material cost rate per unit $/unit 8 9 10
Labor cost rate per unit $/unit 5 6 7
Running cost rate per unit $/unit 4 5 6
Planned maintenance cost % inv. 6% 6% 6%
Major Maintenance (overhaul) $1000 - - 50
Technical overhead cost $1000/year 60 70 80
Office overhead cost $1000/year 40 50 60
Max. profit ratio % Cost 20% 25% 25%
Min. profit ratio % Cost 15% 20% 20%

Technical Study: Working Conditions Analysis

Annual Market Demand 1000 unit 100 140 120
Annual Working Days day/year 300 300 300
Daily Production Unit/day

Total capacity rate unit/hr
Average daily working hours hr/day
Max. daily working hours hr/day 14 14 14

Machine Utilization %
(75 to 85) %

Technical Study: Working Conditions Analysis
Annual Market Demand 1000 unit 100 140 120
Annual Working Days day/year 300 300 300
Daily Production Unit/day 334 467 400
Total capacity rate unit/hr 32 42 36
Average daily working hours hr/day 10.4=11 11.11=12 11.11=12
Max. daily working hours hr/day 14 14 14
Machine Utilization % 10.4/14= 11.11/14= 11.11/14=

(75 to 85) % 74.3 % 79.4 % 79.4%

Quality Policy
Our goal is to ensure customer satisfaction and minimize rejects.
The company achieves this goal by establishing, documenting,

implementing and maintaining an effective and efficient Quality
Management System that meets the requirements of ISO 9001:2008.
Quality improvement is a continuous process and it is primary

responsibility of management. All Staff must consistently strive for a six
sigma target.

Material Handling System
Fork lift - Model 7FGCU35

8000 lb Cap - Low maintenance cost

Storages System
Required Area & Space Layout :

- Productive machining area > 3 total machine area
- Non-Productive area:
• Locker area = 3*3 = 9 m2
• Storage of raw material = 4*4 = 16 m2
• Storage of final product = 4*3 = 12 m2
• Storage of spare parts = 3*3 = 9 m2
• Managerial office = 4*4 = 16 m2
• W.C. area = 2 *4 = 8 m2
Total Non-Productive area = 70 m2
Workshop Layout
20 m * 12 m
Utilities Layout
20 m * 8 m

Workshop Layout
Final
Product
Storage
3*6
12
Spare
Raw Material Locker Pats Tools WC WC Managerial
Storage Room Storage Room 3*2 3*2 Office
4*3 3*3 3*3 3*2 4*3
20
Economical study Investment Analysis
Total Machine investment $1000
Annual machine depreciation $1000/year
Annual Utilities Cost $1000/year

Economical study Investment Analysis
Item Unit Year Year #2 Year #3

#1
Total Machine investment $1000 200 110 -
Book Value $ 1000 130 130+110=240 168
Annual machine depreciation $1000/year 70 72 42
Annual Utilities Cost $1000/year 33.334 53.334 63.334

Economical study Annual Cost Analysis
Direct Cost:
Annual Machine Cost $1000
Annual Material Cost $1000
Annual Labor Cost $1000
Annual Running Cost $1000
Total Direct Cost $1000
Indirect Cost:
Annual Site Rent $1000
Annual Utilities Cost $1000
Planned Maintenance Cost $1000
Major Maintenance (overhaul) $1000
Other Technical Overhead Cost $1000
Other Office Overhead Cost $1000
Total Indirect Cost $1000
Total Annual Cost $1000

Direct Cost:
Annual Machine Cost $1000 70 72 42
Annual Material Cost $1000 800 1260 1200
Annual Labor Cost $1000 500 840 840
Annual Running Cost $1000 400 700 720
Total Direct Cost $1000
Indirect Cost:
Annual Site Rent $1000 80 90 100
Annual Utilities Cost $1000 33.334 53.334 63.334
Planned Maintenance Cost $1000 12 18.6 18.6
Other Technical Overhead Cost $1000 50 60 70
Other Office Overhead Cost $1000 50 60 70
Total Indirect Cost $1000
Total Annual Cost $1000

Direct Cost:
Total Direct Cost $1000 1770 2872 2802
Indirect Cost:
Other Technical Overhead Cost $1000 50 60 70
Total Indirect Cost $1000 225.334 281.934 371.934
Total Annual Cost $1000 1995.334 3153.934 3173.934

Economical study Unit Cost Analysis
Unit Cost $/unit
Max. Profit Ratio % 20 25 25
Planned Unit Price $/unit
Market unit price $/unit
Annual Revenue $1000

Economical study Unit Cost Analysis
Unit Cost $/unit 19.95 22.52 26.44
Max. Profit Ratio % 20 25 25
Planned Unit Price $/unit 23.94 28.15 33.05
Market unit price $/unit 30 32 34
Annual Revenue $1000 2394 3941 3966

Economical study Economical Ratios Analysis
Profit Ratio %
CAPEX Ratio %
OPEX Ratio %
Margin Factor Ratio %
Value Added Ratio %

Capital Cost (CAPEX Elements)
Annual CAPEX $1000 103.334 125.334 135.334
Operating Cost (OPEX Element)
Other Technical Overhead $1000 50 60 70
Annual OPEX $1000

Economical study CAPEX & OPEX Analysis
Annual Total Cost $1000
Annual Capital Cost: $1000
Annual Machine Cost
Annual Utilities Cost
Major Maintenance
CAPEX Ratio %
OPEX Ratio %

Economical study CAPEX & OPEX Analysis
Annual Total Cost $1000 1995.334 3153.934 3173.934
Annual Capital Cost $1000
Annual Machine Cost 70 + 72 + 72 +
Annual Utilities Cost 33.334 53.334 63.334 +
Major Maintenance 50
= 103.334 = 125.334 = 135.334
CAPEX Ratio % 5.1 3.9 4.3
OPEX Ratio % 94.9 96.1 95.7

Economical study Margin Factor Analysis
Annual Revenue $1000 2394 3941 3966

1770 2872 2802
Total Direct Cost (overhead) $1000
Margin Factor Value $1000
Margin Factor Ratio %
Direct Cost : Revenue

100 : ?

Economical study Value Added Analysis
Annual Revenue $1000 2394 3941 3966
External Resources (Material) $1000 800 1260 1200
Value Added $1000
Value Added Ratio %
External Resources : Revenue

100 : ?

Economical study Value Added Analysis
Annual Revenue $1000 2394 3941 3966
External Resources (Material) $1000 800 1260 1200
Value Added $1000 1594 2681 2766
Value Added Ratio % 199 213 231
External Resources : Revenue

100 : 199

Economical study Economical Ratios Analysis
Profit Ratio % 20 25 25
CAPEX Ratio % 5.1 3.9 4.3
OPEX Ratio % 94.9 96.1 95.7
Margin Factor Ratio % 962 1298 966
Value Added Ratio % 199 213 231

Financial study Cash Flow Analysis
Item Unit Period 0 Year Year Year
#1 #2 #3
Annual Revenue (R) $1000/y - 2394 3941 3966
Salvage Value $ 1000 126
Investment & Cost Elements:
 Total machine investment $1000 200 110 - -
 Utilities & infrastructure inv. $1000 100 40 10 -
 Annual Site Rent $1000/y - 80 90 100
 Annual Material cost $1000/y - 800 1260 1200
 Annual Labor cost $1000/y - 500 840 840
 Annual Running cost $1000/y - 400 700 720
 Planned maintenance cost $1000/y - 12 18.6 18.6
 Capital Maintenance cost $1000/y - - - 50
 Other tech. overhead cost $1000/y - 50 60 70
 Other office overhead cost $1000/y - 50 60 70
Total cost (TC) $1000
Net Cash = R - TC $1000
Financial study Cash Flow Analysis
Item Unit Period 0 Year Year Year
#1 #2 #3
Annual Revenue (R) $1000/y - 2394 3941 3966
Salvage Value $ 1000 126
Investment & Cost Elements:
 Total machine investment $1000 200 110 - -
 Utilities & infrastructure inv. $1000 100 40 10 -
 Annual Site Rent $1000/y - 80 90 100
 Annual Material cost $1000/y - 800 1260 1200
 Annual Labor cost $1000/y - 500 840 840
 Annual Running cost $1000/y - 400 700 720
 Planned maintenance cost $1000/y - 12 18.6 18.6
 Capital Maintenance cost $1000/y - - - 50
 Other tech. overhead cost $1000/y - 50 60 70
 Other office overhead cost $1000/y - 50 60 70
Total cost (TC) $1000 300 2042 2408.6 3068.6
Net Cash = R - TC $1000 - 300 352 1532.4 1023.4
1532.4
352 1023.4
0
1 2 3
300
2- Payback Period:
(300/352) * 12 = 11 Month
3- NPV:
- 300 + 352 / (1+0.1) + 1532.4 / (1+0.1)^2 + 1023.4 / (1+0.1)^3
= 2055.341
4- Profitability Index = NPV / Initial

2055.341 / 300 = 6.85 = 685 %
5- IRR:  NPV = f(i) = 0  I  IRR >= MARR

0 = - 300 + 352 / (1+i) + 1532.4 / (1+i)^2 + 1023.4 / (1+i)^3
i% 10 30 40
IRR= %
0 NPV + + + -

Risk study 1- Break Even Point (BEP)

Variable Cost Elements:
• Annual Material Cost $/unit 8 9 10
• Annual Labor Cost $/unit 5 6 7
• Annual Running Cost $/unit 4 5 6
Unit Variable Cost = v $/unit
Fixed Cost Element:
Annual Machine Cost $1000/y 70 72 42
Annual Site Rent $1000/y 80 90 100
Annual Utilities Cost $1000/y 33.334 53.334 63.334
Planned Maintenance Cost $1000/y 12 18.6 18.6
Major Maintenance (overhaul) $1000/y - - 50
Other Technical Overhead Cost $1000/y 50 60 70
Other Office Overhead Cost $1000/y 50 60 70
Total Fixed Cost = TFC $1000/y


• Annual Material Cost $/unit 8 9 10
• Annual Labor Cost $/unit 5 6 7
• Annual Running Cost $/unit 4 5 6
Unit Variable Cost = v $/unit 17 20 23
Fixed Cost Element:
Annual Machine Cost $1000/y 70 72 42
Annual Site Rent $1000/y 80 90 100
Annual Utilities Cost $1000/y 33.334 53.334 63.334
Planned Maintenance Cost $1000/y 12 18.6 18.6
Major Maintenance (overhaul) $1000/y - - 50
Other Technical Overhead Cost $1000/y 50 60 70
Other Office Overhead Cost $1000/y 50 60 70
Total Fixed Cost = TFC $1000/y 295.334 353.934 413.934


Fixed Cost Element:

Unit price = p $/unit 23.94 28.15 33.05
p-v $/unit
BEP = Q unit/y
Revenue = p . Q Total Cost = TFC + v . Q

BEP  Q at Profit = 0  P Q = TFC + v Q
Q = TFC / (p-v)

Fixed Cost Element:

Unit price = p $/unit 23.94 28.15 33.05
p-v $/unit 6.94 8.15 10.03

BEP = Q unit/y 42555 43427 41270
Revenue = p . Q Total Cost = TFC + v . Q

BEP  Q at Profit = 0  P Q = TFC + v Q
Q = TFC / (p-v)
Risk study
Annual Demand change ±10%: Profit ratio = f (Annual demand)
Annual Demand Annual Demand Profit

Change (Unit/year) %
+ 10% 110000 21.6%
0 100000 20%
- 10% 90000 18%
Profit %
21.6 %
-10 % 0%
20 %
+10 % Annual
demand
change %
18%

Annual Demand change ±10%:
0 % Change - 10% + 10%
Annual Demand = 100000 90000 110000
Unit Var. Cost = 17 $/unit
Total Variable Cost= 1700000 1530000 1870000
Total Fixed Cost = TFC = 295334 295334 295334
Total Cost = 1995334 1825334 2165334
Unit Price= 23.94
Total Revenue= 2394000 2154600 2633400
Profit Ratio = 20% 18% 21.6 %

Risk study
Unit Price change ±10%: Profit ratio = f (Unit Price)
Unit Price Unit Price Profit

Change $/unit %
+ 10% 26.334 32 %
0 23.94 20%
- 10% 21.546 8%
Profit %
32 %
-10 % 0%
20 %
+10 % Unit Price
change %
8%

Unit Price change ±10%:
0 % Change - 10% + 10%
Unit Price= 23.94 21.546 26.334
Annual Demand = 100000 100000 100000
Total Revenue= 2394000 2154600 2633400
Total Cost = 1995334 1995334 1995334
Profit Ratio = 20% 8% 32%

Risk study
Material cost change ±10%: Profit ratio = f (Material cost)
Material Cost Material Cost Profit

Change $/unit %
+ 10% 8.8 15.3 %
0 8 20 %
- 10% 7.2 31.9%
Profit %
31.9%
-10 % 0%
20 %
+10 % Material cost
change %
15.3 %

Material Cost change ±10%:
0 % Change - 10% + 10%
Unit Material Cost 8 $/unit 7.2 8.8
Other variable cost = 9 $/unit
Unit Variable cost 17 15.2 17.8
Annual Demand = 100000 100000 100000
Total Variable Cost= 1700000 1520000 1780000
Total Fixed Cost = TFC = 295334 295334 295334
Total Cost = 1995334 1815334 2075334
Total Revenue= 2394000 2394000 2394000
Profit Ratio = 20% 31.9% 15.3 %

Risk study
Profit Range
Main Parameter Profit Ratio

Optimistic Most Likely Pessimistic
Annual Demand change ±10% 21.6% 20 % 18%
Unit Price change ±10% 32 % 20 % 8%
Material cost change ±10% 31.9% 20 % 15.3 %
Profit Range 32 % 20 % 8%

Cost Analysis

Cost Types
• Direct Costs
Related ―Directly‖ to the project
ex. Labor hours, material, equipment,
food, travel. . .
• Indirect Costs Facilities & Administration (F&A)

Overhead used for more than one project
ex. Building rent, taxes, janitorial
services
Total Cost = Direct cost + Indirect Cost

Road Map  Cost Elements
Direct
Cost Material Cost Technical Labor Cost
(Measurable) Equipment Cost Subcontractor Cost
Indirect or = Overhead
(Expected) Operation Cost Inventory Cost
= (10-50%)
Ratio
Material Handling Cost HSE Cost Technical
overhead
Training Cost Maintenance Cost
Office
Office Cost overhead
Hidden Cost:
Unused Unsafe
capacity Conditions Know-how

Cost Estimation
Direct cost:
Material cost
Labor cost
Total direct Technical
Machine cost cost + overhead
Subcontractor cost
Office
=
Manufacturing
cost
+ overhead
= Total cost + Profit
Or Price
Price – Total Cost = Profit

Direct cost:
Material cost
81000
Labor cost Total direct cost Technical overhead
22,600 295,600 + = 20% direct cost
Machine cost
192,000 Manufacturing cost Office overhead
295,600*1.2 = 354720 + = 10% manuf. cost
Total cost = 390,192 LE

Production Quantity = 30 unit
Unit Cost = 390,192 /30 = 13006.4 $/unit
Unit Price = 15,000 $/unit Revenue = 15,000 * 30 = 450,000
Profit = TR – TC = = 450000 – 390192 = = + 59808 = = + 15.3 %TC

Cost Estimation: Future Cost  f (Historical Cost)
Cost Elements:
Cost  f (technical , performance, schedule)
Total direct cost (TDC)
 BOQ * Unit Cost Project level - Certain Value
Direct Materials cost
SMART Items
Direct Labor cost
Direct Equipment/Machine cost
Direct Sub-contract cost
Total indirect cost (overhead): Uncertain Value
oTechnical Overhead: (Testing, Safety, Maintenance, etc)
 Site (factory, process, project) overhead = (10-20%) TDCMulti-Projects
level (Ratio)
o Office (Managerial or General) overhead = (5-10 %) TDC (15-30%)
Risk estimation (for critical / uncertain/abnormal activities / items / resources)

Client\Owner  Change orders  (0 - 25%)TDC Uncertain Value
0  Routine items
Total cost = Direct cost + Indirect cost + Risk estimation
Pipe line: Non-Routine orders Building 1000 m:
• 10 m/d • 6 Month
• 100 m/d Relative Weights • 9 Month
• 500 • 12 Month
• 1000
Cost  f (technical , performance, schedule)
Tank: Welding: Product: 800 LE/m2: Pump: Pipeline: Scaffolding:

•Water • Horizontal Ton: • 100 m2 Water •Water •10 m
• Oil • Vertical • 0ne • 500 m2 Steam • Oil • 50 m
• Steam • Overhead • 10 • 1000 m2 Oil • Steam • 100 m
• Gas • Mixed • 1000 • 5000 m2 Fire • Gas • 200 m

Case Study
Scope of work: Steel Structure for Power Towers
Material type: St 37 Total weight 1000 ton
Information Collection & Analysis:
Resources Information:
• Labor productivity = 10 man-hour /ton
Direct cost elements:

• Material Cost rate = 4000 LE/ton
• Labor rate = 10 LE/hour
• Machining cost rate = 200 LE/ton
• Tools & Supplies cost rate = 50 LE/ton
• Painting cost rate = 20 LE/m2
Overhead cost elements:

• Tech. Overhead= 30%Total Direct Cost
• Office Overhead = 5% Manufacturing cost
Based on this information, discuss & analysis the project cost.

Scope of work: Steel Structure for Power Towers 1000 ton
• Material Cost rate = 4000 LE/ton
• Material Cost = 4000*1000 = 4,000,000 LE
• Labor productivity = 10 m-h/ton
• Labor rate = 10 L.E/hour
• Labor cost = 10*10*1000 = 100,000 LE
• Machining cost rate = 200 LE/ton
• Machining cost = 200*1000 = 200,000 LE
• Tools & Supplies cost rate = 50 LE/ton
• Tooling cost = 50 *1000 = 50,000 LE
• Painting cost rate = 20 LE/m2
• Painting surface area = 20 m2/ton
• Painting Cost = 20 * 20 *1000 = 400,000 LE
• Total direct Cost = 4,750,000 LE
• Tech. Overhead= 30%Total Direct Cost = 1,425,000
• Manufacturing cost = 6,175,000
• Office Overhead = 5% Manufacturing cost = 308,750
• Total overhead = 1,425,000+308,750 = 1,733,750
Total Cost = 6,483,750 LE Unit Cost = 6,483.75 = 6,484 LE/ton

Rough Cut Estimation (Error < ± 10)
Type Electrical Mechanical Construction
& Asphalt
Labor 40% 30% 15%
Material 35% 40% 55%
Equipment 10% 15% 20%
Tech. Overhead 10% 10% 5%
Office Overhead 5% 5% 5%
Total Cost 100% 100% 100%
Type Power stations & Gas PL off Gas PL on

Compressors
Labor 15% 15% 10%
Material 55% 40% 60%
Equipment 15% 20% 15%
Tech. Overhead 10% 20% 10%
Office Overhead 5% 5% 5%
Total Cost 100% 100% 100%
Gas Power Station = 10 MW
Vendor / Supplier Survey  5 to 15 MW 0.90 $M/MW
15 to 30 MW 0.85 $M/MW
30 to 60 MW 0.80 $M/MW
Material Cost  10 * 0.9 = 9.0 $M
Type Power stations Cost estimation
Labor 15% 0.15 * 9.0 /0.55 = 2.45

Material 55% $ 9.0 M
Equipment 15% 0.15 * 9.0 /0.55 = 2.45
Tech. Overhead 10% 0.10 * 9.0 /0.55 = 1.64
Office Overhead 5% 0.05 * 9.0 /0.55 = 0.82
Total Cost 100% $ 16.35 M (Error < ± 10)
Base Cost ~ $ 16.5 M
Base Price Profit ~ 10% $ 18.0 M

Office Building = 1500 M2
Material Survey  < 500 m2 200 $/M2
500 to 1000 M2 180 $/M2
1000 to 2000 M2 170 $/M2
Material Cost  1500 * 170 = 255,000 $
Type Building Cost estimation
Labor 15% 69,454

Material 55% 255,000
Equipment 15% 69,454
Tech. Overhead 10% 69,454
Office Overhead 5%
Total Cost 100% 463,636 (Error < ± 10)
Base Price 500,000

Steel Tanks (Material St. 37)
Total Weights = 1000 ton
Material cost rate = 5000 LE/ton
Total material cost  5000 * 1000 = 5,000,000 LE
Type Building Cost estimation
Labor 15%
Material 55% 5,000,000
Equipment 15%
Tech. Overhead 10%
Office Overhead 5%
Total Cost 100% 9,090,909
Base Price 11,000,000

Operational Cost Analysis: (Value & Ratio): (Annual Term)
Profit = Revenue – Total cost (5 to 20%)
Profitability % = 100 * Revenue / Total cost Main +
Internal Resource (Fixed cost) Utilization:
- Value Added reflects the internal resource utilization

= Internal resources + Profit or
= Revenue – External resources
% = 100 * Revenue / External resources
- Margin factor reflects the total overhead utilization

= Total Overhead + Profit
= Revenue - Total direct cost
% = 100 * Revenue / Total direct cost or
(135 to 175%)
- Markup factor reflects the office overhead utilization

= Office overhead + Profit
= Revenue – (Total direct cost + Technical OH)
% = 100 * Revenue / (Total direct cost + Technical OH)
(120 to 160%)

Value Added reflects the internal resource utilization
= Internal resources + Profit
= Revenue – External resources

% = 100 * Revenue / External resources
External Facility Revenue

Resources
Internal Resources
• Material = 100 • Production profile= 100
• Subcontract = 200 • Price = 10 / unit
Total External Resource Revenue = 100 * 10 =1000

= 100+200 = 300
VA= 1000 – 300 = 700 or VA ratio = 1000/300 = 333 %

Value Added
External Facility Revenue

Resources
Internal Resources
• NG = 1M$/day • LNG = 5$M/day
VA= 5 – 1 = 4 $M/day  Good negotiation
Shutdown  Reduce from 10 day to 7 days
Process saving = (3 day) * (4 $M/day) = 12 $M 

Bonus = (100,000 $/day) * (3 day) = 300,000 $

Cost for a barrel of crude oil $ 82
 Value-added activates
42 gallons in a barrel 42 (eg: refinery, shipping,
service station)
Estimated cost of gasoline $1.95 / gallon
 Speculative purchases
Actual cost of gasoline $3.00 / gallon by investors
 Exorbitant collusion
Differential $1.05 / gallon
profits among producers
INPUT Value OUTPUT

Added Tasks

Exercise
INPUT Value OUTPUT

Added Tasks
1. Share among your table the processes that you are responsible for.
2. Identify your value-added tasks.
3. Discuss how your processes impact others at your table.
4. Share with the class.

Direct cost: Cost Estimation & Analysis
Material cost
Machine cost
+ = -- % direct cost
Manufacturing cost Office overhead

+ = -- % manuf. cost
Total cost = C
Unit Cost = Total Cost / Quantity
Unit Price = -- LE/unit Revenue = Unit Price * Quantity = R
Profit = R – C Value Added = R – ER Margin Factor =R – DC
Ratio = Profit/R Ratio = VA/R Ratio = MF/R

Direct cost: Cost Estimation & Analysis
Material cost
81000
22,600 295,600 + = 20% direct cost
Machine cost
192,000 Manufacturing cost Office overhead
295,600*1.2 = 354720 + = 10% manuf. cost
Total cost = 390,192 LE

Production Quantity = 30 unit
Unit Cost = 390,192 /30 = 13006.4 $/unit
Unit Price = 15,000 $/unit Revenue = 15,000 * 30 = 450,000
Profit = TR – TC Value Added = R – ER Margin Factor = R – DC

= 450000 – 390192 = 450000 – 81000 = 450000 – 295,600
= + 59808 = + 369000 = + 154400
= + 15.3 %TC = + 450 %ER = + 52.2 %DC

Brain Storming:
Discuss the following figure.
Percent % Cost Analysis

200
175
Value Added
150
Margin factor
125
Profit
100
75
50
25
0
1990 1995 2000 2005
Year
Value Analysis

Value Engineering
Performance
Quality
Safety Price
Time
… etc.
Balance
VE is a systematic problem-solving method VE
1
COST SCHEDULE TECHNICAL RISK
Value Engineering
Improving Customer Service

Value Engineering Employs Six Steps
• Information
• Creative
• Analysis
• Development
• Presentation
• Implementation

Product Development:
1. Work Breakdown structure

2. Functional Analysis
• B = Basic Function
• S = Support Function
3. Cost Analysis
COMPANY
4. Brainstorming
5. Development Alternatives
6. Value Analysis
7. Best Alternative
A Pencil
Function of a Pencil
Component Function(s) B S
Pencil Make Marks x
Eraser Remove Marks x
Band Secure Eraser x
Improve Appearance x
Wood Support Lead x
Transmit Force x
Display Info x
COMPANY
Paint Protect Wood x

Logo Advertise Company x
Lead Make Marks x
Alternatives--Mechanical Pencil, Marker, Chalk, etc.
B = Basic Function
S = Support Function

Function of a Pencil
Component Function(s) B S Cost ($)
Pencil Make Marks x 0.40
Eraser Remove Marks x 0.05
Band Secure Eraser x 0.03
Wood Support Lead x 0.09
Transmit Force x
Display Info x
COMPANY
Paint Protect Wood x 0.03

Logo Advertise Company x 0.02
Lead Make Marks x 0.18
Alternatives--Mechanical Pencil, Marker, Chalk, etc.

B = Basic Function
S = Support Function

Value Analysis
―Tender / Proposal Evaluation‖
Supplier / Vendor / Contractor / Consultant
What is the Best for You?
Value analysis is a process that considers cost in the context
of other factors:
• Life-cycle cost
• Quality
• Durability
• Maintainability
Technical
Price
Value Analysis Methods
What is Value?
“The value of an item must not be based on its price but
rather on the utility which it yields”
Bernoulli D. (1738)
Value for money = Function or Desired Performance

Cost
Benefit
Usefulness
Importance

Point Evaluation System:
Total Technical Points

Value Index =
Cost
Quality + Performance + HSE Q+P+H

Value Index = =
Cost C
Max. Value Index

Point Evaluation System:
Cost
Point Cost Index =
Total Technical Points
Cost C
Point Cost = =
Quality + Performance + HSE Q+P+H
Min. Point Cost Index

For example:
Price Value
Function
+
X Point/$ Value=
+ Revenue + Quality
Cost
X $/Point Cost
Function
+
Value=
+ Revenue + Quality

Value Analysis
Offers
Procurement Project
Supplier & Vendor Main Contractor / Contractor / Subcontractor
1. Price 1. Price 1. Price

2. Technical Specs 2. Technical Specs 2. Technical Specs
3. Lead Time 3. Duration 3. Duration
4. Management Approach 4. Grade (1 to 7)
5. Past Experience 5. Past Experience
Relative Weight
Criticality Level (A, B, C, D)  Safety, Process Effect, or Daily Rate
A Super Critical B  Critical C Medium D  Normal

What are Key Performance Indicators (KPIs)?
Price Delivery Quality
Performance to Product reliability

Total product cost
schedule and consistency
KPIs are measurements of a supplier or service provider‘s

performance in key activity areas

Supplier Performance System
3x3 Performance Metrics
Excellent Average Unacceptable
Parameter Offers
A •B C
Quality E A A
Delivery A E E
Price A A E
Evaluation A A E
Not Measurable  Not Accurate

Value Analysis
Main Steps:
1. Scope of work
2. Objectives
3. Main Parameters
4. Rating system
5. Data )offers, types, … etc.(
6. Information collection
7. Solution approach
8. Best solution
9. Presentation
10. Excel file
Rating System
Evaluation  (Scale 010 )
Main Relative
Parameter weight 0 6 8 10
Bad Accepted Good Very Good
P1 w1
x x x x
P2 w2
x x x x
P3 w3
x x x x
P4 w4
x x x x
6  Minimum Requirements
Information Collection
Main Parameter
Offer / Type Price
P1 P2 P3 P4
I $
x x x x
II $
x x x x
III $
x x x x
IV $
x x x x

Case Study:
A manager is trying to decide between four air condition systems
(A,B,C,D) for a computer lab; area 10 m * 14 m * 4 m; maximum
budget 28000 LE. Air Condition rate 1 HP / (8 to 10) m2
Rating System:
Main Relative Scale
Parameter weight 0 6 8 10
Maintainability 4 - C,D B A
Quality & Safety 3 - D B,C A
Electrical Consumption 2 - D B,C A
Design & View 1 - C,D B A
Brand 1 - C,D B A
Cost Information (LE):
HP Type
A B C D
3 6000 5800 5700 5600
4 7000 6700 6550 6500
5 7600 7200 7000 6800
6 8000 7500 7200 7000
Based on this information, discuss & select the best type.
Case Study:
Total Area = 10 m * 14 m = 140 m2 Height = 4 m;
Power = 140/10 = 14 HP
Cost Information (LE): Maximum budget = 28000 LE.

HP Number Total Total Cost
HP A B C D
3 5 15 30000 29000 28600 28000
4 4 16 28000 26800 2620 26000
5 3 15 22800 21600 21000 20400
6 3 18 24000 22500 21600 21000
Technical Rating System:

Main Relative Type
Parameter weight A B C D
Maintainability 4 10 8 6 6
Quality & Safety 3 10 8 8 6
Electrical Cons. 2 10 8 8 6
Design & View 1 10 8 6 6
Brand 1 10 8 6 6
Total Points 110 88 76 66

Value Matrix = Function / Price
HP Number Total Value Index
HP A B C D
3 5 15 X X X 2.3
4 4 16 3.9 3.3 2.9 2.5
5 3 15 4.8 4.0 3.6 3.2
6 3 18 2.5 3.9 3.5 3.1
Value Ratio
HP Number Total Ratio, %
HP A B C D
3 5 15 X X X 47.90
4 4 16 81.25 68.75 60.40 52.00
5 3 15 100.0 83.30 75.00 66.66
6 3 18 54.10 81.25 72.90 64.58
Best Solution:
The best type based on value analysis results is A (5 HP * 3 unit) with
price of 22800 LE.

Brain Storming: Selecting Flooring Materials
You would like to cover your apartment‘s floor with suitable materials .
Main Parameter P1 P2 P3
Description Health and Safety Appearance Easy to clean
Relative Weight 4 3 2
Material Type Price Main Parameters

LE/m2 P1 P2 P3
A- Ceramic 50 6 6 8
B- Wood 100 10 10 10
C- Granite 80 8 8 10
Based on this information, discuss & select the best type.

Criticality Analysis
Safety Process Financial

Effect Effect Effect
Major Effect or Minor Effect
(A) Super Critical,

(B) Critical,
(C) Medium,
(D) Normal.
Local effect, System effect, Plant effect

Spare Parts Criticality Analysis
Centrifugal Pump Criticality
HSE Effect (System level)
Drain system C
Major Water system B
(A)
Minor Crud oil system A
Process
Steam system A
Effect
Fire-fighting system A
Major
(B) Critical Equipment (Planned)
Minor
Standby Non-Critical
Availability
Equipment
Without With
(C) (D)
Project Criticality Analysis - Safety effect
Safety Effect - Process effect
- Daily Rate ($/day)
Major
(A)
Minor
Process Critical Project

Effect
Major
(B)
Minor
Daily Rate
Non-Critical
Project
High Low
(C) (D)
Case Study: Tender Evaluation
Class (A) Class (B) Class (C)

Parameter Weight (point)
1. Price 6 12 20
2. Technical Specs 12 8 4
3. Past Experience 8 8 4
4. Reputation 4 2 2
5. Duration (Fixed) ---- ---- ----

6. Grade (1 to 7) 1 or 2 1 to 4 1 to 6

Supplier or Vendor Evaluation
Relative Weight Point Evaluation System:
Total Index = Price Points * F1 + Technical Points * F2
Max. Total Index

Most Common:
Criticality Level
Level A B C D
F1= Price or Cost 10 20 35 50
F2= Technical 90 80 65 50
or Min. Cost Rule
A= Catastrophic B = Critical C= Medium D= Normal
Technical Relative Weight

Case Study: Assume you have to buy 10 new similar car, and the offers are as follows:
Item (A) (B) (C) (D) (E) (F) (G) (H)
BMW Merc Honda Matrix Opel Toyota Lancer Chery
Price (1000 LE) 260 400 140 100 130 140 110 50
Technical par.
Safety/Stability 8 10 8 6 8 8 6 0
Options 10 10 8 6 8 8 6 6
Fuel consumption 10 10 10 10 10 10 8 8
Maintainability 10 10 8 8 8 10 8 0
Engine Capacity 10 10 10 8 8 8 8 8
Brand & Style 10 10 8 8 8 8 6 0
Model / Year 2008
Relative Weight matrix (relative priority from 1 to 3):
Parameter Safety Options Fuel Maintain- Engine Brand &
con. ability capacity Style
Weight 3 2 3 3 1 1
Technical weight 80% Price weight 20%
Evaluation rules:
Maximum budget = 2,000,000 LE Accepted Technical points > 6
Based on this information, discuss & select the best Car.
Item (A) (B) (C) (D) (E) (F) (G) (H)
BMW Merc Honda Matrix Opel Toyota Lancer Chery
Price (1000 LE) 260 400 140 100 130 140 110 50
Technical par.
Safety/Stability 8 10 8 6 8 8 6 0
Options 10 10 8 6 8 8 6 6
Fuel consumption 10 10 10 10 10 10 8 8
Maintainability 10 10 8 8 8 10 8 0
Engine Capacity 10 10 10 8 8 8 8 8
Brand & Style 10 10 8 8 8 8 6 0
Model / Year 2008
Weight matrix (relative priority from 1 to 3):

con. ability capacity Style
Weight 3 2 3 3 1 1
Evaluation rules:
Maximum budget = 2,000,000 LE Accepted Technical points > 6
Based on this information, discuss & select the best Car.
Item Points Honda Opel Toyota
Price (1000 LE) 140 130 140
Price points 100 130/140 130/130 130/140
= 93 =100 =93
Technical points: R. weight
Safety/Stability 3 8 8 8
Options 2 8 8 8
Fuel consumption 3 10 10 10
Maintainability 3 8 8 10
Engine Capacity 1 10 8 8
Brand & Style 1 8 8 8
Tech. points 112 110 116
100 112/116= 110/116= 116/116=
96.5 94.8 100
Proposal Evaluation:
Price points 100 93 100 93
Tech. points 100 96.5 94.8 100
0.8 *Tech. +0.2 * Price 100 95.80 95.84 98.6

Buy 10 new similar car – Model/year 2008
2) Analysis:
Item Accepted offers Rejected offers
Honda Opel Toyota Over budget Technical
Price (1000LE) 140 130 140 BMW Matrix
Technical index % 96.5 94.8 100 Merc. Lancer
Chery
Value Index %
Strength
points
Weakness
points
3) Recommendation: The best options are:

1) 2) 3)
Case Study: Assume you have to buy a new crane 300 ton, and the offers are as follows:
Item A B C D E
Initial cost (M $) 1.5 1.8 1.4 1.0 1.2
Life, year 12 12 10 8 10
Salvage (% initial cost) 15% 15% 12% 10% 12%
Technical parameters
• Safety/Stability 10 10 8 6 8
• Options 8 10 8 6 8
• Fuel consumption 10 10 10 8 8
• Maintainability 10 10 8 8 8
• Engine Type 10 10 8 6 8
• Brand & Style 8 10 8 0 0
Weight matrix (relative priority from 1 to 4):
con. ability type Style
Weight 4 2 2 3 2 1
Evaluation rules: Maximum budget = 1.5 M$ Accepted Technical points > = 6
Based on this information, discuss & select the best crane.
B is over budget D,E are technical rejected (Brand & style <6)
Item Points A B C D E
Annual Depreciation (SL) 0.1063 0.1232
Price points 100 100 86.24
• Safety/Stability 4 10 8
• Options 2 8 8
• Fuel consumption 2 10 10
• Maintainability 3 10 8
• Engine Type 2 10 8
• Brand & Style 1 8 8
Tech. points 134 116
100 100 86.57
0.8 *Tech. +0.2 * Price 100 86.5
Offer (A) is the best one

Or B is over budget D,E are technical rejected (Brand & style <6)
Item Points A B C D E
Annual Present Worth
Price points 100
• Safety/Stability 4 10 8
• Options 2 8 8
• Fuel consumption 2 10 10
• Maintainability 3 10 8
• Engine Type 2 10 8
• Brand & Style 1 8 8
Tech. points 134 116
100 100 86.57
0.8 *Tech. +0.2 * Price
Offer (A) is the best one

Buy a crane 300 ton
2) Analysis:
A C Over budget Technical
Initial cost (M$)
Technical index %
Total Value Index %
Strength Points
Weakness Points

1) A 2) C
Buy a crane 300 ton
2) Analysis:
A C Over budget Technical
Initial cost (M$) 1.5 1.4 B D,E
Technical index % 100 86.57 1.8 M$ (0) Brand
Total Value Index % 100 86.5 & Style
Strength Points
Weakness Points

1) A 2) C
Contractor Evaluation Policy
Scope of work  Project xxxxx
Technical Parameters:
Scale ( 0  10 )
Parameter Scale Rejected Fair Good Excellent
0 6 8 10
Price $M 10
Technical Approach 10 Specific
Management Approach 10
Past Performance 10 Measurable

Contractor Evaluation  Project  Duration
Total Index
Price Technical Management Past

Approach Approach Performance
A  10 50 20 20
B  30 40 15 15
C  50 30 10 10
D  70 20 5 5
A= Catastrophic B = Critical C= Medium D= Normal
Total Index = PR*F1 + TA* F2 + MA*F3 + PP*F4

PR, TA, MA & PP Point system (1 to 10)
Main Requirements:
• Technical Proposal
• Price Proposal
• Management Approach Report
• Past Experience Report
Submit a hard copy original with the signatures and one

copy for each

Case Study:
Power Station Project

A Catastrophic
Total Index

A  10 50 20 20
Total Index = PR*0.1 + TA* 0.5 + MA*0.2+ PP*0.2
PR, TA, MA & PP Point system (1 to 10)

Case Study:
Gas Pipe Line Project

A Catastrophic
Total Index

A  10 50 20 20

Case Study:
Oil Pipe Line Project

B Critical
Total Index

B 30 40 15 15

Case Study:
Water Pipe Line Project

C  Medium
Total Index

C  50 30 10 10

Case Study:
Office Building Project

D  Normal
Total Index

D 50 30 10 10

Parameter Description:
Evaluation  (Scale 010 )
Parameter
0 6 8 10
Technical
Approach
X X x x
Management
Approach
X x x x
Past
Performance
x x x X
Management Approach Evaluation:
Evaluation
Parameter Weight
0 6 8 10
Organization 6
Structure
Project Manager 4
Experience
Project Manager 3
is Certified
Project Team 4
Experience
Presentation On 3
Management
Approach
Past Performance Evaluation
Evaluation
Parameter Weig
ht 0 6 8 10
Experience 3 None
Field 2 None
Scale 2 None
Technical Approach Evaluation
Evaluation
Parameter Weight
0 6 8 10
Project / Contractor
Case Study:
Project overview: 7 MW Power Station for X-Petroleum Site
5 Proposals
Parameter
A B C D E
Price $M 7.0 7.5 8.0 9.0 10.0
Technical 8/10 8/10 8/10 10/10 10/10

Approach
Management 6/10 6/10 8/10 8/10 10/10
Approach
Past 0/10 6/10 8/10 8/10 10/10
Performance
Evaluation rules:
Maximum budget = $ 9 M Accepted parameters > = 6/10
Based on this information, discuss & select the best proposal.

Management Approach:
0 6 8 10
Bad Fair Good Very Good
CRITERION A B C D E
1) Organisation Structure 6 8 6 10 10
2) Leader Skills (CVs) 6 6 8 8 10
3) Worker Skills (CVs) 10 6 10 8 10
4) QC/QA Management 8 6 8 8 10
5) Safety Management 6 6 8 8 10
6) Resources Mobilisation 6 6 8 6 10
7) Documentation Quality 6 6 8 10 10
8) Quality Manual 6 10 8 8 10
9) Quality of the Co-ordination 0 0 8 6 10
10) Quality of the Support Action 6 6 8 8 10
Overall score  100 Points 60 60 80 80 100
 10 Points 6 6 8 8 10
Past Experience:
0 6 8 10
Bad Fair Good Very Good
Non Ok Ok Ok
but not in the & in the same & Petroleum
same field field contractor
Different Scale Different Scale Same Scale

Project overview: 7 MW Power Station
Proposals
Parameter
A B C D E
Price $M 7.0 7.5 8.0 9.0 10.0
(over $)
Technical 8/10 8/10 8/10 10/10 10/10
Approach
Management 6/10 6/10 8/10 8/10 10/10
Approach
Past 0/10 6/10 8/10 8/10 10/10
Performance (not)
Evaluation rules:
Maximum budget = $ 9 M Accepted parameters > = 6/10
Based on this information, discuss & select the best proposal.

Relative Weight :
Power Station Project

A Catastrophic
Total Index

A  10 50 20 20
All indicators (PR, TA, MA & PP) from (1 to 10) Scale  Relative

Proposals
Parameter
A B C D E
Price $M Best price 10/10 10*7.5/8.0= 10*7.5/9.0=
10*7.5/7.5 = 10 9.375 8.333
Technical 8/10 8/10 10/10
Approach
Management 6/10 8/10 8/10
Approach
Past 6/10 8/10 8/10
Performance
Total Index

Proposals
Parameter
A B C D E
Price $M 10 9.375 8.333
Technical 8 8 10
Approach
Management 6 8 8
Approach
Past 6 8 8
Performance
Total Index 7.4 8.14 9.03

The best offer

2) Analysis:
Item A B C D E
Description
Strength
points
Weakness
points
3) Recommendation:

Financial Analysis

Financial Analysis
BEP
NPV Net Present value BEP Break even point

IRR Internal rate of return

Cash Flows for Project
Cash Flow
Benefits
Time
Cost
Investments

Cash Flow - Timing
End of project:
Salvage Value
Annual Revenues/Savings
Year 1 Year 2 Year 3 TIME
Time zero:
Initial Investment

Project Cash Flow Analysis
Revenue
A F
(+)
P (-)
Cost
i = Interest rate (%) n = Life time (year)

P = Present value  Value at time = 0
F= Future value  Value at time > 0
A= Annual uniform value  Equal value over time
• Interest rate  Certain bank  i% given

• Minimum Attractive Rate of Return (MART)
• Internal Rate return  Cash In/out for Certain project
Project Financial Analysis
Short & Medium term: (< 2 years)

• Cost/Benefit Analysis ―Profit Index or Benefits/cost ratios (1.3 to 1.8)”
• Pay back period *
Long term: "Time is Money―, )>= 2 years)

• Net present value *  Profitability Index
• Annual present value
• Future present value
• Internal rate of return *
• Break even analysis
* The three most popular investment decision tools

Profitability Index
• Allows a comparison of the costs and benefits of different

projects to be assessed and thus allow decision making to be
carried out
Net Present Value

Profitability Index = ---------------------------
Initial Capital Cost
PI < 1.0  Losses  Rejected (or Service project)

PI = 1.0  Break even point  short term
PI > 1.0  Profit  Accepted (>1.2)
Engineering Industry Average:
• Recovery factor  (0.8 to 0.9) Total capacity

• Base Price  80 % Most Common Price (Mode)
• Pay back period  3 to 7 years
• Net present value  Profitability Index >= 1.2
• Internal rate of return  IRR > MARR
• Break even point  Economic limit Production rate
Minimum Attractive Rate of Return (MARR) =

Best Banking i% + (2 to 8 %) ~ 15%
Catastrophic Case  Health effect (Cement)  MARR > 20%

Oil / Gas Projects:
• Recovery factor  (0.4 to 0.7) Total capacity
• Base Price  50 % Most Common Price (Mode)
• Pay back period  5 to 10 year
• Net present value  Profitability Index >= 1.3
• Internal rate of return  IRR > MARR
• Break even point  Economic limit Production rate
Minimum Attractive Rate of Return (MARR) =

Best Banking i% + (5 to 15%) ~ 20%
Catastrophic Case  Iraq  MARR > 30%

Benefit/Cost Ratio & Payback Period
These two approaches have a common problem.
They do not take into consideration the

―TIME is MONEY‖.

The Process of Cost/Benefit Analysis
Calculate the costs
•One time costs
•Ongoing or Repeated Costs
•Opportunity costs
Calculate the Return on
Investment = ROI
= Benefits/Costs × 100%
Calculate the Benefits
•One time benefits
•Ongoing or Benefits
•Savings
•Improved Services

Benefit/Cost Ratio
Simply put it is the financial value of the benefit divided by the
financial cost.
($Benefit / $Cost) = (1.3 to 1.8)

Example:
Project Benefit = $ 7,000 (Total Cash In)

Project Cost = $ 5,000 (Total Cash Out)
Benefit/Cost Ratio = 1.4 (Profitability )
($Benefit / $Cost) = (1.3 to 1.8)

Payback Period:
Payback period is the length of time, usually expressed in years or
fractions there of, needed for a firm to recover its initial investment
on a project.
Example:
Initial Project Expense = $5,000
Payback
Year 1 $1,000 ($4,000)
Year 2 $2,000 ($2,000)
Year 3 $2,000 $0
Year 4 $2,000 $2,000

Example:
Cash flow: $1000
Year 0 Year 1 Year 2 Year 3 Year 4
Cost 1,000 150 150 150 150
Benefit 0 500 500 500 500
Difference (1000) 350 350 350 350

Payback Period
Definition:
The number of years it takes before the cumulative forecasted cash flow equals
the initial investment.
Example: $350 $350 $350 $350
1 2 3 4
years
-$1,000
Payback Period (Investment) = 3 years

MOST COMMON PAYMENT
FACTORS
To find Given Symbol Factor
P (t=0) F (t>0) (P/F, i, n) (1+i)-n
F (t>0) P (t=0) (F/P, i, n) (1+i)n
P (t=0) A (equal (P/A, i, n) {(1+i)n -1}/{i (1+i)n }

over time)
A P (A/P, i, n) {i (1+i)n } / {(1+i)n -1}
F A (F/A, i, n) {(1+i)n -1}/ i
A F (A/F, i, n) i / {(1+i)n -1}

Basic Time Value of Money Calculations
To convert future value to present value:
P = F [ 1 / (1 + i)n ]
P = F [P/F, i , n)
Where:
P = Present value
F = Future value
i = (interest) rate of return
n = number of units of time
Basic Time Value of Money Calculations: Example
Calculate the present value of $1.00 to be

paid (or collected) 5-years from now
assuming an interest rate of 8%. Set it up
as follows:
P = 1.00
(1 + .08)5
Thus: $0.68

Net Present Value
Net Present Value (NPV) is a means to calculate
whether the public sector organization will be better or
worse off if it make a capital investment. It does so by
adding the present value of outflows and the present
value of inflows. It shows the value of a stream of future
cash flows discounted back to the present by some
percentage that represents the minimum desired rate of
return, often called the cost of capital.
NPV = PV Inflows – PV Outflows

The Net Present Value Method: Summary

Net Present Value Calculation
NET PRESENT VALUE EQUALS
Some amount of money
Divided by
(1 + interest rate)n
Where “n” equals the number of periods

Net Present Value
The Value of a Future $1
(P/F.i,n)
Discount rate (d): 10% 20% 30% 40%

Years into future (n)
1 .9091 .8333 .7692 .7142
Present
2 .8264 .6944 .5917 .5102 value
3 .7513 .5787 .4552 .3644 factors
4 .6830 .4823 .3501 .2603
5 .6209 .4019 .2693 .1859
10 .3855 .1615 .0725 .0346
20 .1486 .0261 .0053 .0012
30 .0573 .0042 .0004 .0000
Handout: Table with discount rates

Net Present Value (NPV)
Converting Cash Flows to Present Value
Annual Savings End of project

= ??
= ??
= ??
$38,463 $38,463 $38,463
Year 1 Year 2 Year 3 TIME
Time zero:
Initial Investment = $105,000

Net Present Value
Example:
Interest rate of 12%.
$350 $350 $350 $350
1 2 3 4
years
-$1,000
NPV Investment 
350 350 350 350
 1,000   2
 3

1.12 1.12 1.12 1.12 4
 1,000  350  0.89  350  0.80  350  0.71  350  0.64
 63

Evaluating Capital Investment Proposals: An Illustration
A Company is considering purchasing
a machine with a 5-year life.
Cost and revenue information

Machine cost $ 75,000
Revenue $ 84,375
Cost of goods sold 50,625
Gross profit $ 33,750
Cash operating costs $ 3,350
Depreciation 14,000 17,350
Pretax income $ 16,400
Income tax 6,400
After-tax income $ 10,000
($75,000 - $5,000) ÷ 5 years

Net Present Value
$350 $350 $350 $350
1 2 3 4
years
-$1,000
NPV Investment 
350 350 350 350
 1,000    
1.12 1.12 2 1.123 1.12 4
 1,000  350  0.89  350  0.80  350  0.71  350  0.64
 63

Internal Rate of Return - Decision Criteria
The decision rule is: Accept the project when the internal rate of return is
equal to or greater than the required rate of return. Reject the project when
the internal rate of return is less than the required rate.
The Internal Rate of Return Method: Summary

Internal Rate of Return
Example
You can purchase a building for $350,000. The investment
will generate $16,000 in cash flows (i.e. rent) during the first
three years. At the end of three years you will sell the
building for $450,000. What is the IRR on this investment?
16,000 16,000 466,000

0   350,000   
(1  IRR ) 1
(1  IRR ) 2
(1  IRR ) 3

Definition:
The rate of return that yields a Net Present Value of zero.
Example:
$350 $350 $350 $350
1 2 3 4
years
-$1,000
350 350 350 350

    1,000  0  IRR  0.15
1  IRR (1  IRR ) (1  IRR ) (1  IRR )
2 3 4

Example
You can purchase a building for $350,000. The investment
will generate $16,000 in cash flows (i.e. rent) during the first
three years. At the end of three years you will sell the
building for $450,000. What is the IRR on this investment?
16,000 16,000 466,000

0   350,000   
(1  IRR ) 1
(1  IRR ) 2
(1  IRR ) 3
IRR = 12.96%

IRR=12.96%

Example : New Car
Period Cash 2 Years 2 Years
0 90,000 50,000 40,000
1 - 25,000 35,000
2 - 25,000 35,000
IRR
Which offer should you accept and why?

(P/F, i, n) (1+i)-n

Example :
Period Project A Project B
0 -500 -400 The required

return for both
1 325 325 projects is 10%.
2 325 200
IRR 19.43% 22.17% Which project

should you accept
and why?
NPV 64.05 60.74

Case Study:
You can purchase a building for $350,000. The
investment will generate $16,000 in cash flows (i.e.
rent) during the first three years. At the end of three
years you will sell the building for $450,000.
What is the IRR on this investment?
Minimum Attractive Rate of Return (MARR) = 20%

450
16 16 16
350
16,000 16,000 466,000

0  350,000   
(1  IRR ) (1  IRR ) (1  IRR )
1 2 3
IRR=12.96%
IRR = 12.96%
< MARR
“Rejected”

Case Study - Pump Replacement
Assumptions/Calculations:
- Pump 0.5 HP - Average Annual Costs are constant

- Interest rate is 4% - Life 10 years
1- Axial Pump 2- Centrifugal Pump

Model: 607-3 Model: 8000 Series Horizontal Centrifugal
Initial Cost: $4400 Self-Priming Pump
Annual Costs: $100 Initial Cost: $2464
Annual Costs: $400
3- Diaphragm Pump 4- Piston Plunger Pump

Model: 150 Frame Reciprocating Process
Model: LLC-1010 Pump -- 152R060
Initial Cost: $2399 Initial Cost: $61500
Annual Costs: $512 Annual Costs: $1790
Based on this information, discuss & select the best pump.

Economic Analysis
Centrifugal Axial Piston Plunger Diaphragm

Initial Cost 2464 4400 61500 2399
Annual Costs 400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
Based on this information, discuss & select the best pump.

Economic Analysis
Centrifugal Axial Piston Plunger Diaphragm
Initial Cost 2464 4400 61500 2399
Annual Cost 400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
400 100 1790 512
Total NPW (4%) $5,584.54 $5,180.86 $75,461.06 $6,393.02
NPW = Net Present Worth
•Axial Flow Pump (Model 607-3) is the most cost effective model for our application.

Case Study – An Engine
Suppose you intend to purchase a new engine, 3 types of engine
are available on the market:
Item Option A Option B Option C

First Cost $ 60,000 $ 70,000 $ 80,000
Life, year 12 12 12
Salvage value 0 0 0
Annual O & M Cost $ 3000 $ 2500 $2000
MARR is 15%
Which financing option is a better choice?

Item Option A
First Cost $ 60,000
Life, year 12
Salvage value 0
Annual O & M Cost $ 3000
0 1 2 3 4 5 6 7 8 9 10 11 12
3000 3000 3000 3000 3000 3000
60,000

A (12 year) B (12 year) C (12 year)
0 - Initial Cost $ 60,000 $ 70,000 $ 80,000
1- Annual Costs 3000 2500 2000
2- 3000 2500 2000

3- 3000 2500 2000
4- 3000 2500 2000
5- 3000 2500 2000
6- 3000 2500 2000
7- 3000 2500 2000
8- 3000 2500 2000
9- 3000 2500 2000
10- 3000 2500 2000
11- 3000 2500 2000
12- 3000 2500 2000
Total NPW (15%)

First Cost $ 60,000 $ 70,000 $ 80,000
Life, year 12 12 12
Salvage value 10% First cost 10% First cost 10% First cost
Annual O & M Cost $ 3000 $ 2500 $2000
Overhaul #1 $ 5000 / 2 years $ 6000 / 3 years $ 7000 / 5 years
Overhaul #2 $ 8000 / 6 years $ 10,000 / 9 years $ 12,000 / 10 years
MARR is 15%

Item Option A
First Cost $ 60,000
Life, year 12
Salvage value 10% First cost
Annual O & M Cost $ 3000
Overhaul #1 $ 5000 / 2 years
Overhaul #2 $ 8000 / 6 years

6,000
0 1 2 3 4 5 6 7 8 9 10 11 12
3000 3000 3000 3000 3000 3000
3000+ 3000+ 3000+ 3000+

5000 5000 5000 5000
3000+ 3000+
8000 8000
60,000

0 - Initial Cost $ 60,000 $ 70,000 $ 80,000
1- Annual Costs 3000 2500 2000
2- 3000+5000=8000 2500+6000=8500 2000

3- 3000 2500 2000
4- 3000+5000=8000 2500 2000
5- 3000 2500+6000=8500 2000+7000 = 9000
6- 3000+8000=11000 2500 2000
7- 3000 2500 2000
8- 3000+5000=8000 2500+10000=12500 2000
9- 3000 2500 2000
10- 3000+5000=8000 2500 2000+12000 = 14000
11- 3000 2500+6000=8500 2000
12- 3000 -6000= - 3000 2500-7000= - 4500 2000-8000 = -6000
Total NPW (15%)

First Cost $ 60,000 $ 70,000 $ 80,000
Life, year 12 15 20
Annual O & M Cost $ 3000 $ 2500 $2000
MARR is 15%

0 - Initial Cost $ 60,000 $ 70,000 $ 80,000
1- Annual Costs 3000 2500 2000
2- 3000+5000=8000 2500+6000=8500 2000

3- 3000 2500 2000
4- 3000+5000=8000 2500 2000
5- 3000 2500+6000=8500 2000+7000 = 9000
6- 3000+8000=11000 2500 2000
7- 3000 2500 2000
8- 3000+5000=8000 2500+10000=12500 2000
9- 3000 2500 2000
10- 3000+5000=8000 2500 2000+12000 = 14000
11- 3000 2500+6000=8500 2000
12- 3000 -6000= - 3000 2500 2000
13- ---- 2500 2000
14- ---- 2500+6000=8500 2000
15- ---- 2500-7000= - 4500 2000+7000 = 9000
16- ---- ---- 2000
17- ---- ---- 2000
18- ---- ---- 2000
19- ---- ---- 2000
20- ---- ---- 2000-8000 = -6000
NAW = Net Annual Worth

Main Steps: Not Equal life, (12, 15, 20 year)
All (P,F,A)  P  Sum NPW  NAW (Net Annual Worth)
A B C
Life, year 12 15 20
NPW
NAW NPW (A/P, 15%, 12) NPW (A/P, 15%, 15) NPW (A/P, 15%, 20)
To find Given Symbol Factor

P (t=0) F (t>0) (P/F, i, n) (1+i)-n
A P (A/P, i, n) {i (1+i)n } / {(1+i)n -1}
NAW = Net Annual Worth

A (12 year) NPW  (T=0  P=P & T>0  (P/F,i%,n)
0 - Initial Cost 60000 60000
1- Annual Costs 3000 3000 (P/F, 15%,1) =
2- 8000 8000 (P/F, 15%,2) =
3- 3000 3000 (P/F, 15%,3) =
4- 8000 8000 (P/F, 15%,4) =
5- 3000 3000 (P/F, 15%,5) =
6- 11000 11000 (P/F, 15%,6) =
7- 3000 3000 (P/F, 15%,7) =
8- 8000 8000 (P/F, 15%,8) =
9- 3000 3000 (P/F, 15%,9) =
10- 8000 8000 (P/F, 15%,10) =
11- 3000 3000 (P/F, 15%,11) =
12- - 3000 - 3000 (P/F, 15%,12) =
13- ----
NPW Sum =
NAW NPW (A/P, 15%,12)
NPW  NAW = Net Annual Worth

Relative Weights
First Cost 60 70 80
Life, year 12 15 20
Annual O & M Cost 3.0 2.5 2.0
Overhaul #1 5 / 2 years 6 / 3 years 7 / 5 years
Overhaul #2 8 / 6 years 10 / 9 years 12/ 10 years
MARR is 20%

First Cost $ 60,000 $ 70,000 $ 80,000
Life, year 12 15 20
Annual O & M Cost 1200 + 500* T 1100 + 400 * T 1000 + 300 * T
MARR is 15%

Ex. #1 – A New Car
Suppose you intend to own a new car:

Paying Cash Debt Financing Debt Financing
Cash due at signing $ 31,000 $ 4,500 $ 4,500
Monthly Payment - $ 1250 $ 800
Length - 24 month 42 month
Total $ 31,000 34,500 38,100

Ex. #2 – An Oil well
An oil well has a proven reserve of 10,000,000 barrels.
Suppose that the oil well is expected to produce 1,000,000 barrels

of oil during its first year in production. However, its subsequent
production (yield) is expected to decrease by 10% over the
previous year’s production.
Suppose that the price of oil is expected to be $60 per barrel for
the next several years & Annual interest rate is 12%.
What would be the present worth of the anticipated revenue

stream over the Ten years?

Ex. #3– A Tower
Suppose you intend to purchase & install a new tower, 3 types of
towers are available on the market:
Equipment Cost $ 110,000 $ 100,000 $ 90,000
Installation Cost $ 20,000 $ 25,000 $ 30,000
Annual O & M Cost $ 2,000 $ 2,500 $ 3,000
Life 40 35 30
Salvage value 0 0 0
MARR is 20%

Ex. #4 – A Gas Turbine
Suppose you intend to purchase a new gas turbine, 3 types of
turbine are available on the market:
First Cost $ 1,500,000 $ 1,800,000 $ 2,000,000
Life, year 18 18 20
Salvage value $ 50,000 $ 80,000 $ 100,000
Annual O & M Cost $ 30,000 $ 25,000 $20,000
Overhaul #1 $ 20,000 / 2 years $ 25,000 / 3 years $ 35,000 / 4 years
Overhaul #2 $ 70,000 / 6 years $ 80,000 / 9 years $ 90,000 /12 years
MARR is 20%

Ex. #5 – Payment Conditions
Suppose you are a project manager for a long term project,
(Cash Out) (Cash In)
Year Master Plan ($) Payment Payment

Condition (A) Condition (B)
0 - $ 1,000,000 $ 500,000
1 $ 3,000,000 $ 1,000,000 $ 500,000
2 $ 500,000 $ 1,000,000 $ 500,000
3 $ 500,000 $ 1,000,000 $ 500,000
4 $ 500,000 $ 1,000,000 $ 3,500,000
Total $ 4,500,000 $ 5,000,000 $ 5,500,000
Which financing option is a better choice?  IRR only

Ex. #6 – A New Product
Suppose a firm is considering manufacturing a new product and
the following data have been provided:
Sales price $ 12.5 / unit
Equipment cost $ 200,000
Overhead cost $ 50,000 / year
Operating & Maintenance Cost $ 25 / operating hour
Production time 0.1 hour / unit
Planning horizon 5 years
Salvage value 0
MARR 15 %
Discuss & Analysis the annual production quantity .

12.5 X
0 5
50,000
0.1 (25) X
200,000
X = Annual production quantity = Annual sales

The Annual worth = Annual profit = AW =
-200,000 (A/P, 15%,5) - $ 50,000 - 0.1 (25) X + 12.5 X
-Aw = - 109,660 + 10 X
X 0 1000 5000 10,000 15,000
AW
AW
+
Profit
0
Loss
- Break even point =
10,966 unit/year
X
Ex. #7 – A New Machine
A manager is trying to decide between two power stations
Item Turbine Turbine
A B
Cost elements: ($M)
Initial cost 20 22
Annual operating 0.5 0.3
Annual maintenance cost 0.3 0.2
Annual labor cost 0.15 0.1
Capacity (MW) 20 20
Life, years 15 20
Salvage value 2 3
MARR 15% per year,

Based on this information, discuss & select the best machine.
CASE STUDY
A company needs a part which is currently purchased for LE 110/unit.
When studying the possibility of manufacturing the part, the company found that
two alternative processes (A or B) are available.
Item Process A Process B
Equipment:
– First cost (LE) 370,000 300,000
– Life (year) 10 12
– Salvage value (LE) 70,000 60,000
Tools:
– First cost (LE) 30,000 --
– Life (year) 3
– Salvage value (LE) zero
Material Cost (LE/unit) 9 13
Technical Workers:
– Numbers 2 2
– Rate (LE/hour) 5 5
– Output (Unit/hour) 10 20
Annual overhead “Fixed” (LE/year) 150,000 120,000
What is the optimum decision to be taken by the company?

Total Fixed Cost
New Machine:
Machine Depreciation (370,000-70,000)/10 (300,000-60,000)/12
(LE/year) =30,000 =20,000
Tools:
Tools Depreciation (30,000-zero)/2 --
(LE/year) =15,000
Annual overhead (LE/y) 150,000 120,000
Total Fixed Cost 195,000 140,000
Unit Variable Cost
Labor (LE/unit) 2 * 5/10 = 1 2 * 5 / 20 = 0.5
Unit Variable Cost 10 5.13
(LE/unit)
Total Cost (LE/y) TC =195,000+10 Q TC =140,000+13.5 Q

3 Alternatives
1) Purchase 2) Process A 3) Process B
Fixed cost -- 195,000 140,000
Variable cost 10 Q 13.5 Q
Total Cost TC = 110 Q TC =195,000+10 Q TC =140,000+13.5 Q
Quantity Q < 1451 Q > 15715 1451 < Q > 15715
BEP (P,B) 110 Q = 140,000+13.5 Q Q=1451

BEP (A,B) 195,000+10 Q = 140,000+13.5 Q Q=15715

Fixed cost - Process A
195
Fixed cost - Process B

140
Purchase Process B Process A
Lowest cost process

Case Study:
A manager is trying to decide between two CNC machines
Item Unit Machine Machine
A B
Initial cost $ 300,000 500,000
Annual operating $/year 50,000 40,000

Annual routine maintenance $/year 20,000 15,000
Annual labor cost $/year 30,000 20,000
Overhaul (capital maintenance) $ 30,000 /2 yr 20,000 /3 yr
Annual production quantity Unit/year 11,000 15,000
Rejected ratio (defect rate) % 3 2
Unit price $/unit 25 25
Life Year 3 4
Salvage value ratio % initial cost 10 15

Model Answer:

A B
Cost Elements (-):
Initial cost $ 300,000 500,000
Total Annual cost $/year 100,000 75,000
Overhaul (capital maintenance) $ 30,000 /2 yr 20,000 /3 yr
Annual Revenue $/year 266,750 367,500
Life Year 3 4

Machine (A)
Year 0 1 2 3 4
Cost (-) 300,000 100,000 100,000 100,000 -
30,000
Revenue (+) 266,750 266,750 266,750 -
Salvage (+) 30,000 -
Net - 300,000 +166,750 +136,750 +196,000
Payback Period x
166,750 196,750
136,750
0
1 2 3
300,000
IRR = 29%
Machine (B)
Year 0 1 2 3 4
Cost (-) 500,000 75,000 75,000 75,000 75,000
20,000
Revenue (+) 367,500 367,500 367,500 367,500
Salvage (+) 75,000
Net -500,000 +292,000 +292,000 +272,000 +367,500
Payback Period x
292,000 292,000 367,500

272,000
0
1 2 3 4
500,000
IRR = 47%
Internal Rate of Return:
Machine (A)
IRR=29%
0
Machine (B)
IRR=47%
0

Conclusion:
A B
Cost Elements (-):
Initial cost $ 300,000 500,000
Total Annual cost $/year 100,000 75,000
Overhaul (capital maintenance) $ 30,000 /2 y 20,000 /3 y
Life Year 3 4
Calculations:
IRR % 29 47
Payback Period year 2 2
M/c (B) is the most cost effective model for our application.
Case Study:
A manager is trying to decide between three projects to produce
annual demand 20,000 unit/year & unit price 20 LE/unit.
Item Unit Project Project Project
A B C
Initial cost LE 300,000 400,000 500,000
Life Year 2 2 2
Salvage value ratio % initial cost 20 25 30
Maximum operating hours Hour/year 1500 1850 2000
Production rate Unit/hour 10 13 15
Process defect ratio % 15 10 5
Operating cost rate LE/hour 100 90 80
Based on this information, discuss & select the best project.

Item Unit Project Project Project
A B C
Initial cost LE 300,000 400,000 500,000
Life Year 2 2 2
Salvage value ratio % initial 20 25 30

cost
Operating cost rate LE/hour 100 90 80
Max Annual Demand Unit/year (1500*10)*(1-0.15) =12750 21645 28500

Planned Annual demand Unit/year 20000 20000 20000
Rejected

Item Unit Project Project
B C
Initial cost LE 400,000 500,000
Life Year 2 2
Salvage value ratio % initial 25 30

cost
Operating cost rate LE/hour 90 80
Max Annual Demand Unit/year 21645 28500

Planned Annual demand Unit/year 20000 20000
Annual operating hours Hour/year 20000*1.10/13=1692 20000*1.05/15=1400
Annual operating cost LE/year 152280 112000

Project B
Year 0 1 2
Cost (-) 400,000 152280 152280
Revenue (+) 400,000 400,000

Salvage (+) 100,000
Net - 400,000 247720 347720
Payback Period x
347,720
247,720
0
1 2
400,000
IRR = %
Project C
Year 0 1 2
Cost (-) 500,000 112000 112000
Revenue (+) 400,000 400,000

Salvage (+) 150,000
Net - 500,000 288000 438000
Payback Period x
438,000
288,000
0
1 2
500,000
IRR = %
Conclusion:
Item Unit A B C
Cost Elements (-):
Initial cost $ 300,000 400,000 500,000
Total Annual cost $/year xxxx 152280 112000
Annual Revenue $/year xxxx 400,000 400,000
Life Year 2 2 2
Salvage value ratio % initial 20 25 30
cost
Calculations:
Max Annual Demand Unit/year 12750 21645 28500
Rejected
IRR % -
Payback Period year - 2 2
Project ( ) is the most cost effective model for our application.
Case Study:
Suppose you intend to construct a new project, two types of machines (A & B) are available
on the market:
General Information:
Project: CNC Center Product Description: Spare parts
Material type: Alloy Steel Target Production: 1500 ton/ year
Material Cost: 1000 $ /ton Market Price: 2500 $/ton
Overhead Cost: 30% direct cost Working hours: 1 S & 10 h/d & 5 d/w
Technical Data:
Item Unit M/c (A) M/c (B)
Processing Time min/ton 600 400
Process Yield % 80 85
Process Efficiency % 80 90
Machine Space M 3*2*2 2*2*2
Machine Weight Ton/machine 4 3
Machine Power HP 25 20

Financial Data:
Item Unit M/c (A) M/c (B)
Machine Investment $/machine 80,000 100,000
Machine Life Year 10 12
Machine Salvage Value % Initial cost 15 20
Utilities Investment $/machine 20,000 10,000
Process Running Cost $/hour 12 10
MARR = 15%
Based on this information, Discuss or analyze the following:

1. Number of Machines & Machine Utilization
2. Required Area & Space Layout
3. Cost Estimation Rates ($/hour, $/ton)
4. Unit Price ($/ton)
5. Cash Flow Analysis
6. Select & discuss the best project (A or B).

Number of Machines & Machine Utilization:
Max. Working hours = 1 S * 10 h/d * 5 d/w = 50 h/w
Planned working hours = Max. working hours * process efficiency
Planned production rate = Planned working hours / Processing Time
Required No. of M/cs = Target Production / Planned production rate
Design Capacity = Required No. of M/cs * Max. working hours / Processing Time
Planned Capacity = Required No. of M/cs * Planned production rate
M/c Utilization = Planned capacity / Design capacity
A B
Max. Working hours, h/w 50 50
Process efficiency, % 80 90
Planned working hours, h/w 50*0.8 = 40 50*0.9= 45
Processing Time, min/ton 600 400
Planned production rate, ton/w/mc 40 * 60/600= 4 45 * 60/400= 6.75
Target Production, ton/year 1500 1500
Required No. of M/cs 1500/(4*52) =7.2= 8 1500/(6.75*52)=4.2=5
Design Capacity, ton/w 8*50*60/600= 40 5*50*60/400= 37.7
Planned capacity, ton/w 8*4=32 5*6.75= 33.75
M/c Utilization, % 32/40= 80 % 33.75/37.7=90 %
Summary:
A B
Required No. of M/cs 8 5

Design Capacity, ton/w 40 37.7
Planned capacity, ton/w 32 33.75
M/c Utilization, % 80 % 90 %
According to the number of machines & utilization, Option B is the

best one.

Required Area & Space Layout :
- Productive machining area > 3 total machine area
- Non-Productive area:
• Locker area = 3*3 = 9 m2
• Storage of raw material = 4*4 = 16 m2
• Storage of final product = 4*3 = 12 m2
• Storage of spare parts = 3*3 = 9 m2
• Managerial office = 4*4 = 16 m2
• W.C. area = 2 *4 = 8 m2
Total Non-Productive area = 70 m2
A B
Machine Area, m2 3*2= 6 2*2=4
Total Machine Area, m2 6*8 = 48 4*5 = 20
Productive machining area, m2 (> 48*3) = (> 144) (>20*3) = (> 60)
Total Non-Productive area, m2 70 70
Total Area, m2 144+70= (> 214) 60+70=(> 130)
Proposed Area, m2 12 * 20 = 240 12 *15 = 180
Area utilization, % 144/240 = 60 % 60/180 = 30 %

A:
Final
Product
Storage
3*6
12
Spare
Raw Material Locker Pats Tools WC WC Managerial
Storage Room Storage Room 3*2 3*2 Office
4*3 3*3 3*3 3*2 4*3
20
B:
Locker Tools
Room Room Final
3*3 3*2 Product
Storage
3*6
12
Spare
Raw Material Pats WC WC Managerial
Storage Storage 3*2 3*2 Office
4*3 3*3 4*3
15

Summary:
A B
Total Machine Area, m2 48 20
Total Area, m2 20 *12 = 240 15*12= 180
According to the number of machines & total space, Option B is the

best one.

Cost Estimation Rates ($/hour, $/ton):
- M/c Depreciation = (Investment – Salvage) Total Dep. = M/c Dep. + Utilities Dep.
- Annual Depreciation = Total Depreciation / life
A B
Machine Investment, $/machine 80,000 100,000
Total Machine Investment, $ 640,000 500,000
Machine Life, year 10 12
Machine Salvage Value, % I. cost 15 20
Machine Salvage Value, $ 96,000 100,000
Total M/c Depreciation, $ 640-96= 544,000 500-100=400,000
Utilities Investment, $/machine 20,000 10,000
Utilities Investment, $ 20,000 * 8= 160,000 10,000*5= 50,000
Total Investment, $ 640+160=800,000 500+50=550,000
Total Depreciation, $ 604,000 450,000
Annual Depreciation, $/year 604,000/10=60,400 450,000/12= 37,500
Annual Working hours 50 h/w * 52 w/y= 2600 50 h/w * 52 w/y= 2600
Depreciation rate, $/hour 60,400/(2600*8)= 2.913 37,000/(2600*5)= 2.846
- Power cost rate = (kw) * ($/kw/hr) = $/hr 0.3 LE/6$ = 0.05 $/kw/h
- Machining Cost = Dep. Cost + Processing Cost + Power Cost
A B
Depreciation rate, $/hour 2.913 2.846
Process running cost, $/hour 12 10
Processing Time, min/ton 600 400
Depreciation rate, $/ton (600/60)*2.913=29.13 (400/60)*2.846=18.97
Process running cost, $/ton (600/60)*12=120 (400/60)*10=66.67
Machine Power, HP 25 20
Kw 25/1.36=18.38 20/1.36=14.7
Power cost rate, $/hour 18.38*0.05= 0.9375 14.7*0.05 = 0.75
$/ton (600/60)*0.9375= 9.375 (400/60)*0.75= 5.0
Machining Cost, $/ton 29.13+120+9.375 18.97+66.67+5.0
=158.51 =90.64

- Raw Material Cost: 1000 $ /ton
- Material Quantity = Raw Mat. Quantity / Process yield
- Direct Cost = Machining cost + Material Cost
- Overhead Cost: 30% direct cost
- Total Cost = Direct + Overhead
A B
Machining Cost, $/ton 29.13+120+9.375 18.97+66.67+5.0
=158.51 =90.64
$/hour 158.51 (60/600) 90.64 (60/400)
= 15.851 = 13.596
Process Yield, % 80 85
Material Quantity , ton /ton final 1/0.80 = 1.25 1/0.85= 1.18
Material Cost, $/ton 1000*1.25=1250 1000*1.18=1180
Direct Cost, $/ton
Direct Cost, $/ton 158.51+1250 90.64+1180
= 1408.51 = 1270.64
Overhead Cost: 30% direct cost 422.55 381.19
Total Cost, $/ton 1831.06 1651.83

Summary:
A B
Total Machine Investment, $ 640,000 500,000
Utilities Investment, $ 160,000 50,000
Total Investment, $ 800,000 550,000
Depreciation rate, $/ton 29.13 18.97

Process running cost, $/ton 120 66.67
Power cost rate, $/ton 9.375 5.0
Machining Cost, $/ton 158.51 90.64

Material Cost, $/ton 1250 1180
Direct Cost, $/ton 1408.51 1270.64
Total Cost, $/ton 1831.06 1651.83
According to the unit cost, Option B is the best one.

Unit Price ($/ton):
- Market Price: 2500 $/ton
- Max. Profit = Market Price – Total Cost
- For competition, the proposed price is less than the market price
- Proposed Price = 90 % Market Price = 2250 $/ton
A B
Total Cost, $/ton 1831.06 = 1831 1651.83= 1652
Market Price, $/ton 2500 2500
Max. Profit, $/ton 669 848
% 669/1831= 36.5 % 848/1652= 51.33 %
Proposed Price, $/ton 2250 2250
Proposed Profit, $/ton (2250-1831) (2250-1652)
= 419 = 598
% 419/1831 = 22.9 % 598/1652 = 36.2 %
According to the unit profit, Option B is the best one.

Cash Flow Analysis Unit Profit = 419 $/ton
Target Production: 1500 ton/ year
A: Annual Profit = 419 * 1500 = 628500 $/year
Year Cash Out Cash In Net Payback Period
0 800,000 (- 800,000)
1 628500 (-171,500)
2 628500 + 457000 2 years (16 Month)
3 628500
4 628500
5 628500
6 628500
7 628500
8 628500
9 628500
10 628500
+96,000
11
12
NPV (i=15%) = + 2,300,000 IRR=

Cash Flow Analysis Unit Profit = 598 $/ton
Target Production: 1500 ton/ year
B: Annual Profit = 598 * 1500 = 897000 $/year
Year Cash Out Cash In Net Payback Period
0 550,000 (- 550,000)
1 897000 (+347,000) 1 year (8 Month)
2 897000
3 897000
4 897000
5 897000
6 897000
7 897000
8 897000
9 897000
10 897000
11 897000
12 897000
+ 100,000
NPV (i=15%) = + 2,600,000 IRR=

Select & discuss the best project (A or B).
Parameter Weight A B
Investment, $ 3 800,000 550,000
Payback Period 2 16 Month 8 Month
NPV or IRR 2 2,300,000 2,600,000
Unit Cost, $/ton 2 1831 1652
Area, m2 1 12*20= 240 12*15= 180
Total Index, % 80 % 100 %
According to the total index, B is the best choice

Select & discuss the best project (A or B).
Parameter Weight A B Best Choice
Investment, $ 3 10 B
Payback Period 2 10 B
NPV or IRR 2 10 B
Unit Cost, $/ton 2 10 B
Area, m2 1 10 B
Total Index, % 80 % 100 %

Risk Management

Project Risk Plan
Rejected Accepted
―Be careful:
If you don‘t attack risk, Risk will attack you‖

What is Risk? Risk is any future uncertain
bad news!
 Safety risk or Financial risk
Types of Risk:
Financial
Operational
Safety
Security
• Objective Risk • Quantitative Risk

• Subjective Risk • Qualitative Risk
Budget Estimation  100  Accuracy?
Range Average Error ± Type Tool
99-101 100 1 Deterministic Model
95-105 100 5 Certain Model
90-110 100 10 Uncertain Distribution
80-120 100 20 Uncertain Distribution
70-130 100 30 Random Simulation
20-180 100 80 Random No Pattern
Variance  Risk Assessment

Data types
Deterministic Random
(error < ± 2 %) (error > ± 20 %)
Certain Uncertain
(error < ± 5 %) (error 5 to 20 %)
Routine Normal Abnormal work

work work
Standard Information Risk Analysis
What is Risk Management?
Risk Management is a proactive
systematic approach to minimize
the consequence of any future
uncertain bad news!
―Life is one long risk‖

Main Steps:
1. Define  Scope of work
2. Risk Sources
3. Risk Measure
We cannot change 4. Risk Analysis  Consequence
the direction of the wind, 5. Remedy  Proactive Policy
however we can adjust 6. Action plan
7. Control
our sails!
• Risk:
Any future uncertain bad news
 Safety Risk,
 Financial Risk (Quality, Quantity, Time, Cost, etc.)
• Risk Analysis:
Risk estimation + Criticality analysis (A,B,C)
• Risk Control:
Proactive policy + Remedy process
• Risk Assessment:
Risk analysis + Risk Control
to help the decision making process.
• Risk Management:  System level

Risk Assessment + Risk Update ―Life is one
(Targets, Planning, Organization, Control) long risk‖
Risk Assessment
Main Steps:
1- Define  Scope of work:
Excavation process 5000 m3 during 10 days
2- Risk Sources  Late
3- Risk Measure  + 5 days
4- Risk Analysis  Cost increase $1000/day
5- Remedy  Proactive Policy  Bonus
6- Action plan  + $10/day
7- Control Actual  After 5 days 2300 m3
 Forecast  Late 1 day  Step #1
Long term continuous improvement

Risk Management
Risk Assessment + Risk Control
Risk Identification Risk Planning
Risk Analysis Risk Resolution
Risk Priority Risk Monitoring

Risk Management Steps:
1) Risk Analysis
Top Mang.:
Safety effect
2) Consequence Assessment
Financial
5) Decision effect
Analysis
3) Proactive remedy Process
effect
4) Economic Assessment

Risk Assessment Infrastructure
Leader (Culture & Attitude) + Teamwork

Information Experience Training
1) Identify  Risk Sources

2) Analysis  Risk level
3) How to Remedy ? Eliminate or Minimize
4) How to Manage?  Remedy Policy

5) Action Plan  SMART Plan
6) Maintain (Change Management, Training, feedback)
7) Control  Performance Evaluation &
Update KPI Report for each discipline
Scope of work, Technical
Design & Quality
& Safety Risk
Cost Schedule
Risk 3 2 Risk
Cost estimation & Budget

Time estimation & Scheduling
& Payment conditions
Resources planning & Procurement

(1986 to 1996)
Actual Performance =
Target Performance Cancelled
Successful 20%
30%
Actual Performance <

Target Performance
completed
50%
Risk Analysis  Risk Sources

Technical
Late Problems
Problems 20%
30%
Financial
Problems
50%
Process
Source: Standish Group Strategic Planning and Change Management for Engineers 378
Brain Storming: Leader & Team work
Risk Analysis
Item Main Sources of Risk Remedy
Time
Problems
(30%)
Technical
Problems
(20%)
Financial
Problems
(50%)

Risk Sorting:
NG & Petroleum Projects
Top 5 Risk Items:
Risk Item % Risk Resolution Progress
(Remedy)
1) Budget problems 25 Revising cost estimates & Payment
conditions
2) Schedule problems 15 Revising schedule estimates
3) Resource problems 10 Revising resource plans & procurement
4) Technical problems 30 Holding meetings with project customer &

sponsor to clarify scope
5) Organization structure & 20 Just assigned a new project manager to
Documentation, .. etc. lead the project after old one quit

Top Risk Items:
30
25
20
15
10
0
Budget Schedule Resource Technical

Risk Identification
Category Internal Parameters External Parameters
(we can control) (we can impact)
1-1-1- 1-2-1-
1- Scope 1-1-2- 1-2-2-
2-1-1- 2-2-1-
2- Design & BOQ 2-1-2- 2-2-2-
3-1-1- 3-2-1-
3- Quality 3-1-2- 3-2-2-
4-1-1- 4-2-1-
4- Time 4-1-2- 4-2-2-
5-1-1- 5-2-1-
5- Resource 5-1-2- 5-2-2-
6-1-1- 6-2-1-
6- Cost & Budget 6-1-2- 6-2-2-
7-1-1- 7-2-1-
7- Procurement 7-1-2- 7-2-2-
8-1-1- 8-2-1-
8- Communication 8-1-2- 8-2-2-
9-
10-

Criticality Assessment : (Risk Matrix)
Risk = Severity x Probability
Risk = Consequence x Frequency
For example Probability
Severity (1) Low (2) Medium (3) High
(1) Low (1 * 1) = 1 (2 * 1) = 2 (3 * 1) = 3
(2) Medium (1 * 2) = 2 (2 * 2) = 4 (3 * 2) = 6
(3) High (1 * 3) = 3 (2 * 3) = 6 (3 * 3) = 9

Risk Matrix
(A)
5 High Risk
High Risk
4 (B)
Medium-High Risk
Severity
(C)
2 (D)
Medium Risk
Low Risk
Medium Risk
1
1 2 3 4 5
Probability

Risk Matrix
Severity
Monitor Risks Risk Mitigation Risk Mitigation

(3) High Required Required
(2) Medium Acceptable Risks Monitor Risks Risk Mitigation

Required
Monitor Risks
(1) Low Acceptable Risks Acceptable Risks
Low (1) Medium (2) High (3)
Probability

General Risk Mitigation Strategies:
Technical Risks Cost Risks Schedule Risks
Emphasize team support Increase the frequency Increase the frequency
and avoid stand alone of project monitoring of project monitoring
project structure
Increase project Use WBS and Use WBS and
manager authority PERT/CPM PERT/CPM
Improve problem Improve communication, Select the most
handling and project goals experienced project
communication understanding and team manager
support
Increase the frequency Increase project
of project monitoring manager authority
Use WBS and
PERT/CPM

Project Risk Management
Scope of work
Risk Identification
Classification & Sorting & Rating

Top Priorities & Rule 80/20  Class A
Root Cause Analysis (Why-Why)

Remedy
Risk plan
Risk Control What If Analysis?

Risk Plan
Risk
Schedule Identification
Planning
meetings
Risk Plan and analysis
Preventive Risk
Actions Rating
Outputs
Risk Plan

Risk Identification
Cost / Time /
Budget Schedule
Critical Quality /
Resources Safety
Cause Risk Effect

Risk Rating Must be Customized
Rating Main Parameters
Cost / Budget Schedule Quality Resources
(A)
Very High
(B)
High
(C)
Medium
(D)
Low
(E)
Very Low
Risk Rating
For example, Construction Projects
Risk item level
Risk item level
1) Budget
3) Critical Resources
0 to 5% overrun E
0 to 5% resource shortfall E
5 – 10% overrun D
5% to 10% resource shortfall D
10 - 20% overrun C 10% to 15% resource shortfall C
20 – 40% overrun B 15% to 25% resource shortfall B
over 40% overrun A over 25% resource shortfall A
2) Schedule Impact 4) Quality Impact
0 to 5% slip E 0 to 5% quality gate failure E
5.1% to 10% quality gate failure D
5 to 10% slip D
10.1% to 15% quality gate C
10 to 20% slip C failure
20% to 40% slip B 15.1% to 25% quality gate B
over 40% slip A failure
over 25% quality gate failure A
Risk Rating
For example, Construction Projects
Risk item level
Risk item level
1) Duration
3) Equipment
Less than 6 Month E
Less 5 E
6 – 12 D
5-10 D
12 – 18 C 10-20 C
18 – 24 B 20-40 B
More than 24 Month A More than 40 Equipment A
2) Manpower 4) Subcontractors
Less than 50 man E One E
2-3 D
50 – 100 D
3-5 C
100 – 200 C
5-8 B
200 – 400 B
More than 8 subcontractor A
More than 400 man A

Risk Levels
(E,D) (C,B,A)
Accepted Not Accepted
―I Can Control‖
Mitigation
Transfer
Avoidance
Output: Action plan  Risk Plan
What Should Who?
be done? Responsibility
Activities How? - Manager
- Scope - Engineer
- Specific Resources:
- Department
- Measurable - Manpower
- Machines
When? - Materials
Schedule - Method
Duration - Management
Start - Money
Finish Where?
Location
- Indoor
- Outdoor
- Subcontractor
For each high risk(C,B,A), create a plan to ensure that the risk is managed
Risk Plan
Rating ID Description Preventive Action Time Action Responsibility
Actions Resources Frame Date
Very Within 3
High weeks
High

Project XYZ - Risk Identification
Risk Key
P1 Process changes – little time
Process
P2 Process for additional kits
OS1 Ops Spec late release
Operations Spec
OS2 Accuracy of call estimates in OS
T1 Training materials ready
Training
T2 Training material translation
S1 Unexpected turnover
Staffing
S2 Unexpected high volumes
U1 UAT testing impacts current ops.
Testing U2 Upgrade kits
Testing plan requires more than we
U3
anticipate

Project XYZ Risk Matrix
Actions are being taken to mitigate risks,

prioritized based on probability and degree of
impact on the project
High Risk Key
Process changes – little
P1
Process time
Degree of Impact on the Project
P2 Process for additional kits

U3
Operati OS1 Ops Spec late release
T1
ons Accuracy of call estimates
Spec OS2
U2
in OS
WATCH FOR P2
UNEXPECTED CHANGES MITIGATION PLAN REQUIRD T1 Training materials ready
Training Training material
T2
OS2 OS1 translation
S2
T2 S1 Unexpected turnover
U1 Staffing
S2 Unexpected high volumes
P1
UAT testing impacts
S1 U1
current ops.
Testing U2 Upgrade kits
Testing plan requires
ACTIONS TAKEN U3
Low NO PLAN REQUIRED ACTION PLANS IN PLACE more than we anticipate
Low Probability of Occurring High

Risk Analysis Tools

Risk Analysis Tools
Quantification techniques  Best Practice Tools:
1. Weighted Average  No Trend

2. Scenario Analysis (PERT estimations)  No Trend
3. Probability Analysis (Coefficient of Variation)
4. Decision Tree Analysis
5. Break Even Analysis
6. Sensitivity Analysis
7. Simulations
8. Expert judgment Tools, not rules!
9. Risk exposure
Case by Case
Weighted average
No Trend
Average Weighted average
Year Annual Price Weight Price x Weight
5 years ago $72,30 0,10 7,23

4 years ago 69,60 0,15 10,44
3 years ago 71,60 0,20 14,32
2 years ago 65,30 0,25 16,32
Last year 61,10 0,30 18,33
Summation $339,90 1,00 $66,64
Simple average = ($339.90/5) = $67.98 Weighted average = $66.64

Steel Price Year LE/ton Factor
2008 3500 1
2009 3000 2
2010 3800 3
Total=6
Average  (3500+ 3000+ 3800) / 3 = 3400
Estimation  (3500*1+ 3000*2+ 3800*3) / (1+2+3) = 3483.3
Weighted average
Year LE/ton Factor Weight Est.
2008 3500 1 1/6 3500*1/6=
2009 3000 2 2/6 3000*2/6=
2010 3800 3 3/6 3800*3/6=
Total=6 3483.3
Car 
Initial Cost = 100,000 LE Life = 4 year
Salvage = 40,000 LE Average  Straight Line
Total Depreciation = 100,000-40,000 = 60,000 LE / 4 year

Annual Deprecation = 60,000/4 = 15,000 LE/year
Year A. Dep. Book Factor Weight A. Dep. Book

Value Value
Start - 100,000 - - - 100,000
2010 15000 85,000 4 4/10=0.4 24,000 76,000
2011 15000 70,000 3 3/10=0.3 18,000 58,000
2012 15000 55,000 2 2/10=0.2 12,000 46,000
2013 15000 40,000 1 1/10=0.1 6,000 40,000
T=10

Case Study: Crude Oil Price Forecast
Historical projects:
Average Unit price $/b No Trend

Year Weight Price Standard Correlation
$ deviation factor
2004 1 59.3 0.9 0.9925
2005 2 63.5 1.2 0.9912
2006 3 61.8 1.5 0.9860
2007 4 61.6 1.8 0.9873
2008 5 75.5 3.5 0.8971
2009 6 52.4 2.6 0.9899
Estimation
Based on these data, Estimate the oil price

Scenario Analysis (PERT estimations)

Weight 1 4 1
Estimated value= )O + 4 M + P) /6

Unit Cost 8 10 18
Estimated value= )1*8 + 4* 10 + 1*18) /6 = 66/6 = 11

Scenario Analysis (PERT estimations)

Weight 1 4 1
Estimated value= )O + 4 M + P) /6

Duration 105 120 min 150
Estimated value= )1*105 + 4* 120 + 1*150) /6 = 122.5 min

Brainstorming Price Frequency
$2.75 10
$3.00 12
$3.25 16
$3.50 20
$3.75 28
$4.00 40
$4.25 24
$4.50 20
$4.75 14
$5.00 12
$5.25 4

Price 2.75 4.0 5.25
Estimated value= )1*2.75 + 4* 4.0 + 1*5.25) /6 = 4.0
 Normal Distribution

Performance Rates M3/day Frequency
500 1
400 – 380 2
Excavator Crew 380-360 7
360-340 10
340-320 12
320-300 4
200 1

390 330 310
Estimated value= )1* 390 + 4* 330 + 1* 310 ) /6 = 337 m3/day

Simulation Results: Histogram
Most
Frequency
Likely
Best Worst
Case Case
2.8 2.9 3.0 3.1 3.2 3.3 3.4

Range = 0.4
Net Present Value (NPV), $Millions

Results: Cumulative Distribution
1.0
90%
0.8
Probability
0.6
50%
0.4
0.2
10%
0
2.8 2.9 3.0 3.1 3.2 3.3 3.4
Net Present Value (NPV), $Millions
Case Study: Crude Oil Price Forecast
Average Unit price $/b
Year Price
$
2004 59.3
2005 63.5
2006 61.8 Based on these data,
2007 61.6
Estimate the oil price
2008 75.5
2009 52.4
Optimistic
Most Likely
Pessimistic
Estimation

Company Profit Estimation – Budget Forecast
Pessimistic Case Base Case Optimistic Case
Project:
AAA 15.0% 20.0% 25.0%
BBB 9.5% 11.0% 15.0%
CCC 9.0% 13.0% 16.0%
--- --- --- ---
Company Profit 10% 12% 15%

Case Study: Civil works
Lump Sum Project Expected Quantity m3
Activity Optimistic Most Likely Pessimistic
Excavation 15,000 15,000 17,000
Concrete 2,800 3,000 3,500
F-Concrete 9,000 9,500 10,000
Back filling 7,000 10,000 12,000
Historical projects: Average Unit price $/ m3

Project Excavation Concrete F-Concrete Back filling
1 1.7 18 95 0.85
2 1.9 19 100 0.9
3 2.0 20 100 1.0
4 2.3 20 110 1.0
5 2.5 20 120 1.0
6 2.8 21 123 1.1
Based on these data, Estimate the project cost
Average Unit price $/ m3

1 1.7 18 95 0.85
2 1.9 19 100 0.9
3 2.0 20 100 1.0
4 2.3 20 110 1.0
5 2.5 20 120 1.0
6 2.8 21 123 1.1
Optimistic 1.5 19 95 0.9
Most Likely 2.0 20 100 1.0
Pessimistic 2.5 22 120 1.2
Estimation

Lump Sum Project

Activity Quantity Unit cost Quantity Unit cost Quantity Unit cost
m3 $/ m3 m3 $/ m3 m3 $/ m3
Excavation 15,000 1.5 15,000 2.0 17,000 2.5
Concrete 2,800 19 3,000 20 3,500 22
F-Concrete 9,000 95 9,500 100 10,000 120
Back filling 7,000 0.9 10,000 1.0 12,000 1.2

Probability Analysis (Coefficient of Variation)
Expected Value:
Average of all possible outcomes weighted by their
respective probabilities.
n
E(X)   X p
i i
Standard Deviation: i 1
Square root of the weighted average of the squared
deviations of all possible outcomes from the expected
value.
n
σ  (X  X) p
i1
i
2
i
Coefficient of Variation = CV  σ
X
Impact of Financial Risk Management
on Cash Flow
Likelihood
Post-FRM
Pre-FRM
Cash Flow

Example:
Cash Inflow Probability
3,000 0.10
4,000 0.20
5,000 0.40
6,000 0.20
7,000 0.10
E(Cash Flow) = (3,000 x 0.1) + (4,000 x 0.2) + (5,000 x 0.4) + (6,000 x 0.2)
+ (7,000 x 0.1) = 5,000
(Cash Flow) = [(3,000 - 5,000)2(0.1) + (4,000 - 5,000)2(0.2) + (5,000 -
5,000)2(0.4) + (6,000 - 5,000)2(0.2) + (7,000 - 5,000)2(0.1)]1/2 = 1,095
CV = 1,095 / 5,000 = 0.219

Project A B C
CV 0.219 0.311 0.265
A is preferred
Case Study:
Unit Sales Price Production Demand
Unit Price Prob. Unit Sales Prob.

P(x) P(y)
1,600 0.10
$ 48 0.3 2,000 0.40
2,400 0.50
1,600 0.10
50 0.5 2,000 0.64
2,400 0.26
1,600 0.50
53 0.2 2,000 0.40
2,400 0.10
Based on these data, Estimate the production demand

Case Study:
Unit Sales Price Production Demand Joint Prob.
Unit Price Prob. Unit Sales Prob. P(x,y)=

P(x) P(y) P(x).P(y)
1,600 0.10 0.03
$ 48 0.3 2,000 0.40 0.12
2,400 0.50 0.15
1,600 0.10 0.05
50 0.5 2,000 0.64 0.32
2,400 0.26 0.13
1,600 0.50 0.10
53 0.2 2,000 0.40 0.08
2,400 0.10 0.02
1,600 P(1600,$48) + P(1600,$50)+P(1600,$53) = 0.18
production
demand plan 2,000 P(2000,$48) + P(2000,$50)+P(2000,$53) = 0.52
2,400 P(2400,$48) + P(2400,$50)+P(2400,$53) = 0.30
Case Study:
Total Cost Production
Year $M 1000 Unit
1 125 35
2 145 45
3 141 38
4 88 28
5 105 33
6 129 44
7 118 40
8 75 21
9 132 37
10 127 48
Mean (expected value) 118,5 36,9
Standard deviation 22,7 8,2
Coefficient of variation 0,19 0,22
Uncertain Activities
Unit price $/ m3
1 1.7 18 95 0.85
2 1.9 19 100 0.9
3 2.0 20 100 1.0
4 2.3 20 110 1.0
5 2.5 20 120 1.0
6 2.8 21 123 1.1
Estimate
d

Lump Sum Project - Civil works

Activity Quantit Unit cost Quantity Unit cost Quantity Unit cost
y $/ m3 m3 $/ m3 m3 $/ m3
m3
Excavation 15,000 1.5 15,000 2.0 17,000 2.5
Concrete 2,800 19 3,000 20 3,500 22
F-Concrete 9,000 95 9,500 100 10,000 120
Back filling 7,000 0.9 10,000 1.0 12,000 1.2

Uncertain Material cost: Material cost Probability
$ 100,000 %
9 20
10 50
11 20
12 7
13 3
Estimate the spare parts budget based on the following:
1- Average method ($ 1,100,000)

2- Probability method ($ 1,023,000)
3- PERT method ($ 1,033,000)

Case Study:
Project A Project C
Cash Inflow Probability Cash Inflow Probability
3 0.10 3 0.10
4 0.20 4 0.30
5 0.40 5 0.20
6 0.20 6 0.30
7 0.10 7 0.10
Project B
3 0.10
4 0.25
5 0.30
Based of this information,
6 0.25 select the best project.
7 0.10

Case Study: Project A
3 0.10
4 0.20
5 0.40
6 0.20
7 0.10
E(Cash Flow) = (3 x 0.1) + (4 x 0.2) + (5x 0.4) + (6 x 0.2) + (7 x 0.1) = 5
(Cash Flow) = [(3 - 5)2(0.1) + (4 - 5)2(0.2) + (5 - 5)2(0.4) + (6 - 5)2(0.2) +

(7 - 5)2(0.1)]1/2 = 1.095
CV = 1,095 / 5,000 = 0.219

Project A B C
CV 0.219 0.311 0.265
A is preferred
Crude Oil Price
Dec Jan Feb Mar Apr May
2005 2006 2006 2006 2006 2006
Average Price 59.3 58.7 61.8 61.6 62.1 63.8
Minimum 50 52 54 57 58 59
Maximum 65 64 68 68 68 72
Standard Deviation 0.9 1.2 1.5 1.8 2.2 2.6
Correlation factor 0.993 0.991 0.989 0.988 0.987 0.986

Inflation rate
Inflation is the rate at which the general level of prices is rising,
and subsequently, purchasing power is falling.
Item Unit 2005 2006 2007 Inflation rate %

Building $/m2 170 184 215.9 12.69
Steel $/ton 130 140 151 7.77
Cement $/ton
Building
F = P (1+f)^N
P=170 F=215.9 N=2 f?
215.9 = 170 (1+f)^2 f= 12.69%

NG Pipe Line Inflation rate 4 to 10% ~ 7%
Variance Variance Remark
Cost Element 2006 2007 (A-T) (V/T) %
Total Direct cost 1,230,000 1,470,000 + 140,000 Over run

Material cost 1,000,000 1,100,000 + 100,000 Over run
Labor cost 130,000 150,000 + 20,000 Over run
Equipment cost 100,000 120,000 + 20,000 Over run
F = P (1+f)^N f=?
Cost Element f 2008 2009 2010
Total Direct cost
Material cost
Labor cost
Equipment cost

Decision Tree Analysis
DECISION ANALYSIS FORMULATION
• Identify and bound problem
• Structure problem (decision tree)

– Decision notes
– Chance notes
– Outcome nodes
• Gathering data
• Analyzing decision tree
• Sensitivity analysis

Decision Tree
e 1 State 1 Outcome 1
na tiv 1
er Outcome 2
Alt State 2
Alt
State 1
ern Outcome 3
a tive
2
2 State 2
Outcome 4
Decision
Node
State of Nature Node

Expected Monetary Value Equation
No. of states of nature
N
Payoff
EMV ( Ai ) =  Vi  P (Vi ) Probability of payoff
i 1
 V1  P (V1 )  V2  P (V2 )VN  P (VN )
Alternative i

Case Study:
States of Nature
S1 S2 S3
Poor Average Good
Decision A 300 350 400
Alternatives B -100 600 700
C -1000 -200 1200
Probablilties 0.3 0.6 0.1
Expected Value
States of Nature
S1 S2 S3
Poor Average Good EV
Decision A 300 350 400 340 (300 x 0.3) + (350 x 0.6) + (400 x 0.1)
Alternatives B -100 600 700 400 (-100 x 0.3) + (600 x 0.6) + (700 x 0.1)
C -1000 -200 1200 -300 (-1000 x 0.3) + (-200 x 0.6) + (1200 x 0.1)
Decision Tree
0.3 300
340
0.6 350
0.1
A1 400
0.3 -100
A2 0.6 600
A2 400 0.1 700
400
A3 0.3 -1000
0.6
-300 -200
0.1 1200

Decision Table
States of Nature
Alternatives State 1 State 2
Alternative 1 Outcome 1 Outcome 2
Alternative 2 Outcome 3 Outcome 4

Decisions Under Risk Solution Table*
States of Nature
Alternatives Favorable Unfavorable
Mkt Mkt
Large Plant A1 $200,000 -$180,000
Small Plant A2 $100,000 -$20,000
Do Nothing A3 $0 $0
Probability .50 .50

Decision Tree Solution*
Decision State of Nature Node

Node Favorable Market
Build Large
Plant
1 Unfavorable Market
Favorable Market
Build
2 Unfavorable Market
Small Plant
Do Nothing

Decision Tree Solution
EMV = (.5)(200,000) + (.5)(-180,000) = $10,000 Payoffs

200,000$
Favorable Market (.5)
Build Large
Plant
1
Unfavorable Market (.5) 180,000$-
100,000$
Favorable Market (.5)
Build
2 Unfavorable Market (.5)
Small Plant 20,000$-
EMV = (.5)(100,000) + (.5)(-20,000) = $40,000
Do Nothing
0$
Decision: Build small plant
Decision Tree Example
EMV for node 1

= $74,600 = (.67)($200,000) + (.33)(-$180,000)
Payoffs
Favorable market (.67)
$200,000
1
Unfavorable market (.33)
-$180,000
Favorable market (.67)
$100,000
Construct
small plant 2
Unfavorable market (.33)
-$20,000
EMV for node 2
= $60,400 = (.67)($100,000) + (.33)(-$20,000)
$0

Expected Monetary Value (EMV)

Inflation rate
Inflation is the rate at which the general level of prices is rising,
and subsequently, purchasing power is falling.
Item Unit 2005 2006 2007 Inflation rate %

Building $/m2 170 184 215.9 12.69
Steel $/ton 130 140 151 7.77
Cement $/ton
Building
F = P (1+f)^N
P=170 F=215.9 N=2 f?
215.9 = 170 (1+f)^2 f= 12.69%

Cost Classification
Direct Cost Indirect Cost
Fixed Machine Depreciation Office Overhead

Cost
Tools Depreciation
Variable Material Cost -

Cost
Labor Cost

Machines:
– First cost (LE) 370,000
– Life (year) 10
– Salvage value (LE) 70,000
Tools:
– First cost (LE) 30,000
– Life (year) 3
Office overhead cost (LE/year) 150,000

Material Cost (LE/unit) 9
Workers:
– Numbers 2
– Rate (LE/hour) 5
– Output (Unit/hour) 10

Total Fixed Cost
Item Process A
New Machine:
Machine Depreciation (370,000-70,000)/10
(LE/year) =30,000
Tools:
Tools Depreciation (30,000-zero)/2
(LE/year) =15,000
Additional fixed cost (LE/y) 150,000
Total Fixed Cost 195,000
Variable Cost
Material Cost (LE/unit) 9
Labor (LE/unit) 2 * 5/10 = 1
Unit Variable Cost (LE/unit) 10
Total Variable Cost 10 Q
Total Cost (LE/y) TC =195,000+10 Q

TC =195,000+10 Q
195
Fixed cost

Break-Even Chart
Revenues and costs

($ in thousands)
80 Revenues
70
Break-Even
60 Point
Profit
Total
50 Costs
Variable
40 Costs
Loss
30
Fixed Costs
20
Sales (units
10 in hundreds)
0 10 20 30 40 50 60 70 80 90 100
Process Adapted from Exhibit 7.7

Break-Even Analysis
• Total cost = fixed costs + variable costs (quantity):
TC  F  VC Q
• Revenue = selling price (quantity)
R  SP Q
• Break-even point is where total costs = revenue:
TC  R or F  VC Q  SP Q
F
or Q
SP  VC
Fixed cost = cf = $2,000
Variable cost= cv = $5 per unit
Price =p = $10 per unit
The break-even point is cf 2000

v= p-c = = 400 unit
v 10 - 5
Total
$3,000 — cost line
$2,000 —
Total
$1,000 — revenue line
400 Units
Break-even point
Profit-Volume Graph
Break-even
point
1 2 3 4 5 6 7 8
Process Units
Strategic Planning sold (00s)
and Change Management for Engineers 450
Choosing Between Two Processes or Machines
$20,000 — Total cost of

process A
$15,000 — Total cost of

process B
$10,000 —
$5,000 — Choose Choose

process A process B
| | | |
1000 2000 3000 4000 Units
Point of indifference = 2,667 Units

$ $ Rev.
Rev. Profit
Profit
TC
TC
FC
FC
QBE QBE Volume

Volume
Project A Project B
Break Even Analysis
Total costs A
$
Total costs B
Fixed costs B
Fixed costs A
Volume
Break-Even Analysis
Revenues and costs
($ in thousands)
80 Revenues
70
Break-Even
60 Point
Profit
Total
50 Costs
Variable
40 Costs
Loss
30
Fixed Costs
20
Sales (units
10 in hundreds)
0 10 20 30 40 50 60 70 80 90 100
Process Adapted from Exhibit 7.7

Break-Even Analysis
• Total cost = fixed costs + variable costs (quantity):
TC  F  VC Q
• Revenue = selling price (quantity)
R  SP Q
• Break-even point is where total costs = revenue:
TC  R or F  VC Q  SP Q
F
or Q
SP  VC
Fixed cost = cf = $2,000
Variable cost= cv = $5 per unit
Price =p = $10 per unit
The break-even point is cf 2000

v= p-c = = 400 unit
v 10 - 5
Total
$3,000 — cost line
$2,000 —
Total
$1,000 — revenue line
400 Units
Break-even point
Profit-Volume Graph
Break-even
point
1 2 3 4 5 6 7 8
Process Units
Strategic Planning sold (00s)
and Change Management for Engineers 457
CASE STUDY
A company needs a part which is currently purchased for LE 110/unit. When
studying the possibility of manufacturing the part, the company found that two
alternative processes are available, both give the required specification.
Process A requires buying a new machine at a first cost of LE 370,000 with 10

years life time and LE 70,000 salvage value. The process requires also, tools,
jigs and fixtures of LE 30,000 first cost and 2 years life time with no salvage
value. Additional fixed cost/year of LE 150,000 associated with process A
should also spend. The material cost per unit is estimated at LE 9, and 2
workers at a rate of LE 5/hour each that can produce 10 units/hour, are
needed.
Process B necessitates purchasing a new machine of LE 300,000 first cost, 12

years life time and LE 60,000 salvage value. In additional fixed cost of LE
120,000/year associated with process B should be also incurred. The material
cost/unit is estimated at LE 13 and 2 workers at a rate of LE 5/hour each at a
production rate of 20 units/hour should be employed.

CASE STUDY
A company needs a part which is currently purchased for LE 110/unit.
When studying the possibility of manufacturing the part, the company
found that two alternative processes (A or B) are available.
New Machine:
– First cost (LE) 370,000 300,000
– Life (year) 10 12
– Salvage value (LE) 70,000 60,000
Tools:
– First cost (LE) 30,000 --
– Life (year) 3
Additional fixed cost (LE/year) 150,000 120,000
Workers:
– Numbers 2 2
– Rate (LE/hour) 5 5
– Output (Unit/hour) 10 20
Total Fixed Cost
New Machine:
Machine Depreciation (370,000-70,000)/10 (300,000-60,000)/12
(LE/year) =30,000 =20,000
Tools:
Tools Depreciation (30,000-zero)/2 --
(LE/year) =15,000
Additional fixed cost (LE/y) 150,000 120,000
Total Fixed Cost 195,000 140,000
Unit Variable Cost

Labor (LE/unit) 2 * 5/10 = 1 2 * 5 / 20 = 0.5
Unit Variable Cost 10 5‫ز‬13
(LE/unit)
Total Cost (LE/y) TC =195,000+10 Q TC =140,000+13.5 Q

3 Alternatives
1) Purchase 2) Process A 3) Process B
TC = 110 Q TC =195,000+10 Q TC =140,000+13.5 Q
Q < 1451 Q > 15715 1451 < Q > 15715
BEP (P,B) 110 Q = 140,000+13.5 Q Q=1451

BEP (A,B) 195,000+10 Q = 140,000+13.5 Q Q=15715
Fixed cost - Process A

195
140 Fixed cost - Process B
Purchase Process B Process A

Lowest cost process

Simulation for Risk Analysis
Simulation uses a representation or model of a

system to analyze the expected behavior or
performance of the system.
Monte Carlo analysis simulates a model’s

outcome many time to provide a statistical
distribution of the calculated results.

Sample Monte Carlo Simulation for Project Schedule

Sample Monte Carlo Simulations Results for Project Costs

Expert Judgment
Many organizations rely on the intuitive feelings

and past experience of experts to help
identify potential project risks.
The Delphi method is a technique for deriving

a consensus among a panel of experts to
make predictions about future developments.

Quantifying risk exposure
• One way of presenting the results of sensitivity analysis

is through a payoff diagram, which shows the gain or
loss for different values of a given risk factor
Crude oil –
Heating oil – Gold –
Gasoline – Silver –
Natural gas – Copper –

Payoff diagram
Gain
$250 $270 $310 $330

Decrease in Increase in
gold price gold price
Loss
• For example, consider a payoff diagram for a gold producer
• The horizontal axis shows the gold price and the vertical axis shows
the gain or loss to the corporation

Payoff diagram
Gain
$290
$250 $270 $310 $330

Loss
• The starting point, at the origin, is the current price of gold (assumed
to be $290 per ounce)
• The diagonal line shows the impact of a change in the gold price –
increasing prices represent a gain, and vice versa

Payoff diagram
Gain
$290
$250 $270 $310 $330

-5m
Loss
• A fall in the gold price to $270 would represent a loss to the
corporation of $5m
• The finance manager’s role is to protect against this possibility using
risk management techniques

Sensitivity analysis
• Sensitivity analysis indicates the effect of a change in the

magnitude or timing of individual cash flow elements.
– Sales demand
– Prices
– Investment amount and timing.
– Operating costs.
– Crude and gas production.
– Tax rate or other government take.
• A "High" and "Low" case could be included as sensitivity.
• Probabilistic Risk Economics is also a type of sensitivity

analysis that may be conducted.

Ex. #1:
Total Cost Production Weight
$M 1000 Unit
75 21 1
88 28 2
105 33 3
118 35 4
125 37 5
127 38 6
129 40 7
132 44 8
141 45 9
145 48 10
Based on these data, Estimate the production quantity and total cost

Ex. #2: Crude Oil Price Forecast
Average Unit price $/b
Year Price
$
2004 59.3
2005 63.5
2006 61.8 Based on these data,
2007 61.6
Estimate the oil price
2008 75.5
2009 52.4
Optimistic
Most Likely
Pessimistic
Estimation

Ex. #3: Civil works
Lump Sum Project Expected Quantity m3
Activity Optimistic Most Likely Pessimistic
Excavation 15,000 15,000 17,000
Concrete 2,800 3,000 3,500
F-Concrete 9,000 9,500 10,000
Back filling 7,000 10,000 12,000
Historical projects: Average Unit price $/ m3

1 1.7 18 95 0.85
2 1.9 19 100 0.9
3 2.0 20 100 1.0
4 2.3 20 110 1.0
5 2.5 20 120 1.0
6 2.8 21 123 1.1
Ex. #4: Production Planning
Production Demand Unit Sales Price
Units Probability Unit Price Probability
1,600 0.2 $ 48 0.3
2,000 0.6 50 0.5
2,400 0.2 53 0.2
Based on these data, Estimate the production demand plan

Unit Sales Production Demand Joint Prob.
Price
Unit Price Prob. Unit Sales Prob. P(x,y)=
P(x) P(y) P(x).P(y)
1,600 0.2
$ 48 0.3 2,000 0.6
2,400 0.2
1,600 0.2
50 0.5 2,000 0.6
2,400 0.2
1,600 0.2
53 0.2 2,000 0.6
2,400 0.2
1,600 P(1600,$48) + P(1600,$50)+P(1600,$53) =

production
2,000 P(2000,$48) + P(2000,$50)+P(2000,$53) =
demand plan
2,400 P(2400,$48) + P(2400,$50)+P(2400,$53) =

Ex. #5: Two Projects
Project (A) Project (B)
Revenue ($M) Probability Revenue ($M) Probability
2.0 0.2 1.0 0.3
3.0 0.6 2.5 0.4
3.5 0.2 4.5 0.3
Based on these data, Select the best project.

Reference Books:
The Project
Management Body of
Knowledge
http://www.PMI.org
• www.pmi-ctt.org
• www.projectkickstart.com/html/tips.htm
FastForwardMBA in • www.pmforum.org
Project Management • www.princeton.edu/ppo
•Value at Risk : A New Benchmark for Measuring Derivatives Risk - by Philippe Jorion
Hardcover - 332 pages (August 1996)
Irwin Professional Pub; ISBN: 0786308486 ; Dimensions (in inches): 1.20 x 9.33 x 6.34
•Managing Financial Risk : A Guide to Derivative Products, Financial Engineering and

Value Maximization (Irwin Library of Investment & Finance) -
•by Charles W. Smithson, Clifford W. Smith
Hardcover - 620 pages 3rd edition (July 1998)
McGraw-Hill; ISBN: 007059354X ; Dimensions (in inches): 2.05 x 9.76 x 7.86

Other Books
• Feldman RM, Valdez-Flores C. Applied
Probability and Stochastic Processes
• Hallenbeck W. Quantitative Risk Analysis
for Environmental and Occupational
Health
• Bedford T, Cooke R. Probabilistic Risk
Analysis: Foundations and Methods
• Cox LA. Risk Analysis: Foundations,
Models and Methods
• Valacich J., George J., Hoffer J. (2004)
Essential of Systems Analysis and Design, New
Jersey, Prentice Hall.
• Whitten J., Bentley, L. Dittmna, K. (2004).

System Analysis and Design Methods,
McGraw-Hill.

Reference Books:
– Brinckerhoff, P.C. (1994). Mission-based management: Leading your
not-for-profit into the 21st century. Oak Park, IL: Alpine Guild, Inc.
– Bryson, J.M. (1989). Strategic planning for public and non-profit

organizations. San Francisco: Jossey-Bass Publishers.
– Caffarella, R. (1994). Planning programs for adult leaders: A practical

guide for educators, trainers and staff developers. San Francisco:
Jossey-Bass Publishers.

Relevant Web Sites
• Best Practices in Resolving Customer Complaints:
http://govinfo.library.unt.edu/npr/library/papers/benchmrk/bstprac.html
• Detroit Athletic Club Website:
http://www.thedac.com/
• HDS Services Website
www.hdsservices.com
• RARE Hospitality International, Inc. Website: http://www.rarehospitality.com
• Strategic Quality Plan:

http://www.co.mecklenburg.nc.us/cobudget/pdf/Introduction/StrategicQualPlan01.pdf
• Strategic Quality Planning Through Quality’s Five Dimensions (by Richard Winder):
http://www.ldri.com/articles/93stratqualplan.html
• University Club of MSU Website: http://www.universityclubofmsu.org
• What is Strategic Planning?: http://www.allianceonline.org/FAQ/strategic_planning
Video ―The Balanced Scorecard ―

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Dr. Attia Gomaa

Process Strategic Planning and Change Management for Engineers 3

INPUT PROCESS OUTPUT

Process Strategic Planning and Change Management for Engineers 4

Manpower Scope of work

Process Strategic Planning and Change Management for Engineers 5

Process Strategic Planning and Change Management for Engineers 6

Process Strategic Planning and Change Management for Engineers 8

Process Inspection System

Process Strategic Planning and Change Management for Engineers 10

Requirements Requirements Requirements

Input Boundary Output Boundary

Suppliers Inputs Process Outputs Customers

Process Strategic Planning and Change Management for Engineers 11

Suppliers Inputs Process Outputs Customers

• Production • Work Order • Products • Storage

Process Strategic Planning and Change Management for Engineers 12

Process Strategic Planning and Change Management for Engineers 13

Process Strategic Planning and Change Management for Engineers 14

Service Customer Customer Market

 Which criteria matter most to the customers?

Process Strategic Planning and Change Management for Engineers 15

Optimize the Business Assets

PM is a systematic approach to Optimize:

• Right Scope of Work Right Resources:

Process Strategic Planning and Change Management for Engineers 17

Process Strategic Planning and Change Management for Engineers 18

• Achieved in an Integrated, Rationalized System

Process Strategic Planning and Change Management for Engineers 19

Various types of processes Departments in the organization

Process Strategic Planning and Change Management for Engineers 20

Process Strategic Planning and Change Management for Engineers 21

Defect Root Marketing

Technicians Process Approach

1 Scope of work Contract Project Manager

2 Design Standard X Design Manager

3 Master Plan Contract Planning Manager

4 Work Order Master Plan Site Manager

Process Strategic Planning and Change Management for Engineers 27

Process Strategic Planning and Change Management for Engineers 28

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It is a systemic approach for total productivity improvement

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Target  5 , Next month

Target  12, Next month

Target  8%, Next month

Target  120, Next month

Target  15%, Next month

Leadership & Team Work

© 1995 Corel Corp.

Writing down your goals creates the

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Specific Measurable Applicable

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SMART  Main 5 Parameters

Day to week Week to 3 M 6 M to 1 Y 2 Y to 5 Y

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