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Project Management Risk Management

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Outline 1.Introduction 2.Definition of Risk 3.Tolerance of Risk 4.Definition of Risk Management 5.Certainty, Risk, and Uncertainty 6.Risk Management Process 7.Risk Planning 8.Risk Assessment 9.Risk Identification 1.Introduction 2.Definition of Risk 3.Tolerance of Risk 4.Definition of Risk Management 5.Certainty, Risk, and Uncertainty 6.Risk Management Process 7.Risk Planning 8.Risk Assessment 9.Risk Identification

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Outline 10.Risk Analysis 11.The Monte Carlo Process 12.Risk Handling 13.Selecting the Appropriate Response Mechanism 14.Risk Monitoring 15.Some Implementation Considerations 16.The Use of Lessons Learned 17.Dependencies between Risks 18.The Impact of Risk Handling Measures 19.Risk and Concurrent Engineering 10.Risk Analysis 11.The Monte Carlo Process 12.Risk Handling 13.Selecting the Appropriate Response Mechanism 14.Risk Monitoring 15.Some Implementation Considerations 16.The Use of Lessons Learned 17.Dependencies between Risks 18.The Impact of Risk Handling Measures 19.Risk and Concurrent Engineering

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Basic Concept Risk management focuses on : Known unknowns Proactive management 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 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? 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 ) Likelihood is the probability of occurrence Impact is the amount at stake event

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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 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. 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 Complete uncertainty Relative uncertainty (partial information) Complete certainty

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Maximin Approach Maximax Approach Minimax regret Approach Insufficient Reason Approach Developing and Using Payoff Tables Establishing the procedure to follow Construct the Payoff table Decision-making under certainty Decision-making under complete uncertainty Decision-making under risk 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. 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 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. S 3 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 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. E 1 =56, E 2 =52, and E 3 =66 2. S 3 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 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 S 3 because maximum profit (100M) is S 3 Maximax (Hurwicz) Optimistic Choose the strategy with maximum profit Suitable for large company Choose S 3 because maximum profit (100M) is S 3

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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 S 2 because maximize the minimum payoff (50M) from 40, 50, -50 Maximin (Wald) Concerns how much he can afford to lose Pessimistic Suitable for small company Choose S 2 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 S 2 or S 2 because minimize the maximum regret from 50, 50, 140 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 S 2 or S 2 because 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 S 1 because maximize the expected value from 60, 53.3, 43.3 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 S 1 because maximize the expected value from 60, 53.3, 43.3

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Decision-Making under Uncertainty (7/9) 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 Risk planning Risk assessment Risk identification Risk analysis/quantification Risk handling Risk monitoring

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Poor Risk Management Risk Planning Technical Inability Customer Expectations Actual Performance Performance Time

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Risk Assessment The problem definition stage of risk management Identify and analyze program issues in terms of probability and consequences 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 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 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 Financial risks Market risks Technical risks Production risks

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Risk Quantification STAGE ISTAGE IIGUID- ANCE WARHEAD COST MANU. TEST DESIGN HIGH MEDIUM LOW LEGEND PROGRAM SUMMARY

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Risk Handling Assumption (retention) Avoidance Control (mitigation) Transfer Assumption (retention) Avoidance Control (mitigation) Transfer

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Future Risks Customer’s Knowledge Experienced Inexperienced Simple Complex Contract Type INCREASING RISKS

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How Much Risk Is Acceptable? High tolerance for risk Medium tolerance for risk Low tolerance for risk High tolerance for risk Medium tolerance for risk Low tolerance for risk

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Degrees of Downstream Risk R&D Manufacturing Marketing Time Low Risk

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Degrees of Downstream Risk R&D Manufacturing Marketing Information Exchange Time Moderate Risk

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Degrees of Downstream Risk R&D Manufacturing Marketing Time High Risk

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The Risk-Reward Matrix Low High Reward Medium Risk High Low Medium Quality of Resources Needed Quality of Resources Needed Low Medium High

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Project Procedural Documentation Guidelines High Low Tolerance for Risk Rigid Policies/ Procedures Assumption Reduction Transfer Avoidance Which Method to Use?

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Prioritization of Risks Schedule Cost Technical Performance or Quality First (Highest ) Priority Second Priority Third Priority

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Risk Interdependencies

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Specification Limit On Characteristic B Interacting Risks Product Feature A Product Feature B Desirable Undesirable Desirable

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Risk Categories at Boeing

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Tolerance for Risk

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Risk Control Measures Intensity of Controls Risk Intensity Standard Controls High Range of Controls Low Extreme

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Investment in Risk Management

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Risk Controls Schedule Length Risk Controls Appropriate Too Long Low High Too Many Risk Management Filters and Gates No Risk Plan

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