Project Management

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Project Management

• Risk Management

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Outline

• Introduction
• Definition of Risk
• Tolerance of Risk
• Definition of Risk Management
• Certainty, Risk, and Uncertainty
• Risk Management Process
• Risk Planning
• Risk Assessment
• Risk Identification

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Outline

• Risk Analysis
• The Monte Carlo Process
• Risk Handling
• Selecting the Appropriate Response Mechanism
• Risk Monitoring
• Some Implementation Considerations
• The Use of Lessons Learned
• Dependencies between Risks
• The Impact of Risk Handling Measures
• Risk and Concurrent Engineering

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Basic Concept

• Risk management focuses on
• Known unknowns
• Proactive management

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The alternative to proactive management is
reactive management, also called crisis
management. This requires significantly more
resources and takes longer for problems to
surface.
Basic Concept
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Risk Management

• Risk management focuses on the future
• Risk and information are inversely related

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Risk Management (CONT.)

• Historically, we focused our attentions on
  schedule and cost risk management.
• Today, our primary emphasis is on technological
  risk management
• Can we design it and build it?
• What is the risk of obsolescence?

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Definition Of Risk(1/2)
Risk f(Likelihood, Impact)
event

• Likelihood is the probability of occurrence
• Impact is the amount at stake

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Definition of Risk(2/2)
Risk f(Hazard, Safeguard)
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Risk is a Function of its Components
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Tolerance For Risk

• Risk avoider
• Risk neutral
• Risk lover

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Risk Types
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Definition of Risk Management

• Risk management is the act or practice of dealing
  with risk.
• It includes
• planning for risk,
• assessing risk issues,
• developing risk handling strategies, and
• monitoring risk to determine how they have
  changed.

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Decision-Making Categories

• Complete uncertainty
• Relative uncertainty (partial information)
• Complete certainty

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Developing and Using Payoff Tables
Establishing the procedure to follow
Construct the Payoff table
Decision-making under complete uncertainty
Decision-making under risk
Decision-making under certainty
Maximin Approach Maximax Approach Minimax regret
Approach Insufficient Reason Approach
Expected Monetary Value (EMV) Approach Expected
Opportunity Loss (EOL) Approach Expected Value of
Perfect Information (EVPI) Approach
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Five Steps To Develop Payoff Table

• List all the alternatives.
• List the future consequences of each alternative.
• Identify the payoffs associated with each
  combination.
• Assess the degree of certainty that these
  combinations will materialize
• Decide on a decision criterion.

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Decision-Making under Certainty(1/2)

• A company wish to invest 50 M to develop a new
  product
• Three possible demand
• Strong, Even, and Low
• Three ways or not to develop product
• A, B, and C

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Decision-Making under Certainty(2/2)
Note 1. Profit in Million 2. S3 is the best
regarding how market is
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Decision-Making under Risk (1/2)

• A company wish to invest 50 M to develop a new
  product
• Three possible demand
• Strong, Even, and Low
• Three ways or not to develop product
• A, B, and C
• Probabilities are assigned to each possible state
  of nature

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Decision-Making under Risk (2/2)
Note 1. E156, E252, and E366 2. S3 is the
best choice
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Decision-Making under Uncertainty (1/9)

• Uncertainty
• Meaningful assignment of probabilities are not
  possible
• No single dominant strategy
• Maximax (Hurwicz)
• Maximin (Wald)
• Minimax (Savage)
• Laplace
• Decision Tree

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Decision-Making under Uncertainty (2/9)

• Maximax (Hurwicz)
• Optimistic
• Choose the strategy with maximum profit
• Suitable for large company
• Choose S3 because maximum profit (100M) is S3

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Decision-Making under Uncertainty (3/9)

• Maximin (Wald)
• Concerns how much he can afford to lose
• Pessimistic
• Suitable for small company
• Choose S2 because maximize the minimum payoff
  (50M) from 40, 50, -50

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Decision-Making under Uncertainty (4/9)

• Minimax (Savage)
• Sore loser
• Minimize maximum regret
• Subtract all elements in each column from the
  largest element
• Maximum regret is the largest regret for each
  strategy
• Minimize the maximum regret
• Choose S2 or S2because minimize the maximum
  regret from 50, 50, 140

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Decision-Making under Uncertainty (5/9)
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Decision-Making under Uncertainty (6/9)

• Laplace
• Transform the decision making under uncertainty
  into decision making under risk
• Make priori assumption based on Bayesian
  statistics
• Assuming the probability for each strategy is 1/3
• Choose S1 because maximize the expected value
  from 60, 53.3, 43.3

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Decision-Making under Uncertainty (7/9)
1/3
1/3
1/3
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Decision-Making under Uncertainty (8/9)

• Decision Tree

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Decision-Making under Uncertainty (9/9)

• Decision Tree Example

Direction of computation
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Risk Management Processes

• Risk planning
• Risk assessment
• Risk identification
• Risk analysis/quantification
• Risk handling
• Risk monitoring

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Risk Planning
Poor Risk Management
Customer Expectations
TechnicalInability
Actual Performance
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Risk Assessment

• The problem definition stage of risk management
• Identify and analyze program issues in terms of
  probability and consequences

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Life Cycle Risk Analysis
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Types Of Risks (General)

• Business risks
• Insurable (pure) risk
• Direct property damage
• Indirect consequential loss
• Legal liability
• Personnel

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Types Of Risk (PMI Method)

• External unpredictable
• External predictable
• Internal non-technical
• Internal technical
• Legal

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Risk Types at Boeing

• Financial risks
• Market risks
• Technical risks
• Production risks

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Risk Quantification
STAGE I
STAGE II
GUID-
WARHEAD
ANCE
PROGRAM
SUMMARY
DESIGN
LEGEND
TEST
HIGH
MANU.
MEDIUM
COST
LOW
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Risk Handling

• Assumption (retention)
• Avoidance
• Control (mitigation)
• Transfer

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Future Risks
Inexperienced
INCREASING RISKS
CustomersKnowledge
Experienced
Simple
Complex
Contract Type
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How Much Risk Is Acceptable?

• High tolerance for risk
• Medium tolerance for risk
• Low tolerance for risk

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Degrees of Downstream Risk
Low Risk
RD
Manufacturing
Marketing
Time
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Degrees of Downstream Risk
Moderate Risk
RD
Information Exchange

Manufacturing
Marketing
Time
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Degrees of Downstream Risk
High Risk
RD
Manufacturing
Marketing
Time
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The Risk-Reward Matrix
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Which Method to Use?
Project ProceduralDocumentation
Guidelines
High
Low
Tolerance for Risk
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Prioritization of Risks
TechnicalPerformanceor Quality
Schedule
Cost
First (Highest)Priority
Second Priority
ThirdPriority
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Risk Interdependencies
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Interacting Risks
Desirable
Specification LimitOn Characteristic B
Product Feature A
Undesirable
Undesirable
Desirable
Product Feature B
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Risk Categories at Boeing
50
Tolerance for Risk
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Risk Control Measures
Extreme
StandardControls
Intensity of Controls
Low
High
Low
Risk Intensity
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Investment in Risk Management
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Risk Controls
TooLong
Appropriate
Schedule Length
Low
High
Risk Controls