For the purposes of the exam, all you need to understand about constrained optimization methods is they are mathematical models that use linear, dynamic, integer, nonlinear, and/or multiobjective programming in the form of algorithms—or in other words, a specific set of steps to solve a particular problem. These are complicated mathematical formulas and algorithms that are beyond the scope of this book and require an engineering, statistical, or mathematical background to fully understand. Projects of enormous complexity would use techniques such as these to make decisions regarding projects. The vast majority of project selection techniques will use the benefit measurement methods to make project selection decisions.
Benefit measurement methods employ various forms of analysis and comparative approaches to make project selections. One common form of analy-sis is the benefit/cost analysis. This compares the financial benefits to the company of performing the project to the costs of implementing the project. Obviously, a sound project choice is one where the costs to implement or produce the product of the project are less than the financial benefits. How much less is an individual decision. Some companies are comfortable with a small margin, others with a much larger margin between the two figures.
When examining costs for the benefit/cost analysis, include the costs to produce the product or service, costs to take the product to market, and ongoing operational support costs. For example, let’s say your company is considering writing and marketing a database software product that will allow banks to dissect their customer base, determine which types of customers buy which types of products, and then market more effectively to those customers. Some of the costs you will take into account are the costs to develop the software such as programmer costs, hardware costs, testing costs, etc; marketing costs such as advertising, traveling costs to perform demos at potential customer sites, etc.; and ongoing costs such as having a customer support staff available during business hours to assist customers with product questions and problems.
Let’s say the cost to produce this software plus the ongoing support costs total $5 million. Initial projections look like demand for this product is high. Over a 3-year period, the potential life of the software in its proposed form, projected revenues are $12 million. Taking only the financial information into account, the benefits outweigh the costs of this project. This project should receive a go recommendation.
Projects of significant cost or complexity usually take into account more than one benefit measurement method when making go or no-go decisions, or deciding on one project over another. Keep in mind that selection methods can take subjective matter into account as well—the project is a go because it’s the new CEO’s pet project; nothing else needs to be said.
Another project selection technique in the benefit measurement category is a scoring model, or weighted scoring model. My organization uses weighted scoring models to not only choose between projects, but also as a method to choose between competing bids on outsourced projects.
Weighted scoring models are quite simple. The project selection committee should decide on the criteria that will be used on the scoring model—for example, profit potential, marketability of the product or service, the ability of the company to quickly and easily produce the product or service, and so on. Each of these criteria is assigned a weight, depending on the importance of the criteria to the project committee. More important criteria should carry a higher weight than the less important criteria.