ECOTrans case study

M o d u le S e v e n : P r o je c t R is k M a n a g e m e n t C opyright © 2014 M indE dge Inc. A ll rights reserved. D uplication prohibited. M o d u le S e v e n : P r o je c t R is k M a n a g e m e n t A n e ffe c tiv e p ro je c t m a n a g e m e n t p la n m u st in c lu d e e ffic ie n t risk m a n a g e m e n t p ra c tic e s— a p ro je c t th a t d o e s n o t p ro a c tiv e ly id e n tify , a n a ly z e , a n d re sp o n d to risk s is d o o m e d to fa ilu re . T h e risk s th a t c o u ld im p a c t a p ro je c t m a y a p p e a r, c h a n g e , o r d isa p p e a r o n a d a ily b a sis so p ra c titio n e rs m u st b e p re p a re d fo r c o n tin u o u s re v ie w a n d re sp o n se p la n n in g to sh a p e a n y in flu e n c e th e se fa c to rs m a y h a v e . R isk m a n a g e m e n t stra te g ie s m a y re q u ire th a t risk s b e p rio ritiz e d to g u a ra n te e th a t th e "rig h t" issu e s a re th e h ig h e st p rio ritie s a n d th a t th e y a re m a n a g e d a p p ro p ria te ly a n d p ro d u c tiv e ly to th e b e n e fit o f th e p ro je c t. L e a r n in g O b je c t iv e s A fte r c o m p le tin g th is m o d u le , y o u sh o u ld b e a b le to : 1 . D e sc rib e th e te c h n iq u e s in v o lv e d in risk id e n tific a tio n a n d a n a ly sis 2 . D e sc rib e h o w to m a k e p ro je c t d e c isio n s w h e n o u tc o m e s a re c o m p le x a n d a re a ffe c te d b y u n c e rta in ty 3 . E x p la in h o w risk a n a ly sis a n d risk re sp o n se p la n n in g c o n trib u te to p ro je c t su c c e ss 4 . E x p la in h o w risk e v e n ts c a n b e p rio ritiz e d to e n su re e ffe c tiv e risk m a n a g e m e n t stra te g ie s a re c o m p le te d Id e n t ify in g a n d D o c u m e n t in g P r o je c t R is k s R isk m a n a g e m e n t p ra c tic e s a re d e sig n e d to h e lp p ra c titio n e rs id e n tify risk , e n su re th a t a p ro je c t's risk sta y s w ith in a c c e p ta b le le v e ls, a n d in c re a se th e c h a n c e s th a t e v e n ts th a t a re g o o d fo r th e p ro je c t w ill h a p p e n w h ile d e c re a sin g th e c h a n c e s th a t e v e n ts th a t a re b a d fo r th e p ro je c t w ill h a p p e n . F u rth e rm o re , g iv e n th a t w h e th e r e v e n ts h a p p e n o r n o t is o fte n o u t o f th e ra n g e o f c o n tro l o f p ro je c t p a rtic ip a n ts, g o o d p ro je c t risk m a n a g e m e n t se e k s to lim it th e im p a c t o f p o ssib le n e g a tiv e e v e n ts a n d in c re a se th e im p a c t o f p o sitiv e e v e n ts. P ro b a b ly th e m o st im p o rta n t risk m a n a g e m e n t to o l u se d b y p ro je c t p ra c titio n e rs is th e risk re g iste r d e sc rib e d in th e P la n n in g se c tio n o f th is c o u rse . A s y o u re c a ll, th e risk re g iste r lists th e p ro je c t's risk s a n d a ll o f th e p o te n tia l re sp o n se s to th o se risk s. T h e risk re g iste r is a "liv in g d o c u m e n t" th a t m u st b e c o n tin u o u sly re v ie w e d a n d u p d a te d th ro u g h o u t th e p ro je c t life c y c le to e n su re th a t risk s a re c o n sta n tly id e n tifie d a n d m a n a g e d , to k e e p th e p ro je c t o n tra c k a n d to e n su re p ro je c t su c c e ss. T h e re g iste r c a n b e a sh o rt, sim p le d o c u m e n t o r a m o re -c o m p le x re c o rd o f p ro je c t risk s, d e p e n d in g o n th e n e e d s o f th e p ro je c t. A sim p le risk re g iste r th a t d isp la y s o n ly th e risk s a sso c ia te d w ith a p ro je c t a n d th e e ffe c ts if th o se risk s o c c u r is d isp la y e d b e lo w ; m o re -e la b o ra te re g iste rs c a n b e c re a te d a s th e n e e d a rise s. R e f # E v e n t E ffe c t O w n e r 3 5 2 c e ll to w e rs c o u ld b e d a m a g e d d u rin g e a rth q u a k e re c e p tio n w o u ld n o t b e m a x im a l fo r re le a se o f n e w c o v e ra g e p la n Jo h n A n d e rso n 3 5 3 p rin te r m ig h t fin ish m a rk e tin g m a te ria ls a w e e k e a rly w e c o u ld se n d o u t n o tific a tio n o f n e w p la n to c u sto m e rs e a rlie r Y o o n K w o n 3 5 4 c o m p e tito r m ig h t re le a se its n e w p h o n e p o te n tia l c u sto m e rs m ig h t b e sw a y e d a w a y fro m o u r n e w p la n B ritta n y T o o m e y Id e n tific a tio n T e c h n iq u e s T h e re a re se v e ra l te c h n iq u e s th a t p ra c titio n e rs c a n u se to id e n tify w h ic h risk s to in c lu d e in a risk re g iste r a n d to d e te rm in e p o ssib le re sp o n se s to th o se risk s. T h e fo llo w in g te c h n iq u e s p ro v id e a sta rtin g p o in t fo r p ro je c t p a rtic ip a n ts to u se to c re a te th e ir risk re g iste rs a n d b e g in th e ir risk id e n tific a tio n a c tiv itie s: B r a in sto r m in g B ra in sto rm in g re fe rs to g e n e ra tin g id e a s in a fre e -flo w in g , a sso c ia tiv e m a n n e r. P ra c titio n e rs m a y n e e d to fa c ilita te th e g ro u p o f p e o p le w h o a re b ra in sto rm in g b y fo c u sin g th e ir a tte n tio n o n a fra m e w o rk su c h a s a risk b re a k d o w n stru c tu re . D e lp h i te c h n iq u e T h e D e lp h i te c h n iq u e is b a se d o n g a in in g c o n se n su s fro m e x p e rts w ith o u t b rin g in g th e m to g e th e r in fa c e -to -fa c e m e e tin g s. A fa c ilita to r g a th e rs id e a s se p a ra te ly fro m e x p e rts u sin g a sta n d a rd q u e stio n n a ire , th e n su m m a riz e s re tu rn e d re sp o n se s— w ith o u t a ttrib u tio n — a n d re se n d s th e m to th e e x p e rts fo r a d d itio n a l c o m m e n ts. T h is m e th o d is p a rtic u la rly u se fu l fo r v irtu a l te a m s o r te a m s in w h ic h o n e o r a fe w m e m b e rs h a v e u n d u e in flu e n c e . In te r v ie w in g T h ro u g h in te rv ie w in g , p ra c titio n e rs c a n id e n tify p o ssib le risk s b y q u e stio n in g sta k e h o ld e rs a b o u t th e risk s th a t th e y p e rc e iv e . R o o t c a u se a n a ly sis R o o t c a u se a n a ly sis se e k s to id e n tify th e u n d e rly in g c a u se s o f risk so th a t th e risk c a n b e p re v e n te d o r e lim in a te d . S W O T a n a ly sis S W O T a n a ly sis is a te c h n iq u e th a t id e n tifie s risk (th re a ts a n d w e a k n e sse s) a n d m e a su re s th e m a g a in st th e stre n g th s a n d o p p o rtu n itie s o f th e o rg a n iz a tio n a n d th e p ro je c t. C o m p a n ie s o fte n u se a fra m e w o rk c a lle d S W O T a n a ly sis to a sse ss in te rn a l (c o m p a n y ) a n d e x te rn a l (in d u stry ) fa c to rs th a t m a y im p a c t th e ir b u sin e ss. T h e a p p ro a c h p ro v id e s p a rtic ip a n ts w ith a stra ig h tfo rw a rd w a y to o rg a n iz e a n d e v a lu a te in fo rm a tio n , e n a b lin g th e m to m a k e w e ll-in fo rm e d stra te g ic d e c isio n s. S W O T sta n d s fo r S tre n g th s (c o m p a n y ), W e a k n e sse s (c o m p a n y ), O p p o rtu n itie s (in d u stry ), T h re a ts. C h e c k list a n a ly sis C h e c k list a n a ly sis u se s c h e c k lists th a t a re b a se d o n h isto ric a l in fo rm a tio n o r risk s id e n tifie d in a risk b re a k d o w n stru c tu re . T h e sim p lic ity o f c h e c k lists c a n le a d to o v e rsim p lific a tio n o f p ro je c t risk s so c a re m u st b e ta k e n w h e n u sin g th e se lists. P ra c titio n e rs m u st re m e m b e r th a t g e n e ra l c h e c k lists w ill n e v e r a n tic ip a te e v e ry risk th a t a p ro je c t fa c e s, so th e te a m w ill n e e d to c o n tin u a lly b ra in sto rm to e x p a n d th e c h e c k list d u rin g th e p ro je c t a n d u p d a te c h e c k list te m p la te s w ith le sso n s le a rn e d a fte r e a c h p ro je c t. A ssu m p tio n s a n a ly sis In a ssu m p tio n s a n a ly sis, p ra c titio n e rs re -e x a m in e th e a ssu m p tio n s u n d e r w h ic h th e p ro je c t w a s p la n n e d . N e w in fo rm a tio n m ig h t b e a v a ila b le th a t sh o w s th a t a ssu m p tio n s m a d e m a y h a v e su ffe re d fro m in c o m p le te n e ss, in a c c u ra c y , in c o n siste n c y , o r in sta b ility , a n d th e p ro je c t m a y b e fa c in g risk b e c a u se o f its u n d e rly in g a ssu m p tio n s. D ia g r a m m in g te c h n iq u e s D ia g ra m m in g te c h n iq u e s in c lu d e v a rio u s ty p e s o f d ia g ra m s th a t a im to sh o w th e re la tio n sh ip b e tw e e n e v e n ts a n d th e ir e ffe c ts. D ia g ra m ty p e s in c lu d e c a u se -a n d -e ffe c t d ia g ra m s, sy ste m o r p ro c e ss flo w c h a rts, a n d in flu e n c e d ia g ra m s. B y d ia g ra m m in g p a rts o f a p ro je c t, p ra c titio n e rs m a y e x p o se risk s th a t w o u ld o th e rw ise n o t h a v e b e e n u n c o v e re d . E x p e r t ju d g m e n t P ro je c t p ra c titio n e rs sh o u ld in v ite e x p e rts— th o se w ith e x p e rie n c e re le v a n t to th e p ro je c t — to jo in o th e r sta k e h o ld e rs in id e n tify in g risk s. E x p e rts sh o u ld b e g iv e n a s m u c h in fo rm a tio n a b o u t th e p ro je c t a s p o ssib le so th a t th e y c a n u n d e rsta n d a ll o f th e fa c to rs in th e p ro je c t's su c c e ss. T h e b ia se s o f a ll w h o p ro v id e o p in io n s sh o u ld b e id e n tifie d b y th e p ro je c t m a n a g e m e n t te a m a n d w e ig h e d a g a in st p ro je c t g o a ls. A n a ly z in g R is k s T h e g o a l o f risk a n a ly sis is to d e v e lo p g re a te r in sig h t in to th e n a tu re o f d iffe re n t p ro je c t risk s. M o re sp e c ific a lly , risk a n a ly sis h e lp s to id e n tify th e im p a c t th a t a risk m a y h a v e o n a p ro je c t. W ith th a t k n o w le d g e , p ro je c t p ra c titio n e rs c a n d e c id e h o w to c o n tro l th e risk . T h e re a re tw o d iffe re n t a p p ro a c h e s th a t p ro je c t te a m s c a n ta k e to e v a lu a te th e risk s in th e ir p ro je c ts: q u a lita tiv e risk a n a ly sis a n d q u a n tita tiv e risk a n a ly sis. Q u a lita tiv e a sse ssm e n t is ty p ic a lly le ss c o m p le x th a n q u a n tita tiv e te c h n iq u e s a n d th e re fo re re q u ire s le ss e ffo rt. In m o st sm a ll- a n d m e d iu m -siz e d p ro je c ts, q u a lita tiv e risk a sse ssm e n t m e th o d s w ill b e su ffic ie n t. In c o n tra st, q u a n tita tiv e risk a sse ssm e n t m e th o d s o ffe r m o re p re c ise in fo rm a tio n . T h e u ltim a te p u rp o se o f b o th q u a lita tiv e a n d q u a n tita tiv e risk a n a ly sis is th e sa m e — to u p d a te th e risk re g iste r a n d to h e lp p ra c titio n e rs m a n a g e p ro je c t risk . H o w e v e r, q u a lita tiv e risk a n a ly sis te n d s to b e le ss tim e - a n d re so u rc e -in te n siv e th a n q u a n tita tiv e risk a n a ly sis so it sh o u ld b e c o n sid e re d first to n a rro w d o w n th e n u m b e r o f risk s th a t w ill n e e d to b e fu rth e r e v a lu a te d . Q u a lit a t iv e R is k A n a ly s is E ffe c tiv e risk a n a ly sis b e g in s w ith a n a sse ssm e n t o f e a c h risk 's se v e rity . T h e se v e rity a sso c ia te d w ith a risk is d e riv e d fro m tw o k e y p ie c e s o f in fo rm a tio n : th e p ro b a b ility o f th e risk o c c u rrin g th e im p a c t th a t th e risk w ill h a v e o n th e p ro je c t if it d o e s o c c u r. R is k P r o b a b ility W h e n p ro je c t p ra c titio n e rs a sse ss risk p ro b a b ility q u a lita tiv e ly , th e y d e v e lo p p ro b a b ility ra n g e s o r ra tin g sc a le s a n d th e n a ssig n e a c h risk to o n e o f th e ra n g e s. F o r e x a m p le , a q u a lita tiv e e v a lu a tio n o f risk p ro b a b ility m ig h t u se th re e ra tin g s: Q u a lita tiv e R isk P ro b a b ility R a tin g S c a le U sin g a ra tin g sc a le fo r q u a lita tiv e a sse ssm e n ts o f risk p ro b a b ility h e lp s to re m o v e so m e o f th e su b je c tiv ity fro m w h a t is a n in h e re n tly su b je c tiv e p ro c e ss. In so m e c a se s, th e p ro je c t's te a m m e m b e rs w ill d e v e lo p th e ra tin g sc a le , w h ile in o th e r c a se s, th e p e rfo rm in g o rg a n iz a tio n m a y h a v e sc a le s a lre a d y d e v e lo p e d th a t a re u se d th ro u g h o u t th e o rg a n iz a tio n . R is k Im p a c t W h e n risk im p a c t is e v a lu a te d q u a lita tiv e ly , th e a p p ro a c h is v e ry sim ila r to th a t o f a sse ssin g risk p ro b a b ility . A ra tin g sc a le is u se d th a t m e a su re s th e m a g n itu d e o f th e risk im p a c t. A n e x a m p le o f a th re e -le v e l ra tin g sc a le fo r risk im p a c t m ig h t in c lu d e th e fo llo w in g : Q u a lita tiv e R isk Im p a c t R a tin g S c a le P r o b a b ility L ik e lih o o d H ig h P ro b a b ility 5 0 % o r h ig h e r lik e lih o o d o f o c c u rrin g M e d iu m P ro b a b ility 1 0 % to 5 0 % lik e lih o o d o f o c c u rrin g L o w P ro b a b ility 1 0 % o r lo w e r lik e lih o o d o f o c c u rrin g I m p a c t S ig n ific a n c e H ig h Im p a c t T h e p ro je c t su c c e ss is a t risk a n d th e p ro je c t c a n n o t c o n tin u e w ith o u t m o d ific a tio n s to sc o p e , sc h e d u le , o r re so u rc e s. M e d iu m Im p a c t T h e p ro je c t c a n c o n tin u e , b u t re p e a t p la n n in g w ill b e n e c e ssa ry to e n su re su c c e ss. L o w Im p a c t T h e p ro je c t n e e d n o t c h a n g e . T h e risk c a n b e a d d re sse d th ro u g h m in o r a d ju stm e n ts. R is k -r e la te d A s s e ts T h e p ro je c t m a n a g e m e n t te a m c a n a lso u se h isto ric a l in fo rm a tio n , le sso n s le a rn e d , a n d o th e r risk -re la te d a sse ts fro m p re v io u s p ro je c ts to h e lp th e m a sse ss w h e th e r a n e v e n t sh o u ld b e c o n sid e re d lo w , m o d e ra te , o r h ig h p rio rity b a se d . R isk -re la te d a sse ts c a n in c lu d e a lo o k -u p ta b le o r a p ro b a b ility a n d im p a c t m a trix (w h ic h is u su a lly ta ilo re d to th e p a rtic u la r p ro je c t d u rin g th e P la n n in g p ro c e ss). W h ile c o n d u c tin g q u a lita tiv e risk a n a ly sis, p ro je c t p ra c titio n e rs sh o u ld ta k e in to a c c o u n t a s m a n y re le v a n t fa c to rs a s p o ssib le to d e te rm in e th e p rio rity o f risk e v e n ts. T h e q u a lity o f d a ta sh o u ld b e a sse sse d a n d sta k e h o ld e rs' a n d e x p e rts' b ia se s sh o u ld b e id e n tifie d a n d w e ig h e d . A s w e ll, p ro je c t p a rtic ip a n ts w ill w a n t to c o n d u c t a risk u rg e n c y a sse ssm e n t, w h ic h w ill h e lp th e m d e te rm in e w h e th e r c e rta in risk e v e n ts m a y n e e d to b e p la c e d a t a h ig h e r p rio rity in th e sh o rt-te rm o r w h e th e r c e rta in p h a se s o f th e p ro je c t a re m o re lik e ly to e n c o u n te r risk . R isk s th a t a re id e n tifie d a s m o d e ra te o r h ig h p rio rity m a y b e th e n fu rth e r a n a ly z e d e m p lo y in g q u a n tita tiv e a n a ly sis. T h e P r o b a b ility a n d Im p a c t M a tr ix A p ro b a b ility a n d im p a c t m a trix is a to o l th a t h e lp s p ro je c t p ra c titio n e rs d e te rm in e w h e th e r a risk is c o n sid e re d lo w , m o d e ra te , o r h ig h b y c o m b in in g th e tw o d im e n sio n s o f a risk : its p ro b a b ility o f o c c u rre n c e a n d its im p a c t o n o b je c tiv e s if it o c c u rs. T h is m a trix in d e x e s th e c a lc u la te d risk sc o re o f a risk e v e n t a g a in st th e p rio rity th a t th e p ro je c t m a n a g e m e n t te a m sh o u ld a ssig n th e risk . T h e risk sc o re o f a risk e v e n t is d e te rm in e d b y m u ltip ly in g th e p ro b a b ility th a t th e e v e n t w ill o c c u r b y th e im p a c t o n sc h e d u le , q u a lity , c o st, o r p e rfo rm a n c e , re p re se n te d n u m e ric a lly : (R S = P * I) W ith th is risk sc o re in m in d , p ro je c t p ra c titio n e rs w ill tu rn to th e o rg a n iz a tio n a l p ro b a b ility a n d im p a c t m a trix a n d d e te rm in e w h e th e r th e risk e v e n t sh o u ld b e c o n sid e re d lo w , m o d e ra te , o r h ig h risk b a se d o n th e o rg a n iz a tio n 's c la ssific a tio n sy ste m . R a n k in g sy ste m s g e n e ra lly u se th e fo llo w in g c a te g o rie s fo r ra n k in g risk sc o re s: R e d : h ig h r isk Y e llo w : m o d e r a te r isk G r e e n : lo w r isk T h e c a te g o rie s a n d a c c e p ta b le risk sc o re s fo r p a rtic u la r p ro je c t o b je c tiv e s a n d th e p ro je c t a s a w h o le w ill d e p e n d o n th e p a rtic u la r o rg a n iz a tio n ru n n in g th e p ro je c t a n d th e p re fe re n c e s o f th e p ro je c t sta k e h o ld e rs. In g e n e ra l, risk s w ith lo w e r p rio rity a re a d d e d to a w a tc h list so th a t p ro je c t p a rtic ip a n ts c a n fo c u s o n h ig h e r p rio rity risk s. Q u a lit a t iv e R is k A s s e s s m e n t : T o o ls a n d T e c h n iq u e s O n c e th e p ro b a b ility a n d im p a c t o f a p ro je c t's risk s h a v e b e e n a n a ly z e d , p ro je c t p ra c titio n e rs c a n u se se v e ra l to o ls to h e lp th e m so rt a n d p rio ritiz e p ro je c t risk s, in c lu d in g se q u e n c e d lists a n d a risk a sse ssm e n t m a trix . S e q u e n c e d L is t T h e se q u e n c e d list is th e sim p le st a n d m o st b a sic a p p ro a c h fo r id e n tify in g th e se v e rity o f risk s. It e n u m e ra te s th e risk s, o rd e rin g th e m b y th e ir risk sc o re a n d /o r se v e rity . A B C D E F 1 R isk e v e n t R a n k th is m o n th R a n k la st m o n th N u m b e r o f m o n th s in to p te n R isk r e so lu tio n p r o g r e ss R isk o w n e r 2 D e la y e d c o n stru c tio n m a te ria ls 1 2 3 T w ic e -w e e k ly c o n fe re n c e c a ll w ith v e n d o rs o n d e liv e ry p ro g re ss; re v isin g sc h e d u le e stim a te s F ra n k M e rriw e a th e r 3 In a c c u ra te c o st e stim a te s o n e le c tric a l c o n tra c t w o rk 2 1 4 R e v isin g c o st e stim a te s A b ig a il C h a n g 4 D e la y in lo c a l b u ild in g p e rm it 3 2 2 L o c a l a tto rn e y w o rk in g w ith b u ild in g d e p a rtm e n t; re v isin g c o st e stim a te s S m a th e rs, F ra n k lin & W o re ll 5 P o ssib le sk ille d la b o r sh o rta g e fo r m a so n ry 4 5 3 W o rk in g w ith lo c a l c o n tra c to rs to e n su re e n o u g h m a so n s a re a v a ila b le F ra n k M e rriw e a th e r T h e R is k A s s e s s m e n t M a tr ix A risk a sse ssm e n t m a trix p la c e s th e p ro b a b ility ra tin g s in ro w s a n d th e im p a c t ra tin g s in c o lu m n s (o r v ic e v e rsa ). T h e n e a c h risk is p la c e d in th e c o rre c t c e ll o f th e m a trix , b a se d o n its p ro b a b ility a n d im p a c t. T y p ic a lly th e se m a tric e s a re stru c tu re d in a w a y th a t p la c e s h ig h se v e rity risk s in th e u p p e r rig h t c o rn e r. L im it a t io n s o f Q u a lit a t iv e R a t in g s S o m e risk m a n a g e m e n t e x p e rts a rg u e th a t "h ig h ," "m e d iu m ," a n d "lo w " risk sc a le s a re to o im p re c ise , e sp e c ia lly w h e n c a lc u la tin g risk se v e rity . If a p ro je c t te a m is ra n k in g risk e v e n ts, it c a n b e d iffic u lt to se ttle tie s o r to so rt th ro u g h n u m e ro u s risk s. T h a t's w h y th e se risk m a n a g e m e n t e x p e rts a rg u e fo r th e u se o f n u m b e re d sc a le s o r p e rc e n ta g e s. O n e w a y to a d d re ss th is is to e x p a n d th e sc a le a n d c o n v e rt "su b je c tiv e " ra tin g s in to p e rc e n ta g e s, a s c a n b e se e n in th is c h a rt: R a tin g P e r c e n ta g e V e ry lo w 0 -5 % L o w 6 -2 0 % M e d iu m 2 1 -4 9 % H ig h 5 0 -8 0 % V e ry h ig h 8 1 -1 0 0 % Q u a n t it a t iv e R is k A s s e s s m e n t O n c e a p ro je c t's risk s h a v e b e e n ru n th ro u g h a q u a lita tiv e a n a ly sis p ro c e ss, th o se risk s th a t re q u ire fu rth e r a n a ly sis c a n th e n b e p u t th ro u g h a q u a n tita tiv e a n a ly sis. Q u a n tita tiv e risk a n a ly sis a sse sse s th e o v e ra ll le v e l o f risk e x p o su re a n d h ig h lig h ts sp e c ific a re a s o f risk , a llo w in g p ra c titio n e rs to d e v e lo p a p p ro p ria te re sp o n se s to th o se risk s. Q u a n tita tiv e risk a n a ly sis c a n b e c o m e c o m p le x b e c a u se a sin g le risk e v e n t c a n h a v e m u ltip le p o ssib le e ffe c ts o n a n u m b e r o f sy ste m s a n d p ro c e sse s. P ro je c t p ra c titio n e rs m u st a lso re m a in a le rt to th e d a n g e rs o f re ly in g o n m a th e m a tic a l te c h n iq u e s fo r risk a n a ly sis a n d m a k in g a ssu m p tio n s th a t m a y b e fa lse a b o u t th e ir p re c isio n a n d re lia b ility . A lso , w ith a q u a n tita tiv e a p p ro a c h , risk im p a c t c a n b e d iffic u lt to m e a su re q u a n tita tiv e ly w h e n th e re is m o re th a n o n e fa c to r th a t is im p a c te d . F o r e x a m p le , a sin g le risk m a y re su lt in im p a c ts o n th e p ro je c t sc h e d u le a n d th e p ro je c t c o st; it c a n b e d iffic u lt to c a p tu re b o th o f th e se in a sin g le , q u a n tita tiv e im p a c t m e a su re . Q u a n t it a t iv e R is k A s s e s s m e n t : T o o ls a n d T e c h n iq u e s S im ila r to th o se u se d in q u a lita tiv e a n a ly sis, th e re a re se v e ra l to o ls a n d te c h n iq u e s th a t p ra c titio n e rs c a n u se to so rt th e re su lts o f th e ir q u a n tita tiv e a n a ly sis. T h e se in c lu d e : T h e se q u e n c e d list T w o -d im e n sio n a l q u a n tita tiv e a n a ly sis D e c isio n tre e a n a ly sis a n d e x p e c te d m o n e ta ry v a lu e a n a ly sis S e n sitiv ity a n a ly sis a n d to rn a d o d ia g ra m s S im u la tio n s a n d th e M o n te C a rlo te c h n iq u e E a c h o f th e se w ill b e e x p la in e d in g re a te r d e ta il in th e u p c o m in g a ssig n m e n t o f th is m o d u le . T h e S e q u e n c e d L is t a n d T w o -d im e n s io n a l Q u a n t it a t iv e A n a ly s is Ju st lik e q u a lita tiv e a n a ly sis, q u a n tita tiv e a n a ly sis c a n u se a se q u e n c e d list a n d a tw o - d im e n sio n a l g ra p h ic to o rd e r a n d p rio ritiz e risk s. T h e S e q u e n c e d L is t A sim p le se q u e n c e d list c a n b e u se d w ith n u m e ric a l e stim a tio n s in p la c e ra th e r th a n q u a lita tiv e ra tin g s. F u rth e r, p ro je c t risk se v e rity c a n b e c a lc u la te d b y su m m in g a ll o f th e risk e v e n t se v e rity n u m b e rs. A B C D 1 R isk P r o b a b ility Im p a c t S e v e r ity 2 Q A d e la y s .8 0 .9 0 .7 2 3 S e rv e r c ra sh .3 0 .8 0 .2 4 4 S o ftw a re in c o m p a tib ility .1 0 .4 0 .0 4 5 L o ss o f k e y te a m m e m b e r .0 5 .3 5 .0 1 7 6 S e v e rity T o ta l 1 .0 1 7 T w o -d im e n s io n a l Q u a n tita tiv e A n a ly s is L ik e th e risk a sse ssm e n t m a trix u se d in q u a lita tiv e a n a ly sis, risk s c a n a lso b e d o c u m e n te d v isu a lly u sin g tw o -d im e n sio n a l q u a n tita tiv e a n a ly sis. O n c e a g a in , tw o p e rp e n d ic u la r a x e s a re u se d — o n e a x is m e a su re s th e risk p ro b a b ility w h ile th e o th e r m e a su re s th e risk im p a c t. E a c h risk is p lo tte d , b a se d o n its c o m b in a tio n o f p ro b a b ility a n d im p a c t c h a ra c te ristic s. A n d a g a in , risk s th a t a re m o st se v e re (h ig h p ro b a b ility a n d h ig h im p a c t) a re ty p ic a lly lo c a te d in th e u p p e r rig h t p o rtio n o f th e g ra p h . T h e D e c is io n T r e e A m o re -c o m p le x q u a n tita tiv e a n a ly sis a p p ro a c h in v o lv e s a to o l c a lle d a d e c isio n tre e . A d e c isio n tre e is a d e c isio n a n a ly sis to o l th a t sh o w s a n u m b e r o f o p tio n s, th e p a th s b y w h ic h e a c h o f th e se o p tio n s m a y b e re a c h e d , a n d th e p o ssib le c o n se q u e n c e s o f c h o o sin g e a c h o p tio n . A d e c isio n tre e a n a ly sis is d e sig n e d to e sta b lish a lo g ic a l se q u e n c e fo r d e c isio n s, to c o n sid e r th e d e c isio n a lte rn a tiv e s a v a ila b le , a n d to e v a lu a te th e re su lts th e y w ill p ro d u c e . D e c isio n tre e s a re v a lu a b le fo r risk a sse ssm e n t w h e n a lim ite d n u m b e r o f p o te n tia l o u tc o m e s a re p o ssib le . D e c isio n tre e s u se th e w e ig h t o f e a c h risk a n d e stim a te s to d e te rm in e th e p o te n tia l im p a c t fo r v a rio u s a lte rn a tiv e s. W h e n th e re is a p o in t in a p ro je c t w h e re se v e ra l o p tio n s a re p o ssib le , p ra c titio n e rs a n a ly z e e a c h o p tio n a n d a ssig n it a p ro b a b ility . T h e p ro b a b ilitie s fo r a ll th e o p tio n s sh o u ld to ta l 1 0 0 % . T y p ic a lly d e c isio n tre e s a re u se d w ith risk s th a t a ffe c t th e p ro je c t sc h e d u le o r p ro je c t c o sts. T h ro u g h a d e c isio n tre e a n a ly sis, p ro je c t p a rtic ip a n ts c a n se le c t th e o p tio n th a t h a s th e lo w e st p o ssib le im p a c t. D e c isio n tre e s c a n b e a p p lie d u sin g , o r n o t u sin g , p ro b a b ilitie s. O n e te c h n iq u e w ith p ro b a b ilitie s is th e e x p e c te d v a lu e a p p ro a c h th a t w ill b e d e sc rib e d in th e n e x t a ssig n m e n t. (N o n -p ro b a b ility te c h n iq u e s in c lu d e m in m a x re g re t, m a x im u m re g re t, a n d m a x im u m p a y o ff.) D e c isio n tre e s c a n h e lp se le c t th e b e st c o u rse o f a c tio n in situ a tio n s o f u n c e rta in ty . E x a m p le H e re is a n e x a m p le o f h o w a d e c isio n tre e a n a ly sis is p e rfo rm e d . S u p p o se a lu x u ry c a r d e a le r m u st d e c id e h o w m a n y E u ro p e a n sp o rts c a rs to o rd e r fo r th e c o m in g y e a r. It c o sts h e r $ 2 5 ,0 0 0 to k e e p e a c h u n so ld c a r in in v e n to ry a n d h e r g a in (p ro fit) is $ 5 0 ,0 0 0 o n e a c h c a r so ld . F u rth e r, su p p o se th a t th e c a r d e a le r c a n o rd e r 0 , 1 , 2 , o r 3 c a rs. H e re is h e r d e c isio n ta b le , sh o w in g th e p o te n tia l p a y -o ffs fo r a n y g iv e n c o u rse o f a c tio n . H o w c a n th is c a r d e a le r fig u re o u t h o w m a n y sp o rts c a rs to o rd e r? S h e lo o k s a t m a rk e t re se a rc h a n d h isto ric a l tre n d s to d e v e lo p a ta b le o f th e p ro b a b ilitie s o f th e a n n u a l d e m a n d fo r th e c a rs. A c tu a l A n n u a l D e m a n d D e c isio n : O r d e r 0 C a r s D e c isio n : O r d e r 1 C a r D e c isio n : O r d e r 2 C a r s D e c isio n : O r d e r 3 C a r s 0 C a rs 0 ($ 2 5 ,0 0 0 ) ($ 5 0 ,0 0 0 ) ($ 7 5 ,0 0 0 ) 1 C a r 0 $ 5 0 ,0 0 0 $ 2 5 ,0 0 0 0 2 C a rs 0 $ 5 0 ,0 0 0 $ 1 0 0 ,0 0 0 $ 7 5 ,0 0 0 3 C a rs 0 $ 5 0 ,0 0 0 $ 1 0 0 ,0 0 0 $ 1 5 0 ,0 0 0 C o m b in in g th e p ro b a b ilitie s w ith th e p o te n tia l p a y -o ffs a llo w s th e c a r d e a le r to c o m e u p w ith th e e x p e c te d v a lu e o f e a c h d e c isio n . B a se d o n th e se e x p e c te d v a lu e s, th e c a r d e a le r w o u ld o rd e r 2 sp o rts c a rs; th a t is th e d e c isio n w ith th e h ig h e st e x p e c te d v a lu e . H o w w o u ld th is sa m e in fo rm a tio n lo o k in a d e c isio n -tre e fo rm a t? F irst, it is h e lp fu l to u n d e rsta n d d e c isio n tre e te rm in o lo g y . A d e c isio n -tre e c o n sists o f n o d e s a n d lin k s th a t c o n n e c t n o d e s. D e c isio n n o d e s re p re se n t p o in ts a t w h ic h th e d e c isio n -m a k e r h a s to c h o o se o n e a lte rn a tiv e fro m a n u m b e r o f p o ssib le a lte rn a tiv e s. P ro b a b ility n o d e s re p re se n t p o in ts a t w h ic h c h a n c e , o r p ro b a b ility , p la y s a d o m in a n t ro le a n d re fle c t a lte rn a tiv e s o v e r w h ic h th e d e c isio n -m a k e r h a s (e ffe c tiv e ly ) n o c o n tro l. T e rm in a l n o d e s re p re se n t th e e n d s o f p a th s. P r o b a b ility D e m a n d .0 5 (5 % ) 0 C a rs .3 0 (3 0 % ) 1 C a r .3 5 (3 5 % ) 2 C a rs .3 0 (3 0 % ) 3 C a rs P r o je c te d A n n u a l D e m a n d D e c isio n : O r d e r 0 C a r s D e c isio n : O r d e r 1 C a r D e c isio n : O r d e r 2 C a r s D e c isio n : O r d e r 3 C a r s 0 C a rs (5 % ) 0 5 % x ($ 2 5 ,0 0 0 ) = ($ 1 ,2 5 0 ) 5 % x ($ 5 0 ,0 0 0 ) = ($ 2 ,5 0 0 ) 5 % x ($ 7 5 ,0 0 0 ) = ($ 3 ,7 5 0 ) 1 C a r (3 0 % ) 0 3 0 % x $ 5 0 ,0 0 0 = $ 1 5 ,0 0 0 3 0 % x $ 2 5 ,0 0 0 = $ 7 ,5 0 0 3 0 % x 0 = 0 2 C a rs (3 5 % ) 0 3 5 % x $ 5 0 ,0 0 0 = $ 1 7 ,5 0 0 3 5 % x $ 1 0 0 ,0 0 0 = $ 3 5 ,0 0 0 3 5 % x $ 7 5 ,0 0 0 = $ 2 6 ,2 5 0 3 C a rs (3 0 % ) 0 3 0 % x $ 5 0 ,0 0 0 = $ 1 5 ,0 0 0 3 0 % x $ 1 0 0 ,0 0 0 = $ 3 0 ,0 0 0 3 0 % x $ 1 5 0 ,0 0 0 = $ 4 5 ,0 0 0 E V = 0 E V o f 1 C a r = $ 4 6 ,2 5 0 E V o f 2 C a rs = $ 7 0 ,0 0 0 E V o f 3 C a rs = $ 6 7 ,5 0 0 H e re is h o w o n e b ra n c h o f th e c a r d e a le r's d e c isio n tre e w o u ld lo o k : T h e k e y a ssu m p tio n s b e h in d th e d e c isio n tre e a n a ly sis te c h n iq u e in c lu d e th e fo llo w in g : D e c isio n s a re se q u e n tia l. D e c isio n s to d a y c a n in flu e n c e d e c isio n s to m o rro w . D e c isio n s o r c h a n c e o c c u rre n c e s to m o rro w c a n im p a c t th e re su lts o f d e c isio n s m a d e to d a y . W h ile d e c isio n m a k e rs m a y h a v e n o c o n tro l o v e r d e c isio n s o r c h a n c e o c c u rre n c e s in th e fu tu re , k n o w in g th e ir p ro b a b ility c a n h e lp in m a k in g d e c isio n s n o w . A t th e sa m e tim e , a n y o n e u sin g a d e c isio n tre e m u st b e a w a re th a t th e se p ro b a b ilitie s a n d th e ir im p a c t o n c a sh -flo w (o r p a y -o ff o r g a in ) a re e stim a te s. T h e re a re tw o w a y s to a rriv e a t th e se e stim a te s— b y re ly in g o n th e su b je c tiv e a sse ssm e n t o f th o se c lo se st to th e d e c isio n (o r "e x p e rts") o r b y u sin g h isto ric a l d a ta o f p rio r e v e n ts. T h e b e n e fits o f e m p lo y in g d e c isio n tre e a n a ly sis in c lu d e : A n a ly z in g th e p o ssib le c o n se q u e n c e s o f a d e c isio n G ra p h ic a lly se e in g th e p a th s fo r d e c isio n -m a k in g Q u a n tify in g th e v a lu e s o f o u tc o m e s a n d th e p ro b a b ilitie s o f a c h ie v in g th e m A llo w in g fo r th e o p tim a l d e c isio n o n th e b a sis o f e x istin g in fo rm a tio n T h e re a re , h o w e v e r, sh o rtc o m in g s in d e c isio n tre e a n a ly sis. It is h a m p e re d b y its u n d e rly in g a ssu m p tio n s: if th e e stim a te d p ro b a b ilitie s o f fu tu re e v e n ts p ro v e to b e w ro n g , th e n th e e x p e c te d v a lu e o u tc o m e s w ill a lso b e w ro n g . F u rth e r, d e c isio n tre e a n a ly sis c a n n o t a c c o u n t fo r n a tu ra l d isa ste rs a n d o th e r u n fo re se e n e v e n ts. F in a lly , d e c isio n tre e a n a ly sis isn 't a d ju ste d fo r th e risk to le ra n c e o f th e d e c isio n -m a k e r. E x p e c t e d M o n e t a r y V a lu e E x p e c te d m o n e ta ry v a lu e (E M V ) a n a ly sis is a sta tistic a l te c h n iq u e th a t c a lc u la te s th e a v e ra g e o u tc o m e w h e n th e fu tu re in c lu d e s sc e n a rio s th a t m a y o r m a y n o t h a p p e n . A c o m m o n u se o f th is te c h n iq u e is w ith in d e c isio n tre e a n a ly sis. In E M V a n a ly sis, th e v a lu e o f e a c h p o ssib le o u tc o m e is m u ltip lie d b y its p ro b a b ility o f o c c u rre n c e , a n d th e p ro b a b ility -w e ig h te d v a lu e s o f th e p o ssib le o u tc o m e s a re th e n a d d e d to g e th e r. A d e c isio n tre e c a n b e u se fu l in c la rify in g a c o m p a n y 's o p tio n s, a s w e ll a s d e te rm in in g w h ic h o f th o se o p tio n s is th e m o st b e n e fic ia l o r le a st risk y . N a v ig a te th ro u g h th e d e c isio n tre e a n a ly sis a n d e x p e c te d m o n e ta ry v a lu e e x e rc ise b e lo w to le a rn m o re a b o u t c re a tin g a n d a n a ly z in g a d e c isio n tre e . U sin g th e se to o ls, d e te rm in e w h e th e r th e c o m p a n y ru n n in g th e a n a ly sis b e lo w sh o u ld p u rc h a se a n e w le a rn in g m a n a g e m e n t sy ste m (L M S ), o r k e e p th e o n e th e y c u rre n tly u se . If th e y d e c id e to k e e p th e sy ste m th e y c u rre n tly u se , sh o u ld th e y d e v e lo p e n h a n c e m e n ts fo r it o r c h o o se n o t to in v e st in a n y n e w d e v e lo p m e n t? If th e y d e c id e to p u rc h a se a sy ste m , sh o u ld th e y p u rc h a se P ro d u c t X o r P ro d u c t Y ? A sq u are rep resen ts a d ecisio n to b e m ad e. E ach circle rep resen ts an u n certain ty . D raw y o u r d ecisio n tree so th at each o p tio n is a clear b ran ch o n th e tree. T h is is a p ictu re o f w h at y o u r d ecisio n tree w ill lo o k lik e. O n ce y o u h av e ch arted each o p tio n o n y o u r tree, y o u are read y to an aly ze it. S tart b y estim atin g th e p ay o ff o f each p ath , tak in g in to acco u n t d ecisio n s m ad e an d th e u n certain ty th at w ill affect th e p ath o f th e p ro ject. T h is ch art sh o w s th at th e effectiv en ess o f th e resu ltin g p ro d u ct is u n certain an d w ill affect th e o u tco m e. T h en assess th e p ro b ab ility o f each p o ssib le u n certain o u tco m e, an d rep resen t th e p ro b ab ility in d ecim al fo rm . T h e to tal p ro b ab ility fo r each ch an ce n o d e sh o u ld eq u al 1 . T h is m ean s th at th ere is a 1 0 0 % p ro b ab ility th at o n e o f th e o u tco m es w ill o ccu r fo r each d ecisio n p ath . T o calcu late th e p ro b ab ility -w eig h ted p ay o ff v alu e o f each p o ten tial o u tco m e, m u ltip ly th e p ercen tag e p ro b ab ility b y th e estim ated p ay o ff o f each resu lt. T h en ad d th e p ro b ab ility -w eig h ted p ay o ff v alu e o f each p o ten tial o u tco m e o f each d ecisio n p ath to g eth er to g et each d ecisio n p ath 's p ro b ab ility - w eig h ted p ay o ff. F in ally , w rite d o w n th e p ro jected co st o f each d ecisio n p ath . T h is co st sh o u ld b e su b tracted fro m th e p ath 's p ro b ab ility -w eig h ted p ay o ff. S u b tract th e p ath 's co st fro m th e p ath 's p ro b ab ility -w eig h ted p ay o ff, an d ch o o se th e o p tio n w ith th e larg est b en efit. W h ich o p tio n sh o u ld th e co m p a n y ch o o se? C o n sid er y o u r a n sw er, th en p ro ceed to th e n ex t slid e to see th e a n sw er. T h e co m p an y sh o u ld p u rch ase a n ew learn in g m an ag em en t sy stem . S p ecifically , p ro d u ct X h as th e h ig h est ex p ected m o n etary v alu e, an d ch an ces are, it is th e o p tio n th at w ill h av e th e h ig h est n et v alu e to th e co m p an y . S e n s it iv it y A n a ly s is a n d T o r n a d o D ia g r a m s S e n s itiv ity a n a ly s is A se n sitiv ity a n a ly sis is th e sy ste m a tic a n d c o m p re h e n siv e a n a ly sis o f c h a n g e s in th e re su lts o f m a th e m a tic a l m o d e ls a s v a ria b le s o r a ssu m p tio n s c h a n g e . S e n sitiv ity a n a ly sis is d e sig n e d to id e n tify w h ic h risk s h a v e th e g re a te st p o te n tia l im p a c t o n th e p ro je c t. It e x a m in e s th e e x te n t to w h ic h th e u n c e rta in ty o f e a c h p ro je c t e le m e n t a ffe c ts th e o b je c tiv e b e in g e x a m in e d , w h e n a ll o th e r u n c e rta in e le m e n ts a re h e ld a t th e ir b a se lin e le v e ls. A se n sitiv ity a n a ly sis a llo w s a ra n g e o f p la u sib le in p u ts to b e c o n sid e re d w h e n th e re is u n c e rta in ty a b o u t th e tru e v a lu e o f a n in p u t. A n e x a m p le w o u ld b e c o m p a rin g re su lts o f a m o d e l u sin g a ra n g e o f d isc o u n t ra te s— sa y , lo o k in g a t th e re su lts u sin g 2 % a s a d isc o u n t ra te c o m p a re d to u sin g ra te s o f 5 % a n d 1 0 % . S e n sitiv ity a n a ly sis c a n a lso b e u se d to a sse ss th e p o ssib le e ffe c ts o f p ro je c t risk e v e n ts. A n a n a ly st c a n c h a n g e v a lu e s o f k e y v a ria b le s o n e a t a tim e , o r in d iffe re n t c o m b in a tio n s, to a sse ss h o w o v e ra ll re su lts (fo r e x a m p le , m e a su re d b y th e e x p e c te d v a lu e ) w o u ld b e a ffe c te d . In th o se c a se s w h e re th e p ro je c t is se n sitiv e to c h a n g e s in a v a ria b le th a t is u n c e rta in , it m a y ra ise q u e stio n s a b o u t th e u n d e rly in g a ssu m p tio n s. W h e n e v e r th e p ro b a b ilitie s o f sta te s o f n a tu re (e v e n ts) a n d d e c isio n p a y o ffs re st u p o n su b je c tiv e d e riv a tio n , se n sitiv ity a n a ly sis c a n h ig h lig h t th e p o te n tia l risk s. S e n sitiv ity a n a ly sis c a n b e u se d fo r: 1 . L in e a r p ro g ra m m in g m o d e ls, to a n a ly z e h o w c h a n g e s in th e c o n stra in ts m a y c h a n g e th e o p tim a l so lu tio n 2 . F in a n c ia l p la n n in g m o d e ls (c a sh flo w m o d e ls; c a p ita l b u d g e tin g ), to a n a ly z e c h a n g e s in p ric e s a n d /o r re so u rc e c o sts 3 . D isc o u n te d c a sh flo w m o d e ls, to a n a ly z e c h a n g e s in d isc o u n t ra te o r c a sh flo w s 4 . C V P a n a ly sis, to c a lc u la te m a rg in o f sa fe ty S e n sitiv ity a n a ly sis p ro v id e s v a lu a b le in sig h t in to th e e ffe c t k e y d e c isio n v a ria b le s h a v e o n th e o u tc o m e s o f d e c isio n s. S o m e o f th e b e n e fits in c lu d e : D e te rm in in g h o w se n sitiv e o u tp u t o r o u tc o m e re la te s to v a rio u s v a lu e s o f c ritic a l in p u ts T ra c in g th e e ffe c t o f c h a n g e s in k e y d e c isio n v a ria b le s P ro v id in g a le ss c o stly a n d tim e -c o n su m in g a n a ly sis th a n sim u la tio n a n a ly sis S e n sitiv ity a n a ly sis o f th e re su lts o f a n y q u a n tita tiv e risk a sse ssm e n t c a n b e o f sig n ific a n t v a lu e . E v e n w h e n th e p ro b a b ility o f a p a rtic u la r risk c a n n o t b e d e te rm in e d p re c ise ly , se n sitiv ity a n a ly sis c a n h e lp d e te rm in e w h ic h v a ria b le s h a v e th e g re a te st in flu e n c e o n th e risk . O n e m a jo r d ra w b a c k o f se n sitiv ity a n a ly sis is th a t it o n ly a sse sse s o n e v a ria b le a t a tim e w h e n o fte n it is th e c o m b in a tio n o f u n c e rta in tie s o f a ll re le v a n t v a ria b le s th a t a re c ru c ia l. In a d d itio n , se n sitiv ity a n a ly sis is g e n e ra lly b a se d o n su b je c tiv e e stim a te s o f im p o rta n t d e c isio n v a ria b le s, w h ic h in tro d u c e s m o re p o te n tia l e rro r in to th e a n a ly sis. T o r n a d o d ia g r a m s A c o m m o n w a y to d isp la y a se n sitiv ity a n a ly sis is w ith a to rn a d o d ia g ra m , w h ic h ra n k s th e fa c to rs a ffe c tin g a p ro je c t fro m th e fa c to rs w ith th e m o st u n c e rta in ty a n d im p a c t to th o se w ith th e le a st u n c e rta in ty a n d im p a c t. T h is c o n tra sts th e re la tiv e im p o rta n c e a n d im p a c t o f v a ria b le s th a t h a v e a h ig h d e g re e o f u n c e rta in ty to th o se th a t a re m o re sta b le . H e re is a n e x a m p le o f a to rn a d o d ia g ra m : B a se d o n th is to rn a d o d ia g ra m , th e g re a te st p o te n tia l p o sitiv e a n d n e g a tiv e im p a c t (a s m e a su re d in fin a n c ia l te rm s) fo r th is p ro je c t c o m e s fro m sc h e d u lin g risk . R e m e m b e r th a t n e g a tiv e n u m b e rs (th e le ft h a n d sid e o f th e sc a le ) re p re se n t a re d u c tio n in p ro je c t c o st; p o sitiv e n u m b e rs re fle c t in c re a se d p ro je c t c o st. S im u la t io n s a n d t h e M o n t e C a r lo T e c h n iq u e S im u la tio n a n d m o d e lin g a re u se d to m e a su re risk s fo r th e p ro je c t a s a w h o le , ra th e r th a n fo r in d iv id u a l a lte rn a tiv e s. C o m m o n p ro je c t sim u la tio n to o ls in c lu d e sim u la tio n m o d e ls, w h a t-if a n a ly sis, a n d M o n te C a rlo a n a ly sis. S im u la tio n M o d e ls S im u la tio n m o d e ls u se c o m p u te r-b a se d p ro g ra m s to p re d ic t th e b e h a v io r o f a sy ste m . T h e sim u la tio n a c ts a s a sim ila r b u t sim p le r m o d e l to re p re se n t a situ a tio n o r p ro b le m in o rd e r to a n a ly z e p o ssib le o u tp u ts. M a th e m a tic a l e x p re ssio n s a re u se d to d e sc rib e th e re la tio n sh ip b e tw e e n in p u ts a n d o u tp u ts in a sim u la tio n m o d e l. T h e re a re tw o ty p e s o f in p u ts: C o n tro lla b le in p u ts: In p u ts th a t a re d ire c tly c o n tro lle d b y th e c o m p a n y o r in d iv id u a l. A n e x a m p le w o u ld b e th e d e c isio n b y a c o m p a n y to in v e st in b u ild in g a n e w p ro d u c tio n fa c ility . P ro b a b ilistic in p u ts: In p u ts th a t a re o u tsid e th e d ire c t c o n tro l o f th e c o m p a n y o r in d iv id u a l a n d ta k e o n d iffe re n t v a lu e s. A n e x a m p le w o u ld b e th e c o sts o f ra w m a te ria ls u se d in th e n e w p ro d u c tio n p la n t th e c o m p a n y h a d d e c id e d to b u ild . W h a t-if A n a ly sis W h a t-if a n a ly sis is a fo rm o f sim u la tio n a n a ly sis th a t in v o lv e s se le c tin g d iffe re n t v a lu e s fo r th e p ro b a b ilistic in p u ts in a m o d e l a n d th e n c o m p u tin g th e p o ssib le o u tp u ts. F o r e x a m p le , a c o m p a n y c o u ld u se "w h a t-if a n a ly sis" to m o d e l th e o u tc o m e s (o u tp u t) c a u se d b y a lte rin g th e d e m a n d (a p ro b a b ilistic in p u t) fo r a n e w p ro d u c t. O r a c o m p a n y c o u ld a ssig n a p ro b a b ility d istrib u tio n to th o se in p u ts a n d th e n ru n th e m o d e l w ith th o se n e w v a ria b le v a lu e s a n d lo o k a t th e o u tp u t. M o n te C a r lo A n a ly sis O n e fo rm o f sim u la tio n , th e M o n te C a rlo te c h n iq u e , re lie s o n sta tistic a l sa m p lin g to a p p ro x im a te so lu tio n s to q u a n tita tiv e p ro b le m s. T h e se m o d e ls a re c o m p u te riz e d p ro b a b ilistic c a lc u la tio n s th a t u se ra n d o m n u m b e r g e n e ra to rs to d ra w sa m p le s fro m p ro b a b ility d istrib u tio n s. It is p o ssib le , b u t im p ra c tic a l, to re ly so le ly o n a c a lc u la to r to ru n a M o n te C a rlo sim u la tio n . B u t sin c e th e sim u la tio n is ru n 5 0 0 tim e s o r m o re , p ro je c t te a m s tu rn to re a d ily a v a ila b le so ftw a re p ro g ra m s. T h e o b je c tiv e o f th e sim u la tio n is to fin d th e e ffe c t o f m u ltip le u n c e rta in tie s o n a v a lu e q u a n tity o f in te re st (su c h a s th e to ta l p ro je c t c o st o r p ro je c t d u ra tio n ). W h e n M o n te C a rlo sim u la tio n so ftw a re c a lc u la te s th e v a rio u s p o ssib le o u tc o m e s, th e re su lts fo llo w a c o n tin u o u s lin e . (O n a c o n tin u o u s lin e , e v e ry p o in t o n th e lin e is a p o ssib le re su lt, e v e n th o u g h n o t e v e ry p o in t h a s e q u a l p o ssib ility o f b e in g th e c o rre c t v a lu e . C o n tin u o u s lin e s a re th e o p p o site o f d isc o n tin u o u s lin e s w h ic h h a v e g a p s. D isc o n tin u o u s lin e s h a v e ra n g e s o f p o ssib ilitie s th a t a re d isc re te fro m e a c h o th e r. T h e p ro b a b ility lin e w ill b e d isc o n tin u o u s if d e c isio n s m u st b e m a d e th a t w ill c h a n g e th e c o u rse o f th e p ro je c t.) W h e n u sin g th e M o n te C a rlo te c h n iq u e , re su lts o r o u tc o m e s o f th e p ro je c t c a n in itia lly b e c h o se n ra n d o m ly a n d th e n p lo tte d a lo n g th e lin e . A s m o re is k n o w n a b o u t th e ra n g e a n d w e ig h t o f p o ssib ilitie s, le ss o f th e sim u la tio n c a n b e le ft u p to c h a n c e , a n d m o re a c c u ra te p re d ic tio n s c a n b e m a d e w ith th e lin e . M o n te C a rlo m e th o d s h a v e m a n y a d v a n ta g e s. T h e y c a n d e te rm in e risk e ffe c ts fo r c o st a n d sc h e d u le m o d e ls th a t a re to o c o m p le x fo r c o m m o n a n a ly tic a l m e th o d s. T h e y c a n e x p lic itly in c o rp o ra te th e risk k n o w le d g e o f th e p ro je c t te a m fo r b o th c o st a n d sc h e d u le risk e v e n ts. T h e y h a v e th e a b ility to re v e a l, th ro u g h se n sitiv ity a n a ly sis, th e im p a c t o f sp e c ific risk e v e n ts o n th e p ro je c t c o st a n d sc h e d u le . H o w e v e r, M o n te C a rlo m e th o d s re q u ire k n o w le d g e a n d tra in in g fo r th e ir su c c e ssfu l im p le m e n ta tio n . In p u t to M o n te C a rlo m e th o d s a lso re q u ire s th e u se r to k n o w a n d sp e c ify e x a c t p ro b a b ility d istrib u tio n in fo rm a tio n , m e a n , sta n d a rd d e v ia tio n , a n d d istrib u tio n sh a p e . N o n e th e le ss, M o n te C a rlo m e th o d s a re c o m m o n ly e m p lo y e d fo r p ro je c t risk a n a ly sis b e c a u se th e y p ro v id e d e ta ile d , illu stra tiv e in fo rm a tio n a b o u t risk im p a c ts o n th e p ro je c t c o st a n d sc h e d u le . In a d d itio n to g ra p h ic a lly c o n v e y in g in fo rm a tio n , a M o n te C a rlo sim u la tio n c a n p ro d u c e n u m e ric a l v a lu e s fo r c o m m o n sta tistic a l p a ra m e te rs, su c h a s th e m e a n , sta n d a rd d e v ia tio n , d istrib u tio n ra n g e , a n d sk e w n e ss. S im u la tio n s : A d v a n ta g e s a n d D is a d v a n ta g e s S im u la tio n m o d e ls h a v e m a n y b e n e fits, in c lu d in g th e ir: R e la tiv e sim p lic ity A b ility to m o d e l a n d te st th e b e h a v io r o f c o m p le x sy ste m s F le x ib ility A b ility to e m p lo y a la rg e n u m b e r o f p ro b a b ilistic in p u ts A b ility to c o m p re ss tim e S o m e o f th e d ra w b a c k s o f sim u la tio n s a re th e ir p o te n tia l h ig h c o st, th e c o n sid e ra b le a m o u n t o f p ro g ra m m in g a n d a n a ly sis tim e in v o lv e d , a n d th e ir risk o f e rro r. A M o n t e C a r lo S im u la t io n E x a m p le ( T o t a l P r o je c t C o s t ) T h e fo llo w in g h isto g ra m sh o w s ty p ic a l p ro b a b ility o u tp u ts fro m a M o n te C a rlo a n a ly sis. T h is in fo rm a tio n is u se fu l fo r u n d e rsta n d in g th e m e a n a n d sta n d a rd d e v ia tio n o f a n a ly sis re su lts. N o te th a t th e b a r g ra p h a p p e a rs g e n e ra lly b e ll-sh a p e d a n d sh o w s D istrib u tio n fo r T o ta l P ro je c ts C o sts in C u rre n t D o lla rs. T h e m e a n is 1 8 .5 , w ith a 9 0 % p ro b a b ility ra n g e fro m 1 6 .1 to 2 1 .2 , a n d a 5 % p ro b a b ility a b o v e o r b e lo w th e ra n g e . M o n te C a r lo S im u la tio n E x a m p le (C u m u la tiv e P r o je c t C o s ts ) T h e fo llo w in g c u m u la tiv e c h a rt is u se fu l fo r d e te rm in in g p ro je c t b u d g e ts a n d c o n tin g e n c y v a lu e s a t sp e c ific le v e ls o f c e rta in ty o r c o n fid e n c e . T h e d ia g o n a l c u rv e g e n tly le v e ls o u t b e lo w th e 4 0 0 a n d a b o v e th e 6 0 0 ra n g e . T h e m e a n is 4 9 9 .5 7 , w ith a 9 0 % p ro b a b ility ra n g e fro m 4 3 7 .9 8 to 5 6 6 .9 3 , a n d a 5 % p ro b a b ility a b o v e o r b e lo w th e ra n g e . M o n te C a r lo S im u la tio n E x a m p le (C u m u la tiv e P r o je c t T im e ) T h e fo llo w in g c h a rt, C u m u la tiv e T o ta l P ro je c t T im e , sh o w s th e p ro b a b ility o f c o m p le tin g th e p ro je c t w ith in a ra n g e o f p o ssib le d a te s. A c c o rd in g to th e re su lts o f th is M o n te C a rlo sim u la tio n , th e re is a 5 0 % c o n fid e n c e le v e l th a t th e p ro je c t w ill b e c o m p le te d b e tw e e n A u g u st 2 0 a n d S e p te m b e r 5 . D e v e lo p in g R is k R e s p o n s e P la n s R isk re sp o n se p la n n in g e x p lo re s re sp o n se stra te g ie s fo r th e h ig h -risk ite m s id e n tifie d in th e p ro je c t's q u a lita tiv e a n d q u a n tita tiv e risk a n a ly se s. T h is p la n n in g a lso id e n tifie s a n d a ssig n s p a rtie s to ta k e re sp o n sib ility fo r e a c h risk re sp o n se . It e n su re s th a t e a c h risk re q u irin g a re sp o n se h a s a n o w n e r. T h re e k e y q u e stio n s c a n b e p o se d fo r risk re sp o n se : W h a t c a n b e d o n e a b o u t a g iv e n risk , a n d w h a t re sp o n se s a re p o ssib le ? W h a t a re th e tra d e -o ffs in te rm s o f th e c o sts, b e n e fits, a n d risk s a m o n g th e a v a ila b le o p tio n s? W h a t a re th e im p a c ts o f c u rre n t d e c isio n s o n fu tu re o p tio n s? E le m e n ts o f R is k R e s p o n s e P la n s W h a t a re th e k e y e le m e n ts o f risk re sp o n se p la n n in g ? T h e fo llo w in g c h a rt su m m a riz e s th e se e le m e n ts. E le m e n ts o f R is k R e s p o n s e P la n n in g R e v ie w risk c a u se s a n d risk in te ra c tio n s Id e n tify a lte rn a tiv e risk re sp o n se stra te g ie s, m e th o d s, a n d to o ls fo r e a c h m a jo r risk E v a lu a te a n d p rio ritiz e risk re sp o n se a lte rn a tiv e s E sta b lish a n d c o m m it re q u ire d re so u rc e s fo r sp e c ific risk re sp o n se a lte rn a tiv e s C o m m u n ic a te risk re sp o n se p la n s to p ro je c t p a rtic ip a n ts fo r im p le m e n ta tio n R is k R e s p o n s e T r ig g e r s W h e n sh o u ld p ro je c t p ra c titio n e rs sp e n d th e tim e a n d m o n e y to d e v e lo p risk re sp o n se s? T h e re a re se v e ra l trig g e rs fo r re sp o n se p la n n in g : T h e risk s sh o u ld b e sig n ific a n t a n d th e re sh o u ld b e c o st-e ffe c tiv e re sp o n se s. T h e risk s c o u ld h a v e a h ig h im p a c t a n d th e re fo re m u st b e a d d re sse d — e v e n if th e ir p ro b a b ility o f o c c u rre n c e is lo w . M in o r risk s sh o u ld h a v e re sp o n se s d e v e lo p e d w h e n th e se stra te g ie s a re in e x p e n siv e a n d e ffe c tiv e . R is k R e s p o n s e S t r a t e g ie s N e g a tiv e R is k R e s p o n s e s P ro je c t p ra c titio n e rs h a v e fo u r p o ssib le risk re sp o n se stra te g ie s to d ra w u p o n fo r n e g a tiv e risk s: S tr a te g y D e s c r ip tio n E x a m p le s A v o id a n c e T h is stra te g y se e k s to e lim in a te th re a ts o r n e g a tiv e risk s b y p re v e n tin g th e m fro m e v e r o c c u rrin g . R e d u c in g o r c o m b in in g a n u m b e r o f a c tiv itie s in th e p ro je c t sc h e d u le M itig a tio n T h is stra te g y se e k s to re d u c e th e im p a c t o f n e g a tiv e risk s o r th re a ts. C re a tin g p ro to ty p e s o r in te rim d e liv e ra b le s th a t u se rs c a n te st d u rin g th e p ro je c t T r a n sfe r e n c e T h is stra te g y se e k s to a ssig n re sp o n sib ility fo r n e g a tiv e -im p a c t risk s to a d iffe re n t o rg a n iz a tio n (u su a lly a t a n in c re a se d c o st to th e p e rfo rm in g o rg a n iz a tio n ). P u rc h a sin g in su ra n c e o r a w a rra n ty fo r in c o m p le te w o rk o r d e fe c tiv e m a te ria ls A c c e p ta n c e T h is stra te g y a c c e p ts th a t a n e g a tiv e risk m a y o c c u r a n d th e te a m w ill n o t p la n a re sp o n se b e c a u se th e re sp o n se w o u ld n o t b e fe a sib le o r c o st-e ffe c tiv e to im p le m e n t. N o t h a v in g a p la n to p o w e r y o u r o p e ra tio n s if a c a ta stro p h ic e v e n t c a u se s a re g io n a l p o w e r o u ta g e P o s itiv e R is k R e s p o n s e s T h e re a re a lso fo u r re sp o n se a p p ro a c h e s to u se to re a c t to o p p o rtu n itie s o r p o sitiv e risk s: S tr a te g y D e s c r ip tio n E x a m p le s E x p lo it T h is stra te g y se e k s o p p o rtu n itie s to e x p lo it a p o sitiv e risk e v e n t. T h e id e a is to m a k e su re th a t th e o p p o rtu n ity d e fin ite ly h a p p e n s. A ssig n in g sp e c ia lists to c o m p le te a p ro je c t a t lo w e r c o st S h a r e T h is stra te g y se e k s to sh a re p o sitiv e -im p a c t risk s w ith th ird p a rtie s th ro u g h p a rtn e rsh ip s, te a m s, sp e c ia l-p u rp o se c o m p a n ie s a n d jo in t v e n tu re s. T h is is sim ila r to tra n sfe rrin g risk . E sta b lish in g a jo in t v e n tu re to sh a re risk E n h a n c e T h is stra te g y se e k s to in c re a se th e p ro b a b ility a n d /o r th e p o sitiv e im p a c ts o f a n o p p o rtu n ity . It in v o lv e s id e n tify in g a n d m a k in g u se o f k e y d riv e rs o r ro o t c a u se s o f p o sitiv e -im p a c t risk s. R e c o g n iz in g th a t m o re re so u rc e s w ill a llo w a n e a rly fin ish to a n a c tiv ity A c c e p t T h is stra te g y a c c e p ts o p p o rtu n itie s a s th e y a rise b u t d o e s n o t in v o lv e p u rsu in g th e m . T a k in g a d v a n ta g e o f a p o sitiv e -im p a c t risk (lo w e r- th a n -e x p e c te d c o n stru c tio n c o sts) to re d u c e o v e ra ll p ro je c t c o sts T h e re sp o n se c h o se n — fo r e ith e r p o sitiv e risk o r n e g a tiv e risk — w ill d e p e n d o n th e o rg a n iz a tio n s in v o lv e d , th e ir stru c tu re , th e ir c u ltu re , a n d o th e r p a ra m e te rs a sso c ia te d w ith th e p ro je c t a t h a n d .