accounts

Indian Pharmaceutical Industry Evolution, Trends & Opportunities

Presentation Structure

• Indian Pharmaceutical Evolution

• India Advantage

• Emerging Trends & Opportunities

• Key Partnership Considerations

Indian Pharmaceutical Evolution

Phase II

Government Control

•Indian Patent Act –1970

•Drug prices capped

•Local companies begin to make an impact

Phase III Development Phase

•Process development

•Production infrastructure creation

•Export initiatives

Phase IV

Growth Phase

•Rapid expansion of domestic market

•International market development

•Research orientation

Phase V

Innovation and Research

•New IP law

•Discovery Research

•Convergence

1970 1980 1990 2000 2010

Phase I

Early Years

•Market share domination by foreign companies

•Relative absence of organized Indian companies

Moving up the Value Chain

Specialty Products

Innovative Products

TIME

Generic exports to under-

developed & developing countries

Generic exports to developed countries

API Exports

VALUE

India Advantage

• Large skill base– Experts in process chemistry – Long history of reverse engineering

• Vast talent pool– Sheer number of scientists– Motivated & English speaking– Large number of trained Indians returning home from North

America and Europe

• Unmatched cost competitiveness– Lower cost of infrastructure and skilled manpower– Vertical integration

India Advantage – cont.

• Strong local industry– Growing expertise with international regulatory compliance– High quality manufacturing with abundant capacities

• Speed– Very strong entrepreneurial spirit– Hungry for growth and recognition– Quick learners and fast movers

• Availability of capital– Stock market has seen unprecedented growth in the last decade– Continues to be bullish on the pharma industry

Emerging Trends & Opportunities

• Geographic Convergence– Established and growing destination for Generic product

development and manufacturing– Leading Indian companies seeking overseas markets and

global scale

• Generic – Innovator Convergence– Leading Indian companies trying to climb the value chain

into innovative research– India developing into a Drug Discovery services outsourcing

destination

Generic Product Development & Manufacturing Destination

• Leader in API DMF filings in the US– Jan-Jun 2006 – 175 of the 601 DMF’s filed were by Indian companies– 2005 - 313 of the 946 DMF’s filed were by Indian companies

• Leader in capital investments - largest number of US FDA approved manufacturing facilities (outside the US)

• Almost 20% of ANDA filings in the US

• No place like India for generics R&D and manufacturing of API’s & formulations

• India’s biggest assets – cost, speed & scientists – churning out generics faster than you can say ‘copy’

• In 5 years, 30-35% of the global demand for generic products is expected to be met by India

Generic Product Development & Manufacturing Destination – cont.

• Leading global/regional generic players establishing a presence:– Teva – acquired an Indian co in 2003, setting up new

development centre & another manufacturing facility– Sandoz – development centre, 3 manufacturing facilities,

more than 1000 employees– Actavis - development centre, acquired CRO (Lotus)– Mylan – acquired controlling stake in Matrix last month for

US$ 736 mn– Ratiopharm – development centre, manufacturing facilities

Indian companies seeking overseas marketsand global scale

• Aggressive Growth Strategies– For building a global scale – Ranbaxy aims to be one of the Top 5– For market entry – acquiring local co or setting up subsidiaries

• Recent M&A activity – size of deals growing– Ranbaxy going after acquisitions in US & Europe

• Acquired 3 companies in Europe in March/April 2006– Terapia (Romania) for US$ 324 million

• Raising 1.5 billion to fund further acquisitions– Dr. Reddy’s

• Acquired Betapharm (Germany) for US$ 570 million in March 2006– Matrix (now part of Mylan)

• Acquired Docpharma (Belgium) for US$ 263 million in 2005.

Indian companies seeking overseas markets – cont.

• Partnership opportunities– Large number of large and mid-sized Indian companies with world-

class generic product development and manufacturing capabilities and facilities

– Lot of under-utilized manufacturing capacities– These companies prefer focusing attention & resources on some key

markets (US/EU) and look for partners in other markets– Opportunities for supplementing pipelines, filling pipeline gaps and

reducing/optimizing cost of development and cost of goods:• In-licensing products• Dossier and API development• Contract Manufacturing• Contract Research – pilot & pivotal bio-equivalence studies

– Opportunities for out-licensing and supplying products to leading Indian companies for other markets

Generic – Innovator convergence

• Increasing number of Indian companies moving up the value chain from generic to NDDS/NCE research

• Low cost development/manufacturing to Low cost innovation

• Some examples:– Ranbaxy

• 1 project in Phase II• 1 project in Phase I• 7 projects in Pre-Clinical – 2 with GSK

– Dr. Reddy’s• 3 projects in Phase II• 2 projects in Phase I• 4 projects in Pre-Clinical

– Glenmark• 2 projects in Phase II – deals with US$ 190 million signed• 4 projects in Pre-Clinical

• Opportunities for in-licensing & out-licensing

Drug Discovery Services Outsourcing

• Global outsourcing market:– US$ 15-20 billion – Manufacturing– US$ 3-4 billion – Research (informatics, chemistry services & chemical

custom synthesis)• Big pharma is entering into deals with Indian companies to

lower their cost of R&D– Collaborative R&D – GSK - Ranbaxy– Service outsourcing - Wyeth – GVK, Jubilant, Lilly – Suven

• Global discovery services companies are looking at India to retain their cost advantages– Albany Molecular & Nektar have already established a presence

• Indian industry hoping to see 3-4 global discovery services companies emerging out of India

Drug Discovery Services Outsourcing

• Leading Indian Service Providers:– Contract Manufacturing – Jubilant, Shasun, Divi’s– Clinical Research – Syngene (Biocon), Aurigene

(Reddy’s), Synchron– Bio-informatics & other IT services – TCS, Satyam,

Infosys, GVK Bio, Jubilant– Drug Discovery/Medicinal Chemistry – Aurigene, Divi’s,

Syngene, Suven, GVK Bio– Pre-clinicals – Vimta, Lambda– Central laboratory services – SRL Ranbaxy, Vimta

Key Partnership Considerations

• Supplier/Partner mapping/selection– Capability / Keenness / Reliability / Competitiveness– Key team members – development, regulatory & commercial

• Optimal Number of Partners– Strategic – markets/product lines– Opportunistic – product specific

• Relationship management– Relationship oriented culture

• Contract negotiation– Clear distribution of responsibilities and timelines– Demand performance - penalties for not meeting deliverables

• Project management– Regular visits and video/teleconferences a must

Closing Comment

India is an acquired taste

Give it some time & it will grow on you

Basics of Accounting and Finance

What is Accounting?

• Identifying a business transaction• Preparation of Business Documents.• Recording of the transaction in the book of first entry

(Journal) – Sales or Purchase Module – Relevance with the banking operations

• Posting in the ledger (Automatic in Software)• Preparation of Trial Balance (System Generated)• Preparation of Profit and Loss Account and Balance

Sheet

Important terms in accounting

• Debtors • Creditors• Assets• Liabilities• Income• Expenses• Account

Important accounting concepts• Dual Entity• Money Measurement Concept• Accounting Period Concept• Going Concern Concept• Conservatism Concept (Provisioning for NPA in

Banks)• Accrual Concept ( Accrual of interest income and

expenses in Banks)• Consistency Concept• Matching Concept

Process of Accounting

• Types of business transactions– Cash and credit

• Double Entry Principle in Accountancy– Debit and credit effect

• Implications• Basic Categories of Accounts

– Personal, Real and Nominal

Golden Rules in Accounting• To identify the effect of a transaction on a account

there are rules:–For Personal Account:•Debit: the receiver•Credit: the giver

-For Real Account:•Debit: what comes in •Credit: what goes out

-For Nominal Account:•Debit: all expenses and losse•Credit: all incomes and gains

Recording of business transactions

• Syntel Technologies Issued 1000 shares of Rs.10 each at a premium of Rs.110 each. The amount was deposited in our bank account (SBI)

• Raised a loan from Bank of India Rs.25,000.• Purchased materials costing Rs.20000 cash down.• Purchased materials costing Rs.10000 on credit.• Manufacturing expenses incurred Rs.25000• Administration and selling expenses incurred Rs.15,000.• Sold goods for cash Rs.120000.• Sold goods on credit Rs.20000• Collection from customers Rs.10000.• Payment to suppliers Rs.5000.• Outstanding wages of workers Rs.5000.• Interest payable to the bank Rs.2500.

Finalization of accounts• Refers to the preparation of Profit and Loss

Account and the Balance sheet as per the legislative famework.

• Adjusting entries are to be passed.• The revised trial balance is generated.• Financial statements are prepared.• Relevance of Accrual Concept, Matching

Concept, Accounting Period Concept, Conservatism Concept at the time of finalization.

BALANCE SHEET

• Sources of Funds

1) Capital2) Reserves & Surplus3) Term Liabilities4) Current Liabilities

BALANCE SHEET ANALYSIS

Uses of Funds• 1) Fixed Assets• 2) Intangible Asets• 3) Non Current Assets• 4) Current Assets


Capital• 1) Authorised Capital• 2) Issued Capital• 3) Subscribed Capital• 4) Paid-up Capital


Reserves• 1) Subsidy Received From The Govt• 2) Development Rebate reserve• 3) Revaluation of fixed assets• 4) Issue of Shares at Premium• 5) General Reserves• Surplus• The credit balance in profit and loss account

BALANCE SHEET ANALYSIS• Term Liabilities• Redeemable preference shares• Debentures• Deferred payment gaurantees• Public Deposits(Repayable after 12 months)• Term loans and unsecured loans from friens,

relatives,directors repayable over a period of time• Remark : The company can raise public deposits to

the extent of 25% of paid up capital plus free reserves and 10% from share holders for the maturity period ranging from 6 months to 3 yrs

BALANCE SHEET ANALYSIS• Current Liabilities• Working capital bank borrowings• T.loans deferred credit inst falling due in 12 mths• public deposits maturing within 12 months• unsecured loans, unless the repayment is on

deferred terms• sundry creditors• advances from dealers and customers• interest accrued but not paid• tax provisions• Dividend declared and payable


• Contingent Liabilities• Tax disputes• Legal litigations• Bills and cheques discounted with banks• Claims against the company not acknowledged

BALANCE SHEET ANALYSIS• Fixed Assets• Infrastructure like land & building• plant & machinery• Vehicles• Furniture & fixtures• Depreciation• Straight line method• Written down Value Method• Remark : Dep added to profit to arrive

repayment obligation especially in term loans

BALANCE SHEET ANALYSIS• Investments• 1) Shares And Securities• 2) Associate Companies• 3) Fixed deposits with banks/finance companies• Remark : While analysing bal sheet we can

analyse necessity of such investments• Remark : While fixed deposits with banks are

considered as fixed assets, the investmetns in associate concerns are treated as non current assets.


• Non Current Assets• Deferred recievables/Overdue recievables(like

disputed amounts and Over Due > 6 mths)• Non moving stocks/inventory/un usable spares • Investment/Lending to associate concern• Borrowing of the directors from the company• Telephone deposits/ ST deposits etc


• Intangible Assets• Preliminary & Preoperative expenses• Deferred Revenue Expenditure• Goodwill• Trade mark• Patents• Rem : The o/s balance to be written off every

year by charging P&L account

BALANCE SHEET ANALYSIS• Current Assets• Raw materials, work-in-progress,finished

goods,spares and consumables• Sundry debtors and recievables < 6 mths• Advances paid to suppliers of raw materials• Cash and bank balances• Interest recievables• Other current assets such as Government

securities, Bank deposits ..etc

BALANCE SHEET ANALYSISNotes• The valuation of the stock is done as per the

opinion of the management• Depreciation method may be changed to boost

profit• It may be silent on key personnel and staff

turnover• Marginal changes in the classification of certain

items would lead to different results.

BALANCE SHEET ANALYSIS• Notes• Management competence• Investment decision• Resorting to window dressing• experience of the promoters• Board comprises of only family members• The key personnel of the company• The structure of the organisation• The authority and decision making are

decentralised

BALANCE SHEET ANALYSIS• Notes• The state of industrial relations• Financial systems and procedures• management control• planning, budgeting, forecasting• capacity utilisation• status of the technology• awareness of the market, competitions ..etc• for listed co: share prices, EPS, book value,

dividend record, public response ..etc

Profit & Loss Account• It is a summary of revenue earned and expenses

incurred which ultimately results in profit or loss of to the company

• No defined format in law• Operating revenue = Sales revenue• Non_operating revenue = Other income ( out of

sale of investments, interest, commission and discount etc)

• Hence operating profit is a yard stick for operating profit of the company

• Operating profit = Sales Revenue- Operating Cost

Profit & Loss AccountGross Sales• Gross sales includes excise duty to be charged to the customer, central sales tax applicable,

state sales tax applicable, the discount o be allowed to distributors/dealers/customers. The gross sales appears in the P&L account comprises of all the above part from the basic unit price.

Net Sales• The sales figure excluding all the factors explained above are the net sales.

Cost of production• This is the cost incurred right from the procurement of raw material to the finished good.• For ex in a garment firm following cost is incurred while production• 1) cost of raw material cloth, buttons, canvas, hooks, zips etc• 2) Maintenace of sewing machines• 3) payment of wages to workers• 4) power• 5) washing, ironing,packing etc.

Selling And General Administarative Expenses• Maintaining office staff for admn & acctg• marketing effort• payment of salaries/Tr All to marktg personnel• All the expenses which are not directly connected to manufacturing are classifed as selling

and/or general expenses

Profit & Loss AccountCost of goods sold• Cost of goods sold includes all manufacturing expenses and the adjustments for

opening and closing stock• Cost of Goods sold = Opening stock + Purchases + Manufacturing expenses -

Closing stockGross Profit is arrived deducting figure of cost of goods sold from the sales figure ie

Gross profit = Sales - Cost of goods sold.

Operating Profit is arrived deducting selling, administrative and general expenses , provision for bad debts, interest and miscellaneous expenses from the gross profit. ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad debt + mis exp )

Profit Before Tax When other income is added and other expenses are deducted from the operating profit we get profit before Tax ie PBT = Op Profit + oth Inc - oth exp

Net Profit When provision for taxes is deducted from the Profit Before Tax we get Net profit ie Net Profit = PBT - taxes

Profit & Loss AccountNon Operating Income/Expenses • The income earned by the unit from other than manufacturing and seling

operations is classified under this head . i.e a) Interest earned on fixed deposits b) Dividends and profit earned by sale of assets and share.• All those expenses which are not directly connected with operations of the unit are

classified under this head. i.e a) Preliminary expenses written off b) Loss suffered due to sale of assets & share

Cash flow Statement• What is cash flow statement?• Why cash flow statement?• AS3: Cash Flow Statements• How to prepare cash flow statement?

– Cash from operating activities– Cash from financing activities– Cash from investing activities– Change in cash and cash equivalents

Ratio Analysis• Accounting ratios is an expression showing the relationship

between two figures of financial statement. Accounting ratios may be expressed in terms of fractions like 1/2 ,1/3 or rates like two times, three times or percentage like 10%, 20%, etc. Many times absolute figures do not help to understand the position of the concern & the final account & financial statements prepared there from may not reveal enough information which will help in decision making. Therefore ratio analysis is employed as a tool to analyse financial position & make logical inferences out of the same.

• There are three types of ratio:-• 1) Balance Sheet ratios.• 2) Revenue Statement ratios.• 3) Combined ratios.

Important RatiosBalance Sheet Ratios

Revenue Statement Ratios

Combined Ratios

i) Current ratio

ii) Quick ratio

iii) Proprietary ratio

iv) Debt Equity ratio

i) Gross profit ratio

ii) Operating ratio

iii) Stock- turnover ratio

iv) Net profit ratio

i) Return on Investment

ii) Return on Proprietor’s

Fund

iii) Return of Equity

Capital

iv) Earning per share

v) Price earning ratio

vi) Dividend Payout ratio

vii) Debt Service ratio

viii) Debtor’s turnover ratio

ix) Creditors Turnover ratio

Current Ratio• Current ratio = Current Asset/Current

Liabilities• It Indicates short term solvency or short term financial

strength of company.• It shows whether the company is capable of paying off

its short term commitments easily out of its current assets

• Too high & too low ratios not desirable. A high current ratio indicates presence of idle funds whereas low ratio indicates inadequacy of funds.

Quick Ratio• Quick ratio = Quick Asset/Quick

liabilities• It Indicates immediate solvency / financial

strength of company.• It shows whether the organization is in a

position to pay its liabilities within a very short period of time out of assets which can realize money quickly.

Proprietory Ratio• Proprietary Ratio = Share holders

Funds / Total Assets• Total Assets = Fixed Assets + Investments + Current

Assets. • It Indicates long term solvency or long term financial

strength of • company.• Proprietors funds should be equal to atleast fixed assets

but it • may not be possible in all industries.

Debt Equity Ratio• Debt Equity Ratio = Debt Funds / Equity Funds• It Indicates borrowing capacity of organization

& emphasizes that more the borrowing, the more is the rate of return for owners.

• However there should be a suitable compromise as far as this ratio is concerned.

• In earlier years business should have more owned funds whereas after establishment i.e. in subsequent years business should resort to more external funds.

Gross Profit Ratio• Gross Profit ratio = GPX100/ Sales

• It shows the trading efficiency of management.• It should be sufficient enough to cover operating and

non- operating expenses to assure final profits.

Stock Turnover Ratio

• Stock – Turnover Ratio = Cost of goods sold / Average Stock

• It shows amount blocked in stock & how fast it can be converted into sales & finally cash.

• It indicates efficiency of company in inventory management.

• Sometimes too high ratio also indicates a possibility of stock out.

Return on Investment or capital employed

• ROI = NP before tax & Interest/ Capital Employed

• It Indicates management efficiency in utilizing shareholder’s & borrowed funds. & is a clear index of earning capacity.

• Higher ratio indicates higher returns & hence can attract additional funds from lenders.

• Higher earning power indicate more punctual repayment of interest & principal amount.

Return on Proprietors Funds• Return on net worth = NP after tax and interest / Net Worth

• It indicates profitability on proprietor’s funds and efficiency of company in utilizing shareholder’s fund.

• It is used by share holders before investing additional funds into business.

• Higher profitability attracts higher funds from shareholders & can also increase market price of shares in anticipation of higher dividends & bonus shares.

Return on Equity Capital

• Ret on Eq,Capital = Pafter tax – Pref Dividend / Equity Capital

• It indicates earning for equity holders and management’s efficiency in utilizing equity capital.

• Dividend percentage is also determined on the basis of above ratio after taking decisions of retention of some portion of profit for expansion of diversification schemes.

Earnings per share

• EPS = (NP after tax - Pref Div) / No. of eq. Shares

• It indicates absolute earning per share which affect a market prices of shares.

• High EPS encourages prospective investors.

Price Earning Ratio

• Price Earning ratio = MPS / EPS

• It indicates market price as compared to earning per share.

• Lower ratio generally attracts investors for purchase of share.

Dividend Payout Ratio• Dividend – payout ratio = (DPSX100) / EPS

• It indicates extent of dividend declared out of earnings.

• Lower ratio indicates greater portion kept for self financing.

• Short terminvestors are always interested in higher ratio & vice versa for long terms investors.

Debt service coverage ratio• DSCR = (NP bef int tax and dep) / Interest +

Instalment due in next year

• It indicates ability to meet current interest & instalment due.

• it is an index of long term solvency.

• Higher ratio indicates more safety for lenders.

Debtor Turnover ratio and collection period

• Drs turnover ratio = Sales / Average receivables

• It indicates efficiency of company in management of account receivables.

• Higher the index, better is the ratio & result.

Creditors turnover ratio and average payment period

• Crs Turnover ratio = Purchase / Average Payables

• It helps to know creditor’s velocity i.e. average period offered by suppliers for making payment.

• Lower the turnover, better is the result as it indicates more period offered by suppliers to make payment.

Importance of Ratios in financial statement analysis

• Liquidity Position and working capital financing

• Minimum permissible bank finance

• Profitability ratio

• ROCE, dividend payout ratio, pe ratio and the investors preferences.

Cost-Benefit Analysis

Cost-benefit analysis (CBA) is the implicit or explicit assessment of the benefits and costs (i.e., pros and cons, advantages and disadvantages) associated with a particular choice.

Benefits and costs may be monetary (pecuniary) or non-monetary (non-pecuniary, “psychic”).

For private decisions, such as taking martial arts classes or going to a movie on Saturday night, we are often not aware of any internal process of consideration of costs and benefits, but behave as though we do.

An individual will choose an action if:

Benefits (B) > Costs (C) orNet Benefits (NB) = B - C > 0.

What is a Benefit and a Cost?

• The benefits of a change are those goods or services that result from the change for which someone would be willing to make sacrifices to obtain

• We measure benefits in terms of Willingness to Pay (WTP)

• Cost is the value of opportunities forgone! (it could be a Euro value, but could include much more e.g. the value of your time).

• Opportunity Cost: An activity's opportunitycost is equal to the most net benefits thatyou could have obtained from doing something else.

1) Benefit - marginal benefit - total benefit

2) Cost - marginal cost - total cost

3) Net benefits - marginal net benefit

- total net benefit

An efficient allocation maximizes Total Net Benefit

minus

=

!!! !!!

Important Concepts

Cost-Benefit Analysis (CBA)

In any CBA, several stages must be conducted

1) Definition of the Project2) Identification of the Project Impacts3) Which Impacts are Economically Relevant?4) Physical Quantification of Relevant Impacts5) Monetary Valuation of Relevant Effects6) Discounting of Cost and Benefit Flows7) Applying the Net Present Value Test8) Sensitivity Analysis

Quality Management

69Information Technology Project

Management, Fourth Edition

The Importance Quality Management

• Many people joke about the poor quality

• But quality is very important in any projects.



What Is Quality?• The International Organization for Standardization

(ISO) defines quality as “the degree to which a set of inherent characteristics fulfils requirements” (ISO9000:2000).

• Other experts define quality based on:

– Conformance to requirements: The project’s processes and products meet written specifications.

– Fitness for use: A product can be used as it was intended.



What Is Quality Management?

• quality management ensures that the project will satisfy the needs for which it was undertaken.

• Processes include:– Quality planning: Identifying which quality standards are

relevant to the project and how to satisfy them.– Quality assurance: Periodically evaluating overall project

performance to ensure the project will satisfy the relevant quality standards.

– Quality control: Monitoring specific project results to ensure that they comply with the relevant quality standards.



Quality Planning• Implies the ability to anticipate situations and

prepare actions to bring about the desired outcome.

• Important to prevent defects by:

– Selecting proper materials.

– Training and indoctrinating people in quality.

– Planning a process that ensures the appropriate outcome.



Design of Experiments• Design of experiments is a quality planning

technique that helps identify which variables have the most influence on the overall outcome of a process.

• Also applies to project management issues, such as cost and schedule trade-offs.

• Involves documenting important factors that directly contribute to meeting customer requirements.



Scope Aspects of Projects• Functionality is the degree to which a system performs its

intended function.• Features are the system’s special characteristics that appeal to

users.• System outputs are the screens and reports the system

generates. • Performance addresses how well a product or service performs

the customer’s intended use. • Reliability is the ability of a product or service to perform as

expected under normal conditions.• Maintainability addresses the ease of performing maintenance

on a product.



Who’s Responsible for the Quality of Projects?

• Project managers are ultimately responsible for quality management on their projects.

• Several organizations and references can help project managers and their teams understand quality.

– International Organization for Standardization (www.iso.org)

– IEEE (www.ieee.org)



Quality Assurance• Quality assurance includes all the activities related to

satisfying the relevant quality standards for a project.

• Another goal of quality assurance is continuous quality improvement.

• Benchmarking generates ideas for quality improvements by comparing specific project practices or product characteristics to those of other projects or products within or outside the performing organization.

• A quality audit is a structured review of specific quality management activities that help identify lessons learned that could improve performance on current or future projects.



Table 8-1. Table of Contents for a Quality Assurance Plan*

*U.S. Department of Energy

1.0 Draft Quality Assurance Plan1.1 Introduction1.2 Purpose1.3 Policy Statement1.4 Scope2.0 Management2.1 Organizational Structure2.2 Roles and Responsibilities2.2.1 Technical Monitor/Senior Management2.2.2 Task Leader2.2.3 Quality Assurance Team2.2.4 Technical Staff3.0 Required Documentation

4.0 Quality Assurance Procedures4.1 Walkthrough Procedure4.2 Review Process4.2.1 Review Procedures4.3 Audit Process4.3.1 Audit Procedures4.4 Evaluation Process4.5 Process Improvement5.0 Problem Reporting Procedures5.1 Noncompliance Reporting Procedures6.0 Quality Assurance MetricsAppendixQuality Assurance Checklist Forms



Quality Control

• The main outputs of quality control are:– Acceptance decisions– Rework– Process adjustments

• Some tools and techniques include:– Pareto analysis– Statistical sampling– Six Sigma– Quality control charts



Pareto Analysis

• Pareto analysis involves identifying the vital few contributors that account for the most quality problems in a system.

• Also called the 80-20 rule, meaning that 80 percent of problems are often due to 20 percent of the causes.

• Pareto diagrams are histograms, or column charts representing a frequency distribution, that help identify and prioritize problem areas.



Figure 8-1. Sample Pareto Diagram



Statistical Sampling and Standard Deviation

• Statistical sampling involves choosing part of a population of interest for inspection.

• The size of a sample depends on how representative you want the sample to be.

• Sample size formula:Sample size = .25 X (certainty factor/acceptable error)2

• Be sure to consult with an expert when using statistical analysis.



Six Sigma

• Six Sigma is “a comprehensive and flexible system for achieving, sustaining, and maximizing business success. Six Sigma is uniquely driven by close understanding of customer needs, disciplined use of facts, data, and statistical analysis, and diligent attention to managing, improving, and reinventing business processes.”*

*Pande, Peter S., Robert P. Neuman, and Roland R. Cavanagh, TheSix Sigma Way, New York: McGraw-Hill, 2000, p. xi.



Basic Information on Six Sigma

• The target for perfection is the achievement of no more than 3.4 defects per million opportunities.

• The principles can apply to a wide variety of processes.

• Six Sigma projects normally follow a five-phase improvement process called DMAIC.



DMAIC• DMAIC is a systematic, closed-loop process for continued

improvement that is scientific and fact based.• DMAIC stands for:

– Define: Define the problem/opportunity, process, and customer requirements.

– Measure: Define measures, then collect, compile, and display data.

– Analyze: Scrutinize process details to find improvement opportunities.

– Improve: Generate solutions and ideas for improving the problem.

– Control: Track and verify the stability of the improvements and the predictability of the solution.



How is Six Sigma Quality Control Unique?

• It requires an organization-wide commitment.• Training follows the “Belt” system.• Six Sigma organizations have the ability and

willingness to adopt contrary objectives, such as reducing errors and getting things done faster.

• It is an operating philosophy that is customer focused and strives to drive out waste, raise levels of quality, and improve financial performance at breakthrough levels.



Examples of Six Sigma Organizations

• Motorola, Inc. pioneered the adoption of Six Sigma in the 1980s and saved about $14 billion.*

• Allied Signal/Honeywell saved more than $600 million a year by reducing the costs of reworking defects and improving aircraft engine design processes.**

• General Electric uses Six Sigma to focus on achieving customer satisfaction.

*Pande, Peter S., Robert P. Neuman, and Roland R. Cavanagh, The Six Sigma Way. New York: McGraw-Hill, 2000, p. 7.**Ibid. p. 9.



Six Sigma and Project Management• Joseph M. Juran stated, “All improvement takes place project by

project, and in no other way.”*• It’s important to select projects carefully and apply higher quality

where it makes sense; companies that use Six Sigma do not always boost their stock values.

• As Mikel Harry puts it, “I could genetically engineer a Six Sigma goat, but if a rodeo is the marketplace, people are still going to buy a Four Sigma horse.”**

• Six Sigma projects must focus on a quality problem or gap between the current and desired performance and not have a clearly understood problem or a predetermined solution.

*“What You Need to Know About Six Sigma,” Productivity Digest (December 2001), p. 38.**Clifford, Lee, “Why You Can Safely Ignore Six Sigma,” Fortune (January 22, 2001), p. 140.



Six Sigma Projects Use Project Management

• The training for Six Sigma includes many project management concepts, tools, and techniques.

• For example, Six Sigma projects often use business cases, project charters, schedules, budgets, and so on.

• Six Sigma projects are done in teams; the project manager is often called the team leader, and the sponsor is called the champion.



Six Sigma and Statistics

• The term sigma means standard deviation.

• Standard deviation measures how much variation exists in a distribution of data.

• Standard deviation is a key factor in determining the acceptable number of defective units found in a population.

• Six Sigma projects strive for no more than 3.4 defects per million opportunities, yet this number is confusing to many statisticians.



Six Sigma Uses a Conversion Table• Using a normal curve, if a process is at six sigma, there

would be no more than two defective units per billion produced.

• Six Sigma uses a scoring system that accounts for time, an important factor in determining process variations.

• Yield represents the number of units handled correctly through the process steps.

• A defect is any instance where the product or service fails to meet customer requirements.

• There can be several opportunities to have a defect.



Figure 8-2. Normal Distribution and Standard Deviation



Table 8-3. Sigma and Defective Units



Table 8-4: Six Sigma Conversion Table

The Six Sigma convention for determining defects is based on the above conversion table. It accounts for a 1.5 sigma shift to measure the number of defects per million opportunities instead of the number of defects

per unit.



Quality Control Charts and the Seven Run Rule

• A control chart is a graphic display of data that illustrates the results of a process over time. It helps prevent defects and allows you to determine whether a process is in control or out of control.

• The seven run rule states that if seven data points in a row are all below the mean, above the mean, or are all increasing or decreasing, then the process needs to be examined for non-random problems.



Six 9s of Quality

• Six 9s of quality is a measure of quality control equal to 1 fault in 1 million opportunities.

• In the telecommunications industry, it means 99.9999 percent service availability or 30 seconds of down time a year.

• This level of quality has also been stated as the target goal for the number of errors in a communications circuit, system failures, or errors in lines of code.



Quality Control Charts• A control chart is a graphic display of data that illustrates the

results of a process over time.• The main use of control charts is to prevent defects, rather than

to detect or reject them.• Quality control charts allow you to determine whether a process

is in control or out of control.– When a process is in control, any variations in the results of the

process are created by random events; processes that are in control do not need to be adjusted.

– When a process is out of control, variations in the results of the process are caused by non-random events; you need to identify the causes of those non-random events and adjust the process to correct or eliminate them.



The Seven Run Rule

• You can use quality control charts and the seven run rule to look for patterns in data.

• The seven run rule states that if seven data points in a row are all below the mean, above the mean, or are all increasing or decreasing, then the process needs to be examined for non-random problems.



Figure 8-3. Sample Quality Control Chart



Testing

• Many IT professionals think of testing as a stage that comes near the end of IT product development.

• Testing should be done during almost every phase of the IT product development life cycle.



Figure 8-4. Testing Tasks in the Software Development Life Cycle



Types of Tests• Unit testing tests each individual component (often

a program) to ensure it is as defect-free as possible.

• Integration testing occurs between unit and system testing to test functionally grouped components.

• System testing tests the entire system as one entity.

• User acceptance testing is an independent test performed by end users prior to accepting the delivered system.



Figure 8-5. Gantt Chart for Building Testing into a Systems Development Project Plan



Testing Alone Is Not Enough• Watts S. Humphrey, a renowned expert on software quality,

defines a software defect as anything that must be changed before delivery of the program.

• Testing does not sufficiently prevent software defects because:

– The number of ways to test a complex system is huge.

– Users will continue to invent new ways to use a system that its developers never considered.

• Humphrey suggests that people rethink the software development process to provide no potential defects when you enter system testing; developers must be responsible for providing error-free code at each stage of testing.



Modern Quality Management

• Modern quality management:

– Requires customer satisfaction.

– Prefers prevention to inspection.

– Recognizes management responsibility for quality.

• Noteworthy quality experts include Deming, Juran, Crosby, Ishikawa, Taguchi, and Feigenbaum.



Quality Experts• Deming was famous for his work in rebuilding Japan and

his 14 Points for Management.• Juran wrote the Quality Control Handbook and ten steps

to quality improvement.• Crosby wrote Quality is Free and suggested that

organizations strive for zero defects.• Ishikawa developed the concepts of quality circles and

fishbone diagrams.• Taguchi developed methods for optimizing the process

of engineering experimentation.• Feigenbaum developed the concept of total quality

control.



Figure 8-6. Sample Fishbone or Ishikawa Diagram



Malcolm Baldrige Award

• The Malcolm Baldrige National Quality Award originated in 1987 to recognize companies that have achieved a level of world-class competition through quality management.

• Given by the President of the United States to U.S. businesses.

• Three awards each year in different categories:– Manufacturing– Service– Small business– Education and health care



ISO Standards• ISO 9000 is a quality system standard that:

– Is a three-part, continuous cycle of planning, controlling, and documenting quality in an organization.

– Provides minimum requirements needed for an organization to meet its quality certification standards.

– Helps organizations around the world reduce costs and improve customer satisfaction.

• ISO 15504, sometimes known as SPICE (Software Process Improvement and Capability dEtermination), is a framework for the assessment of software processes.



Improving Information Technology Project Quality

• Several suggestions for improving quality for IT projects include:

– Establish leadership that promotes quality.

– Understand the cost of quality.

– Focus on organizational influences and workplace factors that affect quality.

– Follow maturity models.



Leadership

• As Joseph M. Juran said in 1945, “It is most important that top management be quality-minded. In the absence of sincere manifestation of interest at the top, little will happen below.”*

• A large percentage of quality problems are associated with management, not technical issues.

*American Society for Quality (ASQ), (www.asqc.org/about/history/juran.html).



The Cost of Quality

• The cost of quality is the cost of conformance plus the cost of nonconformance.– Conformance means delivering products that meet

requirements and fitness for use.– Cost of nonconformance means taking responsibility

for failures or not meeting quality expectations.• A 2002 study reported that software bugs cost

the U.S. economy $59.6 billion each year and that one third of the bugs could be eliminated by an improved testing infrastructure.*

*RTI International, “Software Bugs Cost U.S. Economy $59.6 Billion Annually, RTI Study Finds,” July 1, 2002.



Table 8-5. Costs Per Hour of Downtime Caused by Software Defects

Business Cost per Hour Downtime

Automated teller machines (medium-sized bank) $14,500

Package shipping service $28,250

Telephone ticket sales $69,000

Catalog sales center $90,000

Airline reservation center (small airline) $89,500



Five Cost Categories Related to Quality• Prevention cost: Cost of planning and executing a project so

it is error-free or within an acceptable error range.

• Appraisal cost: Cost of evaluating processes and their outputs to ensure quality.

• Internal failure cost: Cost incurred to correct an identified defect before the customer receives the product.

• External failure cost: Cost that relates to all errors not detected and corrected before delivery to the customer.

• Measurement and test equipment costs: Capital cost of equipment used to perform prevention and appraisal activities.



Media Snapshot*

• A 2004 study by Nucleus Research Inc. estimates that spam will cost large companies nearly $2,000 per employee in lost productivity in 2004 alone, despite investments in software to block spam. Spam currently accounts for more than 70 percent of total e-mail volume worldwide.

• In just one month (August 2003), at least 50 new Internet viruses surfaced, and losses related to computer viruses cost North American companies about $3.5 billion. Businesses have suffered at least $65 billion in lost productivity because of computer viruses since 1997.

*McGuire, David, “Report: Spam Costs Are Rising at Work,” Washington Post (June 7, 2004).



Organizational Influences, Workplace Factors, and Quality

• Study by DeMarco and Lister showed that organizational issues had a much greater influence on programmer productivity than the technical environment or programming languages.

• Programmer productivity varied by a factor of one to ten across organizations, but only by 21 percent within the same organization.

• Study found no correlation between productivity and programming language, years of experience, or salary.

• A dedicated workspace and a quiet work environment were key factors to improving programmer productivity.



Expectations and Cultural Differences in Quality

• Project managers must understand and manage stakeholder expectations.

• Expectations also vary by:

– Organization’s culture

– Geographic regions



Maturity Models

• Maturity models are frameworks for helping organizations improve their processes and systems.

– The Software Quality Function Deployment Model focuses on defining user requirements and planning software projects.

– The Software Engineering Institute’s Capability Maturity Model is a five-level model laying out a generic path to process improvement for software development in organizations.



CMM Levels and CMMI

• CMM levels, from lowest to highest, are:– Initial– Repeatable– Defined– Managed– Optimizing

• The Capability Maturity Model Integration (CMMI) is replacing the older CMM ratings and addresses software engineering, system engineering, and program management.

• Companies may not get to bid on government projects unless they have a CMMI Level 3.



PMI’s Maturity Model

• PMI released the Organizational Project Management Maturity Model (OPM3) in December 2003.

• Model is based on market research surveys sent to more than 30,000 project management professionals and incorporates 180 best practices and more than 2,400 capabilities, outcomes, and key performance indicators.

• Addresses standards for excellence in project, program, and portfolio management best practices and explains the capabilities necessary to achieve those best practices.



Using Software to Assist in Project Quality Management

• Spreadsheet and charting software helps create Pareto diagrams, fishbone diagrams, and so on.

• Statistical software packages help perform statistical analysis.

• Specialized software products help manage Six Sigma projects or create quality control charts.

• Project management software helps create Gantt charts and other tools to help plan and track work related to quality management.



Chapter Summary

• Project quality management ensures that the project will satisfy the needs for which it was undertaken.

• Main processes include:

– Quality planning

– Quality assurance

– Quality control

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