Capacity allocation and downsizing decisions in project portfolio management.

Abstract

This paper aims to gain insight into capacity allocation and downsizing decisions in project portfolio management. By downsizing, we mean reducing the scale or size of a project and thereby changing the project's content. We first determine the amount of critical capacity that is optimally allocated to strategic projects with deterministic or stochastic workloads for a single-period problem when the impact of downsizing is known. In order to solve the multi-period problem, we have modeled the behavior of the portfolio in subsequent periods as a single project for which the return on investment can be estimated. Secondly, we investigate how the scarcity of resources affects the (expected) value of projects. The independent (expected) project value is calculated under the assumption of unlimited capacity; in contrast, the dependent (expected) project value incorporates the resource constraints. We find that the dependent project value is equal to the independent project value when the return on investment of the portfolio is sufficiently low. In addition, we determine the relation between the return on investment of the portfolio and the value of a project and conclude that the impact of resource scarcity on the value of a project cannot be fully captured by the common financial practice of adapting the discount rate with the estimated return on investment.Project portfolio management; Downsizing; Stochastic workload;