Operations Management (OMMP19-3)

Sessions 05 & 06 → Project (Contracts) +

Critical Chain Project Management + Capacity
Cost-Plus-Incentive-Fee (CPIF)
Contract – Example
◼ Total fee may be limited between maximum and minimum
fee

◼ Contract Agreement:
Cost estimate = Rs. 100,000
◼ All allowable costs will be reimbursed
Target Fee = Rs. 10,000
Minimum Fee = Rs. 5,000
Maximum Fee = Rs. 15,000
Target Price = 110,000
Gain Sharing Ratio = 70/30

Dipankar Bose - XLRI

 CPIF Contract – Example – Continued

Contractor’s 70,000 80,000 90,000 100,000 110,000 120,000

Cost
Fee Min Min Min Min Max Max
(19000, (16000, (13000, (10000, (7000, (4000,
15000) 15000) 15000) 15000) 5000) 5000)
= 15000 = 15000 = 13000 = 10000 = 7000 = 5000
Final Price 85,000 95,000 103,000 110,000 117,000 125,000
Profit % 21.43% 18.75% 14.44% 10% 6.36% 4.16%

Dipankar Bose - XLRI

Fixed-Price-Incentive-Fee (FPIF)
Contract

◼ Includes → Price Ceiling and Price Floor

◼ Point of total assumption
◼ Contractor assumes all liability for additional cost

◼ Example – Contract Agreement:

Cost estimate = 100,000
Fee = 10,000
Target price = 110,000
Gain Sharing Ratio = 70/30
Price Floor = 75,000
Price Ceiling = 125,000
◼ Minimum and Maximum payable by client
including fee and reimbursement Dipankar Bose - XLRI
 FPIF Contract – Example – Continued

◼ Point of total assumption (PTA) = ((Ceiling Price – Target

Price)/Buyer's Share) + Cost Estimate
Contractor’s
40,000 60,000 100,000 121,428 125,000 140,000
Cost
True Profit 28000 22000 10000 3572 3572 – 3572 –
(125000 (140000
– –
121428) 121428)
Final Price Max Max Max 125000 125000 125000
(68000, (82000, (110000,
75000) = 75000) = 75000) =
75000 82000 110000
Profit % 87.5% 36.67% 10% 2.94% 0% – 10.71%

Dipankar Bose - XLRI

Traditional Project Management
Planning
◼ Identify the tasks
◼ Specify the resources needed for each one
◼ Allocate sufficient time to each task
◼ Time the task should take on average, plus some
contingency to give confidence

◼ Apply task dependencies

◼ Find longest path of tasks in the Project (Critical Path)

◼ The time along this path is the time-line of the Project

◼ Project which shows any lateness
◼ Squeeze the remaining tasks in the Project
◼ Typically compromise on time, cost or scope and
reschedule Dipankar Bose - XLRI
How Projects Work in Reality?

◼ Sequence of work in projects is not constant but dynamic

◼ A large part of the effort goes in follow-ups
◼ Coordination meetings end up taking more and more time
◼ More and more tasks start turning critical
◼ A re-planning session at any point in time shows small
delay on the critical path
◼ In reality, project delays keep increasing
◼ Finally end up to be much larger than what the critical
path suggested
◼ Teams start releasing bits and pieces of work in a just-in-
time mode
◼ Keeps others busy, buys some more time
Dipankar Bose - XLRI
Why Projects Get Delayed?

◼ A project accumulates delays, it does not accumulate gains

◼ Individuals always desire a safety buffer
◼ No early finishes
◼ Parkinson’s Law
◼ Student Syndrome
◼ Multi-tasking
◼ Murphy’s Law

◼ Remedy – CCPM Suggests

◼ Full Kitting
◼ Reverse Planning
◼ Planning based on availability
◼ Prioritization of activities Dipankar Bose - XLRI
Critical Chain Project Management
(CCPM)
◼ Apply CPM to prepare late start (LS) schedule
◼ If there is resource conflict
◼ Resolve it going backward in time
◼ Reschedule the activities
◼ Ensuring minimum increase in the project duration
◼ Avoid multi-tasking in the process
◼ Identify the critical chain
◼ If there are more than one, choose any one of them
◼ Cut 25-33% of original time estimates
◼ Add a Project Buffer (PB) at the end of the project
◼ PB = Total time cut from the critical chain activities

Dipankar Bose - XLRI

Critical Chain Project Management
(CCPM) – Continued
◼ Add Feeding Buffers (FB)
◼ Where non-critical chain merges into critical chain
◼ Protects critical chain from any variations in the
non-critical chain activities
◼ FB = Total time cut from longest chain of non-critical
activities
◼ Consider the Resource Buffer (RB)
◼ Virtual task inserted prior to critical chain tasks
◼ That require critical resources
◼ Drum Buffer/Capacity Buffer
◼ Resources shared among multiple projects
◼ Buffer management → Green-Yellow-Red Rule
Dipankar Bose - XLRI
CCPM – Example

What is total duration?

2
A (30) B (15)

X Y

1 4
X Z

C (20) D (20)
3

Apply CPM to prepare late start (LS) schedule

Dipankar Bose - XLRI
CPM (Step 1 in CCPM)
– Example – ES vs. LS
Time 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46
A
B
C
D

Time 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46
A
B
C
D

Dipankar Bose - XLRI

CPM (Step 1 in CCPM)
– Example – ES vs. LS
Time 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46
A
B
C
D

Time 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46
A
B
C
D

Dipankar Bose - XLRI

 CCPM
– Example – Continued
Time 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46
A
B
C
D
Identify Critical Chain A before C or C before A?

1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 6 6 6 6
Time 2 4 6 8
0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6
A
B
C
D
Dipankar Bose - XLRI
CCPM – Example – Continued
Cut 25-33% of original time estimates
1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 6 6 6 6
Time 2 4 6 8
0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6
A
B
C
D

PB = Total time cut in Critical Chain

1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 6 6 6 6
Time 2 4 6 8
0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6
A
B
C
D
PB
Dipankar Bose - XLRI
CCPM – Example – Continued
1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 6 6 6 6
Time 2 4 6 8
0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6
A
B
C
D
FB

Project Duration = 44 days without PB (65 days including 21 days PB)

Resource Buffer and Capacity Buffer?

Important → BUFFER MANAGEMENT (Green-Yellow-Red)

Dipankar Bose - XLRI

Implementation Issues

◼ How many days work until the Project is completed ?

◼ How certain are we about the answer?
◼ Compare
◼ Fraction of the Completion Buffer Remaining (CBR)
◼ Fraction of the Critical Chain Remaining (CCR)
◼ CBR/CCR is ≥ 1
◼ Project status is GREEN – Watch
2
◼ CBR/CCR is between 1 and
3
◼ Project status is YELLOW – Prepare a recovery plan
2
◼ CBR/CCR is <
3
◼ Project status is RED – Implement recovery plan

Dipankar Bose - XLRI

Buffer Management – Two examples
1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 6 6 6 6
Time 2 4 6 8
0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6
A
B
C
D

CBR_PB = 17/21 CBR_FB = 6/6 CCR = 28/48

1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 6 6 6 6
Time 2 4 6 8
0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6
A
B
C
D

CBR_PB = 17/21 CBR_FB = 6/6 CCR = 40/48 Dipankar Bose - XLRI

Topic: Capacity Management

Dipankar Bose - XLRI

What is Capacity?

◼ “ Capacity is the capability of a worker, machine, work

center, plan or organization to produce output per period
of time” – APICS Dictionary

◼ How to measure the inputs and outputs?

◼ Car manufacturing/ Hospital/ Airline/ Pizza parlor/
Retail store/ Theater/ Restaurant

◼ Basic questions
◼ What type of capacity is needed?
◼ How much is needed?
◼ When is it needed?
Dipankar Bose - XLRI
Examples of Capacity Types and
Measures
◼ Types
◼ Design Capacity/Best operating level
◼ System capacity/Effective capacity
◼ Actual output

◼ Measure
◼ Throughput
◼ Utilization
◼ Efficiency

Dipankar Bose - XLRI

Capacity Measures – Formula

◼ Effective capacity = Design capacity – Planned downtime

◼ Actual output = Effective capacity – Unplanned downtime

◼ Utilization = (Actual Output)/ (Design Capacity)

◼ Efficiency = (Actual Output)/ (Effective Capacity)

◼ Ways to increase capacity

◼ Lead Strategy/ Lag Strategy

Dipankar Bose - XLRI

Some Important Terms

◼ Economies of scale
◼ Diseconomies of scale
◼ Economics of scope
◼ Learning curve
◼ Focused factories
◼ Plant within a plant (PWP)
◼ Subcontractor networks
◼ Capacity cushions

Dipankar Bose - XLRI

Capacity Cushion – Example

◼ ABC Co. wishes to install a sufficient number of machines

to produce 400,000 products/year.
◼ The operation takes 2 minutes/product, and management
requires a capacity cushion of 5%.
◼ How many machines will be required if each one is
available for 1800 hours (of capacity) per year?

Dipankar Bose - XLRI

Use of Output Measure – Example

◼ A process currently serves 50 customers/day on an

average. Capacity cushion is 10%. Demand is expected to
be double in 5 years. Management also wants to increase
capacity cushion to 20%.
◼ What capacity requirements should be planned?

Dipankar Bose - XLRI

Use of Output Measure – Answer

◼ Method 1:
◼ Current demand = Capacity used = 50
◼ Capacity available = 50 ×1.1 = 55
◼ Future demand = capacity required = 50 × 2 = 100
◼ Future capacity proposed = 100 × 1.2 = 120
◼ Capacity addition planned = 120 – 55 = 65
◼ Method 2:
◼ Current demand = Capacity used = 50
◼ Capacity available = 50 /0.9 = 55.56
◼ Future demand = capacity required = 50 × 2 = 100
◼ Future capacity proposed = 100 / 0.8 = 125
◼ Capacity addition planned = 125 – 55.56 = 69.44
Dipankar Bose - XLRI
Use of Input Measure – Formulation

◼ D = demand forecast based on input measure

◼ p = Processing time (in hours per customer served or
product produced)
◼ Depends on process and methods selected to do the
work
◼ N = Total no of hours/year in which process operates
◼ C = Desired capacity cushion (in %)
◼ Q = No of units in each lot
◼ s = Setup time in hours per lot

◼ Capacity requirements = M
= [D. p + (D/Q). S]/[N. {1 – (C/100)}]
Dipankar Bose - XLRI
Use of Input Measure – Example

◼ Copy center at XLRI prepares Handouts for BM and HRM

students. The process operates 250 days/year with one 8
hours shift/day. Desired capacity cushion is 15%. Other
information is given below:
Item BM HRM
Annual demand forecast (copies) 3500 2800
Standard processing time (hour/copy) .5 .7
Average Lot size (copies per course) 90 95
Standard setup time (hours) .4 .35

◼ Determine the number of copy machines required

Dipankar Bose - XLRI

Use of Input Measure – Answer

3500
◼ BM time required = (3500 × 0.5 + × 0.4) = 1765.56
90
◼ BM time with capacity cushion = 2077.12
2800
◼ HRM time required = (2800 × 0.7 + × 0.35)
95
=1970.32
◼ HRM time with capacity cushion = 2318.02
◼ If the machine can be used for both BM and HRM material
◼ Then total time = 4395.14
◼ One machine input capacity = 250 × 8 = 2000 hrs.
◼ If demand must be met and cushion must be > 15%
◼ No of machine required = 4395.14/ 2000 = 2.2 ≈ 3
◼ What was the assumption about Capacity Cushion?
Dipankar Bose - XLRI
Evaluating Capacity Requirements –
Example
◼ Current situation
◼ 3 flexible machines for Type X with
◼ 150,000/year for each machine
◼ Requires 2 operators/Machine – No extra operator
◼ 5 flexible machines for Type Y with
◼ 250,000/year for each machine
◼ Requires 3 operators/Machine – 5 extra operator
◼ Demand Forecast (In Thousands)
Product Type Year 1 Year 2 Year 3 Year 4 Year 5
Type X 60 100 150 200 250
Product A
Type Y 100 200 300 400 500
Type X 75 85 95 105 120
Product B
Type Y 200 400 600 700 900
Dipankar Bose - XLRI
Mix Capacity – Solution

◼ Consider demand for Type X and Type Y

Year 1 Year 2 Year 3 Year 4 Year 5
Type X 135 185 245 305 370
Type Y 300 600 900 1100 1400

◼ Current capacity of Machine for Type X = 450

◼ Current operators = 6, No extra operator
◼ Current capacity of Machine for Type Y = 1250
◼ Current operators = 15 + 5 = 20
◼ For Type X → No increase in capacity for next 5 years
◼ For Type Y → Increase 1 m/c (= 250) capacity in Year 5
◼ From Year 5 → Type Y capacity = 250×6 = 1500
◼ Operators required = 18, Extra now = 2
Dipankar Bose - XLRI