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Risk Management

Risk Management. Production Process. Lecture content. Recap on last week What is risk management? Quantitative risk evaluation Decision trees Expected Value Sensitivity analysis Failure Mode Effect Analysis. Last week. What is ‘risk management’?.

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Risk Management

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  1. Risk Management Production Process

  2. Lecture content • Recap on last week • What is risk management? • Quantitative risk evaluation • Decision trees • Expected Value • Sensitivity analysis • Failure Mode Effect Analysis

  3. Last week

  4. What is ‘risk management’? • “A risk is any event that could prevent the project realising the expectations of stakeholders as stated in the agreed project brief or agreed definition” (Young 1996. P71)

  5. Types of risk • Project & Process risks • Estimation errors • Planning assumptions • eventualities • Project manager’s job • Identify & evaluate risk • Get agreement on plans to minimise risk • Take action & monitor results • Quickly fix issues arising from risks

  6. Why is it necessary? • The plan is your route to success • Try to anticipate changes to plan & head off • Highlights areas for attention • Prevent risks from becoming issues

  7. Identifying & Ranking risk • Identify – How? • Rank risks on probability scale (1=low, 9=high) • Assess impact of risk • High – significant impact on success • Medium –less serious, but costs attached • Low – little effect on project or costs

  8. Impact on Project Probability

  9. Quantitative risk evaluation • Lots of different methods • Catastrophe theory • Game theory • Monte-Carlo simulation • Pert Analysis (read about this from the core text) • Decision Trees • Expected Value • Sensitivity analysis • Failure Mode Effect Analysis

  10. Decision trees 0.75 £100k A 0.25 £20k 0.5 £200k B 0.5 outcome £0 decision

  11. Expected Value • EV of an event = possible outcomes multiplied by the probability of occurrence • E.g. a project with a 50% chance of increasing profit by £50k = 0.5*50k =£25k

  12. Expected Value II • What is the expected value of projects ‘A’ & ‘B’ in the decision tree slide? • Project A • (0.75*100)+(0.25*20) =£80k • Project B • (0.5*200)+(0.5*0) =£100k

  13. Sensitivity analysis • Shows the likely change in finance if variables alter • People + materials major costs of projects • How? • Identify the main inputs • Assess the optimistic and pessimistic value

  14. Sensitivity analysis II • Costs: • Materials – 60k • Labour – 20k • Contribution to overheads – 35k • Revenues • Fixed at 120k • Profit = revenue-materials-labour-o/head

  15. Sensitivity analysis III Materials Labour + overheads

  16. Failure Mode Effect Analysis • Consider • How serious a particular ‘failure’ would be? • How likely is it that the problem would go unnoticed? • How likely it is to occur? Total risk = (Seriousness)*(likelihood unnoticed)*(likelihood of occurrence) (Maylor 1999, p132)

  17. Failure Mode Effect Analysis II

  18. Risk Register • Documentation showing all identified risks & control mechanisms to reduce them • Record • Reference • Title & description • Current status • Potential impacts • Risk owner • Actions • Action log

  19. References • Maylor H(1999) Project Management, Prentice Hall, UK • Young T (1996) The handbook of Project Management, Kogan Page, UK.

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