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Trade-off Analysis in a Project Management Environment and R

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nicole durand

on 13 November 2014

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Transcript of Trade-off Analysis in a Project Management Environment and R

Trade-off Analysis in a Project Management Environment and Risk Management

Trade-off Analysis in a Project Management Environment
Successful project management attempts to control corporate resources within constraints of time, cost, and performance

Trade-offs are based on the constraints of the project

Many factors go into the decision to sacrifice either time, cost, or performance

It is not always possible to sacrifice one without affecting the others

Methodology for Trade-Off Analysis
First step
Recognizing/understanding the basis for project conflicts

Second step
Reviewing the project objectives

Third step
Analyzing the project environment and status

Methodology for Trade Off Analysis
Fourth step
Identifying the alternative courses of action
Situation 1 – Performance is fixed
Situation 2 – Cost is fixed
Situation 3 – Time is fixed
Situation 4 – No constraints are fixed

Fifth step
Analyzing/selecting the best alternative

Sixth step
Revising the project plan
It is clear the project manager has options to control a project during its execution

The availability of specific options will depend on the particular project environment

The greatest contribution a project manager can make to a project team organization is stability in adverse conditions

Interpersonal relationships are relevant to alternatives since team performance will be required

Trade-off Analysis in a Project Management Environment Conclusion
Trade-off Analysis in a Project Management
Environment Conclusion
Project managers can make trade-offs, encourage team members, and reassure the project sponsor in order to produce a satisfactory project through a combination of management skill and sensitivity.

Risk Management
What is Risk?
Measure of probability and consequences of not achieving a define project goal
Something that could potentially occur in the future and has consequences

Two Components of Risk

Risk Tolerance
Classifications of Risk Tolerance

Risk Averter
Demand a premium to accept risk
Risk Neutral
Satisfaction that is received from payout increases at a steady rate
Risk Seeker
Will pay a penalty to take a risk

Risk Management
Risk Management System Should Include Activities to:
Formal plan risk management activities
Estimate probability and impact of risks
Choose risk response strategy
Monitor and control risks

Risk Management Should Be:
Tailored to size, culture, type of customer etc.

Decision Making Under Certainty
Decision-makers know with 100% accuracy what the states of nature and payoffs will be

Pay-off Matrix

Decision Making Under Risk
Decision-makers have to choose strategy based off of probabilities of different states of nature occurring

Pay-off Matrix

Decision Making Under Uncertainty
Decision-makers will have no way of determining the probability of each state of nature

Four Criteria
Hurwicz Criterion
Optimistic decision maker, maximize profits
Wald Criterion
Pessimistic decision maker, minimize loss
Savage Criterion
Decision maker is a sore-loser, minimize regret
Laplace Criterion
Assumes all states of nature have equal probability of occurring

Risk Identification & Classification
Methods of Identifying Risk
According to Source
According to life cycle phase
Any source of information that allows recognition of a potential problem can be used to identify risks

Methods of Classifying Risk
Business risk vs. Insurable risk
Internal vs. external

Risk Management Plan (RMP)
Risk- related road map to guide project team

Risk Management Plan Includes:
Risk management strategy
Methods to execute strategy
Plan for adequate resources

Risk Analysis
Risk analysis is a systematic process to estimate the level of risk for identified and approved risks.

probability of occurrence
consequence of occurrence scales together with a
risk mapping matrix to convert the values to risk levels.

expected value
decision tree analysis
payoff matrices
modeling and simulation

Risk Categories
Cost Evaluation
Builds on technical and schedule evaluation results.
Translates technical and schedule risks into cost.
Derives cost estimate by integrating technical risk, schedule risk, and cost
Schedule Evaluation
Evaluates baseline schedule inputs.
Reflects technical foundation, activity definition, and inputs from technical areas.
Incorporates cost and technical evaluation and schedule uncertainty inputs to program schedule model.
Technical Evaluation
Provides technical foundation.
Identifies and describes program risks (e.g., technology).
Analyzes risks and relates them to other internal and external risks.

Evaluating Risk
When a qualitative risk analysis is performed, risk ratings can be used as an indication of the potential importance of risks on a program.
High risk: Substantial impact on cost, technical performance, or schedule. Substantial action required to alleviate issue. High-priority management attention is required.
Medium risk: Some impact on cost, technical performance, or schedule. Special action may be required to alleviate issue. Additional management attention may be needed.
Low risk: Minimal impact on cost, technical performance, or schedule. Normal management oversight is sufficient.

Qualitative Risk Analysis
A commonly used qualitative risk analysis methodology involves risk scales (templates) for estimating probability of occurrence and consequence of occurrence, coupled with a risk-mapping matrix.

The risk is evaluated using:
Expert opinion against all relevant probability of occurrence scales
Three consequences of occurrence scales
Technical performance

Classes of Risk Analysis Scales
Calibrated Ordinal
Estimated Probability

Risk Mapping Matrix
Valuable to convert probability and consequence scores to risk, they have several limitations and if not carefully used can lead to errors.

Quantitative Risk Analysis
Payoff Matrixes
Decision analysis
Expected value
Monte Carlo process
Key to producing Accurate Quantitative Risk Analysis:
developing an accurate model structure
incorporating accurate probability information

Monte Carlo Process
an attempt to create a series of probability distributions for potential risks
randomly sample these distributions
transform numbers into useful information
estimate risk in the design of service centers;
time to complete key milestones in a project
the cost of developing, fabricating, and maintaining an item
inventory management

Monte Carlo Process
1. Develop and validate a suitable cost or schedule deterministic model without risk and/or uncertainty.
2. Develop the reference point estimate (e.g., cost or schedule duration) for each WBS element or activity contained within the model.
3. Check and recheck the model logic (cost and schedule) and constraints (schedule)
4. Identify the lowest WBS or activity level for which probability distributions will be constructed.
5. Identify which WBS elements or activities contain estimating uncertainty and/or risk.
6. Develop suitable probability distributions for each WBS element or activity with estimating uncertainty and/or risk.
7. Aggregate the WBS element or activity probability distributions functions using a Monte Carlo simulation.
8. Sensitivity and scenario analyses should also be considered for cost and schedule risk analyses.

Plan Risk Response
Descriptive uncertainty
Measurement uncertainty
Voluntary risk or opportunity
Involuntary risk or opportunity
Equitable risks or opportunities
Inequitable risks or opportunities
Length of exposure to the risk or time available

Types of Responses
Risk Management
Successful risk assumption and management is twofold:
Identify the resources needed to overcome a risk should it occur and
Ensure that necessary administrative actions are taken to identify a management reserve to accomplish those management actions.

Risk Management
Risk avoidance involves making changes in:

The concept (including design),
Specifications, and/or
Practices that reduce risk to an acceptable or manageable level.

Monitor and Control of Risk
Techniques to monitor and control risk:

Earned Value
Program Metrics
Schedule Performance Monitoring
Technical Performance Measurement

Risk Interdepencies
Project management methodologies cannot be counted upon to accurately define the dependencies between risks.

Risk Handling Measures
Over investment in risk management can lead to substantial financial setbacks.
Underinvestment in risk management for a project can lead to heavy losses/damages, and potential project failure.
Some sort of balance in position is critical.

Risk and Concurrent Activity
Reaching the marketplace first often requires overlapping activities.
Overlapping activities can lead to schedule compression and lower costs.
It is very important to identify and achieve an overlapping point that increases benefits while decreasing rework

Cost to buy = $78.00/unit versus cost to make = $75.80
It’s more economical to make rather than buy with a saving of $22,000
Reasons to opt for the non-economical choice:
What other products can Teloxy make
Profit margin bigger by outsourcing
Where liability lies
Would natural flow of manufacturing be disrupted
Relationship with supplier

Increase in runs from 10,000 units to 18,000 units
Economic feasibility if production remains at 10,000 units cost = $80.80 increase to 18,000 units cost = $74.13
Probability of defect initially won’t change but over time a decrease will occur
If defects can be reduced and if more business can be generated then the larger unit production will cause cost per unit to drop

Teloxy received a one time contract to design and manufacture a 10,000 unit product
Management felt that the new product could be designed and manufactured for a low cost
During the final stage the engineers required a higher grade component that cost higher than budgeted causing a cost overrun
The manufacturing team is able to produce a maximum of 10,000 units with set up cost of $100,000 and raw material cost of $40/component

Material cost = # of units multiplied by material cost/unit
# of defective units = percent defective multiplied by # of units
Defective unit cost = # of defective units multiplied by defective unit cost
Total cost of units & replacement cost = sum of setup cost, total material cost and defective unit cost
Probability of cost = probability of occurrence multiplied by total cost of units & replacement cost
EV to make = sum of probability of cost divided by # of units for per unit basis
Scrap, purchase & handling = (probability of cost divided by (# of units multiplied by small component cost/unit)) multiplied by new total material cost
Total cost to buy = sum of new total material cost and scrap, purchase & handling

The manufacturing team have found away to increase runs from 10,000 to 18,000 units
Setup cost will increase to $150,000 and defect cost will stay the same
Determining economic feasibility of make or buy
Should probability of defects change if there is an increase in run
What happens if follow on contracts will be forthcoming and if probability of defects changes due to learning-curve efficiencies

Formulas used:
EV of defective = sum of all runs of probability of occurrence multiplied by # of defective units
Total cost = (defective unit cost multiplied by EV of defective) plus new setup cost plus total material cost. Divided by # of units for per unit basis
# of defective units = new # of units multiplied by percent defective
Total cost for 18,000 units = total material cost change using new # of units

The End
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