INDEX

MB0044 - Production & operations Management - 4 Credits 3Assignment Set- 1................................................................................................................3

MB0045 – Financial Management - 4 Credits........................................................................14

Assignment Set- 1..............................................................................................................14

MB0046 – Marketing Management - 4 Credits.......................................................................36

Assignment Set- 1..........................................................................................................36

MB0047 – Management Information System - 4 Credits.......................................................52

Assignment Set- 1..............................................................................................................52

MB0048 – Operations Research - 4 Credits..........................................................................74

Assignment Set- 2..............................................................................................................74

MB0049 – Project Management - 4 Credits...........................................................................87

Assignment Set- 1..............................................................................................................87

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MB0044 – Production and Operation Management - 4 Credits

Assignment Set- 1

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Note: Each question carries 10 Marks. Answer all the questions.

Q 1. What are the components of systems productivity? Explain how CAD and CIM help in improving productivity?

Q 2. What do you understand by ‘industry best practice’? Briefly explain different types of Benchmarking?

Q 3. List out the various automated systems for transfer of materials in the production plant. What do you understand by Line Balancing? Explain with an example?

Q 4. Explain the different types of Quality Control Tools with examples? How do Crosby’s absolutes of quality differ from Deming’s principles?

Q 5. Define project cycle, project management, and scope of project. List the various project management knowledge areas? What are the reasons for failure of a project?

Q 6. Explain the various phases in project management life cycle. Explain the necessity and objectives of SCM?

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Q 1. What are the components of systems productivity? Explain how CAD and CIM help in improving productivity?

Ans:- Production management encompasses all activities which go into conversion of asate of inputs into outputs which are useful to meet human needs. It involves the identification of the perquisite materials, knowledge of the processes, and installation of equipments necessary to convert or transform the materials to products. System productivity is generally expressed as the ratio of outputs to inputs. Productivity can be calculated for a single operation, a functional unit, a department division or a plant. It is a measure of the efficiency of the system and looks at the economies achieved during the processes. Every process will have number of contributors-people machines, facilitating goods, ancillary equipments, technology, etc. Which help in achieving maximum productivity - each element attempting to enhance the contribution of other elements? Enhancement of productivity is achieved by either reducing the inputs for the same output or increasing the output by using the same input. Opportunities exist at all stages of the workflow. The entire system of introduce measures for increasing productivity. However in actual manufacturing situations, the inefficiencies will have cascading effect in hampering productivity. Communication, effective review processes and innovative methods will ensure optimization of resources. Capital productivity: Capital deployed in plant, machinery, buildings and the distribution system as well as working capital are components of the oust of manufacture and need to be productive. Demand fluctuations, uncertainties of production owing to breakdowns and inventories being crated drag the productivity down. Therefore, strategies are needed to maximize the utilization of the funds allotted towards capital. Adapting to new technologies, outsourcing and balancing of the workstations to reduce the proportion of idle times on equipments are the focus of this section.

Computers in design and manufacturing applications make it possible to remove much of the tedium and manual labor involved. For example, the many design specifications, blueprints, material lists, and other documents needed to build complex machines can require thousands of highly technical and accurate drawings and charts. If the engineers decide structural components need to be changed, all of these plans and drawings must be changed. Prior to CAD/CAM, human designers and draftspersons had to change them manually, a time consuming and error-prone process. When a CAD system is used, the computer can automatically evaluate and change all corresponding documents instantly. Inaddition, by using interactive graphics workstations, designers, engineers, and architects can create models or drawings, increase or decrease sizes, rotate or change them at will, and see results instantly on screen.

CAD is particularly valuable in space programs, where many unknown design variables are involved. Previously, engineers depended upon trial-and-error testing and modification, a time consuming and possibly life-threatening process. However, when aided by computer simulation and testing, a great deal of time, money, and possibly lives can be saved. Besides its use in the military, CAD is also used in civil aeronautics, automotive, and data processing industries.

CAM, commonly utilized in conjunction with CAD, uses computers to communicate instructions to automated machinery. CAM techniques are especially suited for manufacturing plants, where tasks are repetitive, tedious, or dangerous for human workers.

Computer integrated manufacturing (CIM), a term popularized by Joseph Harrington in 1975, is also known as Autofacturing. CIM is a programmablemanufacturing method designed to link CAD, CAM, industrial robotics, and machine manufacturing using

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unattended processing workstations. CIM offers uninterrupted operation from raw materials to finished product, with the added benefits of quality assurance and automated assembly.

Q 2. What do you understand by ‘industry best practice’? Briefly explain different types of Benchmarking?

Ans:- Industry best practice: Each industry would have developed over years or decades. Materials would have changed, processes would have changed. As all products or services are meant to serve needs of the customers, they undergo continuous changes – both in shapes and features. Because of research that is conducted, materials and methods go on improve necessarily. The companies that were at the force innovate to stay in business as new entrants would be adopting the latest techniques that the pioneers had taken decades to establish. So the practices adopted by various firms in any industry would end up adopting almost similar methods of getting an output required. Such practices would get refined to great extent giving rise what we call industry best practices. These tend to get stabilized or changed owning to the development of new equipments which are designed and manufacturers of those with an eye on growing markets which demand higher quality and reduced prices. Competition benefits those who can use all these to their advantage. Industry best practices open up the field for benchmarking by companies which need to improve their performance.

Bench Marking: It is a method of measuring a company’s processes, methods, procedures and in a way all functions in great detail. Benchmarking is used to understand how these got into the system and what circumstances brought them about. It is a learning process with a few to find out whether some of the reasons have changed and bring in new processes for improvement.. The metrics that could be used are – number of pieces per hour, cost per unit, number of breakdowns per week, customer alienation during a week, return on investment, number of returns from customers in a month, inventory turnover, and many others. As can be seen the figures as found above determine the efficiency of the organization. To keep focused, many organizations, especially the large ones, select a few processes for purposes of benchmarking. This helps in ensuring constant and deep attention to those aspects which are to be dealt with. The following are the types of benchmarking firms consider.

Types of Benchmarking:• Process benchmarking - the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration.• Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity.• Benchmarking from an investor perspective- extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor.• Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms.

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• Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.• Strategic benchmarking - involves observing how others compete. This type isusually not industry specific, meaning it is best to look at other industries.• Functional benchmarking - a company will focus its benchmarking on a singlefunction to improve the operation of that particular function. Complex functionssuch as Human Resources, Finance and Accounting and Information andCommunication Technology are unlikely to be directly comparable in cost andefficiency terms and may need to be disaggregated into processes to make validcomparison.• Best-in-class benchmarking - involves studying the leading competitor or thecompany that best carries out a specific function.• Operational benchmarking - embraces everything from staffing andproductivity to office flow and analysis of procedures performed.

Q 3. List out the various automated systems for transfer of materials in the production plant. What do you understand by Line Balancing? Explain with an example?

Ans:- About the automated flow lines we can say it is a machine which is linked by atransfer system which moves the parts by using handling machines which are also automated, we have an automated flow line. Human intervention ma is needed to verify that the operations ate taking place according to standards. When these can be achieved with the help of automation and the processes are conducted with self regulation, we will have automated flow lines established. In fixed automation or hard automation, where one component is manufactured using services operations and machines it is possible to achieve this condition. We assume that product life cycles are sufficiently stable to interest heavily onthe automate flow lines to achieve reduces cast per unit. Product layouts ate designed so that the assembly tasks are performed in the sequence they are designed at each station continuously. The finished item came out at the end of the line. In automated assembly lines the moving pallets move the materials from station to station and moving arms pick up parts, place them at specified place and system them by perusing, riveting, & crewing or even welding. Sensors will keep track of their activities and move the assembles to the next stage. The machines are arranged in a sequence to perform operations according to the technicalrequirements. The tools are loaded, movements are effected, speeds controlled automatically without the need for worker’s involvement. The flexibility leads to better utilization of the equipments. It reduces the numbers of systems and rids in reduction of investment as well as a space needed to install them. One of the major cancers of modern manufacturing systems is to be able to respond to market demands which have uncertainties. Prototyping is a process by which a new product is developed in small number so as to determine the suitability of the materials, study the various methods of manufactured, type of machinery required and develop techniques to over come problems that my be encountered when full scale manufacture is undertaken. Prototypes do meet the specification of the component that enters a product and performance can be measured on these. It helps in con be reforming the design and any shortcomings can be rectified at low cost. Flexibility has three dimensions in the manufacturing field. They are variety, volume and time. There demands will have to be satisfied. In that sense they become constraints which restrict the maximization of productivity. Every business will have to meet the market demands of its various products in variety volumes of different time. Flexibility is also needed

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to be able to develop new products or make improvements in the products fast enough to cater to shifting marker needs. Manufacturing systems have flexibility built into them to enable organization meet global demand. You have understood how the latest trends inmanufacturing when implemented help firms to stay a head in business.

Q 4. Explain the different types of Quality Control Tools with examples? How do Crosby’s absolutes of quality differ from Deming’s principles?

Ans:- Quality Control (QC) is a system of routine technical activities, to measure andcontrol the quality of the inventory as it is being developed. The QC system is designed to: Provide routine and consistent checks to ensure data integrity, correctness, and completeness; Identify and address errors and omissions; Document and archive inventory material and record all QC activities.The following seven are considered basic tools for achieving quality.I. Flow ChartII. Check sheetIII. HistogramIV. Pareto AnalysisV. Scatter DiagramVI. Control ChartVII. Cause and Effect Diagram

I.Flow Chart It is a visual representation of process showing the various steps. It helps inlocating the points at which a problem exists or an improvement is possible. Detailed data can be collected, analyzed and methods for correction can be developed. A sample is shown below lists out the various steps or activities in a particular job. It classifies them as a procedure or a decision. Each decision point generates alternatives. Criteria and Consequences that go with decision are amenable to evaluation for purposes of assessing quality. The flow chart helps in pin-pointing the exact at which errors have crept in. A simple chart is shown below.

II.Check Sheet

These are used to record the number of defects, types of defects, locations atwhich they are occurring, times at which they are occurring, workmen by whom they are occurring. It keeps a record of the frequencies of occurrence with reference to possible defect causing parameter. It helps to implement a corrective procedure at the point where the frequencies are more, so that the benefit of correct will be maximum. A sample sheet is shown below.

III.Histogram

Histograms are graphical representations of distribution of data. They aregenerally used to record huge volumes of data about a process. They reveal whether the pattern of distribution – whether there is a single peak, or many peak and also the extent of variation around the peak value. This helps in identifying whether the problem is serious.

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When used in conjunction with comparable parameters, the visual patterns help us to identify the problem which should be attended to.

IV.Pareto Analysis

This is a tool for classifying problem areas according to the degree of importance and attending to the most important. Pareto principle, also called 80-20 rule,states that 80 percent of the problems that we encounter arise out of 20 percent of items. If we find that, in a day, we have 184 assemblies have given problems and there are 11 possible causes, it is observed that 80 per cent of them i.e. 147 of them have been caused by just 2 or 3 of them. It will be easy to focus on these 2 or three and reduce the number of defects to a great extent. When the cause of these defects have been attended, we will observe that some other defect

V.Scatter Diagram

These are used when we have two variables and want to know the degree ofrelationship between them. We can determine if there is cause and effect relationship between and its extent over a range of values. Sometimes, we can observe that there is no relationship, in which we can change one parameter being sure that it has no effect on the other parameter.

VI.Control Charts

These are used to verify whether a process is under control. Variables when they remain within a range will render the product maintain the specifications. This isthe quality of conformance. The range of permitted deviations is determined by design parameters. Samples are taken and the mean and range of the variable of each sample (subgroup) is recorded. The mean of the means of the samples gives the control lines. Assuming normal distribution, we expect 99.97 per cent of all values to lie within the UCL when we take 3 standard deviations – Upper Control Limit – and LCL – Lower Control Limit. The graphical representation of data helps in changing settings to bring back the process closer to the target.

VII.Cause and Effect Diagram

This is a diagram in which all possible causes are classified on qualitycharacteristics which lead to a defect. These are arranged in such a way that different branches — the causes are – leading the stem in the direction of the discovery of the problem. When each of them is investigated thoroughly we will be able to pinpoint some factors which cause the problem. We will also observe that a few of them will have cumulative effect or even a cascading effect.

Deming WheelDeming’s approach is summarized in his 14 points.Constancy of purpose for continuous improvementAdopt the TQM philosophy for economic purposesDo not depend on inspection to deliver qualityDo not award any business based on price aloneImprove the system of production and service constantlyConduct meaningful training on the jobAdopt modern methods of supervision and leadershipRemove fear from the minds of everyone connected with the organisationRemove barriers between departments and peopleDo not exhort, repeat slogans and put up posters.

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Do not set up numerical quotas and work standardsGive pride of workmanship to the workmenEducation and training to be given vigorouslyState and exhibit top management’s commitment for quality and productivity

Using the above principles, Deming gave a four step approach to ensure apurposeful journey of TQM. The slope is shown to indicate that if efforts are letup the program will roll backPlan – means that a problem is identified, processes are determined and relevanttheories are checked out.Do – means that the plan is implemented on a trial basis. All inputs are correctlymeasured and recorded.Check/Study/Analyze – means that the trials taken according to the plan are inaccordance with the expected results.Act – When all the above steps are satisfactory regular production is started sothat quality outcomes are assuredCrosby’s Absolutes of QualityLike Deming, he also lays emphasis on top management commitment andresponsibility for designing the system so that defects are not inevitable. Heurged that there be no restriction on spending for achieving quality. In the longrun, maintaining quality is more economical rather than compromising on itsachievement.His absolutes can be listed as under.Quality is conformance to requirements – not ‘goodness’.Prevention, not appraisal, is the path to quality.Quality is measured as the price paid for non-conformance and as indexes.Quality originates in all factions – not quality department. There are no qualityproblems people, design, process create problems.Crosby also has given 14 points similar to those of Deming. His approachemphasizes on measurement of quality, increasing awareness, corrective action,error cause removal and continuously reinforcing the system, so that advantagesderived are not lost over time. He desires that the quality management regimenshould improve the overall health of the organization and prescribed a vaccine.The ingredients are:Integrity – honesty and commitment to produce everything right first time, everytime.Communication – Flow of information between departments, suppliers,customers – helps in identifying opportunities.Systems and operations – These should bring in a quality environment – so thatnobody is comfortable with anything less than the best.

Q 5. Define project cycle, project management, and scope of project. List the various project management knowledge areas? What are the reasons for failure of a project?

Ans:- Project Cycle – A project cycle basically consists of the various activities ofoperations, resources and the limitations imposed on them.

Definition of “Project Management”: It is the practice of controlling the use of resources, such as cost, time,

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manpower, hardware and software involved in a project, that start with a problem statement and end with delivery of a complete product. Project management involves understanding its scope and various processes in theproject cycle. Project Management Definition As per PMBOK (Project Management — Body of Knowledge, defined by PMI – Project Management Institute) : “Project management is the application of knowledge, skills, tools and techniques to project activities to meet project requirements. As per DIN 69901 (German Organization for Standardization): “Project management is the complete set of tasks, techniques, tools applied during project execution”Scope – It refers to the various parameters that affect the project in its planning, formulation and executions, Like:- The range of one's perceptions, thoughts, or actions. Breadth or opportunity to function. See Synonyms at room. The area covered by a given activity or subject. See Synonyms at range. The length or sweep of a mooring cable. Informal A viewing instrument such as a periscope, microscope, or telescope. Before knowing the reasons of failure we have to know about project. Project is a set of activities which are networked in order and aimed towards achieving goal of a project. Now, the reasons are project failure: Incidence of Project failure Projects being initiated of random at all levelsProject objective not in line with business objective Project management not observedProject manager with no prior experience in the related project Non- dedicated teamLack of complete support from clients Factors contributing to project success not emphasized: Project objective in alignment with business objective Working within the framework of project management methodology Effective scoping planning, estimation, execution, controls and reviews, project bottlenecks Communication and managing expectations effectively with clients, team merits and stake holders Prior expectance of PM in a similar project Overview of information and communication Technologies (ICT) project:Involve information and communication technologies such as the word wide web, e-mail, fiber-optics satellites.ii) Enable societies to produce, access, adapt and apply information in greateramount, more rapidly and at reduce casts.iii) Offer enormous opportunities for enhancing business and economic viability.iv) Common problems encountered during projects.v) No prioritization of project activity from an organizational position.vi) One or more of the stages in the project mishandled.vii) Less qualified non-dedicated manpower.viii) Absence of smooth flow of communication between the involved parties.

These basic reasons lead a project to failures. In the project failures businessmanagement and project management is directly involved. From the management point of view it is basic things to care above topics to success of a project. Project is the core business of a company.

Q 6. Explain the various phases in project management life cycle. Explain the necessity and objectives of SCM?

Ans:- This is the initial phase of any project. In this phase information is collected fromthe customer pertaining to the project and the requirements are analyzed. The entire project has to be planned and it should be done in a strategic manner. The project manager conducts the analysis of the problem and submits a detailed report to the top project justification, details on what the problem is a method of solving the problem, list of the objectives to be achieved, project budget and the success rate of completing the project.

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The report must also contain information and the project feasibility, and the risks involved in the project. Project management life cycle is the integrated part of management. It is attach with project responsibility or failure of a project. The important tasks of this phase are as follows:

->Specification Requirements Analysis (SRA): It has to be conducted to determine the essential requirements of a project in order to achieve the target.-> Feasibility study: To analyze whether the project is technically, economically and practically feasible to be undertaken.-> Trade off analysis: To understand and examine the various alternatives which could be considered.-> Estimation: To estimate the project cost, effort requires for the project and functionality of various process in the project.-> System design: Choose a general design that can fusil the requirements.-> Project evolution: Evaluate the project in terms of expected profit, cost and risks involved marketing phase. A project proposal is prepared by a group of people including the project manager. This proposal has to contain the strategies adopted to market the product to the customers.-> Design phase: This phase involves the study of inputs and outputs of the various project stages.-> Execution phase: In this phase the project manager and the teams members work on the project objectives as per the plan. At every stage during the execution reports are prepared.-> Control: Inspecting, Testing and Delivery phase during this phase. The project team works under the guidance of the project manager. The project manager has to ensure that the team working under his, implements the project designs accurately, the project manager has to ensure ways of managing the customer, perform quality control work. Closure and post completion analysis phase upon satisfactory completion and delivery of the intended product or service the staff performance has to be evaluated. Document the lessons from the project. Prepare the reports on project feedback analysis followed by the project execution report. The phase which involve in the above are: The preparation stage involves the preparation and approval of project outline, project plan and project budget. The next stage involves selecting and briefing the project team about the proposals followed by discussions on the roles and responsibility of the project member and the organization.The project management life cycle:

A Life cycle of a project consists of the following:

Understanding the scope of the project Establishing objectives of the project Formulating and planning various activities Project execution and Monitor and control the project resources. Risk Management: Risk is defined in ISO 31000 as the effect of uncertainty on objectives (whether positive or negative). Risk management can therefore be considered theidentification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary. Several risk management standards have been developed including the Project Management Institute, the National Institute of Science and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety. The strategies to manage risk include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk.

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Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk even though the confidence in estimates and decisions increase. Necessity and objectives of SCM: SCM is the abbreviation of supply chain Management. It is considered by many express worldwide as the ultimate solution towards efficient enterprise management. SCM is required by and enterprise as a tow to enhance management effectiveness with a following organizational objective: Reduction of inventory:-Enactment in functional effectiveness of existing systems like ERP, Accounting. Software and Documentation like financial reports statements ISO 9000 Documents etc.Enhancement of participation level and empowerment level: Effective integration of multiple systems like ERP, communication systems, documentation system and secure, Design R&D systems etc. Better utilization of resources- men, material, equipment and money. Optimization of money flow cycle within the organization as well as to and from external agencies. Enhancement of value of products, operations and services and consequently, enhancements of profitability. Enhancement of satisfaction level of customer and clients, supporting institutions, statutory control agencies, supporting institutions, statutory control agencies, suppliers and vendors, employees and executives . Enhancement of flexibility in the organization to help in easy implementation of schemes involving modernization,expansion and divestment, merges and acquisitions Enhancement of coverage and accuracy of management information systems. With the objectives of SCM its implementation are required. Implementation is in the form of various functional blocks of an organization interpenetrated through which a smooth flow of the product development is possible. A relatively new SCM option involves web based software with a browser interface. Several electronic marketplaces for buying and selling goods and materials. Steps involved in the implementation of SCM: There is many steps which involved in SCM implementation are- Business Process, sales and marketing. Logistics, costing, demand planning, trade- offanalysis, environmental requirement, process stability, integrated supply, supplier management, product design, suppliers, customers, material specifications, etc.Some important aspect of SCM: The level of competition existing in the market and the impact of competitive forces on the product development. Designing and working on a strategic logic for better growth through value invention. Working out new value curve in theproduct development along with necessary break point. Using it to analyze markets and the economies in product design. Time, customer, quality of product and the concept of survival of fittest.

Steps of SCM principals:-Group customer by need: Effective SCM groups, customer by tie tinct service meets those particular segment.Customize the logistics networks:- In designing their logistics network, companies need to focus on the service requirement and profit potential of the customer segments identified. Listen to signals of market demand and plan accordingly sales and operations planners must monitor the entire supply chain to detect early warning signals of changing customer demand and needs.Differentiate the product closer to the customer:- companies today no longer can afford to stock pile inventory to compensate for possible forecasting errors, instead, they need to postpone product differentiation in the manufacturing.

Process closer to actual customer demand.

Strategically manage the source of supply:- by working closely with their key suppliers to reduce the overall casts of owning materials and services; SCM maximizes profit margins both for themselves, and their supplies. Develop a supply chain wide technology strategy: as one of the cornerstones of successful SCM information technology must be able to support multiple levels of decision making. Adopt channel spanning performance measures- Excellent supply performance measurement systems do more than just monitor internal functions. They apply performance criteria that embrace bathe service and financial metrics, including as such as each accounts true profitability.

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MB0045 – Financial Management - 4 Credits

Assignment Set- 1

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Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Write the short notes on 1. Financial management

2. Financial planning

3. Capital structure

4. Cost of capital

5. Trading on equity.

Q.2 a. Write the features of interim divined and also write the factor Influencing divined policy? b. What is reorder level ?

Q.3. Sales Rs.400, 000 less returns Rs 10, 000, Cost of Goods Sold Rs 300,000, Administration and selling expenses Rs.20, 000, Interest on loans Rs.5000, Income tax Rs.10000, preference dividend Rs. 15,000, Equity Share Capital Rs.100, 000 @Rs. 10 per share. Find EPS.

Q.4. What are the techniques of evaluation of investment?

Q. 5 What are the problems associated with inadequate working capital?

Q. 6. What is leverage? Compare and Contrast between operating Leverage and financial leverage ?

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Q.1 Write the short notes on

1. Financial management

2. Financial planning

3. Capital structure

4. Cost of capital

5. Trading on equity.

Financial management

Financial Management is the art and science of managing money. Regulatory and economic environments have undergone drastic changes due to liberalisation and globalisation of Indian economy. This has changed the profile of Indian finance managers. Indian financial managers have transformed themselves from licensed raj managers to well-informed dynamic proactive managers capable of taking decisions of complex nature.

Traditionally, financial management was considered a branch of knowledge with focus on the procurement of funds. Instruments of financing, formation, merger and restructuring of firms and legal and institutional frame work occupied the prime place in this traditional approach.

The modern approach transformed the field of study from the traditional narrow approach to the most analytical nature. The core of modern approach evolved around the procurement of the least cost funds and its effective utilisation for maximisation of share holders’ wealth.

The three core elements of financial management are:

a. Financial Planning

Financial Planning is to ensure the availability of capital investments to acquire the real assets. Real assets are land and buildings, plants and equipments. Capital investments are required for establishing and running the business smoothly.

b. Financial Control

Financial Control involves managing the costs and expenses of a business. For example, it includes taking decisions on the routine aspects of day to day management of collecting money due from the firms’ customers and making payments to the suppliers of various resources.

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c. Financial Decisions

· Decision needs to be taken on the sources from which the funds required for the capital investments could be obtained.

· There are two sources of funds – debt and equity. In what proportion the funds are to be obtained from these sources is to be decided for formulating the financing plan.

Financial planning

Liberalisation and globalisation policies initiated by the government have changed the dimension of business environment. Therefore, for survival and growth, a firm has to execute planned strategies systematically. To execute any strategic plan, resources are required. Resources may be manpower, plant and machinery, building, technology or any intangible asset.

To acquire all these assets, financial resources are essentially required. Therefore the finance manager of a company must have both long-range and short-range financial plans. Integration of both these plans is required for the effective utilisation of all the resources of the firm.

The long-range plans must include:

· Funds required for executing the planned course of action

· Funds available at the disposal of the company

· Determination of funds to be procured from outside sources

Financial planning has the following objects:

Let us start with defining financial planning as an essential objective.

Financial planning is a process by which funds required for each course of action is decided.

A financial plan has to consider capital structure, capital expenditure and cash flow. Decisions on the composition of debt and equity must be taken.

Financial planning or financial plan indicates:

· The quantum of funds required to execute business plans

· Composition of debt and equity, keeping in view the risk profile of the existing business, new business to be taken up and the dynamics of capital market conditions

· Formulation of policies, giving effect to the financial plans under consideration

Capital structure

The capital structure of a company refers to the mix of long-term finances used by the firm. In short, it is the financing plan of the company. With the objective of maximising the value of the equity shares, the choice should be that pattern of using of debt and equity in a proportion which will lead towards achievement of the firm’s objective. The capital structure

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should add value to the firm. Financing mix decisions are investment decisions and have no impact on the operating earnings of the firm. Such decisions influence the firm’s value through the earnings available to the shareholders.

The value of a firm is dependent on its expected future earnings and the required rate of return. The objective of any company is to have an ideal mix of permanent sources of funds in a manner that it will maximise the company’s market price. The proper mix of funds is referred to as optimal capital structure. The capital structure decisions include debt-equity mix and dividend decisions. Both these have an effect on the EPS.

The features of an ideal capital structure are (see figure 7.1) – profitability, flexibility, control and solvency.

Figure 7.1: Features of an ideal capital structure

Profitability

The firm should make maximum use of leverage at a minimum cost.

Flexibility

An ideal capital structure should be flexible enough to adapt to changing conditions. It should be in a position to raise funds at the shortest possible time and also repay the money it borrowed, if they appear to be expensive.

This is possible only if the company’s lenders have not put forth any conditions like restricting the company from taking further loans, no restrictions placed on the assets usage or laying a restriction on early repayments. In other words, the finance authorities should have the power to take decisions on the basis of the circumstances warrant.

Control

The structure should have minimum dilution of control.

Solvency

Use of excessive debt threatens the very existence of the company. Additional debt involves huge repayments. Loans with high interest rates are to be avoided however attractive some investment proposals look. Some companies resort to issue of equity shares to repay their debt for equity holders do not have a fixed rate of dividend

Cost of capital

Capital structure is the mix of long-term sources of funds like debentures, loans, preference shares, equity shares and retained earnings in different ratios.

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It is always advisable for companies to plan their capital structure. Decisions taken by not assessing things in a correct manner may jeopardise the very existence of the company. Firms may prosper in the short-run by not indulging in proper planning but ultimately may face problems in future. With unplanned capital structure, they may also fail to economise the use of their funds and adapt to the changing conditions.

The Cost of Different Sources of Finance is:

Cost of debentures Cost of term loans Cost of preference capital

Cost of equity capital Cost of retained earnings Capital asset pricing model approach Earnings price ratio approach

Trading on equity

Trading on equity is sometimes referred to as financial leverage or the leverage factor.Trading on equity occurs when a corporation uses bonds, other debt, and preferred stock to increase its earnings on common stock. For example, a corporation might use long term debt to purchase assets that are expected to earn more than the interest on the debt. The earnings in excess of the interest expense on the new debt will increase the earnings of the corporation’s common stockholders. The increase in earnings indicates that the corporation was successful in trading on equity.

If the newly purchased assets earn less than the interest expense on the new debt, the earnings of the common stockholders will decrease.

Financial leverage as opposed to operating leverage relates to the financing activities of a firm and measures the effect of earnings before interest and tax (EBIT) on earnings per share (EPS) of the company.

A company’s sources of funds fall under two categories –

· Those which carry a fixed financial charges like debentures, bonds and preference shares and

· Those which do not carry any fixed charges like equity shares

Debentures and bonds carry a fixed rate of interest and have to be paid off irrespective of the firm’s revenues. Though dividends are not contractual obligations, dividend on preference shares is a fixed charge and should be paid off before equity shareholders are paid any. The equity holders are entitled to only the residual income of the firm after all prior obligations are met.

Financial leverage refers to the mix of debt and equity in the capital structure of the firm. This results from the presence of fixed financial charges in the company’s income stream. Such expenses have nothing to do with the firm’s performance and earnings and should be paid off regardless of the amount of earnings before income and tax (EBIT).

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It is the firm’s ability to use fixed financial charges to increase the effects of changes in EBIT on the EPS. It is the use of funds obtained at fixed costs which increase the returns on shareholders.

A company earning more by the use of assets funded by fixed sources is said to be having a favourable or positive leverage. Un-favourable leverage occurs when the firm is not earning sufficiently to cover the cost of funds. Financial leverage is also referred to as “Trading on Equity”.

Q.2 a. Write the features of interim divined and also write the factors Influencing divined policy? b. What is reorder level ?

A dividend declared before a firm's annual earnings and dividend-paying ability are accurately known by its management. An interim dividend is ordinarily paid in each of the first three quarters of the fiscal year. These payments are followed by a final dividend at the time that earnings can be accurately determined.

Dividend to be deposited in a separate bank account — S. 205(1A) :

Ss.(1A) of S. 205 provides that the Board of directors may declare interim dividend. In the case of interim dividend there is no declaration of dividend, but there is payment of dividend by the Board without its declaration. Hence the word ‘declare’ may in the context be construed as ‘pay’ giving thereby statutory sanction to the payment of interim dividend as provided in Regulation 86 of Table A. The sub-section further provides that the amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of declaration of ‘such dividend’ i.e., dividend including interim dividend referred to in the earlier part of the sub-section. Both the final dividend and the interim dividend are to be deposited in a separate bank account within the period afore-said. Ramaiya’s observation that “the interim dividend shall be deposited in a separate bank account” (Ramaiya’s Guide to the Companies Act, 15th edition, p. 1789) is not correct and needs revision.

As the interim dividend is paid by the Board without any declaration of dividend, it may be deposited in a separate bank account within five days from the date on which the Board resolves to pay such dividend. The Board has no doubt the power to rescind the resolution before such dividend is paid. In such case the provision regarding the deposit of such dividend in a separate bank account would become ineffective or otiose in law. Further since ‘dividend’ as defined by S. 2(14A) includes interim dividend, the expression ‘including interim dividend’ after the word ‘dividend’ used in Ss.(1A) as well as Ss.(1B) seems unnecessary.

Ss.(1A) of S. 205 is not happily worded and needs amendment to bring out clearly the intent of Government in the matter.

Payment of dividend out of amount deposited — S. 205(1B) :

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Ss.(1B) of S. 205 provides that the amount of dividend includ-ing interim dividend so deposited U/ss.(1A) shall be used for payment of interim dividend. The amount of the final dividend and the interim dividend are to be used for payment of such dividend. The expression ‘interim dividend’ used at the end of the sub-section is obviously an inadvertent error. Having regard to the intention of Parliament the said expression should be read as ‘such dividend’, i.e., the final dividend or the interim dividend, as the case may be. This is permissible in view of the well accepted rule of con-struction of statutes enunciated by Denning L J in Seaford Courts Estates Ltd. v. Asher, (1949) 2 All E.R. 155, 154 (CA), namely, that “A judge should not alter the material of which the Act is woven, but he can and should iron out the creases.”

Provisions applicable to interim dividend — S. 205(2C) :

Ss.(1C) of S. 205 provides that the provisions contained in S. 205, S. 205A, S. 205C, S. 206, S. 206A and S. 207 shall, as far as may be, also apply to any interim dividend. These Sections are to be applied to interim dividend, so far as they may be applicable or relevant for the purpose. Each and every provision contained in these Sections would not be applicable to interim dividends since final dividend and interim dividend have distinct features and powers for the purpose are vested in different authorities.

Dividend to be paid within 30 days — S. 205A(1) :

S. 205A(1) provides for the payment of dividend declared by a company within thirty days from the date of declaration. This provision is applicable to the final dividend declared by the company in general meeting. It is difficult to apply this provision in the case of the interim dividend, where payment of the dividend is made without its declaration. However, in view of the definition of ‘dividend’ contained in S. 2(14A) as well as S. 205(1C) provisions of S. 205A should be construed as applicable to interim dividend as well. Interim dividend should be paid within 30 days from the date of the Board’s resolution authorising payment of such dividend. Dividend is to be paid only to the registered holder of shares or to his order or to his bankers as provided in S. 206(1)(a). Unpaid or unclaimed dividend, whether final or interim, must be transferred to the Unpaid Dividend Account of the company within seven days from the expiry of 30 days from the date of declaration of the dividend as provided in S. 205A(1). Before the expiry of the said period, the Board may rescind the resolution for payment of interim dividend. In such a case the question of transfer of the unpaid or unclaimed interim dividend to the Unpaid Dividend Account would not arise.

Clause 16 of the Listing Agreement needs amendment :

Clause 16 of the Listing Agreement requires a listed company (a company listed on a stock exchange) to give 42 days’ notice to the stock exchange for fixing the record date or for the book closure. This can be done when the actual date of dividend proposed to be declared is made known as required by stock exchange regulations. In respect of shares held in the demat form the stock exchange requires 30 days’ notice for purposes aforesaid. For these purposes stock exchanges may be required to agree to notice of a shorter period.

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Clause 16 requires to be duly amended by reducing the period of notice of book closure from 42 days to a shorter period. The matter needs to be taken up by the Department with the Securities and Exchange Board of India for necessary action.

Penalty for failure to distribute dividend within thirty days :

S. 207 provides for penalty for default to distribute dividend within thirty days from the date of declaration. Besides imprison-ment for a term upto three years and a fine of Rs.1000/- for every day during which the default continues, the company is liable to pay interest at the rate of 18% per annum during the period for which such default continues. Such interest must enure to the benefit of the members of the company. See in this connection the provision contained in S. 205A(4) regarding default in transferring unpaid dividend to the unpaid dividend account of the company.

Tax on interim dividend :

A mere resolution of the Board of directors to pay a certain amount as interim dividend does not create a debt enforce-able against the company. Interim dividend is taxable as the income of the year in which the dividend warrant is actually issued. S. 205(1A) authorises the Board of directors to declare interim dividend and not to pay interim dividend as provided in Regulation 86 of Table A. How-ever, that makes no difference in the true character of the right arising in favour of the shareholders of the company on the exercise of the power by the Board. [J. Dalmia v. CIT, (1964) 43 ITR 83, 87 (SC). See also Potel v. IRC, (1971) 46 T.C. 658, 667; CIT v. Godfrey Philips, (1986) 161 ITR 684]. The above principle is now given statutory effect by clause (b) of S. 8 of the Income-tax Act, 1961, which makes interim dividend taxable as the income of the year in which it is ‘unconditionally made available’ (i.e. paid) to the shareholder. Dividend is taxable in the hands of the share-holder as recipient subject to deduction u/s.80L upto the ceiling of Rs.9,000/-. With effect from 1-6-2002 tax on dividend is required to be deducted at source. No deduction shall, however, be made in the case of a shareholder, being an individual, if the amount of such dividend distributed or paid during the financial year by the company to the shareholder does not exceed Rs.1,000/-. [S. 194].

The factors influencing the dividend policy are:

1. Stability of Earnings. The nature of business has an important bearing on the dividend policy. Industrial units having stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their savings and earnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods.

2. Age of corporation. Age of the corporation counts much in deciding the dividend policy. A newly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy while, on the other hand, an older company can formulate a clear cut and more consistent policy regarding dividend.

3. Liquidity of Funds. Availability of cash and sound financial position is also an important factor in dividend decisions. A dividend represents a cash outflow, the greater the funds and

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the liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of expansion and the manner of financing. If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend.

4. Extent of share Distribution. Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group, would face a great difficulty in securing such assent because they will emphasise to distribute higher dividend.

5. Needs for Additional Capital. Companies retain a part of their profits for strengthening their financial position. The income may be conserved for meeting the increased requirements of working capital or of future expansion. Small companies usually find difficulties in raising finance for their needs of increased working capital for expansion programmes. They having no other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at low rates and retain a big part of profits.

6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend policy is adjusted according to the business oscillations. During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves have been built up.

7. Government Policies. The earnings capacity of the enterprise is widely affected by the change in fiscal, industrial, labour, control and other government policies. Sometimes government restricts the distribution of dividend beyond a certain percentage in a particular industry or in all spheres of business activity as was done in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises.

8. Taxation Policy. High taxation reduces the earnings of he companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond 10 % of paid-up capital are subject to dividend tax at 7.5 %.

9. Legal Requirements. In deciding on the dividend, the directors take the legal requirements too into consideration. In order to protect the interests of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. Moreover, a company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. It proposes that Dividend should not be distributed out of capita, in any case. Likewise, contractual obligation should also be fulfilled, for example, payment of dividend on preference shares in priority over ordinary dividend.

10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep in mind the dividend paid in past years. The current rate should be around the average past rat. If it has been abnormally increased the shares will be subjected to speculation. In a new concern, the company should consider the dividend policy of the rival organisation.

11. Ability to Borrow. Well established and large firms have better access to the capital market than the new Companies and may borrow funds from the external sources if there

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arises any need. Such Companies may have a better dividend pay-out ratio. Whereas smaller firms have to depend on their internal sources and therefore they will have to built up good reserves by reducing the dividend pay out ratio for meeting any obligation requiring heavy funds.

12. Policy of Control. Policy of control is another determining factor is so far as dividends are concerned. If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders they fear dilution of control and diversion of policies and programmes of the existing management. So they prefer to meet the needs through retained earing. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy.

13. Repayments of Loan. A company having loan indebtedness are vowed to a high rate of retention earnings, unless one other arrangements are made for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout.

14. Time for Payment of Dividend. When should the dividend be paid is another consideration. Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a time when is least needed by the company because there are peak times as well as lean periods of expenditure. Wise management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the undertaking is already in need of urgent finances.

15. Regularity and stability in Dividend Payment. Dividends should be paid regularly because each investor is interested in the regular payment of dividend. The management should, inspite of regular payment of dividend, consider that the rate of dividend should be all the most constant. For this purpose sometimes companies maintain dividend equalization Fund.

Reorder Level

This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out.

The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity plus the safety stock quantity.

Formula of Re-order Level or Ordering Point:

The following two formulas are used for the calculation of reorder level or point.

[ Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time ]

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The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided. When safety stock is provided then the following formula will be applicable:

[ Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time + Safety stock ]

Examples:

Example 1:

Minimum daily requirement 800 unitsTime required to receive emergency supplies 4 daysAverage daily requirement 700 unitsMinimum daily requirement 600 unitsTime required for refresh supplies One month (30 days)

Calculate ordering point or re-order level

Calculation:

Ordering point = Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time

= 800 × 30

= 24,000 units

Example 2:

Tow types of materials are used as follows:

Minimum usage

20 units per week each

Maximum usage 40 units per week eachNormal usage 60 units per week eachRe-order period or Lead timeMaterial A:Material B3 to 5 weeks2 to 4 weeks

Calculate re order point for two types of materials

Calculation:

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Maximum re-order period

A: 60 × 5 = 300 unitsB: 60 × 4 = 240 units

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Q.3 Sales Rs.400, 000 less returns Rs 10, 000, Cost of Goods Sold Rs 300,000, Administration and selling expenses Rs.20, 000, Interest on loans Rs.5000, Income tax Rs.10000, preference dividend Rs. 15,000, Equity Share Capital Rs.100, 000 @Rs. 10 per share. Find EPS?

Ans:-

Sales 400,000

Less Returns 10,000 390,000

Less

COGS 30,000

S&A 20,000

Int on Loan 5,000

IT 10,000 325,000

Div 15,000

ESC 100,000 @ 10/-

NPAT - Pref Share Div

No of Shares

NPAT 55,000

less Pref Share Div 15,000 40,000

EPS 40,000 = Rs.4/-

10,000

Q.4 What are the techniques of evaluation of investment?

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Steps involved in the evaluation of any investment proposal are:

· Estimation of cash flows both inflows and outflows occurring at different stages of project life cycle

· Examination of the risk profile of the project to be taken up and arriving at the required rate of return

· Formulation of the decision criteria

8.8.1 Estimation of cash flows

Estimating the cash flows associated with the project under consideration is the most difficult and crucial step in the evaluation of an investment proposal. Estimation is the result of the team work of many professionals in an organisation.

· Capital outlays are estimated by engineering departments after examining all aspects of production process

· Marketing department on the basis of market survey forecasts the expected sales revenue during the period of accrual of benefits from project executions

· Operating costs are estimated by cost accountants and production engineers

· Incremental cash flows and cash out flow statement is prepared by the cost accountant on the basis of the details generated in the above steps

The ability of the firm to forecast the cash flows with reasonable accuracy lies at the root of the success of the implementation of any capital expenditure decision.

8.8.2 Estimation of incremental cash flows

Investment (capital budgeting) decision requires the estimation of incremental cash flow stream over the life of the investment. Incremental cash flows are estimated on tax basis.

Incremental cash flows stream of a capital expenditure decision has three components.

· Initial cash outlay (Initial investment)

Initial cash outlay to be incurred is determined after considering any post tax cash inflows. In replacement decisions existing old machinery is disposed of and a new machinery incorporating the latest technology is installed in its place.

On disposal of existing old machinery the firm has a cash inflow. This cash inflow has to be computed on post tax basis. The net cash out flow (total cash required for investment in capital assets minus post tax cash inflow on disposal of the old machinery being replaced by a new one) therefore is the incremental cash outflow. Additional net working capital required on implementation of new project is to be added to initial investment.

· Operating cash inflows

Operating cash inflows are estimated for the entire economic life of investment (project). Operating cash inflows constitute a stream of inflows and outflows over the life of the project.

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Here also incremental inflows and outflows attributable to operating activities are considered. Any savings in cost on installation of a new machinery in the place of the old machinery will have to be accounted on post tax basis. In this connection incremental cash flows refer to the change in cash flows on implementation of a new proposal over the existing positions.

· Terminal cash inflows

At the end of the economic life of the project, the operating assets installed will be disposed off. It is normally known as salvage value of equipments. This terminal cash inflows are computed on post tax basis.

Prof. Prasanna Chandra in his book Financial Management (Tata McGraw Hill, published in 2007) has identified certain basic principles of cash flow estimation. The knowledge of these principles will help a student in understanding the basics of computing incremental cash flows.

The basic principles of cash flow estimation, by Prof. Prasanna Chandra, are (see figure 8.2) – Separation principle, Increment principle, Post-tax principle and Consistency principle.

Figure 8.2: Principles of Prof. Prasanna Chandra

Separation principle

The essence of this principle is the necessity to treat investment element of the project separately (i.e. independently) from that of financing element. The financing cost is computed by the cost of capital. Cost of capital is the cut off rate and rate of return expected on implementation of the project. Therefore, we compute separately cost of funds for execution of project through the financing mode. The rate of return expected on implementation if the project is arrived at by the investment profile of the projects. Therefore, interest on debt is ignored while arriving at operating cash inflows.

The following formula is used to calculate profit after tax

EBIT = earnings (profit) before interest and taxes

t = tax rate

Incremental principle

Incremental principle says that the cash flows of a project are to be considered in incremental terms. Incremental cash flows are the changes in the firms total cash flows arising directly from the implementation of the project. Keep the following in mind while determining incremental cash flows.

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· Ignore sunk costs

Sunk costs are costs that cannot be recovered once they have been incurred. Therefore, sunk costs are ignored when the decisions on project under consideration is to be taken.

· Opportunity costs

If the firm already owns an asset or a resource which could be used in the execution of the project under consideration, the asset or resource has an opportunity cost. The opportunity cost of such resources will have to be taken into account in the evaluation of the project for acceptance or rejection.

Q.5 What are the problems associated with inadequate working capital?

Ans:- Working capital may be regarded as the life blood of business. Working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business. Every business needs funds for two purposes.

Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc

Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. . It is otherwise known as revolving or circulating capital

It is nothing but the difference between current assets and current liabilities. i.e. Working Capital = Current Asset – Current Liability.

Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on a piece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access to more working capital when we need it.

Importance of Adequate Working Capital

A business firm must maintain an adequate level of working capital in order to run its business smoothly. It is worthy to note that both excessive and inadequate working capital positions are harmful. Working capital is just like the heart of business. If it becomes weak,

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the business can hardly prosper and survive. No business can run successfully without an adequate amount of working capital.

Danger of inadequate working capital

When working capital is inadequate, a firm faces the following problems.

Fixed Assets cannot efficiently and effectively be utilized on account of lack of sufficient working capital. Low liquidity position may lead to liquidation of firm. When a firm is unable to meets its debts at maturity, there is an unsound position. Credit worthiness of the firm may be damaged because of lack of liquidity. Thus it will lose its reputation. There by, a firm may not be able to get credit facilities. It may not be able to take advantages of cash discount.

Disadvantages of Redundant or Excessive Working Capital

1. Excessive Working Capital means ideal funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments.

2. When there is a redundant working capital, it may lead to unnecessary purchasing and

Accumulation of inventories causing more chances of theft, waste and losses.

3. Excessive working capital implies excessive debtors and defective credit policy which

May cause higher incidence of bad debts.

4. It may result into overall inefficiency in the organization.

5. When there is excessive working capital, relations with banks and other financial

institutions may not be maintained.

6. Due to low rate of return on investments, the value of shares may also fall.

7. The redundant working capital gives rise to speculative transactions.

Disadvantages or Dangers of Inadequate Working Capital

1. A concern which has inadequate working capital cannot pay its short-term liabilities

in time. Thus, it will lose its reputation and shall not be able to get good credit facilities.

2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.

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3. It becomes difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital.

4. The firm cannot pay day-to-day expenses of its operations and its creates inefficiencies, increases costs and reduces the profits of the business.

5. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds.

6. The rate of return on investments also falls with the shortage of working capital.

Disadvantages or Dangers of Inadequate or Short Working Capital

1. Can’t pay off its short-term liabilities in time. 2. Economies of scale are not possible.3. Difficult for the firm to exploit favorable market situations 4. Day-to-day liquidity worsens5. Improper utilization the fixed assets and ROA/ROI falls sharply

Q.6 What is leverage? Compare and Contrast between operating leverage and financial leverage?

Ans:- A company uses different sources of financing to fund its activities. These sources can be classified as those which carry a fixed rate of return and those whose returns vary. The fixed sources of finance have a bearing on the return on shareholders. Borrowing funds as loans have an impact on the return on shareholders and this is greatly affected by the magnitude of borrowing in the capital structure of a firm.

Leverage is the influence of power to achieve something. The use of an asset or source of funds for which the company has to pay a fixed cost or fixed return is termed as leverage. Leverage is the influence of an independent financial variable on a dependent variable. It studies how the dependent variable responds to a particular change in independent variable.

Operating Leverage Operating leverage arises due to the presence of fixed operating expenses in the firm’s income flows. A company’s operating costs can be categorised into three main sections as shown in figure 6.2 – fixed costs, variable costs and semi-variable costs.

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Figure 6.2: Classification of operating costs

Fixed costs

Fixed costs are those which do not vary with an increase in production or sales activities for a particular period of time. These are incurred irrespective of the income and value of sales and generally cannot be reduced. Financial Management Unit 6 Sikkim Manipal University Page No. 108

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For example, consider that a firm named XYZ enterprises is planning to start a new business. The main aspects that the firm should concentrate at are salaries to the employees, rents, insurance of the firm and the accountancy costs. All these aspects relate to or are referred to as ―fixed costs‖.

Variable costs

Variable costs are those which vary in direct proportion to output and sales. An increase or decrease in production or sales activities will have a direct effect on such types of costs incurred. For example, we have discussed about fixed costs in the above context. Now, the firm has to concentrate on some other features like cost of labour, amount of raw material and the administrative expenses. All these features relate to or are referred to as ―Variable costs‖, as these costs are not fixed and keep changing depending upon the conditions.

Semi-variable costs

Semi-variable costs are those which are partly fixed and partly variable in nature. These costs are typically of fixed nature up to a certain level beyond which they vary with the firm’s activities. For example, after considering both the fixed costs and the variable costs, the firm should concentrate on some-other features like production cost and the wages paid to the workers which act at some point of time as fixed costs and can also shift to variable costs. These features relate to or are referred to as ―Semi-variable costs‖.

The operating leverage is the firm’s ability to use fixed operating costs to increase the effects of changes in sales on its earnings before interest and taxes (EBIT). Operating leverage occurs any time a firm has fixed costs. The percentage change in profits with a change in volume of sales is more than the percentage change in volume.

As operating leverage can be favourable or unfavourable, high risks are attached to higher degrees of leverage. As DOL considers fixed expenses, a larger amount of these expenses increases the operating risks of the company and hence a higher degree of operating leverage. Higher operating risks can be taken when income levels of companies are rising and should not be ventured into when revenues move southwards.

Application of Operating Leverage The applications of operating leverage are as follows: Business risk measurement

Production planning

Measurement of business risk

Risk refers to the uncertain conditions in which a company performs. A business risk is measured using the degree of operating leverage (DOL) and the formula of DOL is: DOL = Q(S–V) / Q(S–V)–F Greater the DOL, more sensitive is the earnings before interest and tax (EBIT) to a given change in unit sales. A high DOL is a measure of high business risk and vice versa. Production planning

A change in production method increases or decreases DOL. A firm can change its cost structure by mechanising its operations, thereby reducing its variable costs and increasing its fixed costs. This will have a positive impact on DOL. This situation can be justified only if

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the company is confident of achieving a higher amount of sales thereby increasing its earnings.

Financial Leverage

Financial leverage as opposed to operating leverage relates to the financing activities of a firm and measures the effect of earnings before interest and tax (EBIT) on earnings per share (EPS) of the company. A company’s sources of funds fall under two categories – Those which carry a fixed financial charges like debentures, bonds and preference shares and

Those which do not carry any fixed charges like equity shares

Debentures and bonds carry a fixed rate of interest and have to be paid off irrespective of the firm’s revenues. Though dividends are not contractual obligations, dividend on preference shares is a fixed charge and should be paid off before equity shareholders are paid any. The equity holders are entitled to only the residual income of the firm after all prior obligations are met.

Financial leverage refers to the mix of debt and equity in the capital structure of the firm. This results from the presence of fixed financial charges in the company’s income stream. Such expenses have nothing to do with the firm’s performance and earnings and should be paid off regardless of the amount of earnings before income and tax (EBIT).

It is the firm’s ability to use fixed financial charges to increase the effects of changes in EBIT on the EPS. It is the use of funds obtained at fixed costs which increase the returns on shareholders.

A company earning more by the use of assets funded by fixed sources is said to be having a favourable or positive leverage. Unfavourable leverage occurs when the firm is not earning sufficiently to cover the cost of funds. Financial leverage is also referred to as “Trading on Equity”.

This example shows that the presence of fixed interest source funds leads to a value more than that occurs due to proportional change in EPS. The presence of such fixed sources implies the presence of financial leverage. This can be expressed in a different way. The degree of financial leverage (DFL) is a more precise measurement. It examines the effect of the fixed sources of funds on EPS. DFL = %change in EPS %change in EBIT DFL=ΔEPS/EPS ÷ ΔEBIT/EBIT Or DFL = EBIT ÷ EBIT—I—Dp/(1-T)

I is Interest, Dp is dividend on preference shares, T is tax rate.

Use of Financial Leverage

Studying the degree of financial leverage (DFL) at various levels makes financial decision-making, on the use of fixed sources of funds, for funding activities easy. One can assess the impact of change in earnings before interest and tax (EBIT) on earnings per share (EPS).

Like operating leverage, the risks are high at high degrees of financial leverage (DFL). High financial costs are associated with high DFL. An increase in financial costs implies higher level of EBIT to meet the necessary financial commitmen

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A firm which is not capable of honouring its financial commitments may be forced to go into liquidation by the lenders of funds. The existence of the firm is shaky under these circumstances. On one side the trading on equity improves considerably by the use of borrowed funds and on the other hand, the firm has to constantly work towards higher EBIT to stay alive in the business. All these factors should be considered while formulating the firm’s mix of sources of funds. One main goal of financial planning is to devise a capital structure in order to provide a high return to equity holders. But at the same time, this should not be done with heavy debt financing which drives the company on to the brink of winding up.

Impact of financial leverage

Highly leveraged firms are considered very risky and lenders and creditors may refuse to lend them further to fuel their expansion activities. On being forced to continue lending, they may do so with their own conditions like earning a minimum of X% EBIT or stipulating higher interest rates than the market rates or no further mortgage of securities.

Financial leverage is considered to be favorable till such time that the rate of return exceeds the rate of return obtained when no debt is used.

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MB0046 – Marketing management - 4 Credits

Assignment Set- 2

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Note: Each question carries 10 Marks. Answer all the questions.

Q. 1 Highlight the importance of Distribution channel and marketing intermediaries in carrying out the marketing function

Q. 2 a. Explain the different product mix pricing strategies. b. Give a note on marketing concepts.

Q. 3 a. What are the features of business markets? b. Write a short note on product line and product mix.

Q. 4 a. Select any deodorant brand and evaluate its positioning strengths or weakness in terms of attributes, benefits, values, brand name and brand equity. b. You are a research expert in the field of marketing footwear products. What are the

various research approaches you would consider before making a consumer survey regarding footwear?

Q. 5 a. What advice would you give a company that has facing bad publicity? What steps would you tell the company to improve its reputation? b. As a brand manager, what are the ways in which you will select a brand name for

your product- watches and how will you position it in the market?

Q. 6 a. What is MIS? What are its benefits? b. How is rural marketing different from urban markets?

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Q1. Highlight the importance of Distribution channel and marketing intermediaries in carrying out the marketing function?

Ans:- The delivery of goods and services from producers to their ultimate consumers or users includes many different activities. These different activities are known as marketing functions. Different thinkers have described these functions in different ways. Some of the most important functions of marketing are briefly discussed below:

1. Marketing Research and Information Management

Marketers need to take decisions scientifically. Marketing research function is concerned with gathering, analyzing and interpreting data in a systematic and scientific manner. The types of market information could be analysis of market size and characteristics, consumer tastes and preferences and changes in them from time to time, channels of distribution and communication and their effectiveness, economic, social, political and technological environment and changes therein. A company can procure such information from specialized market research agencies, government or can decide to collect themselves.

2. Advertising and Sales Promotion – Advertising is a mass media tool used to inform, persuade or remind customers about products or services. It is an impersonal form of communication targeted at a chosen group through paid space or time.

Sales Promotion is a short-term incentive given to customers or intermediaries to promote sales. It supplements advertising and personal selling and can be used at the time of launching a new product or even during its maturity period.

3. Product Planning and Management – A Marketer should identify the needs and wants of consumers, develop suitable products / services and make them available. Marketer is also required to maintain the product and its variations in size, weight, package and price range according to the changing needs and requirements of his customers. Information available through Market Research helps product management in taking appropriate decisions while planning the marketing efforts.

4. Selling – This function of marketing is concerned with transferring of products to the customer. An important part of this function is organizing sales force and managing their activities. Sales force management includes recruitment, training, supervision, compensation and evaluation of salesmen. They need to be assigned targets and territories where they can operate. The salesmen interact with prospective purchasers face-to-face in order to sell the goods. The purchaser may be end customer or an intermediary, such as a retailer or a dealer.

5. Physical Distribution – Moving and handling of products from factory to consumers come under this function. Order processing, inventory, management, warehousing and transportation are the key activities in the physical distribution system.

6. Pricing – This is perhaps the most important decision taken by marketer, as it is the only revenue fetching function and success and failure of the product may depend upon this decision. Therefore, the decision regarding how much to charge should be taken such that the price is acceptable to the prospective buyers and at the same time fetches profits for the company. While deciding on the price, the factors to be considered are competition, competitive prices, company’s marketing policy, government policy, and the buying capacity of target market etc.

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Importance of marketing intermediaries

These are firms which distribute and sell the goods of the company to the consumer.

Marketing intermediaries play an important role in the distribution, selling and promoting the goods and services. Stocking and delivering, bulk breaking, and selling the goods and services to customer are some of the major functions carried out by the middlemen. Retailers, wholesalers, agents, brokers, jobbers and carry forward agents are few of the intermediaries. Retailers are final link between the company and the customers. Their role in the marketing of product is increasing every day.

Q.2 a. Explain the different product mix pricing strategies?

Product Mix Pricing Strategies

Ans:- 1. Product Line pricing: Strategy of setting the price for entire product line. Marketer differentiates the price according to the range of products, i.e. suppose the company is having three products in low, middle and high end segment and prices the three products say at Rs 10 Rs 20 and Rs 30 respectively.

Figure

In the above example of Nokia mobile phones Nokia 1110 is priced @ Rs 1349, Nokia 7610 priced @ Rs 6249 and Nokia E90 priced @ Rs 34599. All the three products cater to the different segments – low, middle and high income group respectively. The three levels of differentiation create three price points in the mind of consumer. The task of marketer is to establish the perceived quality among the three segments. If the customers do not find much difference between the three brands, he/she may opt for low end products.

2. Optional Product pricing: this strategy is used to set the price of optional or accessory products along with a main product.

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Body cover Rs 1521

Slide Molding Rs 1123

Rear underbody Rs 8883

Roof End Rs 6396

Maruti Suzuki will not add above accessories to its product Swift but all these are optional. Customer has to pay different prices as mentioned in the picture for different products. Organizations separate these products from main product so that customer should not perceive products are costly. Once the customer comes to the show room, organization explains the advantages of buying these accessory products.

3. Captive product pricing: Setting a price for a product that must be used along with a main product. For example, Gillette sells low priced razors but make money on the replacement cartridges.

4. By-product pricing: It is determining the price for by-products in order to make the main product’s price more attractive. For example, L.T. Overseas, manufacturers of Dawaat basmati rice, found that processing of rice results in two by-products i.e. rice husk and rice brain oil. If the company sells husk and brain oil to other consumers, then company is adopting by-product pricing.

5. Product bundle pricing: It is offering companies several products together as a bundle at the reduced price. This strategy helps companies to generate more volume, get rid of the unused products and attract the price conscious consumer. This also helps in locking the customer from purchasing the competitors’ products. For example, Anchor toothpaste and brush are offered together at lower prices.

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Q 2 b. Give a note on marketing concepts?

Ans:- The Marketing Concept – The Marketing Concept proposes that a company’s task is to create, communicate and deliver a better value proposition through its marketing offer, in comparison to its competitors; to its target segment and that this customer oriented approach only can lead to success in the market place.

Today, marketing function is seen as one of the most important functions in the organization. Many marketers put the customers at the centre of the company and argue in favor of such a customer orientation, where all functions work together to respond, serve and satisfy the customer.

Many successful and well known multinational companies have adopted marketing concept as their business and marketing philosophies. Many Indian companies in the banking and other service sectors follow customer orientation and service as their motto. According to this concept, a company’s marketing effort must start right from identifying, through Market Research, exact needs and wants of the target market.

Q.3 a. What are the features of business markets?

Ans:- Features or Characteristics of Business Markets

Following are some of the unique features of business markets where large establishments purchase the required goods and services from other businesses. Such B2B operations determine the organizations as buyers and those organizations who supply the various requirements will be the sellers or suppliers or service providers.

1. Few but bulk Buyers: The no. of buyers is few but they buy in large quantity. For example, major airlines buy the necessary equipments from the aircraft manufacturers

2. Geographical concentration of buyers: Buyers are geographically concentrated. For example, shipping industries are located on the east and west coasts of India than in any other places.

3. Variable demand: The nature of demand is fluctuating because the demand is basically a derived one. Based on the requirements of the consumer markets, organizations buy the goods and make the finished goods available in the market for final consumption. Larger the consumer demand, larger will be the organizational buying. For example, mobiles are being used by a large population and so cellular companies have to meet this rising demand.

4. Inelastic demand: The demand is also inelastic because organizations cannot make rapid changes in the production structure and so prices remain constant in the short-term. For example, Shoe manufacturers will not buy much leather if the price of leather is less neither will they buy less leather if the price increases.

5. Systematic purchasing: The purchasing activity is directly between the buyer and supplier organization which means there are no or very few middlemen involved. Purchasing activity is usually undertaken by purchase departments based on a proper structure and

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through various mechanisms like having purchase requisitions from other sections, inviting tenders and sending invoices from the suppliers, purchasing agreements or contracts with the key suppliers, renewing agreements etc. For example, Reliance Fresh has regular contracts with the agricultural producers for smooth supply of fresh fruits and vegetables.

6. Multiple buying influences: there will be several parties involved in deciding about the purchases because organizations will have several departments and units functioning under it with different requirements. So, unless they have the proper resources to work with there will be problems in the departments. For example, purchase department in a Hospital must be aware about the specific requirements in the clinical wards, operation theaters, labs, etc.

7. Reciprocation: This means that when an organization buys goods from another organization then the supplier organization also might need certain other goods that are produced by the buyer organization. For example, a stationery supplier will supply the necessary stationeries to the paper manufacturer who in turn provides papers to the supplier.

8. Lease agreements: Most organizations take on lease the expensive equipments required by them rather than buy it. So, in this way, they reduce cost, get better service and the lessor or one who provides the equipments will also profit from the rent or lease charges. For example, TATA provides the transport trucks to other organizations on lease.

Q.3 b. Write a short note on product line and product mix?

Ans:- Product line: The group of related products which uses same marketing efforts to reach the consumer.

The product line identifies profitable and unprofitable products and helps in allocation of resources according to that. The product line understanding helps the marketer to take line extension, line pruning and line filling strategies of the company.

Pidilite Industries, the adhesives and chemical company, have the following group of related products (or product lines) in consumer and business markets.

Consumer market.

1. Adhesives and sealants.2. Art materials and stationeries.3. Construction chemicals.4. Automotive chemicals5. Fabric care

Business market

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1. Industrial adhesives.2. Textile chemicals.3. Organic pigment powders.4. Industrial resins and 5. Leather chemicals.

Product Line Decisions:

The major product line decisions area. Product line length b. Product line stretchingc. Product line fillingd. Product line pruning

a. Product line length: The number of items in the product line is called the product line length. Company should decide whether it requires longer chain or shorter length. The decision depends upon the objective of the company, competitive environment and profitability. If the chain is short company can add new products and if it is lengthy company can reduce the number of products. For example, Pidilite’s adhesives and sealants line has following 11 items in the product line. Hence the length of product line is 11

1. White Glue 2. Paper Glue 3. Glue Stick 4. Instant Adhesive 5. Epoxy Putty 6. Epoxy Adhesive 7. PVC Insulation Tape 8. Silicone Sealants 9. Contact Glue 10. All Purpose Glue 11. Maintenance Spray

b. Product line stretching: Company lengthens its product line either by stretching upwards or downwards or both ways. Line stretching decision depends on three situations -

i. Company which operates in high end market may come up with mid class or low class targeted products.

ii. The company which operates in lower end of market may come up with high end market products.

iii. If the company operates in mid segment and comes out with low end product as well as high end product then it is stretching both ways.

For example, Maruti Suzuki Limited launched its first product, Maruti 800 in the year 1983 and in the year 1985 it launched Maruti Gypsy. Gypsy is costlier than Maruti 800 and targeted for higher segment. This shows that the company extended its product line upwards or in short, upward stretch.

Tata Motors launched their Rs 1 lakh car NANO in the year 2008. The company which was targeting upper class and middle class with their products SUMO and Indica respectively, has stretched downwards to reach the lower level segment. This illustrates the downward stretch.

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Toyota Kirloskar Limited which extended their line from Qualis and Corolla to Innova and Camry is planning to come out with small car in India. This clearly illustrates the two way stretch of the product line.

c. Product line filling: Adding more items in the present product line. For example, in the year 2000 Maruti Suzuki launched Alto. This product was between Maruti 800 and Maruti Zen. Here company was trying to fill the gap existing in the segment by introducing ALTO, i.e. line filling.

d. Product line pruning: Removing the unprofitable products form the product line. Toyota Kirloskar phased out their well known brand Qualis when they thought the brand was not adding value to the product line.

Product Mix

Product mix: The number of product lines and items offered by marketer to the consumers

A company’s product mix has four different dimensions. They are product mix width, product mix length, product mix depth and product mix consistency.

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The following shows the product mix of Jyothy Laboratories:

Fabric care House hold insecticide

Utensil cleaners

Fragrances Personal care

Allied business

Ujala supreme

(9ml, 30ml, 75ml, 125ml,250ml)

Maxo cyclothrin coil

(8hr, 10hr, 12hr)

Exo dish wash bar

(100g, 200g 380g)

Maya

(8, 15, 20, 40 and 100 sticks.)

Jeeva Natural

(Coconut Milk with Milk Protein, Coconut Milk with Jasmine and Coconut Milk with Kasturi Manjal, and is presented in 75gm packs. )

Continental special

Ujala washing powder

(25g, 500g, 1Kg)

Max vaporizer

(30ml, 45ml)

Exo dish wash liquid

(500ml, 125ml)

Marketing of godrej Tea

Stiff & shine

(20gm sachets, 100ml and 200ml bottles)

Max aerosol

(150ml,300ml)

Marketing of Ekta dhoop

Product mix width: The total number of product lines that company offers to the consumers.

For example, Jyothy Laboratories’ product mix has six lines. Hence the width is 6

Product mix length: The total number of items that company carries within its product line.

For example, Jyothy Laboratories fabric care division has three items

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Product line depth: The number of versions offered of each product in the line.

For example, Jyothy Laboratories’ Jeeva Natural is offered in three versions i.e. Coconut Milk with Milk Protein, Coconut Milk with Jasmine and Coconut Milk with Kasturi Manjal, and is presented in 75gm packs.

Product mix consistency: If company’s product lines usage, production and marketing are related, then product mix is consistent, else it is unrelated.

In the case of Jyothy Laboratories, all six product lines are FMCGs. Hence it is having consistent product mix. But ITC Company’s cigarette and cloth product lines are totally unrelated.

Q.4. a. Select any deodorant brand and evaluate its positioning strengths or weakness in terms of attributes, benefits, values, brand name and brand equity?

Ans:- Brand Name

A name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers’.

The legal term for brand is trademark. A brand may identify one item, a family of items, or all items of that seller. If used for the firm as a whole, the preferred term is trade name

Brand name: Axe

Axe was launched in France in 1983 by Unilever. It was inspired by another of Unilever's brands, Impulse.

Unilever were keen to capitalize on Axe's French success and the rest of Europe from 1985 onwards, later introducing the other products in the range. Unilever were unable to use the

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name Axe in the United Kingdom and Ireland due to trademark problems so it was launched as Lynx

Although Axe's lead product is the fragranced aerosol deodorant body spray, other formats of the brand exist. Within underarm care the following are available: deodorant aerosol body spray, deodorant stick, deodorant roll-on, anti-perspirant aerosol spray (called Axe Dry), and anti-perspirant stick (also called Axe Dry).

The attribute of the brand that customer associates with his/ her belief. A person may associate the brand for power, strength or protectiveness. For example, a customer may associate Axe brand not just for perfumes but also any accessory associated with perfumes such as Shampoos etc. So, for him, Axe represents perfume.

Brand Equity

Brand equity is set of assets linked to a brand‘s name and symbol that adds value to the product or service and/or that firm’s customer.

Components of brand equity:

1. Brand loyalty: From its launch (Axe), the yearly fragrance variant has played a key part in the success of the brand by offering something new each year.

2. Brand awareness: The type of fragrance (Axe) variants have evolved over time. From 1983 until about 1989, the variant names were descriptions of the fragrances and included Musk, Spice, Amber, Marine, and Oriental.

3. Perceived quality

4. Brand associations: Axe also launches limited edition variants from time to time that may be on sale for a few months or over a year

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Q 4.b. You are a research expert in the field of marketing footwear products. What are the various research approaches you would consider before making a consumer survey regarding footwear?

Ans:- Below are the various research approaches that need to be considered before making a consumer survey regarding footwear products:

1. Observational Research – Fresh data can be collected by observing the situation and the people in the situation.

2. Focus Group Research is a method of discussion in which a team of eight to twelve persons invited for a group discussion in presence of a skilled moderator to discuss a product, service, a firm or any marketing related activity. The proceedings are observed and recorded on videotape and subsequently analyzed to understand consumer attitudes, beliefs and behavior.

3. Survey Research – This is the most common of the approaches wherein surveys are undertaken with the help of a questionnaire to learn about people’s knowledge, beliefs and preferences.

4. Behavioral Research – Customer’s actual behavior in terms of actual purchases reflect their preferences and are more reliable than responses provided in surveys which are memory based.

5. Experimental Research – The most scientific method of research is experimental research which tries to capture cause and affect relationships.

Q. 5 a. What advice would you give a company that has facing bad publicity? What steps would you tell the company to improve its reputation?

Ans:- Publicity can be said as a simple act of making a suggestion to the concerned parties – TV or radio channel, news reporter or journalist, film makers, etc. that leads to the inclusion of a company/products in an already existing story or a newly developed one. Publicity may also include any such information that attracts attention to a company, its products, its people or any event, usually generated by a third party such as media. Publicity maybe a part of PR or it may be independent of it in certain situations.

Publicity may have positive or negative impacts. For example, it became a negative publicity for Coca-Cola when people in India, started to throw or break the bottles on the roads because of the belief that it contained pesticides or toxic substances. News channels covered the same giving negative publicity to the company and the products.

Ways in which organizations can use publicity as a communication tool are as follows:

· Organizing events, contests, exhibitions, public displays, tours, etc.

· Sponsoring awards, scholarships or giving charity for any noble cause.

· Issuing reports, conducting survey or polls, taking stand on any debatable or environmental issues, etc.

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· Any other way that is appropriate like for example displaying the products in a movie and asking the lead actors to use the products in that movie.

Ways in which organizations can avoid or minimize the effects of bad publicity:

· Providing people with the accurate information and giving clarifications if needed either through press release, media interviews, websites, public messages, advertising etc.

· Company’s top management or spokesperson can give a public statement or comment in the various media.

· Improvising Public Relations and designing good publicity message to erase the effects of bad publicity.

· Continuing to provide quality products and services to the consumers.

· Involving in community work or environmental protection campaigns or any such activity for a good cause.

Q 5 b. As a brand manager, what are the ways in which you will select a brand name for your product- watches and how will you position it in the market?

Ans:- Brand provides the image to the product. Brand manager should be careful in selecting a proper name for the brand for watches.

Brand Name: Titan

There are six suggestions from Philip Kotler to create a successful brand name. They are

1. It should suggest something about the product benefits and qualities; e.g. Titan

2. It should be easy to pronounce, recognize, and remember

3. The brand name should be distinctive

4. It should be extendable

5. The name should be easily translated into a foreign language

6. It should be capable of registration and legal protection e.g. Titan is a registered brand and other brands cannot compete with it using any similar sounding name.

Brand managers have four options of sponsoring the brand. They are

1. Manufacturer brand

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2. Private brand

3. Licensing

4. Co- branding

Q. 6 a. What is MIS? What are its benefits?

Ans:- MIS (Marketing Information System):

MIS is a set of procedures to collect, analyze and distribute accurate, prompt and appropriate information to different levels of marketing decision makers.

Benefits of MIS

Various benefits of having a MIS and resultant flow of marketing information are given below:

1. It allows marketing managers to carry out their analysis, planning implementation and control responsibilities more effectively.

2. It ensures effective tapping of marketing opportunities and enables the company to develop effective safeguard against emerging marketing threats.

3. It provides marketing intelligence to the firm and helps in early spotting of changing trends.

4. It helps the firm adapt its products and services to the needs and tastes of the customers.

5. By providing quality marketing information to the decision maker, MIS helps in improving the quality of decision making.

Q 6.b. How is rural marketing different from urban markets?

Ans:-

Rural Marketing

In a rapidly changing scenario, marketers have to continuously explore new markets and ways of serving them. In India, enterprises are discovering the potential of a huge rural population to drive business. Prof C K Prahlad, had aptly summed up the potential as

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‘fortune at the bottom of the pyramid’ in a pathbraking book of the same name. Rural marketing is not something akin to glocalisation. It is not the modification of urban marketing strategies to suit the rural market. On the other hand it is developing products to meet the needs of the rural sector and reaching it across as per the specific characteristics of the rural environment. In case of a detergent, it is producing one which will suit the rural environment (considering that the dirt and grime is different, clothing alternatives are different, availability of water and number of times of washing is different and so on); packaging and pricing which will be akin to their requirement and alternative ways for which the detergent may be put to use. For example Hindustan Lever found that its detergent was being used for washing the cattle.

Importance of Rural marketing: The following table will give you some idea about the emergence of the rural market which marketers may ignore at their own peril.

Rural Markets different from Urban Markets

This has to be understood in the light of the 4Ps or 7Ps of marketing. Imagine that you are trying to establish a Coffee Café Day Outlet in a remote village in Maharashtra. Will that be viable proposition? Yet there may be consumers for coffee in the rural sector too. The offering has to suit the sector. Similarly an ice cream parlor may not be a workable idea in a village or a cluster of villages if there is no electricity connection there. The ice cream cart vendor is a better idea. Keeping these situations in perspective, one can draw some inferences why rural marketing is different.

1. Accessibility and mobility: This applies both for the supplier and the consumer. The movement of the people is restricted by the lack of surface roads and the mode of transport. There are restrictions by way of visibility during night.

2. Average income level of consumers: The average wage earners are characterized by lower per capita income and disposable income in comparison to the urban.

3. Geographical distances: The living quarters are separated more than they are in the urban areas. The cluster of villages is also segregated by distances.

4. Literacy level: On an average the literacy level in the rural sector is lower in comparison to the urban sector.

There could be several other issues which are specific to the rural sector. These may force marketers to take a different approach for the entire marketing process or at least some of them as against the urban sector.

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MF0047 – Management Information System - 4 Credits

Assignment Set- 1

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Note: Each question carries 10 Marks. Answer all the questions.

Q.1 What is MIS? Define the characteristics of MIS? What are the basic Functions of MIS? Give some Disadvantage of MIS?

Q.2 Explain Knowledge based system? Explain DSS and OLAP with example? Q.3 What are Value Chain Analysis & describe its significance in MIS? Explain what is meant by BPR? What is its significance? How Data warehousing & Data Mining is useful in terms of MIS?

Q.4 Explain DFD & Data Dictionary? Explain in detail how the information requirement is determined for an organization?

Q.5 What is ERP? Explain its existence before and its future after? What are the advantages & Disadvantages of ERP? What is Artificial Intelligence? How is it different from Neural Networks? Q.6 Distinguish between closed decision making system & open decision making system? What is ‘What – if‘ analysis? Why is more time spend in problem analysis & problem definition as compared to the time spends on decision analysis?

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Q1. What is MIS? Define the characteristics of MIS? What are the basic Functions of MIS? Give some Disadvantage of MIS?

Ans:-

MIS systems are extensively used in generating statistical report of any organization which can be used to study management by behavior. They set objectives to their employees using ratio analysis. Management also uses MIS for decision making from the low level management to top level management. In order to perform task using Information systems use of technical support is required. So it is the combination of 3 components i.e. organization, technology and management.

MIS characteristics

It supports transaction handling and record keeping. It is also called as integrated database Management System which supports in major

functional areas. It provides operational, tactical, and strategic level managers with east access to timely

but, for the most, structured information. It supports decision –making function which is a vital role of MIS. It is flexible which is needed to adapt to the changing needs of the organization. It promotes security system by providing only access to authorized users. MIS not only provides statistical and data analysis but also works on the basis on MBO

(management by objectives). MIS is successfully used for measuring performance and making necessary change in the organizational plans and procedures. It helps to build relevant and measurable objectives, monitor results, and send alerts.

Basic Function of MIS

The main functions of MIS are:

Data Processing: Gathering, storage, transmission, processing and getting output of the data. Making the data into information is a major task.

Prediction: Prediction is based on the historical data by applying the prior knowledge methodology by using modern mathematics, statistics or simulation. Prior knowledge varies on the application and with different departments.

Planning: Planning reports are produced based on the enterprise restriction on the companies and helps in planning each functional department to work reasonably.

Control: MIS helps in monitoring the operations and inspects the plans. It consists of differences between operation and plan with respect to data belonging to different functional department. It controls the timely action of the plans and analyzes the reasons for the differences between the operations and plan. Thereby helps managers to accomplish their decision making task successfully.

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Assistance: It stores the related problems and frequently used information to apply them for relative economic benefits. Through this it can derive instant answers of the related problem.

Disadvantages of MIS

The following are some of the disadvantages of MIS:

MIS is highly sensitive: MIS is very helpful in maintaining logging information of an authorized user. This needs to monitor constantly.

Quality of outputs is governed by quality of inputs. MIS budgeting: There is difficulty in maintaining indirect cost and overheads. Capturing

the actual cost needs to have an accrual system having true costs of outputs which is extremely difficult. It has been difficult to establish definite findings.

MIS is not flexible to update itself for the changes. The changes in the decision of top level management decrease its effectiveness. Information accountability is based on the qualitative factors and the factors like morality,

confidence or attitude will not have any base.

Q 2. Explain Knowledge based system? Explain DSS and OLAP with example?

Ans:-

Knowledge Based System (KBS)

KBS are the systems based on knowledge base. Knowledge base is the database maintained for knowledge management which provides the means of data collections, organization and retrieval of knowledge. The knowledge management manages the domain where it creates and enables organization for adoption of insights and experiences.

There are two types of knowledge bases.

a. Machine readable knowledge bases: The knowledge base helps the computer to process through. It makes the data in the computer readable code which makes the operator to

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perform easier. Such information sare used by semantic web. Semantic web is a web that will make a description of the system that a system can understand.

b. Human readable knowledge bases: They are designed to help people to retrieve knowledge. The information need to be processed by the reader. The reader can access the information and synthesize their own.

KBS refers to a system of data and information used for decision making. The system is automated to work on the knowledge based data and information required in a particular domain of management activity. The processing is done based on the past decisions taken under suitable conditions. Decision making is based on the fact that the condition is similar to the past situation hence the decision is also is similar.

Examples of KBS are intelligent systems, robotics, neural networks etc.

Online Analytical Processing (OLAP)

OLAP refers to a system in which there are predefined multiple instances of various modules used in business applications. Any input to such a system results in verification of the facts with respect to the available instances.

A nearest match is found analytically and the results displayed form the database. The output is sent only after thorough verification of the input facts fed to the system. The system goes through a series of multiple checks of the various parameters used in business decision making. OLAP is also referred to as a multi dimensional analytical model. Many big companies use OLAP to get good returns in business.

The querying process of the OLAP is very strong. It helps the management take decisions like which month would be appropriate to launch a product in the market, what should be the production quantity to maximize the returns, what should be the stocking policy in order to minimize the wastage etc.

A model of OLAP may be well represented in the form of a 3D box. There are six faces of the box. Each adjoining faces with common vertex may be considered to represent the various parameter of the business situation under consideration.

E.g.: Region, Sales & demand, Product etc.

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Model of OLAP

Decision Support Systems (DSS)

DSS is an interactive computer based system designed to help the decision makers to use all l the resources available and make use in the decision making. In management many a time problems arise out of situations for which simple solution may not be possible. To solve such problems you may have to use complex theories. The models that would be required to solve such problems may have to be identified. DSS requires a lot of managerial abilities and managers judgment.

You may gather and present the following information by using decision support application:

• Accessing all of your current information assets, including legacy and relational data sources, cubes, data warehouses, and data marts

• Comparative sales figures between one week and the next

• Projected revenue figures based on new product sales assumptions

• The consequences of different decision alternatives, given past experience in a context that is described.

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Manager may sometimes find it difficult to solve such problems. E.g. – In a sales problem if there is multiple decision variables modeled as a simple linear problem but having multiple optima, it becomes difficult to take a decision. Since any of the multiple optima would give optimum results. But the strategy to select the one most suitable under conditions prevailing in the market, requires skills beyond the model.

It would take some trials to select a best strategy. Under such circumstances it would be easy to take decision if a ready system of databases of various market conditions and corresponding appropriate decision is available. A system which consists of database pertaining to decision making based on certain rules is known as decision support system. It is a flexible system which can be customized to suit the organization needs. It can work in the interactive mode in order to enable managers to take quick decisions. You can consider decision support systems as the best when it includes high-level summary reports or charts and allow the user to drill down for more detailed information.

A DSS has the capability to update its decision database. Whenever manager feels that a particular decision is unique and not available in the system, the manager can chose to update the database with such decisions. This will strengthen the DSS to take decisions in future.

There is no scope for errors in decision making when such systems are used as aid to decision making. DSS is a consistent decision making system. It can be used to generate reports of various lever management activities. It is capable of performing mathematical calculations and logical calculation depending upon the model adopted to solve the problem. You can summarize the benefits of DSS into following:

• Improves personal efficiency

• Expedites problem solving

• Facilitates interpersonal communication

• Promotes learning or training

• Increases organizational control

• Generates new evidence in support of a decision

• Creates a competitive advantage over competition

• Encourages exploration and discovery on the part of the decision maker

• Reveals new approaches to thinking about the problem space

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Q 3. What are Value Chain Analysis & describe its significance in MIS? Explain what is meant by BPR? What is its significance? How Data warehousing & Data Mining is useful in terms of MIS?

Ans:-

Value Chain Analysis:

The activities performed by a particular enterprise can be analyzed into primary activities, which directly adds value to the enterprise’s factors of production, which are together referred to as the ‘value chain’, and supporting activities.

Figure: Product Differentiation and Value Chain representation

Porter’s Enterprise Value-Chain

Value-addition activities like production, marketing delivery, and servicing of the product. These activities are connected in a chain. Support activities include those providing purchased inputs, technology, human resources, or overall infrastructure functions to support the primary activities.

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It is possible to reduce the transaction cost by proper coordination of all the activities. It should be possible to gather better information for various controls and also replace the same by less costlier activities. It will also be possible to reduce the overall time required to complete an activity.

Therefore coordination is very important to achieve competitive advantage. For this it is necessary to manage the value chain as a system rather than as separate parts. An enterprise’s value chain for competing in a particular industry is embedded in a larger stream of activities. What Porter termed as ‘value system’, may be referred to as the ‘industry value-chain’. This chain consists of mainly the suppliers and distribution channels. Any activity of an organization is subjected to one or more of the following –

• New technologies – Newer technologies changes the direction of the value chain.

• Shifting buyer needs – The buyers have been increasing their demands to satisfy their needs in the form convenience and better price and features. This demand influences a change in the related market segments;

• Variation in industry segmentation – The value system undergoes a change depending upon the existence of old and new systems and its components in the value chain. Organizations, which fail to adjust will have to close down their business.

• Changes in the costs – It is possible to gain competitive advantage by optimizing the activities based on present conditions. Enterprises which continue to work on the older approaches in outdated modes of operation suffer.

• Changes in government regulations – If there is a change in the standards of the product of the enterprise, with respect to the environmental controls, restrictions on entry to the market, and trade barriers then it affect the performance of the enterprise.

BPR

The existing system in the organization is totally reexamined and radically modified for incorporating the latest technology. This process of change for the betterment of the organization is called as Business process re-engineering. This process is mainly used to modernize and make the organizations efficient. BPR directly affects the performance. It is

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used to gain an understanding the process of business and to understand the process to make it better and re-designing and thereby improving the system.

BPR is mainly used for change in the work process. Latest software is used and accordingly the business procedures are modified, so that documents are worked upon more easily and efficiently. This is known as workflow management.

Signification of BPR

Business process are a group of activities performed by various departments, various organizations or between individuals that is mainly used for transactions in business. There may be people who do this transaction or tools. We all do them at one point or another either as a supplier or customer. You will really appreciate the need of process improvement or change in the organizations conduct with business if you have ever waited in the queue for a longer time to purchase 1 kilo of rice from a Public Distribution Shop (PDS-ration shop). The process is called the check-out process. It is called process because uniform standard system has been maintained to undertake such a task. The system starts with forming a queue, receiving the needed item form the shop, getting it billed, payment which involves billing, paying amount and receiving the receipt of purchase and the process ends up with the exit from the store. It is the transaction between customer and supplier.

Data Warehousing – Data Warehouse is defined as collection of database which is referred as relational database for the purpose of querying and analysis rather than just transaction processing. Data warehouse is usually maintained to store heuristic data for future use. Data warehousing is usually used to generate reports. Integration and separation of data are the two basic features need to be kept in mind while creating a data warehousing. The main output from data warehouse systems are; either tabular listings (queries) with minimal formatting or highly formatted "formal" reports on business activities. This becomes a convenient way to handle the information being generated by various processes. Data warehouse is an archive of information collected from wide multiple sources, stored under a unified scheme, at a single site. This data is stored for a long time permitting the user an access to archived data for years. The data stored and the subsequent report generated out of a querying process enables decision making quickly. This concept is useful for big companies having plenty of data on their business processes. Big companies have bigger problems and complex problems. Decision makers require access to information from all sources. Setting up queries on individual processes may be tedious and inefficient.

Data Mining – Data mining is primarily used as a part of information system today, by companies with a strong consumer focus - retail, financial, communication, and marketing organizations. It enables these companies to determine relationships among "internal" factors such as price, product positioning, or staff skills, and "external" factors such as

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economic indicators, competition, and customer demographics. And, it enables them to determine the impact on sales, customer satisfaction, and corporate profits. Finally, it enables them to "drill down" into summary information to view detail transactional data. With data mining, a retailer could use point-of-sale records of customer purchases to send targeted promotions based on an individual's purchase history. By mining demographic data from comment or warranty cards, the retailer could develop products and promotions to appeal to specific customer segments.

Q 4. Explain DFD & Data Dictionary? Explain in detail how the information requirement is determined for an organization?

Ans:-

DFD

Data flow diagrams represent the logical flow of data within the system. DFD do not explain how the processes convert the input data into output. They do not explain how the processing takes place.

DFD uses few symbols like circles and rectangles connected by arrows to represent data flows. DFD can easily illustrate relationships among data, flows, external entities stores. DFD can also be drawn in increasing levels of detail, starting with a summary high level view and proceeding o more detailed lower level views.

Rounded rectangles represent processes that transform flow of data or work to be done.

Rectangle represents external agents- the boundary of the system. It is source or destination of data.

The open-ended boxes represent data stores, sometimes called files or databases. These data stores correspond to all instances of a single entity in a data model.

Arrow represents data flows, inputs and outputs to end from the processes.

A number of guideline should be used in DFD

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Choose meaningful names for the symbols on the diagram. Number the processes consistently. The numbers do not imply the sequence. Avoid over complex DFD. Make sure the diagrams are balanced

Data Dictionary

The data dictionary is used to create and store definitions of data, location, format for storage and other characteristics. The data dictionary can be used to retrieve the definition of data that has already been used in an application. The data dictionary also stores some of the description of data structures, such as entities, attributes and relationships. It can also have software to update itself and to produce reports on its contents and to answer some of the queries.

Determining the Information Requirement

The sole purpose of the MIS is to produce such information which will reduce uncertainty risk in a given situation.

The difficulty to determine a correct and complete set of information is on account of the factors given below:

1. The capability constraint of the human being as an information processor, a problem solver and a decision-maker.

2. The nature and the variety of information in precise terms.

3. Reluctance of decision-makers to spell out the information for the political and the behavioural reasons.

4. The ability of the decision-makers to specify the information.

In spite of these difficulties, methods are evolved based on the uncertainty scale, starting from the low to the high level of uncertainty. If the uncertainty is low, seeking information requirement or needs is easy as against a very high level of uncertainty.

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There are four methods of determining the information requirements. They are:

1. Asking or interviewing

2. Determining from the existing system

3. Analysing the critical success factors

4. Experimentation and modelling.

Asking or Interviewing

In this method a designer of the MIS puts questions or converses with the user of the information and determines the information requirements. Putting the questions is an art and it should be used properly to seek information.

When the user has to select one answer from a finite set of answers a closed question should be asked. For example, "Which are the raw materials used for making a product?" But an open question is put, when the user has no precise knowledge but has an ability to determine all answers to select one out of them? For example, "Which are the raw materials which can be used in a product?" In open questions, the answers may not be immediate but can be obtained by surveying the domain knowledge of the user.

When multiple users or several decision-makers in similar functions or positions are involved, a brain storming session is performed to cover all possible answers to the questions. When several users are involved, group consensus can be sought to get the most feasible set of answers.

The experts or experienced users are asked to give their best answers—this approach is called the Delphi method. In all these methods, the system designer has to test the validity of all the answers independently. An experienced designer is able to analyse critically the answers given to the ques¬tions and determine the correct information requirement.

Determining from the Existing System

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In a number of cases the existing system, which has been evolved after a number of years, and has been designed out of experience gives straightaway the requirement of information. In any situations, systems from other companies can give additional information requirements.

The fund of knowledge is available from the textbooks, handbooks, research studies which can determine the information requirement. For example, systems such as the accounts receivables, the accounts payables, the pay roll, the inventory control, the financial accounting, etc., have a well determined, information requirement.

Irrespective of the type of organization and business, ninety per cent of the information requirement is common and the balance ten per cent may be typical to the organization or the business, which needs to be determined separately. The managers in the operations and the middle management use the existing systems as a reference for determining the information requirements.

This method is adopted when the rules and decision methods are outside the purview of the decision-maker. They are determined or imposed by external sources such as the Government, the Authority, the principles, etc. For example, the information required to manage shares of the company are determined through the rules and regulations laid down by the Company Law Board. The manager of the shares department has very little additional information need.

In all such functions, the manager determines the information needs and the designer of the MIS can always fall back on the prescribed law books, manuals, theory and textbooks, hand books, etc to confirm the information needs.

Analyzing the Critical Success Factors

Every business organization performs successfully on efficient management of certain critical success factors. Other factors are important and play a support role in the functioning of the organization. Many times a function is singularly critical to the successful functioning of a business organization.

For example, in a high technology business, the management of the technology becomes the critical function. Or in a service organization, the management of service becomes a critical factor. In a consumer industry, marketing and service becomes the critical function.

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The information requirements of such organization largely relate to these critical factors. The analysis of these functions or factors will determine the information requirements.

Experimentation and Modelling

When there is total uncertainty, the designer and the user of the information resort to this method for determining the information requirement. The experimentation would decide the methodology for handling the complex situation. If the method is finalised, the information needs are determined as they have been evolved through the experimentation. Test marketing of a product is an approach of the experimentation to decide the correct marketing strategy.

Sometimes models are used for deciding the initial information needs and they are modified during the implementation stage. The information requirements determined through such methods undergo a qualitative change as the users get the benefit of learning and experience and the needs may undergo a change or get replaced completely.

Q 5. What is ERP? Explain its existence before and its future after? What are the advantages & Disadvantages of ERP? What is Artificial Intelligence? How is it different from Neural Networks?

Ans:-

ERP

Manufacturing management systems have evolved in stages over the few decades from a simple means of calculating materials requirements to the automation of an entire enterprise. Around 1980, over-frequent changes in sales forecasts, entailing continual readjustments in

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production, as well as the unsuitability of the parameters fixed by the system, led MRP (Material Requirement Planning) to evolve into a new concept : Manufacturing Resource Planning (or MRP2) and finally the generic concept Enterprise Resource Planning (ERP)

The initials ERP originated as an extension of MRP (material requirements planning then manufacturing resource planning). ERP systems now attempt to cover all basic functions of an enterprise, regardless of the organization’s business or charter. Non-manufacturing businesses, non-profit organizations and governments now all utilize ERP systems.

To be considered an ERP system, a software package must provide the function of at least two systems. For example, a software package that provides both payroll and accounting functions could technically be considered an ERP software package.

However, the term is typically reserved for larger, more broadly based applications. The introduction of an ERP system to replace two or more independent applications eliminates the need for external interfaces previously required between systems, and provides additional benefits that range from standardization and lower maintenance to easier and/or greater reporting capabilities.

Examples of modules in an ERP which formerly would have been stand-alone applications include: Manufacturing, Supply Chain, Financials, Customer Relationship Management (CRM), Human Resources, Warehouse Management and Decision Support System.

ERP Before and After

Before

Prior to the concept of ERP systems, departments within an organization (for example, the human resources (HR)) department, the payroll department, and the financial department) would have their own computer systems. The HR computer system (often called HRMS or HRIS) would typically contain information on the department, reporting structure, and personal details of employees. The payroll department would typically calculate and store paycheck information. The financial department would typically store financial transactions for the organization. Each system would have to rely on a set of common data to communicate with each other. For the HRIS to send salary information to the payroll system, an employee number would need to be assigned and remain static between the two systems to accurately identify an employee. The financial system was not interested in the employee-level data, but only in the payouts made by the payroll systems, such as the tax payments to

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various authorities, payments for employee benefits to providers, and so on. This provided complications. For instance, a person could not be paid in the payroll system without an employee number.

After

ERP software, among other things, combined the data of formerly separate applications. This made the worry of keeping numbers in synchronization across multiple systems disappears. It standardized and reduced the number of software specialties required within larger organizations.

Advantages and Disadvantages of ERP

Advantages – In the absence of an ERP system, a large manufacturer may find itself with many software applications that do not talk to each other and do not effectively interface. Tasks that need to interface with one another may involve:

A totally integrated system The ability to streamline different processes and workflows The ability to easily share data across various departments in an organization Improved efficiency and productivity levels Better tracking and forecasting Lower costs Improved customer service

Disadvantages – Many problems organizations have with ERP systems are due to inadequate investment in ongoing training for involved personnel, including those implementing and testing changes, as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and how it is used.

While advantages usually outweigh disadvantages for most organizations implementing an ERP system, here are some of the most common obstacles experienced:

Usually many obstacles can be prevented if adequate investment is made and adequate training is involved, however, success does depend on skills and the experience of the workforce to quickly adapt to the new system.

Customization in many situations is limited The need to reengineer business processes ERP systems can be cost prohibitive to install and run Technical support can be shoddy

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ERP's may be too rigid for specific organizations that are either new or want to move in a new direction in the near future.

Artificial Intelligence

Artificial Intelligence is the science and technology based on various functions to develop a system that can think and work like a human being. It can reason, analyze, learn, conclude and solve problems. The systems which use this type of intelligence are known as artificial intelligent systems and their intelligence is referred to as artificial intelligence. It was said that the computer don’t have common sense. Here in AI, the main idea is to make the computer think like human beings, so that it can be then said that computers also have common sense. More precisely the aim is to obtain a knowledge based computer system that will help managers to take quick decisions in business.

Artificial Intelligence and Neural Networks

Artificial intelligence is a field of science and technology based on disciplines such as computer science, biology, psychology, linguistics, mathematics and engineering. The goal of AI is to develop computers that can simulate the ability to think, see, hear, walk, talk and feel. In other words, simulation of computer functions normally associated with human intelligence, such as reasoning, learning and problem solving.

AI can be grouped under three major areas: cognitive science, robotics and natural interfaces.

Cognitive science focuses on researching on how the human brain works and how humans think and learn. Applications in the cognitive science area of AI include the development of expert systems and other knowledge-based systems that add a knowledge base and some reasoning capability to information systems. Also included are adaptive learning systems that can modify their behavior based on information they acquire as they operate. Chess-playing systems are some examples of such systems.

Fussy logic systems can process data that are incomplete or ambiguous. Thus, they can solve semi-structured problems with incomplete knowledge by developing approximate inferences and answers, as humans do.

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Neural network software can learn by processing sample problems and their solutions. As neural nets start to recognize patterns, they can begin to program themselves to solve such problems on their own.

Neural networks are computing systems modeled after the human brain’s mesh like network of interconnected processing elements, called neurons. The human brain is estimated to have over 100 billion neuron brain cells. The neural networks are lot simpler in architecture. Like the brain, the interconnected processors in a neural network operate in parallel and interact dynamically with each other.

This enables the network to operate and learn from the data it processes, similar to the human brain. That is, it learns to recognize patterns and relationships in the data. The more data examples it receives as input, the better it can learn to duplicate the results of the examples it processes. Thus, the neural networks will change the strengths of the interconnections between the processing elements in response to changing patterns in the data it receives and results that occur

Q 6. Distinguish between closed decision making system & open decision making system? What is ‘what – if‘analysis? Why is more time spend in problem analysis & problem definition as compared to the time spends on decision analysis?

Ans:-

Closed decision making system & Open decision making system

The decision-making systems can be classified in a number of ways. There are two types of systems based on the manager’s knowledge about the environment. If the manager operates in a known environment then it is a closed decision-making system. The conditions of the closed decision-making system are:

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a) The manager has a known set of decision alternatives and knows their outcomes fully in terms of value, if implemented.

b) The manager has a model, a method or a rule whereby the decision alternatives can be generated, tested, and ranked for selection.

c) The manager can choose one of them, based on some goal or objective criterion.

Few examples are a product mix problem, an examination system to declare pass or fail, or an acceptance of the fixed deposits.

If the manager operates in an environment not known to him, then the decision-making system is termed as an open decision-making system. The conditions of this system in contrast closed decision-making system are:

a) The manager does not know all the decision alternatives.

b) The outcome of the decision is also not known fully. The knowledge of the outcome may be a probabilistic one.

c) No method, rule or model is available to study and finalise one decision among the set of decision alternatives.

d) It is difficult to decide an objective or a goal and, therefore, the manager resorts to that decision, where his aspirations or desires are met best.

Deciding on the possible product diversification lines, the pricing of a new product, and the plant location, are some decision-making situations which fall in the category of the open decision-making systems.

The MIS tries to convert every open system to a closed decision-making system by providing information support for the best decision. The MIS gives the information support, whereby the manager knows more and more about environment and the outcomes, he is able to

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generate the decision alternatives, test them and select one of them. A good MIS achieves this.

What if analysis

Decisions are made using a model of the problem for developing various solution alternatives and testing them for best choice. The model is built with some variables and relationship between variables considered values of variables or relationship in the model may not hold good and therefore solution needs to be tested for an outcome, if the considered values of variables or relationship change. This method of analysis is called 'what if analysis.'

For example, in decision-making problem about determining inventory control parameters (EOQ, Safety Stock, Maximum Stock, Minimum Stock, Reorder level) lead time is assumed fairly con¬stant and stable for a planning period. Based on this, the inventory parameters are calculated. Inventory manager wants to know how the cost of holding inventory will be affected if lead time is reduced by one week or increased by one week. The model with changed lead time would compute the cost of holding inventory under new conditions. Such type of analysis can be done for purchase price change, demand forecast variations and so on. Such analysis helps a manager to take more learned decisions. ‘What if analysis’ creates confidence in decision-making model by painting a picture of outcomes under different conditions?

Why is more time spend in problem analysis & problem definition as compared to the time spends on decision analysis?

The manager, being a human being, behaves in a peculiar way in a given situation. The response of one manager may not be the same as that of the two other managers, as they differ on the behavioural platform. Even though tools, methods and procedures are evolved, the decision is many a times influenced by personal factors such as behaviour.

The managers differ in their approach towards decision-making in the organization, and, therefore, they can be classified into two categories, viz., the achievement-oriented, i.e., looking for excellence and the task-oriented, i.e., looking for the completion of the task somehow. The achievement-oriented manager will always opt for the best and, therefore, will be enterprising in every aspect of the decision-making. He will endeavour to develop all the possible alternatives. He would be scientific, and therefore, more rational. He would weigh all the pros and cons properly and then conclude.

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The manager’s personal values will definitely influence ultimately. Some of the managers show a nature of risk avoidance. Their behaviour shows a distinct pattern indicating a conservative approach to decision-making – a path of low risk or no risk. Further, even though decision-making tools are available, the choice of the tools may differ depending on the motives of the manager. The motives are not apparent, and hence, are difficult to understand. A rational decision in the normal course may turn out to be different on account of the motives of the manager.

The behaviour of the manager is also influenced by the position he holds in the organisation. The behaviour is influenced by a fear and an anxiety that the personal image may be tarnished and the career prospects in the organisation may be spoiled due to a defeat or a failure. The managerial behaviour, therefore, is a complex mix of the personal values, the atmosphere in the organisation, the motives and the motivation, and the resistance to change. Such behaviour sometimes over¬rides normal decisions based on business and economic principles.

The interplay of different decision-making of all the managers in the organisation shapes up the organisational decision-making. The rationale of the business decision will largely depend upon the individuals, their positions in the organisation and their inter-relationship with other managers.

If two managers are placed in two decision-making situations, and if their objectives are in conflict, the managers will arrive at a decision objectively, satisfying individual goals. Many a times, they may make a conscious decision, disregarding organisation’s objective to meet their personal goals and to satisfy their personal values. If the manager is enterprising, he will make objectively rational decisions. But if the manager is averse to taking risk, he will make a decision which will be subjectively rational as he would act with limited knowledge and also be influenced by the risk averseness. Thus, it is clear that if the attitudes and the motives are not consistent across the organisation, the decision-making process slows down in the organisation.

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MB0048 – Operations Research - 4 Credits

Assignment Set- 2

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Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Explain how to transform an unbalanced transportation problem into a balanced transportation problem where the demand of warehouses is satisfied by the supply of factories.

Q.2 Explain how the profit maximization transportation problem into a balanced transportation problem where the demand of warehouses is satisfied by the supply of factories.

Q.3 Illustrate graphically the following special cases of Linear programming problems: i) Multiple optimal solutions, ii) No feasible solution, iii) Unbounded problem

Q.4 How would you deal with the Assignment problems, where a) the objective function is to be maximized? b) Some Assignments are prohibited?.

Q.5 “Simulation is an especially valuable tool in a situation where the mathematics needed to describe a system realistically is too complex to yield analytical solutions”. Elucidate.

Q.6 Describe Gomory’s method of solving an all-integer programming problem.

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Q1. Explain how to transform an unbalanced transportation problem into a balanced transportation problem where the demand of warehouses is satisfied by the supply of factories?

Ans:-

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Q 2. Explain how the profit maximization transportation problem into a Balanced transportation problem where the demand of warehouses is Satisfied by the supply of factories?

Ans:- A fictive corporation A has a contract to supply motors for all tractors producedby a fictive corporation B. Corporation B manufactures the tractors at fourlocations around Central Europe: Prague, Warsaw, Budapest and Vienna. Planscall for the following numbers of tractors to be produced at each location:Prague 9 000Warsaw 12 000Budapest 9 000Corporation A has three plants that can produce the motors. The plants andproduction capacities areHamburg 8 000Munich 7 000Leipzig 10 000Dresden 5 000Due to varying production and transportation costs, the profit earns on each motordepends on where they were produced and where they were shipped. Thefollowing transportation table (Table 7.9) gives the accounting departmentestimates of the euro profit per unit (motor).

"Highest - Profit Assignment"Applying the Stepping Stone method (modified for maximization purposes) to theinitial solution we can see that no other transportation schedule can increase theprofit and so the Highest – Profit initial allocation is also an optimal solution ofthis transportation problem.Stepping Stone MethodStep 1: Pick any empty cell and identify the closed path leading to that cell. Aclosed path consists of horizontal and vertical lines leading from an empty cell

back to itself (If assignments have been made correctly, the matrix has only oneclosed path for each empty cell.) In the closed path there can only be one emptycell that we are examining. The 90-degree turns must therefore occur at thoseplaces that meet this requirement. Two closed paths are identified. Closed path ais required to evaluate empty cell A-E; closed path b is required to evaluate emptycell A-FStep 2: Move one unit into the empty cell from a filled cell at a corner of theclosed path and modify the remaining filled cells at the other comers of the closedpath to reflect this move. (More than one unit could be used to test the desirability

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of a shift. However, since the problem is linear, if it is desirable to shift one unit, itis desirable to shift more than one, and vice versa.) Modifying entails adding toand subtracting from filled cells in such a way that supply and demand constraintsare not violated. This requires that one unit always be subtracted in a given row orcolumn for each unit added to that row or column. Thus, the following additionsand subtractions would be required :For the path a:• Add one unit to A-E (the empty cell).• Subtract one unit from A-H.• Add one unit to C-H.• Subtract one unit from C-E.For the path b,• Add one unit to A-F (the empty cell).• Subtract one unit from A-H.• Add one unit to C-H.• Subtract one unit from C-G.• Add one unit to D-G.• Subtract one unit from D-F.Step 3: Determine desirability of the move. This is easily done by (1) summingthe cost values for the cell to which a unit has been added, (2) summing the costvalues of the cells from which a unit has been subtracted, and (3) taking thedifference between the two sums to determine if there is a cost reduction. If thecost is reduced by making the move, as many units as possible should be shiftedout of the evaluated filled cells into the empty cell. If the cost is increased, nomove should be made and the empty cell should be crossed.For cell A-E, the pluses and minuses are

Q 3. Illustrate graphically the following special cases of Linear programming problems:

i) Multiple optimal solutions, ii) No feasible solution, iii) Unbounded problem

Ans:- Solving a LPP with 2 decision variables x1 and x2 through graphical representation is easy. Consider x1 x2 – the plane, where you plot the solution space enclosed by the constraints. The solution space is a convex set bounded by a polygon; since a linear function attains extreme (maximum or minimum) values only on the boundary of the region. You can consider the vertices of the polygon and find the value of the objective function in these vertices. Compare the vertices of the objective function at these vertices to obtain the optimal solution of the problem.

Working rule The method of solving a LPP on the basis of the above analysis is known as the graphical method. The working rule for the method is as follows. Step 1: Write down the equations by replacing the inequality symbols by the equality symbols in the given constraints. Step 2: Plot the straight lines represented by the equations obtained in step I. Step 3: Identify the convex polygon region relevant to the problem. Decide on which side of the line, the half-plane is located.

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Step 4: Determine the vertices of the polygon and find the values of the given objective function Z at each of these vertices. Identify the greatest and least of these values. These are respectively the maximum and minimum value of Z. Step 5: Identify the values of (x1, x2) which correspond to the desired extreme value of Z. This is an optimal solution of the problemWe can analyse linear programming with 2 decision variables graphically. Example Let’s look at the following illustration. Maximise Z = 700 x1+500 x2 Subject to 4x1+3x2 210 2x1+x2 90 and x1 0, x2 0 Let the horizontal axis represent x1 and the vertical axis x2. First, draw the line 4x1 + 3x2 = 210, (by replacing the inequality symbols by the equality) which meets the x1-axis at the point A (52.50, 0) (put x2 = 0 and solve for x1 in 4x1 + 3x2 = 210) and the x2 – axis at the point B (0, 70) (put x1 = 0 in 4x1 + 3x2 = 210 and solve for x2).

Suppose a linear programming problem has an unbounded feasible solution space. If the set of all values of the objective function at different feasible solutions is not bounded above (respectively, bounded below), and if the problem is a maximisation (respectively, minimisation) problem, then we say that the given problem has an unbounded solution

Q 4. How would you deal with the Assignment problems, where a) the objective function is to be maximized?

b) Some Assignments are prohibited?

Ans:- Let’s say there are „n‟ jobs in a factory having „n‟ machines to process the jobs. A job i (=1… n), when processed by machine j (=1… n) is assumed to incur a cost Cij. The assignment is to be made in such a way that each job can associate with one and only one machine. You can then determine an assignment of jobs to the machines to minimise the overall cost. The cost data is given as a matrix where rows correspond to jobs and columns to machines and there are as many rows as the number of columns. The number of jobs and number of machines should be equal. Assignment becomes a problem because each job requires different skills and the capacity or efficiency of each person with respect to these jobs can be different. This gives rise to cost differences. If each person is able to do all jobs with same efficiency then all costs will

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be the same and each job can be assigned to any person. When assignment is a problem it becomes a typical optimization problem. Therefore, you can compare an assignment problem to a transportation problem. The cost element is given and is a square matrix and requirement at each destination is one and availability at each origin is also one. Additionally, you have number of origins,

Which equal the number of destinations. Therefore, the total demand is equal to the total supply. There is only one assignment in each row and each column. However if you compare this to a transportation problem, you will find that a general transportation problem does not have the above mentioned limitations. These limitations are peculiar to assignment problems only. An assignment problem can be either balanced or unbalanced. Let’s first focus on a balanced assignment problem. A balanced assignment problem is one where the number of rows = the number of columns (comparable to a balanced transportation problem where total demand =total supply).

Balanced assignment problem: No. of rows = No. of columns

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A:- the objective function is to be maximized :-

Some assignment problems are phrased in terms of maximizing the profit or effectiveness or payoff of an assignment of people to tasks or of jobs to machines. You cannot apply the Hungarian method to such maximization problems. Therefore, you need to reduce it to a minimization problem. It is easy to obtain an equivalent minimization problem by converting every number in the table to an opportunity loss. To do so, you need to subtract every value from the highest value of the matrix and then proceed as usual You will notice that minimizing the opportunity loss produces the same assignment solution as the original maximization problem.

B:- b Some Assignments are prohibited

Infeasible assignments It is sometimes possible that a particular person is incapable of doing certain work or a specific a specific job cannot be performed on a particular machine. The solution of the assignment problem should take into account these restrictions so that the infeasible assignment can be avoided. This can be achieved by assigning a very high cost (say ∞ or M) to the cells where assignments are prohibited, thereby, restricting the entry of this pair of job – machine or resource – activity into the final solution. After inserting a high value at the cell we need to apply Hungarian method to solve the problem.

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Q 5. “Simulation is an especially valuable tool in a situation where the mathematics needed to describe a system realistically is too complex to yield analytical solutions”.Elucidate.

Ans:- Simulation is an especially valuable tool in a situation where the mathematics needed to describe a system realistically is too complex to yield analytical solutions”. Elucidate. Simulation is the imitation of some real thing, state of affairs, or process. The act of simulating something generally entails representing certain key characteristics or behaviours of a selected physical or abstract system. Simulation is used in many contexts, such as simulation of technology for performance optimization, safety engineering, testing, training,education, and video games. Training simulators include flight simulators for training aircraft pilots. Simulation is also used for scientific modeling of natural systems or human systems in order to gain insight into their functioning. Simulation can be used to show the eventual real effects of alternative conditions and courses of action. Simulation is also used when the real system cannot be engaged, because it may not be accessible, or it may be dangerous or unacceptable to engage, or it is being designed but not yet built, or it may simply not exist. Simulation can be used when the problem is toocomplex for analytical solution and too dangerous for actual experimentation. Key issues in simulation include acquisition of valid source information about the relevant selection of key characteristics and behaviours, the use of simplifying approximations and assumptions within the simulation, and fidelity and validity of the simulation outcomes.

Q6. Describe Gomory’s method of solving an all-integer programming problem.

Ans:- An optimum solution to an IPP is obtained by using the simplex method, ignoring the restriction of integral values. In the optimum solution, if all the variables have integer values, the current solution will be the required optimum integer solution. Otherwise, the given IPP is modified by inserting a new constraint called Gomory’s constraint or secondary constraint. This constraint represents necessary conditions for integrability and eliminates some non-integer solution without losing any integral solution. On addition of the secondary constraint, the problem is solved using dual simplex method to obtain an optimum integral solution. If all the values of the variables in the solution are integers, then an optimum inter-solution is obtained, or else a new constraint is added to the modified LPP and the procedure is repeated till the optimum solution is derived. An optimum integer solution will be reached eventually after introducing enough new constraints to eliminate all the superior non-integer solutions. The construction of additional constraints, called secondary or Gomory’s constraints is important and needs special attention.

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Construction of Gomory’s constraints Consider a LPP or an optimum non–integer basic feasible solution. With the usual notations, let the solution be displayed in the following simplex.

The optimum basic feasible solution is given by xB = [x2, x3 ] = [y10, y20]; max z = y00 Since xB is a non-integer solution, we can assume that y10 is fractional. The constraint equation is y10 = y11 x1 + y12 x2 + y13 x3+ y14 x4 0xx4 1 It reduces to y10 = y11 x1 + x2 + y14 x4 _____ (1) 0xx4 1 Because x2 and x3 are basic variables (which implies that y12 = 1 and y13 = 0). The above equation can be rewritten as x2 = y10 - y11 x1 - y14 x4 This is a linear combination of non-basic variables. Now, since y10 0 the fractional part of y10 must also be non-negative. You can split each of yij in (1) into an integral part Iij , and a non-negative fractional part, f1j for j = 0,1,2,3,4. After the breakup (1) above, you can write it as: I10 + f10 = (I11 + f11) x2 + (I14 + f14) x4 Or f10 - f11 x2 - f14 x4 = x2 + I11 x1 + I14x4 - I10 _

If you compare (1) and (2), you will see that if you add an additional constraint in such a way that the left-hand side of (2) is an integer; then you will be forcing the non-integer y10 towards an integer. The desired Gomory’s constraint is f10 – f11 x1 – f11 x4 ≤ 0 It is possible to have f10 – f11 x1 – f11 x4 = h where h > 0 is an integer. Then f10 = h + f11 x1 + f14 x4 is greater than one. This contradicts that 0 < fij < 1 for j = 0, 1, 2, 3, 4. Thus Gomory’s constraint is 10 sla 4 ,1j j ij 4 , 1j 10 j ij 4 , 1j j ig f ) 1(G x f or f x . f or f x f 10 Where Gsla (1) is a slack variable in the above first Gomory’s constraint The additional constraint to be included in the given LPP is towards obtaining an optimum all integer solution. After adding the constraint, the optimum simplex table looks like given below.

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Since – f10 is negative, the optimal solution is unfeasible. Thus the dual simplex method is to be applied for obtaining an optimum feasible solution. After obtaining this solution, the above referred procedure is applied for constructing second Gomory’s constraint. The process is to be continued till all the integer solution has been obtained.

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MB0049 – Project Management - 4 Credits

Assignment Set- 1

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Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Comment on the following a. Importance of DMAIS in project management cycle b. Knowledge areas of project management

Q.2 Write few words on: a. Project Characteristics b. WBS c. PMIS d. Project Management strategies-Internal & external

Q.3 What are the various SCMo soft wares available in project management? Explain each in brief.

Q.4 List the various steps for Risk management. Also explain GDM and its key features.

Q.5 Answer the two parts: a. Importance of data management in project management-Comment. b. What is the significance of reviewing ROI?

Q.6 XYZ Company implements CMMI level-03. To make further changes it decides on starting a new division in the organization. It decides to advance the existing project management. What are the steps to be followed by the organization to drive project management to a new horizon?

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Q.1 Comment on the following

Ans:- a. Importance of DMAIS in project management cycle

The projectised mantras of production management can be broadly identified as - Define Measure, Analyze, Improve, Standardize (DMAIS). These projectised mantras help in identifying, evaluating, and selecting the right improvement solutions for managing a project. The mantras also help in identifying the critical issues thus assisting the organization to adapt to the changes introduced through the implementation of different solutions.

The phases associated with each projectised mantra of production management are:

1. Define: benchmark, customer requirement, process flow map, quality function deployment, project management plan

2. Measure: data collection, defect metrics, sampling3. Analysis: cause and effect, failure modes and effect analysis, decision and risk

analysis, root cause analysis, reliability analysis4. Improve: design of experiments, modeling, and robust design

5. Standardize: control charts, time series, procedural adherence, performance management, preventive activities displays the various phases of DMIAS.

b. Knowledge areas of project management There are nine knowledge areas in Project Management:1. Project Integration Management2. Project Scope Management 3. Project Time Management4. Project Cost Management5. Project Quality Management6. Project Human Resource Management7. Project Communications Management8. Project Risk Management9. Project Procurement ManagementEach of the nine knowledge areas contains the processes that need to be

accomplished within its discipline in order to achieve an effective project management program. Each of these processes also falls into one of the five basic process groups, creating a matrix structure such that every process can be related to one knowledge area and one process group.

Q.2 Write few words on: a. Project Characteristics

Ans:-The word PROJECT comes from the Latin word PROJECTUM from the Latin verb PROICERE; which means “to throw something forwards” which in turn comes from PRO-, which denotes something that precedes the action of the next part of the word in time and ICERE, “to throw”. The word PROJECT thus actually originally meant “something that comes before anything else happens”.

A project in business and science is a temporary endeavor undertaken to create a unique product, service, or result. Basically, it is planned to achieve a particular aim. The aim of a project is to attain its objective and then terminate. Some of the reasons to start a project can be:

A customer request or market demand

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An organizational need A customer request A technological advance A legal requirement Projects and operations differ primarily in that operations are ongoing and repetitive,

while projects are temporary and unique. Generally, a project is a means of organizing some activities that cannot be addressed within the normal operational limits.

Project characteristics:

It is temporary – temporary means that every project has a definite beginning and a definite end. Project always has a definitive time frame.

A project creates unique deliverables, which are products, services, or results. A project creates a capability to perform a service. Project is always developed in steps and continuing by increments – Progressive

Elaboration.

b. WBS A work breakdown structure (WBS) in project management and systems engineering,

is a tool used to define and group a project's discrete work elements in a way that helps organize and define the total work scope of the project..

A work breakdown structure element may be a product, data, a service, or any combination. A WBS also provides the necessary framework for detailed cost estimating and control along with providing guidance for schedule development and control. Additionally the WBS is a dynamic tool and can be revised and updated as needed by the project manager

The Work Breakdown Structure is a tree structure, which shows a subdivision of effort required to achieve an objective; for example aprogram, project, and contract. In a project or contract, the WBS is developed by starting with the end objective and successively subdividing it into manageable components in terms of size, duration, and responsibility (e.g., systems, subsystems, components, tasks, subtasks, and work packages) which include all steps necessary to achieve the objective.

The Work Breakdown Structure provides a common framework for the natural development of the overall planning and control of a contract and is the basis for dividing work into definable increments from which the statement of work can be developed and technical, schedule, cost, and labor hour reporting can be established.

A work breakdown structure permits summing of subordinate costs for tasks, materials, etc., into their successively higher level “parent” tasks, materials, etc. For each element of the work breakdown structure, a description of the task to be performed is generated. This technique (sometimes called a System Breakdown Structure ) is used to define and organize the total scope of a project.

The WBS is organised around the primary products of the project (or planned outcomes) instead of the work needed to produce the products (planned actions). Since the planned outcomes are the desired ends of the project, they form a relatively stable set of categories in which the costs of the planned actions needed to achieve them can be collected. A well-designed WBS makes it easy to assign each project activity to one and only one terminal element of the WBS. In addition to its function in cost accounting, the WBS also helps map requirements from one level of system specification to another, for example a requirements cross reference matrix mapping functional requirements to high level or low level design documents.

c. PMIS Project Management Information System (PMIS) are system tools and techniques

used in project management to deliver information. Project managers use the techniques

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and tools to collect, combine and distribute information through electronic and manual means. Project Management Information System (PMIS) is used by upper and lower management to communicate with each other.

Project Management Information System (PMIS) help plan, execute and close project management goals. During the planning process, project managers use PMIS for budget framework such as estimating costs. The Project Management Information System is also used to create a specific schedule and define the scope baseline. At the execution of the project management goals, the project management team collects information into one database. The PMIS is used to compare the baseline with the actual accomplishment of each activity, manage materials, collect financial data, and keep a record for reporting purposes. During the close of the project, the Project Management Information System is used to review the goals to check if the tasks were accomplished. Then, it is used to create a final report of the project close. To conclude, the project management information system (PMIS) is used to plan schedules, budget and execute work to be accomplished in project management.

d. Project Management strategies-Internal & external Effective Internal Project Management StrategiesProjects fail for many internal reasons, some of them technical, some of them

managerial. However, even the technical failures can often be traced back to a failure on the part of the project's executive management to recognize and deal with these inherent managerial risks. On the other hand, probably the majority of apparently successful projects do not reflect their optimum potential either.

As a matter of project experience, a number of prerequisites have been identified with the successful project. While these prerequisites do not necessarily guarantee success of future projects, their absence may well lead to sub-optimal success, if not outright failure. The Project's Executive has a vital role to play in achieving project success and should therefore insist on the following:

Executive Support - The Executive must clearly demonstrate support for the project management concept by active sponsorship and control.

External Authority - The project manager must be seen as the authoritative agent in dealing with all parties, and be the responsible and single formal contact with them.

Internal Authority - The project manager must have the necessary managerial authority within his organization to ensure response to his requirements.

Commitment Authority - The project manager must have the responsibility and authority to control the commitment of resources, including funds, within prescribed limits. The results of these decisions must be both accountable and visible.

Project Manager Involved in All Major Decisions - No major technical, cost, schedule, or performance decisions should be made without the project manager's participation.

Competence - The project manager and his team members must be competent. Other functional personnel assigned to the project must also be competent.

Project Team - The project manager should have a say in the assembly of his project team, which will help him to obtain their personal commitment, support and required quality of service.

Management Information Systems - Effective project management information and control systems must be in place.

Effective External Project Management StrategiesPrerequisites for avoiding internal project failure, or at least sub-optimal results, were

discussed earlier. However, it has also been noted earlier that external conditions and events also represent uncertainty and risk to the successful accomplishment of the project.

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These conditions have been linked to the external stakeholders of the project. Therefore, it is essential to develop a sound stakeholder environment.

Developing a Sound Stakeholder EnvironmentJust as the means of influencing the project's cultural environment, as described

above, was one of developing the right attitude, so it is with developing a sound stakeholder environment. Perhaps this attitude is best reflected by adopting a mind set that reverses the traditional organization chart hierarchy. In other words, place the project stakeholders at the top of the chart, followed by the front-line project team members, and on down to the project manager at the bottom. Perhaps the project team will then be better visualized as a truly service organization, designed to serve the best interests of a successful project outcome, both perceived and in reality.

Some suggested steps in this process include: Learn how to understand the role of the various stakeholders, and how this

information may be used as an opportunity to improve both the perception and reception of the project

Identify the real nature of each stakeholder group's business and their consequent interest in the project

Understand their behavior and motivation Assess how they may react to various approaches Pinpoint the characteristics of the stakeholders' environment and develop appropriate

responses to facilitate a good relationship Learn project management's role in responding to the stakeholders drive behind the

project Determine the key areas which will have the most impact on the successful reception

of the project Remember always that even a minor stakeholder group may discover the "fatal flaw"

in the project and which could bring the project to a standstill!

Q.3 what are the various SCMo soft wares available in project management? Explain each in brief?

Ans:- The process documentation system is intranet based to provide immediate access to current, up-to-date process documentation. The system allows users to navigate through graphical structures to relevant documentation and processes which were created with the ARIS-Toolset.

The content of the process documentation system includes the area supply chain management from the Odette Supply Chain Management Group. The system includes graphical process documentation, in the form of process chains, as well as the entire range of documentation related to the processes. The Process Documentation System gives, according to its objectives, an overview and a detailed view of the relevant processes for SCMo.

The entry point in the documentations system is the model “Process Overview SCMo”. This model is the starting point for the navigation to other models. The navigation between models is done via the assignment symbol. The assignment symbol of a function / process Interface indicates that there is a link to another model. The linked / assigned models can be opened by double-clicking on the assignment symbol.

This can be classified into two different navigations as shown in figure.

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a) Vertical Navigation: The vertical navigation is the navigation on different levels. Starting on the work package level and going downwards into more detail, the first models of processes are found on the sub-process level.

In the model “Process Overview SCMo” those processes are assigned to the functions on Level 2. In the models there can be assignments for some functions, e.g. for a Function Allocation Diagram or a sub-process that describes that function. These two examples are currently the models on the lowest level.

b) Horizontal Navigation: The horizontal navigation is on the same level. Some processes have a link to other processes, which can be at the start or end or even in the process itself, when another process is imbedded in the process. Those links are represented by Process Interfaces.

Microsoft has a team project management solution that enables project managers and their teams to collaborate on projects. The Microsoft Project 2002 products in these solutions are:

Microsoft Project Standard 2002 Microsoft Project Server 2002 Microsoft Project Server Client Access License (CAL) 2002.

Support SoftwareHaving learnt the basics of application software, you would have a fair idea of how

and to what extent project management processes could be automated. However, the challenge of “making things work” remains unchanged. While software vendors are confident of “making it work”, two yawning gaps still remain:

1. Business processes which are not covered in such software 2. Integration of multi vendor supported software applicationsThe enterprise is normally in a dilemma – whether to look at the same vendors to

support such customization or not. This normally works out too expensive for their comfort or within their tight budgets.

Several software vendors have seized the opportunity with offerings that substantially fill these gaps effectively at a fraction of the costs quoted by the major vendors. The other carrot which these vendors offer is a unilateral transfer of the facility to customize themselves which is seen as a huge advantage. The various support software that may be used for managing projects are:

ARROW FEDORA VITAL PILIN MS EXCHANGE SERVER 2003The ARROW ProjectIt is a consortia of institutional repository solution, combining open source and

proprietary Software .Arrow is preferred support software because it:· Provides a platform for promoting research output in the ARROW context· Safeguards digital information· Gathers an institution’s research output into one place· Provides consistent ways of finding similar objects· Allows information to be preserved over the long term

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· Allows information from many repositories to be gathered and searched in one step· Enables resources to be shared, while respecting access constraints · Enables effective communication and collaboration between researchersThe vision of project ARROW: “The ARROW project will identify and test software or

solutions to support best practice institutional digital repositories comprising e-prints, digital theses and electronic publishing.” ARROW project wanted to be a solution for storing any digital output. Their initial focus was on print equivalents such as thesis and journal articles among others. It provided solution that could offer on-going technical support and development past the end of the funding period of the project.

FedoraARROW wanted a robust, well architected underlying platform and a flexible object-

oriented data model to be able to have persistent identifiers down to the level of individual data streams. It accommodates the content model to be able to be version independent.

Since the beginning of the project ARROW has worked actively and closely with Fedora and the Fedora Community. The ARROW project’s Technical Architect is a member of Fedora Advisory Board and sits on Fedora Development Group.

This association is reinforced by VTLS Inc. VTLS President is a member of Fedora Advisory Board and VITAL Lead Developer sits on Fedora Development Group

VITALVITAL refers to ARROW specified software created and fully supported by VTLS Inc.

built on top of Fedora. It currently provides: 1. VITAL Manager2. VITAL Portal3. VITAL Access Portal4. VALET – Web Self-Submission Tool5. Batch Loader Tool6. Handles Server (CNRI)7. Google Indexing and Exposure8. SRU / SRW Support9. VITAL architecture overviewVITAL is part of creative development of ARROW institutional repositories. VITAL

has the following features:1. Inclusion of multimedia and creative works produced in Australian universities2. Limited exposure nationally or internationally3. Addition of annotation capability4. Inclusion of datasets and other research output not easily provided in any other

publishing channel 5. Being developed in conjunction with the DART (ARCHER) Project6. Exploration of the research-teaching nexus tools that will allow value added

services for repositories 7. Integration with or development of new tools that will allow value added services

for repositories (for instance the creation of e-portfolios or CVs of research output of individual academics)

PILIN – Persistent Identifiers and Linking Infrastructure There has been a growing realisation that sustainable identifier infrastructure is

required to deal with the vast amount of digital assets being produced and stored within universities.

PILIN is a particular challenge for e-research communities where massive amounts of data are being generated without any means of managing this data over any length of time. The broad objectives are to:

1. Support adoption and use of persistent identifiers and shared persistent identifier management services by the project stakeholders

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2. Plan for a sustainable, shared identifier management infrastructure that enables persistence of identifiers and associated services over archival lengths of time

3. Deploy a Worldwide Site Consolidation Solution for Exchange Server 2003 at Microsoft

4. Add Picture5. Use Microsoft Exchange Server 2003 to consolidate more than 70 messaging sites

worldwide into seven physical locations In this context, let us look at Microsoft Model Enterprises (MME).

Microsoft Model Enterprises (MME) Objectives · Maximising the number of management tasks performed centrally · Decreasing the number of sites through the consolidation of the smaller locations

into a smaller number of RDCs· Reducing the total number of infrastructure and application servers· Standardising infrastructure and devices worldwideSolution· Consolidation of 75 tail sites into 6 regional data centers (RDCs) using local storage

area networks (SANs)· Key Focus Areas· Proactive, detailed monitoring and analysis of WAN bandwidth utilisation and

latency · Effective but flexible approach to project planning, scheduling, and cross-group

coordination· Coordination and control of deployment of successive pre-release versions of Office

System 2003 (including Outlook 2003)Business Benefits· Four percent overall direct cost savings· Key enabler of the Microsoft ME initiative which through fiscal year 2003 has

produced millions in overall consolidation savings including USEIT Benefits· Improved server utilisation· Improved server management· Strengthened security· Increased reliability

Q.4 List the various steps for Risk management. Also explain GDM and its key features.

Ans:- Risk management may be classified and categorized as:

1. Risk assessment and identification The assessment and identification focuses on numerating possible risks to the project. Methods that can aid risk identification include checklists of possible risks, surveys, meetings and brainstorming and reviews of plans, process and work products. The project manager can also use the process database to get information about risks and risk management on similar projects.

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2. Risk prioritization – focus on the highest risk. Prioritization requires analyzing the possible effects of the risk event in case it actually occurs. This approach requires a quantitative assessment of the risk probability and the risk consequences. For each risk rate the probability of its happening as low, medium or high. If necessary, assign probability values in the ranges given for each rating. For each risk, assess its impact on the project as low, medium, high or very high. Rank the risk based on the probability. Select the top few risk items for mitigation and tracking.

3. Risk Control: The main task is to identify the actions needed to minimize the risk consequences, generally called risk mitigation steps. Refer to a list of commonly used risk mitigation steps for various risks from the previous risk logs maintained by the PM and select a suitable risk mitigation step. The risk mitigation step must be properly executed by incorporating them into the project schedule. In addition to monitoring the progress of the planned risk mitigation steps periodically revisit project. The results of this review are reported in each milestone analysis report. To prepare this report, make fresh risk analysis to determine whether the priorities have

Risk Analysis

The first step in risk analysis is to make each risk item more specific. Risks such as, “Lack of Management buy in,” and “people might leave,” are a little ambiguous. In these cases the group might decide to split the risk into smaller specific risks, such as, “manager Jane decides that the project is not beneficial,” “Database expert might leave,” and “Webmaster might get pulled off the project.” The next step is to set priorities and determine where to focus risk mitigation efforts. Some of the identified risks are unlikely to occur, and others might not be serious enough to worry about. During the analysis, discuss with the team members, each risk item to understand how devastating it would be if it did occur, and how likely it is to occur. For example, if you had a

risk of a key person leaving, you might decide that it would have a large impact on the project, but that it is not very likely. In the process below, we have the group agree on how likely it thinks each risk item is to occur,using a simple scale from 1 to 10 (where 1 is very unlikely and 10 is very likely). The group then rates how serious the impact would be if the risk did occur, using a simple scale from 1 to 10 (where 1is little impact and 10 is very large). To use this numbering scheme, first pick out the items that rate 1 and 10, respectively. Then rate the other items relative to these boundaries. To determine the priority of each risk item, calculate the product of the two values, likelihood and impact. This priority scheme helps push the big risks to the top of the

list, and the small risks to the bottom. It is a usual practice to analyze risk either by sensitivity analysis or by probabilistic analysis. In sensitivity analysis a study is done to analyse the changes in the variable values because of a change in one or more of the decision criteria. In the probability analysis, the frequency of a particular event occurring is determined, based on which it average weighted average value is calculated.

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Each outcome of an event resulting in a risk situation in a risk analysis process is expressed as a probability. Risk analysis can be performed by calculating the expected value of each alternative and selecting the best alternative.

Ex: Now that the group has assigned a priority to each risk, it is ready to select the items to mange. Some projects select a subset to take action upon, while others choose to work on all of Project the items. To get started, you might select the top 3 risks, or the top 20%, based on the priority calculation.

GDM –

The Global Delivery Model (GDM) is adopted by an Industry or Business such that it has a capability to plan design, deliver and serve to any Customers or Clients Worldwide with Speed, Accuracy, Economy and Reliability. The key Features of GDM are ·

Standardization

Modularization

Minimum Customization

Maximum Micro structure

Adoption of a Combination of the Greatest Common Multiple and the Least Common

Factor of a Large Mass of Microbial Components-

a) Standardization - Ingenious Design and Development of Components and Features which are like to be accepted by 90% of Worldwide Customers. Global Standards of Design focusing on highly standardized Methods and Processes of manufacture or Development. Adopt Plug and socket Concepts with minimum adaptable joints or Connections.

b) Modularization - Product or Solution split up into smallest possible individual Identifiable Entities, with limited Individual Functioning Capability but powerful and robust in Combination with other Modules.

c) Minimum Customization - Minimum Changes or Modifications to suit Individual Customers.

d) Maximum micro structuring - Splitting of the Product Modules further into much smaller entity identifiable more through characteristics rather than application Features. Approach through Standardization of these Microbial Entities even across Multiple Modules. Application of these Microbial Entities to rest within multiple Projects or Products or even as add-ons suit belated Customer Needs.

Special Features of GDM

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Some of the special features of GDM are ·

Cuts across Geographical and Time Zone Barriers Unimaginable Speeds of Response and Introduction. Common Pool of Microbial Components Largely Independent of Skill Sets required at Delivery Stages Highly automated Processes Quality Assurance as a Concurrent rather than a Control Process Near Shore Development, Manufacture and Delivery for better Logistics Mapping of Economical Zones rather than Geographic Zones Continuous Floating virtual Inventory to save Time and Efforts.

Q.5 Answer the two parts:

Ans:- a. Importance of data management in project management-Comment.

The Role of Effective Data Management in the Success of Project Management

Data management consists of conducting activities which facilitate acquiring data,

processing it and distributing it. Acquisition of data is the primary function.

To be useful, data should have three important characteristics – timeliness, sufficiency and

relevancy. Management of acquisition lies in ensuring that these are satisfied before they

are stored for processing and decisions taken on the analysis.

There should be data about customers, suppliers, market conditions, new technology,

opportunities, human resources, economic activities, government regulations, political

upheavals, all of which affect the way you function. Most of the data go on changing

because the aforesaid sources have uncertainty inherent in them. So updating data is a very

important aspect of their management. Storing what is relevant in a form that is available to

concerned persons is also important. When a project is underway dataflow from all members

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of the team will be flowing with the progress of activities. The data may be about some

shortfalls for which the member is seeking instructions. A project manager will have to

analyse them, discover further data from other sources and see how he can use them and

take decisions. Many times he will have to inform and seek sanction from top management.

The management will have to study the impact on the overall organisational goals and

strategies and convey their decisions to the manager for implementation. For example, Bill of

Materials is a very important document in Project Management. It contains details about all

materials that go into the project at various stages and has to be continuously updated as all

members of the project depend upon it for providing materials for their apportioned areas of

execution. Since information is shared by all members, there is an opportunity for utilising

some of them when others do not need them. To ascertain availability at some future point of

time, information about orders placed, backlogs, lead times are important for all the

members. A proper MIS will take care of all these aspects. ERP packages too help in

integrating data from all sources and present them to individual members in the way they

require. When all these are done efficiently the project will have no hold ups an assure

success.

b. What is the significance of reviewing ROI?

ROI - Return on Investment (ROI) is the calculated benefit that an organization is projected to receive in return for investing money (resources) in a project. Within the context of the Review Process, the investment would be in an information system development or enhancement project. ROI information is used to assess the status of the business viability of the project at key checkpoints throughout the project’s lifecycle.

ROI may include the benefits associated with improved mission performance, reduced cost, increased quality, speed, or flexibility, and increased customer and employee satisfaction. ROI should reflect such risk factors as the project’s technical complexity, the agency’s management capacity, the likelihood of cost overruns, and the consequences of under or nonperformance. Where appropriate, ROI should reflect actual returns observed through pilot projects and prototypes.

ROI should be quantified in terms of dollars and should include a calculation of the breakeven point (BEP), which is the date when the investment begins to generate a positive return. ROI should be recalculated at every major checkpoint of a project to se if the BEP is still on schedule, based on project spending and accomplishments to date. If the project is behind schedule or over budget, the BEP may move out in time; if the project is ahead of schedule or under budget the BEP may occur earlier. In either case, the information is important for decision making based on the value of the investment throughout the project lifecycle. Any project that has developed a business case is expected to refresh the ROI at each key project decision point (i.e., stage exit) or at least yearly.

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Exclusions

If the detailed data collection, calculation of benefits and costs, and capitalization data from which Return on Investment (ROI) is derived was not required for a particular project, then it may not be realistic or practical to require the retrofit calculation of ROI once the project is added to the Review portfolio. In such a case, it is recommended that a memorandum of record be developed as a substitute for ROI. The memorandum should provide a brief history of the program, a description of the major benefits realized to date with as much quantitative data as possible, and a summary of the process used to identify and select system enhancements.

Some of the major benefits experienced by sites that installed the information system that would be important to include in the memorandum are:

a) Decommissioning of mainframe computers

b) Reduction/redirection of labour

c) Elimination of redundant systems

d) Ability to more cost effectively upgrade all sites with one standard upgrade package.

In each case above, identify the specific site, systems, and labour involved in determining the cited benefit. Identify any costs or dollar savings that are known or have been estimated. The memorandum will be used as tool for responding to any future audit inquiries on project ROI.

For the Project Management Review, it is recommended that the project leader replace the text on the ROI document through -

1) a note stating which stage of its cycle the project is in;

(2) A bulleted list of the most important points from the memorandum of record; and

(3) a copy of the memorandum of record for the Review repository.

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In subsequent Reviews of the information system, the ROI slide can be eliminated form the package. There is one notable exception to this guidance. Any internal use software project in the maintenance phase of its lifecycle that adds a new site or undertakes an enhancement or technology refresh that reaches the cost threshold established by Standard will need to satisfy capitalization requirements. It requires all agencies to capitalize items acquired or developed for internal use if the expected service life is two or more years and its cost meets or exceeds the agency’s threshold for internal use software. The standard requires capitalization of direct and indirect costs, including employee salaries and benefits for both Federal and Contractor employees who materially participate in the Software project. Program managers are considered to be the source of cost information for internal use software projects. If capitalization data is collected for the project in the future, the project would be expected to calculate and track its ROI.

Q.6 XYZ Company implements CMMI level-03. To make further changes it decides on starting a new division in the organization. It decides to advance the existing project management. What are the steps to be followed by the organization to drive project management to a new horizon?

Ans:- Capability Maturity Model Integration (CMMI) is a process improvement approach that helps organizations improves their performance. CMMI can be used to guide process improvement across a project, a division, or an entire organization.

CMMI in software engineering and organizational development is a process improvement approach that provides organizations with the essential elements for effective process improvement. CMMI is a trademark owned by Software Engineering Institute of Carnegie Mellon University.

According to the Software Engineering Institute (SEI, 2008), CMMI helps "integrate traditionally separate organizational functions, set process improvement goals and priorities, provide guidance for quality processes, and provide a point of reference for appraising current processes."[2]

CMMI currently addresses three areas of interest:

1. Product and service development — CMMI for Development (CMMI-DEV),2. Service establishment, management, and delivery — CMMI for Services (CMMI-

SVC), and3. Product and service acquisition — CMMI for Acquisition (CMMI-ACQ).

CMMI was developed by a group of experts from industry, government, and the Software Engineering Institute (SEI) at Carnegie Mellon University. CMMI models provide guidance for developing or improving processes that meet the business goals of an organization. A CMMI model may also be used as a framework for appraising the process maturity of the organization.[1]

CMMI originated in software engineering but has been highly generalised over the years to embrace other areas of interest, such as the development of hardware products, the delivery

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of all kinds of services, and the acquisition of products and services. The word "software" does not appear in definitions of CMMI. This generalization of improvement concepts makes CMMI extremely abstract. It is not as specific to software engineering as its predecessor, the Software CMM.

CMMI was developed by the CMMI project, which aimed to improve the usability of maturity models by integrating many different models into one framework. The project consisted of members of industry, government and the Carnegie Mellon Software Engineering Institute (SEI). The main sponsors included the Office of the Secretary of Defense (OSD) and the National Defense Industrial Association.

CMMI is the successor of the capability maturity model (CMM) or software CMM. The CMM was developed from 1987 until 1997. In 2002, CMMI Version 1.1 was released. Version 1.2 followed in August 2006.

CMMI representation

CMMI exists in two representations: continuous and staged. The continuous representation is designed to allow the user to focus on the specific processes that are considered important for the organization's immediate business objectives, or those to which the organization assigns a high degree of risk. The staged representation is designed to provide a standard sequence of improvements, and can serve as a basis for comparing the maturity of different projects and organizations. The staged representation also provides for an easy migration from the SW-CMM to CMMI.

CMMI model framework

Depending on the CMMI constellation (acquisition, services, development) used, the process areas it contains will vary. Key process areas are the areas that will be covered by the organization's processes. The table below lists the process areas that are present in all CMMI constellations. This collection of eight process areas is called the CMMI Model Framework, or CMF.

Capability Maturity Model Integration (CMMI) Model Framework (CMF)

Abbreviation Name Area Maturity Level

REQM Requirements Management Engineering 2

PMC Project Monitoring and Control Project Management 2

PP Project Planning Project Management 2

CM Configuration Management Support 2

MA Measurement and Analysis Support 2

PPQA Process and Product Quality Assurance Support 2

OPD Organizational Process Definition Process Management 3

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CAR Causal Analysis Support 5

Maturity Levels

There are Five maturity levels. However, maturity level ratings are awarded for levels 2 through 5.

Maturity Level 2 - Managed

CM - Configuration Management MA - Measurement and Analysis PMC - Project Monitoring and Control PP - Project Planning PPQA - Process and Product Quality Assurance REQM - Requirements Management SAM - Supplier Agreement Management

Maturity Level 3 - Defined

DAR - Decision Analysis and Resolution IPM - Integrated Project Management +IPPD OPD - Organizational Process Definition +IPPD OPF - Organizational Process Focus OT - Organizational Training PI - Product Integration RD - Requirements Development RSKM - Risk Management TS - Technical Solution VAL - Validation VER - Verification

Maturity Level 4 - Quantitatively Managed

QPM - Quantitative Project Management OPP - Organizational Process Performance

Maturity Level 5 - Optimizing

CAR - Causal Analysis and Resolution OID - Organizational Innovation and Deployment

CMMI models

CMMI best practices are published in documents called models, each of which addresses a different area of interest. The current release of CMMI, version 1.2, provides models for three areas of interest: development, acquisition, and services.

CMMI for Development (CMMI-DEV), v1.2 was released in August 2006. It addresses product and service development processes.

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CMMI for Acquisition (CMMI-ACQ), v1.2 was released in November 2007. It addresses supply chain management, acquisition, and outsourcing processes in government and industry.

CMMI for Services (CMMI-SVC), v1.2 was released in February 2009. It addresses guidance for delivering services within an organization and to external customers.

CMMI Product Suite (includes Development, Acquisition, and Services), v1.3 is expected to be released in 2010. CMMI Version 1.3—Plans for the Next Version

Regardless of which model an organization chooses, CMMI best practices should be adapted by an organization according to its business objectives.

Appraisal

An organization cannot be certified in CMMI; instead, an organization is appraised. Depending on the type of appraisal, the organization can be awarded a maturity level rating (1-5) or a capability level achievement profile.

Many organizations find value in measuring their progress by conducting an appraisal. Appraisals are typically conducted for one or more of the following reasons:

1. To determine how well the organization’s processes compare to CMMI best practices, and to identify areas where improvement can be made

2. To inform external customers and suppliers of how well the organization’s processes compare to CMMI best practices

3. To meet the contractual requirements of one or more customers

Appraisals of organizations using a CMMI model must conform to the requirements defined in the Appraisal Requirements for CMMI (ARC) document. There are three classes of appraisals, A, B and C, which focus on identifying improvement opportunities and comparing the organization’s processes to CMMI best practices. Appraisal teams use a CMMI model and ARC-conformant appraisal method to guide their evaluation of the organization and their reporting of conclusions. The appraisal results can then be used (e.g., by a process group) to plan improvements for the organization.

The Standard CMMI Appraisal Method for Process Improvement (SCAMPI) is an appraisal method that meets all of the ARC requirements.

A class A appraisal is more formal and is the only one that can result in a level rating. Results of an appraisal may be published (if the appraised organization approves) on the CMMI Web site of the SEI: Published SCAMPI Appraisal Results. SCAMPI also supports the conduct of ISO/IEC 15504, also known as SPICE (Software Process Improvement and Capability Determination), assessments etc.

Achieving CMMI compliance

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The traditional approach that organizations often adopt to achieve compliance with the CMMI involves the establishment of an Engineering Process Group (EPG) and Process Action Teams (PATs).This approach requires that members of the EPG and PATs be trained in the CMMI, that an informal (SCAMPI C) appraisal be performed, and that process areas be prioritized for improvement. More modern approaches that involve the deployment of commercially available, CMMI-compliant processes, can significantly reduce the time to achieve compliance. SEI has maintained statistics on the "time to move up" for organizations adopting the earlier Software CMM and primarily using the traditional approach.[6] These statistics indicate that, since 1987, the median times to move from Level 1 to Level 2 is 23 months, and from Level 2 to Level 3 is an additional 20 months. These statistics have not been updated for the CMMI.

The Software Engineering Institute’s (SEI) Team Software Process methodology and the Capability Maturity Modeling framework can be used to raise the maturity level.

Applications

The SEI published that 60 organizations measured increases of performance in the categories of cost, schedule, productivity, quality and customer satisfaction.[7] The median increase in performance varied between 14% (customer satisfaction) and 62% (productivity). However, the CMMI model mostly deals with what processes should be implemented, and not so much with how they can be implemented. These results do not guarantee that applying CMMI will increase performance in every organization. A small company with few resources may be less likely to benefit from CMMI; this view is supported by the process maturity profile (page 10). Of the small organizations (<25 employees), 70.5% are assessed at level 2: Managed, while 52.8% of the organizations with 1001–2000 employees are rated at the highest level (5: Optimizing).

Interestingly, Turner & Jain (2002) argue that although it is obvious there are large differences between CMMI and agile methods, both approaches have much in common. They believe neither way is the 'right' way to develop software, but that there are phases in a project where one of the two is better suited. They suggest one should combine the different fragments of the methods into a new hybrid method. Sutherland et al. (2007) assert that a combination of Scrum and CMMI brings more adaptability and predictability than either one alone. David J. Anderson (2005) gives hints on how to interpret CMMI in an agile manner. Other viewpoints about using CMMI and Agile development are available on the SEI Web site.

The combination of the project management technique earned value management (EVM) with CMMI has been described (Solomon, 2002). To conclude with a similar use of CMMI, Extreme Programming (XP), a software engineering method, has been evaluated with CMM/CMMI (Nawrocki et al., 2002). For example, the XP requirements management approach, which relies on oral communication, was evaluated as not compliant with CMMI.

CMMI can be appraised using two different approaches: staged and continuous. The staged approach yields appraisal results as one of five maturity levels. The continuous approach yields one of six capability levels. The differences in these approaches are felt only in the

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appraisal; the best practices are equivalent and result in equivalent process improvement results.

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