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COST MANAGEMENT 642 - Paper 6

COST MANAGEMENT 642 - Paper 6. PROJECT SELECTION NUMERICAL METHODOLOGIES SCORING 1.0. INTRODUCTION 2.0. SCORING METHODOLOGIES 2.1. Scoring Methodologies: Introduction 2.2. Scoring Methodologies: Unweighted Scoring 2.3. Scoring Methodologies: Weighted Scoring

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COST MANAGEMENT 642 - Paper 6

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  1. COST MANAGEMENT 642 - Paper 6 PROJECT SELECTION NUMERICAL METHODOLOGIES SCORING • 1.0. INTRODUCTION • 2.0. SCORING METHODOLOGIES • 2.1. Scoring Methodologies: Introduction • 2.2. Scoring Methodologies: Unweighted Scoring • 2.3. Scoring Methodologies: Weighted Scoring • 2.4. Scoring Methodologies: Advantages and Disadvantages • 2.5. Scoring Methodologies: Example (Angling, 1985)

  2. Scoring Methodologies - Introduction • ”Use of formal, numeric procedures for evaluation & selection of projects is a recent phenomenon, largely post-WW2" • 2 types of numeric methods - SCORING & FINANCIAL. • Financial PS uses cashflows as a means for selection. • If all projects expressable in cashflows then selection is simple: alternative with largest profit or lowest cost • But often PS criteria cannot be measured in $$. Scoring used to evaluate projects against a set of diverse criteria. • Criteria usually set by upper management & derived from organisation's goals. • Proposed projects allocated scores based on how they meet the selection criteria. The scores are totalled and projects ranked.

  3. Scoring Methodologies - Introduction • Either all projects meeting a certain score chosen; or highest scoring projects selected until a total budget is reached. • “Take care. Scores are just relative indications of best projects. Small differences are probably not significant. But, large differences indicate that 1 project is clearly better than another. Team needs to examine results to determine that they really do make sense” • Selection by scoring typically by group process • Scoring methodologies useful as initial screening process for project proposals

  4. Scoring Methodologies QUESTION • PROJECT - best way to travel 3km to work - walk, bicycle, car, bus • Select the project selection criteria - Do & Discuss • Method 1 - - Do & Discuss

  5. Scoring Method 1 - No-Range & Unweighted Selection CriteriaProject AProject B Alignment with core business 1 0 Top-management support 1 1 Positive impact on stakeholders 1 0 Stage of technology development 0 1 Adequate knowledge of technology 0 0 Existing facility and equipment 0 1 Availability of raw materials 1 1 Potential market for output 1 1 Probability of share of potential market 1 0 Ability to reach market timely 1 1 Adequate return on investment 0 1 Adequate payback period 0 1 • TOTALS 78

  6. Scoring method 1 - No-Range & Unweighted • Project receives a point for each criteria met. • Project meeting minimum number of criteria may be chosen. • Major disadvantages: • assumes all criteria are of equal importance • no graduation of degree to which a project meets criteria

  7. Scoring Methodologies QUESTION • PROJECT - best way to travel 3km to work - walk, bicycle, car, bus • Method 2 - - Do & Discuss • Method 3 - - Do & Discuss

  8. Scoring Method 2 - Range & Unweighted Selection Criteria Project A Project B Alignment with core business 4 4 Top-management support 4 4 Positive impact on stakeholders 5 2 Stage of technology development 1 4 Adequate knowledge of technology 2 2 Existing facility and equipment 1 3 Availability of raw materials 5 5 Potential market for output 5 5 Probability of share of market 5 1 Ability to reach market timely 5 3 Adequate return on investment 2 3 Adequate payback period 2 5 TOTAL 4141

  9. Scoring Method 2 - Range & Unweighted • each criterion - each project is allocated a subjectively evaluated score within a range (e.g., 5 = very good, down to 1 = very poor). • permits allocation of degree to which project meets each criterion • Disadvantage - No rating of importance of criteria.

  10. Scoring Method 3: Weighted Scoring • Each criterion weighted according to its perceived importance relative to the other criteria. • Against each criterion project is given a score within a range (5 = very good, down to 1 = very poor) to reflect how it meets the criterion. • Weighted score for each criterion = Weighting x Score.

  11. Scoring Methodologies: Weighted Scoring Project A Project B Selection Criteria Weighting Score Weighted Score Weigh ScoreScore Alignment with core business 13 4 52 4 52 Top-management support 10 4 40 4 40 Positive impact on stakeholders 10 5 50 2 20 Stage of technology development 6 1 7 4 24 Adequate knowledge of technology 7 2 14 2 14 Existing facility/equipment 4 1 4 3 12 Availability of raw materials 9 5 45 5 45 Potential market for output 10 5 50 5 50 Probability of share of market 10 5 50 1 10 Ability to reach market timely 8 5 40 3 24 Adequate return on investment 8 2 16 3 24 Adequate payback period 5 2 10 5 25 TOTAL 100 378340

  12. Selecting Weighted Values for Criteria Anchoring – Uses 9-point scale: • 9= most important criterion • 1= least important criterion. • All other criteria are then rated to these anchoring limits. Pairwise Comparison • Criteria compared with each other in pairs • For each pairwise comparison, judgement & score made of relative importance between the two. • Allows focus on 2 selection criteria in isolation, without the distraction of considering all other criteria.

  13. PAIRWISE COMPARISION B C D A. A8 A2 A6 B. B1 B3 C. D2 CRITERIA RAW SCORE % / WEIGHTING Criterion A 16 73 Criterion B. 4 18 Criterion C. 0 0 Criterion D. 29 22100%

  14. Scoring Methodologies QUESTION What are the • benefits • problems with scoring methods for project selection ?

  15. Scoring Methodologies - Advantages • Considers multiple criteria - can evaluate complex projects • Beyond narrow focus of $ - “growing realisation that profitability alone is not a sufficient test for the quality of an investment” • convenient numerical means to summarise project’s effectiveness • Makes management focus on what it wants from a project. • easy to use and understand • Reflects management policy - what is and is not important • Easily altered to suit changes in managerial philosophy or environment • Weighted scoring acknowledges some criteria are more important than others

  16. Scoring Methodologies - Disadvantages • Give relative measurement. Final score does not represent absolute value - so does not directly indicate if project should proceed • Criteria are assumed to be independent • Unweighted scoring assumes all criteria are equally important • Ease of use leads to the inclusion of numerous criteria which have small and insignificant weightings • Numerical nature may delude that process is objective, whereas scores invariably reflect subjective opinions • May requirea significant effort to achieve consensus among the stakeholders who are involved in the decision process

  17. Paper 6 - SCORING METHODOLOGIES • Scoring Methodologies: Introduction • Scoring Methodologies: Unweighted Scoring • Scoring Methodologies: Weighted Scoring • Scoring Methodologies: Advantages and Disadvantages • Scoring Methodologies: Example (Angling, 1985)

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