Anatomy 101

Ever wonder what all those confusing business terms really mean? Here is a list of the terms we have used and some plain English to help you understand them.

activity on node (AON) -

in CPM, an activity cannot begin until all of its preceeding activities are completed.

activity time - this is the amount of time that is needed for an activity. Since the activity times often vary for the same activity, a beta distribution curve is used. ( a + 4 * m + b ) / 6 where a is the best time, b is the worst time and m is the expected time.

adaptive organizations - relate to organizational structure. ever-changing, flexible, ideal for highly complex products/services. differ from dynamic organizations in that there are usually multiple life cycles (e.g., technology software) (See "static organizations" and "dynamic organizations".)

cash vs accrual based accounting - cash basis refers to when the income and expenses are refelected. For example, let's assume that the company has a fiscal year that is the same as the calendar year. The company makes a purchase December 15^th with a credit card but the credit card bill doesn't reflect the purchase until January of the following year. If the company is on cash basis, then the the expense is reflected in the following tax year. This is because cash did not leave the company to pay for the credit card until the next fiscal year. On an accrual basis, however, the expense goes on the tax year that matches the receipt -- the date of purchase.

computer numerically controlled (CNC) - refers to machines that house the commands for the tools, as opposed to manually controlled. Generally, CNC machines lower material waste and because they're replacing humans, lower labor costs. They also are extremely accurate and overall improve quality and increase customer service levels (CSL). CNC machines are typically huge capital investments. If the cost benefit analysis cannot justify the pay-off within eight years, then it might not be the time to make the investment.

control limit (CL) - control limit

critical path - the longest time possible for the project to take. It includes all critical activities, but omits "dummy activity"

critical path method (CPM) - the process for assessing a realistic project time because the activity times are known. Inventing a new product is unknown, for example, and therefore PERT is a more reliable means of project management.

customer service level (CSL) - Company decides the benchmark for the CSL. CSL for service industry is typically greater than non-service oriented companies, or companies which may produce products but have a competitive advantage because of the service they provide. The higher the CSL, the more costly. For a more thorough cost analysis, see Determining a Cost-Effective Customer Service.

direct costs - those costs which are directly related to the cost of goods (services) sold. (e.g., direct labor, direct materials, freight)

dummy activity - the activity defined to show there is a hierarchy of criticial activities. For example, activities F and G order are irrelevant sequentially, but before activity H to be completed, F must be done. To identify this, there is a "dummy activity" called D₁ (d for dummy) that must be completed. It's not a true activity. It only shows that no matter what, F must be complete before H is to start. If there is more than one hierarchial activities where sequence is irrelevant, then the dummy notation is D₂, and so on.

dynamic organizations - relate to organizational structure. typically repetitive process but size of the organization varies usually because the product / service is highly competitive and consumers can easily switch (See "static organizations" and "adaptive organizations".)

early finish (EF) - relates to critical path. This is the earliest time the project can be completed.

early start (ES) - relates to critical path. This is the earliest time the project can start.

economic order quantity (EOQ) - in purchasing, EOQ weighs ordering cost vs. carrying cost. Is it more fiscally wise to order in bulk and have a higher inventory vs. to order leanly?
EOQ = ( (2 * Q * O) / C) ^1/2
Q = quantity to order annually
O = cost to place one order
C = carrying cost for one unit

economic production rate (EPR) - in manufacturing, the ideal quantity to produce.
EPR = ( (2 * Q * S) / C ) ^1/2
Q = annual quantity to produce
S = set up cost
C = carrying cost for one unit

fish diagram - cause and effect diagram. The effect is the center line going through the fish and the lines extending from it are the causes

free slack (FS) - the amount of time that an activity can be delayed without delaying another task. Free is sometimes referred to as "float."

indirect costs - those costs which are not directly related to the cost of goods (services) sold. (e.g., indirect labor, insurance, benefits)

late finish (LF) - relates to critical path. This is the longest time for the entire project to be completed.

late start (LS) - relates to critical path. This is the latest time the project can begin without missing the project deadline.

lower control limit (LCL) - lower control limit

overhead absorption rate (OAR) - the ratio between indirect and direct costs expressed as (indirect + interest expense) / direct

Pareto Principle - states that 20% of the causes affect 80% of the company problems. aka, "The 80-20 Rule, "The Law of the Vital Few," and "Principle Factor of Sparsity." Named for Italian economist Vilfredo Pareto.

program evaluation and review technique (PERT) - contrasting to critical path, PERT uses statistics in identifying the project length. PERT is used because the activities are not fully defined yet and/or the activities length of time is unknown. (e.g., inventions of new products)

Six Sigma (6σ) - range for the outcomes in testing. Statistically with normal distribution, they span the mean +/- three units standard deviations.

static organizations - relate to organization structure. typically inflexible, repetitive work with repetitive, known output. Very little "vary." (See dynamic organizations and adaptive organizations.)

stress test - administration of a series of tests to a given system (usually manufacturing or software/hardware). The results indicate the maximum capacity the system can handle before it breaks down or crashes. Stress test relates to control limits.

total slack (TS) - If the total slack is less than zero, then the time of what you've calculated as the "critical path" is really not the critical path. The critical path must be re-adjusted to include the "delay." In short, it is the amount of time that the project can be delayed without missing the project deadline.

TS = LS - ES = LF - EF
LS = late start,
ES = early start,
LF = late finish and
EF = early finish.

upper control limit (UCL) - upper control limit

WIIFM - what's in it for me

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Anatomy 101

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