The official release date for Solving for Project Risk Management is just two days away! In anticipation of the release, I have been blogging about individual chapters. Today’s post is about Chapter 7, titled “Trying to Do Too Much with Too Little: The Importance of Portfolio Planning.” The genesis for this chapter is an observation that I made that organizations tend to try to conduct too many projects at the same time for their budget. Like a traffic jam in rush hour in a big city, there is just not enough (budgetary) space for all the projects an organizations wants to conduct.
Here is a practical (but notional) example in the production phase of a project that illustrates this point. Suppose two production projects each have fixed cost equal to $100 million and variable cost equal to $10 million. Suppose the total production budget is equal to $1 billion. Then 80 units total can be produced each year. This is because the total cost of 80 units is $100 million + $100 million + 80 × $10 million = $1,000 million = $1 billion. If this is expanded to five such projects, all with the same fixed and variable costs, the total production drops to 50 units, since 5 × $100 million + 50 × $10 million = $1,000 million = $1 billion. If this is expanded to 10 systems, no units can be produced since the fixed costs consume the entire production budget. See the graph below.
Norm Augustine, former senior executive with the Army and former CEO of Lockheed Martin, analyzed defense projects from the 1960s and 1970s, and he found that most were at the edge of producing just enough units to stay economical, which he considered to be the output produced by a one-shift, five-day-a-week basis. Anything less resulted in idle labor. When he updated his original book, Augustine found that Department of Defense budget cuts in the 1990s led to production rates for many projects falling into the uneconomical region. For example, the B-2A stealth bomber had a production run of only 15 aircraft with an average variable production cost equal to $907 million. Augustine noted this tendency to produce at a minimally efficient rate to be so strong that he named it the “Law of Marginal Survival,” which he defined as, “The more one produces, the less one gets.”
For more on this topic, check out my book, which is now available for pre-order from from Amazon and Barnes and Noble.