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’? “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 P71)

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

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

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

LowMediumHigh 7-9MediumHigh Unacceptable 4-6LowHigh Unacceptable 1-3LowMediumHigh Impact on Project Probability

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

Decision trees A decision outcome B £100k £20k £200k £0 0.5

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

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

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

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

Sensitivity analysis III -10%Expected+10% -10% = = =4.5 Expected = = =(1) +10% = =(0.5) =(6.5) Materials Labour + overheads

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)

Failure Mode Effect Analysis II Activity seriousness Likelihood unnoticed Likelihood of occuring Total Carry out tests using automated equipment Enter data manually

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

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