Question

Peak Lighting, Inc.

Peak Lighting, Inc. develops stages, lighting systems, and special effects for the concert tours of major musical acts. Recently, they were approached by Bullwhip, a popular band, to develop the stage, lighting, and special effects for its upcoming tour. The project to develop the stage, lighting, and special effects for a concert tour progresses through four major phases. In the first phase, which lasts about a week, Peak develops a sound track for the concert based on the song list the band provides it for the tour. Using the sound crack, Peak employees develop a synchronized lighting and special effects show on a computer that allows them to view an animated stage with the lighting and special effects as the sound track is being played. In the second phase, the materials needed for the stage, lighting, and special effects are ordered from outside suppliers. The lead time for receiving these materials is 4 weeks, and during this period the project team members are assigned to other projects. Once all the materials arrive, the third phase involves constructing the stage with the lighting and special effects. Also, writing the computer code to control the lighting and special effects is done in the third phase. This phase takes 3 weeks. In the final phase, which takes a week, the lighting and special effects are tested and enhanced. The total cost of the Bullwhip project is estimated to be $600,000 of which $400,000 is for the stage, lighting equipment, and special effects, and $200,000 is for labor costs. Eric Page was recently hired as Peak's VP of Operations. All the project managers that oversee the stage and lighting projects report to Eric. Prior to joining Peak Lighting, Eric served as a project manager for a leading management consulting firm for 10 years. Based on extensive project management experience, one of the first things Eric did in his new role as VP was implement a formal project reporting system that would help him monitor the progress of the projects underway. The Bullwhip project had been underway for 5 years, and all the materials had arrived. The project team was now ready to start the third phase of the project and construct the stage with the designed lighting and special effects. In reviewing the most recent progress report for the Bullwhip project and based on his project management experience, Eric became gravely concerned. According to the report, the project had an earned value of $120,000 based on the project manager Jimmy Rush's estimate that 20 percent of the project had been completed. In further studying the report, Eric observed that the planned value and actual costs incurred were both $440,000. Based on his concern, Eric decided to walk down the hall to Jimmy's cubicle and discuss his concerns related to the progress on the project. Eric began: I just reviewed the progress report for the Bullwhip project, and I am very concerned that the project is falling way behind schedule. Based on my review, it appears there are very significant cost and schedule variances. As you know, we have a hard deadline for completing the project as the Bullwhip needs everything fully operational 2 weeks prior to the start of their tour so they can rehearse with it, Jimmy responded: To be perfectly honest, I don't know much about schedule and cost variances, but I do have a great deal of experience managing these projects. Again, I don't know how you calculated the variances you mentioned; but in my view we are exactly where we should be. To this Eric replied: I don't see how you can possibly think the project is on track when it has an earned value of only $120,000 and the planned value by this point in the project is $440,000? And I am equally disturbed you don't understand basic project management concepts such as earned value. Later that day, Jimmy shared his frustration about his new boss with one of the project team members. "Eric really chewed me out today. He questioned my ability to manage a project. I wonder if he even understands the nature of these projects. Does he even get it that two thirds of the project costs are for materials and that these costs are incurred in the early part of the project? Reference. Meredith, J. R., Mantel, S. J., Shafer, S. M., & Sutton, M. M. (2014). Project management in practice. Wiley.

QUESTIONS: 1. Calculate the schedule variance and cost variance for the Bullwhip project?

2. Does Jimmy's point about the material costs have merit? If so, does this have any implications for the way the earned valued is calculated at Peak?

3. Who is right about the status of the project? Eric or Jimmy?

4. What advice, if any, would you offer Eric related to his new role of VP of Operations?

Answer 1