Category “Project Management”

How to Gain Approval from Senior Management

July 3, 2014 by Clark

You have identified several issues within your operations.  You feel that if fixed, your company will benefit greatly by eliminating these issues; how do you now go about soliciting senior management for funding approval to pay for the solution that you feel will solve the issues you have identified?

All senior management will bias their decision to fund a project based on a financial analysis of the opportunity.  In other words, “is there a ROI or Return on the Investment?” Understanding how to present a financial analysis to senior management therefore is very important.  You might be thinking “I don’t have the proper training in financial analysis to present a solid case for funding my project.”  This is where Setpoint can help; we have developed an online ROI calculator (Return On Investment) to assist you in putting together a high level financial summary that will ultimately be required by your Sr. Management, to fund your potential project.

You may not be a financial wizard; but, everything you do can be quantified in monetary terms.  Here is a road map that you can follow in your quest to gather this information.  It all begins with your company’s pain or in the discovery of “what do you have to much of or not enough of?“  For instance, you have too much scrap, too much labor, not enough equipment utilization, not enough throughput, or you can ask yourself what are the current issues facing your business, whether it is management dictated or issues that you have identified yourself.  Start by listing all of the issues you have identified, then prioritize each of them by importance to solve, and assign each one a monetary value.  You could say your scrap rate is 5% and that equates to 25,000 parts per month.  If each part scrapped costs $.50, you just valued the scrap being produced at $12,500/month.  Do this same analysis with each of your issues.

Once you have established what all of the issues are, you can then make a correlation between what your current business situation looks like now, and then you need to decide what you want it to be once all the issues are solved.  You may not be able to solve all of the issues you identified right away but start with those issues that pose the largest potential gain for your company if solved.    For example, if you currently have 10 operators and you believe you can get it down to 6, or if your throughput is 60 ppm and you believe you can get it up to 90 ppm, there will be a benefit to your company that can be calculated if you can indeed achieve this level of improvement or change.  After making it through your list of pains and you have quantified what it is now and what you would like it to be, that the differences will now need to be converted into a monetary value to get your annual benefit.  If the improvements are related to a project with a specific time frame, you can multiply the annual benefits x the number of years the benefits should be realized. Below is an example project to give you an idea of how to complete this analysis.

Annual Benefit Calculations

 

Now that you have your annual benefit calculated, you will need to know your estimated cost of your project, the number of years your new equipment will be used and your annual minimum interest rate or what interest rate you need in order to make the investment, sometimes this is referred to as the hurdle rate.  For our example we will assume the cost of the solutions or the new equipment is $4.5 million.  We have determined that will use this new equipment for 5 years and the minimum interest rate is 7%.  With your annual benefit calculated, an estimate of the cost, years in production and interest rate, it’s time to go to our ROI calculator and plug in the numbers to find out if your project is worth pursuing.  Below is a screenshot of our ROI calculator for the above example project.

Return On Investment Calculator

 

From our inputs we are given three important numbers that will sell your CFO on your project; the Net Present Value (NPV), Payback – in years, and Internal Rate of Return (IRR).  We will briefly explain each number and why it is important.  Because a dollar earned in the future won’t be worth as much as one earned today, the NPV method provides a value for your project in today’s dollars minus the initial cost of the project.  When interpreting the NPV, if the number is greater than zero, it should be accepted.  For our example project, our NPV came back at $17,349,952.14; compared to the investment of $4.5 million this project should be an easy sell.

The payback method is the simplest way to evaluate the return of a project; basically, it tells you how many years it will take to get the return on your money or investment. For this method, the payback period must be shorter than the life of the project.  In our example, we are estimating an equipment life of five years and our payback period is under one year (0.84 years), you should definitely feel confident in presenting this project to senior management.  We find that most companies require an ROI period to be less than or equal to 2 years.  Some very aggressive companies actually won’t invest in capital equipment unless the ROI is one year or less.

The final metric shown in the ROI calculator is IRR, which calculates the actual return provided by the projected cash flows.  The IRR can then be compared with the company’s hurdle rate.  When considering the IRR of your project you want it to be greater than your company’s hurdle rate, otherwise the project doesn’t make sense financially.  In our example, the IRR was calculated at 115.84%, which is greater than the 7% hurdle rate, making this project a good one to pursue.

Next time you have identified some issues in your operations and need funds for a project to correct these issues, remember to calculate the ROI to see if pursuing the project makes sense before spending a bunch of time and effort on something that will not ultimately get funded for lack of an acceptable ROI.  As long as your return is positive you will have the financial evidence and confidence to present your project to senior management and sell them on your project.

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My first big project

August 28, 2013 by Raleigh

Here I am, an early college grad stepping out into the big kid world and working for Setpoint Systems. Right off the bat I was assigned to work on a brand new project for the company. This new project was unlike anything Setpoint had ever done before. Everything about this project was brand new. Luckily I was put under the wing of Steve our senior Applications Engineer. He helped me take this seemingly complex machine and break it down into bite sized chunks which could be easily handled.

After months of design work and drafting, most of the parts had made their way into our shop. It didn’t take long until the machine was partially thrown together. Obviously the machine wasn’t perfect right away, and parts needed revising. There were also delays on critical components. It almost felt like waiting for Christmas, though instead of Santa Claus I had to beg purchasing & receiving for my goodies. The big day finally came and the unit made its triumphant entrance onto the set with loads of damage due to shipping problem, and on top of that the power which we had anticipated to work for the unit would not work… And the wait continued.

Meanwhile Brad our CEO had his eye on my little project. He of course noticed that all the parts for my machine were finally in and only one thing remained, when would the machine run. On Tuesday, Brad decided to mosey on over to my desk and ask me a very simple question.

“Raleigh, when am I going to see this machine run?”

Of course being somewhat blindsided by his presence and question, I fumbled around a little bit.

“Give me 30 minutes and I’ll tell you when this machine will be up and running.” was my response.

So I dashed about, trying to get a hold of any of my key players. First off I needed to make sure that the power to my machine was finally wired. Luckily the wiring had just been finished the afternoon before. Next I needed to see if I could get some programming and assembly time. Luck was on my side, and I was also able to get their help. After I got confirmation from these two, I approached Brad at 30 minutes on the dot.

“Brad I can get this machine up and running on Friday.”

“By lunch on Friday?” Brad inquired.

“Yes, by lunch on Friday.” I responded.

So for the next two days I buckled down and got to work. It must’ve been a good week, because luck remained on my side. During the whole assembly/debug process no bugs were encountered. Thursday evening eventually came around and I had the machine cycling. I made sure to check, double check, and triple check every little sub assembly that I had on the machine. The reason being was that if any part were broken we were facing a minimum 5 week lead time to receive a brand new part. Of course I didn’t want my first designed and assembled machine to break such valuable tooling on its very first run. I finally developed the confidence and showed Steve the working machine.

“Well let’s throw a part in the machine and see if it actually works.” Steve said.

He then began to call up all the bigwigs. It wasn’t long before there was quite the little crowd gathered around my machine. There was now only one thing left to do, drop a part into the machine. Hesitantly I dropped my hopefully lucky part into the apparatus, and placed my fingers on the go switches. It felt like my stomach was up in my throat. It felt like eternity as my machine went through its processes. Finally the machine’s cycle came to an end and it appeared as if it had successfully made it from point A to B without any hang-ups. Mark our president reached into the bin and pulled out one well transformed part. The adrenaline kicked in, and I could feel my hands shaking, it was so exciting!

I was so excited, not only that my machine worked but also that I was able to keep my word and not only get my machine working on time but to also have it up and running before I promised it to be. I was once told “there’s no shame being on time,” well I know that I feel pretty proud I was able to get my first project running early. I can safely say that this accomplishment would not have been anywhere near possible without the help of my wonderful and talented coworkers.

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The Agony of Outsourced Project Work

July 23, 2013 by Setpoint

Ask yourself: who do you think feels more frustrated when a multi-month outsourced project drags on long past the original completion date and costs much more than planned? The vendor charging for the service (the custom web/software development, engineering services, construction, and marketing companies of the world) or the customer paying for the project work?

You get a gold star if you guessed the customer! Having felt this with our vendors Setpoint began utilizing our project management philosophy with them. One of our strategic partners implemented our system when they began working with us and had great results. Recently GapZen conducted primary research with both vendors and customers of complex projects, and can state with complete confidence that customers feel significantly more pain when projects drag on incessantly, costing more than planned. And, if we’re all being honest with ourselves, these types of projects are rarely, if ever, delivered on time and on budget.

Over 90 percent of the customers they surveyed and interviewed were eager to express intense feelings of frustration and distrust (to put it mildly) for their vendors. Customers feel a total lack of control and never seem to have a clear idea how much work has actually been done on a project, when it will really be complete, and how much it will truly cost in the end. Customers dislike feeling “locked-in” to poorly performing vendors who never seem to share bad news until the project is so far along that it is cost prohibitive for the customer to make a switch. And customers really hate receiving final invoices that are eye-poppingly higher than expected.

Though not as severe, project vendors also expressed feelings of pain. Many vendors feel that realistic bids are unlikely to win contracts, so they submit low bids up front and opt to “fight it out” with the customer later on. Vendors know that scope is never clear enough up front, leading to an inevitable barrage of scope change requests from the customer. And some vendors have felt the painful sting of not finding out until after completing a project that it has actually lost money.

Are these painful problems simply an unavoidable consequence of outsourcing project work? Or can these gaps between vendors and customers be closed to the mutual delight of both parties?

We know these gaps can be closed. Over the last two decades we have perfected a better system for managing complex outsourced projects. Using this system, we’ve won awards for completing projects on time when they were delivered six weeks late. And if your customer doesn’t think you’re late, you’re not!

We’re so excited about closing these gaps that we wrote a book and created a website to help others implement our system. Vendors will find a nuts and bolts management and financial system in our book, Project Management for Profit. Customers will find a simple yet powerful system for managing their vendors at www.gapZEN.com.

We invite you to investigate these solutions to repair shattered customer confidence in multi-month outsourced project vendors while simultaneously enabling these vendors to run more profitable businesses.

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Balancing Employees and Contract Labor

April 17, 2013 by Jason

For many years employers of labor have struggled with the balance of maintaining efficiency and productivity with the ever changing project demands versus capacity of labor. Changes in volume of work can range from needing 50% more available labor to finding work for 50% of your already employed work force.

In order to maintain the balance of employed labor and contracted labor the employer must have a basic understanding of their current capacity and productivity.  Real capacity can only be established by understanding their current productivity.

Capacity = Total available hours employees work

Productivity = Worked Hours (time on the project clock) versus Earned Hours (hours that change the configuration of a product in a way that your customer is willing to pay for or has already paid for, Gross Profit)

Once an employer truly understands their productivity, then and only then should they make decisions of employing labor to complete projects at an efficient rate of return for the company.

Once the decision has been made that the work load over loads or under loads the current available labor, the employer must choose the most efficient and productive method to maintain productivity and in turn keep their profit margin at a point that they can maintain a healthy business.  The balance of full time employees versus contract labor plays a key role in this decision.  As an employer analyzes the deviation from capacity, using capacity and productivity, they must understand the long term goals of the company by answering the following questions:

  • Is the new work demand part of the growth path the company has chosen?
  • Is the new work demand just a high spot and not part of the long term plans of the company?

A good decision making point for bringing in contract labor is a 10% overload.  If a project or projects are going to overload an already 90% productive work force for a short period of time, overtime and extra effort from existing employees is the most economical method.  If a project or projects are going to overload a currently 90% productive work force for an extended period of time, then bringing in contract labor is necessary to keep productivity and profit at the appropriate level.

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Setpoint’s Project Management Method Part 5

December 11, 2012 by Kara

Setpoint lives, breathes, and survives by its project management system.  Each employee gets involved in the numbers because they see how what they do affects each project.   In the last of our 5 part series Joe talks about why Setpoint benefits from our project management system.

Interested in more?  Pick up the Project Management for Profit book on Amazon.

Want to see how it works?  Try out the PM4Profit system

Watch our other project management videos to hear the whole story

Project Management Part 4 – Gross Profit per Hour (GP/H)

Project Management Part 3 – The fundamental processes

Project Management Part 2 – Why traditional project management doesn’t work

Project Management Part 1 – How Setpoint manages projects

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Setpoint’s Project Management Method Part 4

June 20, 2012 by Kara

Following the information gathered from the first three project management clips Joe walks through collecting the percentage complete based on labor hours and using that to measure how much gross profit you have earned. Once you know the gross profit you can measure your gross profit per hour to show you if you are making money or not.

Use the Setpoint project management system at www.pm4profit.com.

Watch our other project management videos to hear the whole story.

Project Management Part 3 – The Fundamental Processes

Project Management Part 2 – Why traditional project management doesn’t work

Project Management Part 1 – How Setpoint manages projects

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The Project Management For Profit System

April 25, 2012 by Roger

Can somebody please just tell me what the score is?

Several decades ago, while coaching my son and his friends in a first-year t-ball league, I had a very eye-opening experience. During the first game of the season, one of my precocious young charges came up to me and asked what the score was. I gently explained that in this league, we didn’t need to keep track of the score. Our goal was to teach the skills of the game, not to track wins and losses. The lad looked me straight in the eye and said disdainfully, “Well that’s just stupid. How are we supposed to know how to play the game if we don’t even know what the score is?!” His disgust was palpable as he turned away and trudged back to his spot on the bench. I was instantly just a little irritated, but not for the reasons that you may think. In fact, I was irritated because I agreed whole-heartily with my young (and somewhat obnoxious) tormentor. He was right…We should be keeping score! At this point I’m thinking “Well that’s another glorious lowlight for volunteer coaches everywhere…”

Shortly thereafter, I glanced over at my team and noticed that they were keeping track of the score themselves, using sticks on the dugout floor. Wow. These kids were bound and determined to know the score of the game, even if all of us well-meaning adults wouldn’t keep track of it for them. If I remember correctly, we won that game 6 sticks to 3…Not that I was keeping score or anything.

The takeaway lesson for me that day was this: No matter what age you are, no matter what task it is that you’re undertaking, in order to perform at your most effective levels you must know what the score is. Whether we admit it or not, the truth is that whatever game we’re participating in, the score dictates our basic human behaviors. Instinctually we all act differently whether we’re ahead or behind “late in the fourth quarter” of any venture, be it sporting, business, or just life in general. Our operational strategies automatically adjust and adapt to meet the needs dictated by our position on the scoreboard.

In this aspect, Project Management is no different than any other game. In order to know exactly how to manage the project; what to watch closely; what not to worry over; what to panic over; etc…..we must know what the score is at any given time. And the score in the project management game always has dollar signs in front of the numbers. Any time that we don’t know where we stand (or worse yet, have a falsely-inflated view of where we stand), our chances of winning the game decrease dramatically. As that 5 year-old ball player once chastised me, “How are we supposed to know how to play the game if we don’t even know what the score is?” If a project manger can use that score to help him consistently play at the most effective levels, his chances of winning the game with successful projects that net windfall profits increase exponentially.

But the problem is, very few project-based companies can actually tell you where they stand on the financial scoreboard at any given time. Very few project managers really know what the financial score is on their projects until they are long-completed. Unfortunately, this is an all too common tale that I’ve lived through personally time and time again.

After nearly two decades of project management experience in a variety of industries, I came to work at Setpoint as a contract project manager in early 2004. From day one I could see that the “Setpoint way” of tracking project financial progress was like nothing I’d ever seen or experienced. I was amazed (and at first, just a little skeptical) when Setpoint project managers were able to consistently calculate their project earnings in nearly real time. In my previous business experiences, this level of financial tracking was not only unheard of, but in fact, I’m quite sure it would have been laughed off as impossible if anyone had been silly enough to even bring up the possibility.

I quickly realized that by keeping close track of just a few critical project financial metrics, I too could pull off this near-magical feat of financial score-keeping that the Setpoint system facilitated. Being a numbers geek at heart, I not only accepted this new system, I embraced it to the utmost degree. Suddenly I was able to make decisions regarding my projects with a complete and thorough understanding of the financial impact that each choice would have on my project’s budget. And not some vague theoretical understanding of the financial impact. No, I could now put a solid dollar figure to every action, nearly every time.

My teams were now able to adapt operational strategies throughout the life of the project, with every financial impact measured and reported weekly. Now a strategy was not necessarily successful just because it solved an operational issue, it had to be financially effective, in order to be considered a success. My project strategies evolved based on this wonderful new financial enlightenment. Suddenly our weekly goals were measured with more than just a task list and a calendar.

I’ve always been a big believer in the age-old adage that says “Knowledge is power”. And the financial knowledge that we were able to generate and track with the Setpoint system was so powerful, it certainly played a huge part in establishing the solid financial foundation of Setpoint that lives on to this day. Without the precise and regular tracking that we’ve completed on every project every week, there’s a good chance that Setpoint may have fallen by the wayside years ago, a tragic victim of good-projects-gone-bad, like so many of our competitors over the years have done. The nasty truth of project-based businesses is this: You usually don’t get many ‘bad projects’ in a row before you get crushed. If things get out of control on several projects at once, you may find yourself in the express line to the business graveyard.

In the past two decades we’ve shared the fundamentals of the Setpoint system with many companies, including a number of our strategic business partners. Over time the management team at Setpoint realized that this system could be helpful to many companies that deal with similar challenges in monitoring and influencing a project’s financial success. And thus was born the ‘Profit Management for Profit’ (PMFP) system.

With the PMFP system, we’ve dissected the metrics and methods of the Setpoint system and reassembled them in a manner that nearly any small business can utilize to accurately track the financial success of their efforts. In our book Profit Management For Profit (Harvard Business Press June 26, 2012), we provide not only the metrics and equations needed to use the PMFP system, but also the philosophical and cultural aspects of the system that are so critical to it’s successful implementation in any business culture. What’s your current philosophy on project financial tracking? Are you able to announce the real-time financial score on your projects at the drop of a hat? Maybe you already think you know the score, or maybe you don’t even care what the score is. But if you and your company really do realize how critical the score is to the success of your efforts, then maybe some of the PMFP methods can help you.

The bottom line? You’d better have a very good method to consistently and accurately track the financial score of your efforts. If you don’t, you may be in trouble and not even know it. Because after all, how are we supposed to know how to play the game if we don’t even know what the score is?

Find out more about the PMFP system at: www.pm4profit.com

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Setpoint’s Project Management Method Part 3

March 28, 2012 by Kara

In part 3 of our project management series, Joe Knight our CFO talks about the fundamental processes that Setpoint uses to successfully manage projects.  Joe talks about how to keep your company out of trouble and becoming a “walking dead” company.  Joe explains how to track a project financially using a more rational method than the traditional approach.

Watch our other project management videos to hear the whole story.

Project Management Part 2 – Why traditional project management doesn’t work

Project Management Part 1 – How Setpoint manages projects

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Making a Project Successful

October 14, 2010 by Ken

When Setpoint starts a project we begin with the mindset that we want to make a fair profit even though it doesn’t always work out that way. When you bid a clean sheet design it’s at best an educated guess hoping you are on the high side, if you are lucky and bidding on more than one of the same machine you stand a chance to make up some of your losses from the first one on the following on’s. The first one is your test unit where you find out how close you got with the design.

Once you have the first machine assembled you can see what does and doesn’t work.  This is just the way it is, no one can foresee all the issues you will face. So you go back to the drawing board and hope you can fix it with one more try.  Now let’s say you have a proven machine that works and you start on the follow-on’s. We had a project where we thought it would take 1998.08 hours to complete; we ended up using 4776.75 hours on the first machine so we went over by 2778.67 hours.  The cost of materials was over by $46,735.90 but we still had 3 more to build.

After building the first machine we knew what worked and what didn’t.  I set up all the assemblies to be done in sets of 3 to promote the effectiveness of repetitious assembly.  So for instance, all 3 lifting assemblies and all 3 pulling assemblies were built at the same time by the same tech.  One tech cut the entire conduit for all 3 machines at the same time, while another cut and labeled the wires to be put in the conduit, and others laid out the panels to be wired. We drilled all the holes needed in the frames before anything is put in the way, then we installed the guarding and started putting the completed assemblies on the unit.  Getting the order of events down made a big difference.   All assemblies that are built with sensors and air lines are labeled and set before it is moved to the unit for installation.

We had minimum debug time due to having done it once already, which makes follow-on’s go much smoother.  The start up also went faster because the programmer had worked out all the bugs in the program.

We had a total of 2900 hours to complete all 3 units, and $391,737.50 to purchase all materials, our hours came in at 2573 hours, 327 hours under.  The cost of materials was $379,769.01, we were able to save $11,968.49 so all in all not too bad.  What made this successful was taking those things that we learned from the first machine and applying them to make the follow-on’s go quickly.

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What it means to be a Setpoint Strategic Partner

August 12, 2010 by Setpoint

By John Lennox-Gentle – L-GA

For many years we at Lennox-Gentle Automation in Golden, Colorado, have held a special relationship with Setpoint Systems of Ogden, Utah, we are a proud Setpoint Systems Strategic Partner.

In our Strategic Partner role we assist Setpoint during their “capacity shortage” periods by providing the Lennox-Gentle Automation teams engineering and manufacturing expertise at special “trade” rates.  This synergistic relationship has certainly profited Lennox-Gentle Automation, and we hope it has also profited Setpoint.

From our first meeting with Setpoint, many years ago we have been impressed with the Setpoint Systems philosophy.  This philosophy sprang from a vision laid out by the Setpoint founding partners.  It is a simple yet profoundly effective outlook.  They just maintain an “open and honest” relationship with their employees, associates, vendors and most important, their customers.   I hail from the “old school” of management which taught us “tell your people (staff and customers) nothing but good news or you will loose them” so the first “open” step I took was more of a “leap of faith” for me.   I threw all cares aside and engaged the Lennox-Gentle Automation team in the Setpoint “open” policy.

My first cautious step was made easier by my main contact with Setpoint, my “Project Manager”, my “Mentor”, and now my dear friend, Roger Thomas.  Roger, with his avuncular attitude, genial manner and inherent wit, places his personal stamp on the relationships he develops with his people, his vendors and his customers.  Rogers’ honesty is contagious, and each member of his team has the same “tell me the full scoop, no filters, no holding back” attitude.  Roger is the epitome of “open”.  Not just by his “open” policy, but also by his “full frontal”, “show it how it is”, “open toga” policy of true, honest project reporting, “pimples, warts and all”.

Working with Roger, Clark, Bob, Ken, John, Scott, Steve, Joe and the rest of the Setpoint team is a joy for us.  Each of their attitudes naturally promotes the entire team to get involved, and this combined energy is focused on the fight with the delinquent project issues, rather than in, the other company, who lull each other into a false sense of accomplishment or security.

I know that Roger and the Setpoint team has our six, they have proved it time and again, and I am sure they know that we have theirs.  We hold no project “secrets”, we share all the project problems, as well as the project progress with the entire Project Team.  (The “Project Team” being the L-GA and Setpoint project staff, company staff, vendors and most important, project customers).

I have now modeled my company on the Setpoint, “open” policy.  I recently remodeled my engineering offices by knocking down all the office physical and psychological walls and was pleasantly surprised how this has positively affected the Lennox-Gentle Automation team morale.

The team members can hear each of the other members’ project interaction with vendors, other team players and customers.  Now there is no need for any “pat each other on the back” meetings, and the progress and “status” meetings have shortened from hours to minutes because of this “open office” and “open policy”.  Team communication is almost subliminal.  We inherently know each others problems so we can be immediately ready to assist with their resolution.

Being a Setpoint Strategic partner means much more to us than sharing a mountain range, albeit when visiting us the Setpoint team retains an odd sense of “direction” as their mountains are in the East.  It is sharing the project responsibilities, sharing the project pains and project glories with a trusted companion who is as eager as you are in bringing it to a successful conclusion.

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