Distance Learning Center

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Distance Learning Center

• Technology Project Management
• Risk Management Part One
• Melissa Lin, IT Consultant
• HenEm, Inc. Parkville, Missouri
• linm_at_ipfw.edu
• http//www.etcs.ipfw.edu/linm

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Basic Concept

• Risk management focuses on
• Known unknowns
• Proactive management
• The alternative to proactive management is
  reactive management, also called crisis
  management. This requires significantly more
  resources and takes longer for problems to
  surface.

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Risk Management

• Historically, we focused our attentions on
  schedule and cost risk management
• Risk and Information are inversely related
• Risk Management focuses on the future
• 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

• A probability (Likelihood) of occurrence of
  that event
• Impact is the amount at stake

Risk f(Likelihood, Impact)
event
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Tolerance For Risk

• Risk avoider
• Risk neutral
• Risk lover

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Decision-Making Categories

• Decision Making Categories
• Complete uncertainty
• Hurwicz criterion
• Wald (maximin) criterion
• Savage criterion
• Laplace criterion
• Relative risk (partial information)
• Complete certainty

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Example 1 Decision Making under Certainty

• A company wishes to invest 50 million to develop
  a new product
• Product choices
• A product
• B product
• C Product
• States of nature
• A strong market demand (N1 Up)
• An even market demand (N2 Even)
• A low market demand (N3 Low)

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Example 1 (continue)
States of Nature
Payoff Matrix (Profit in Millions)
Payoff 50 40 -50 50
50 60 100 80 90
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Example 2 - Decision Making under Risk
States of Nature
Payoff Matrix (Profit in Millions)
E1 Payoff for strategy 1 50 0.25 40
0.25 90 0.5 67.50E2 55 million E3
20 millions
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Example 2 - Decision Making under Risk (continue)
States of Nature
Payoff Matrix (Profit in Millions)
E1 Payoff for strategy 1 50 0.6 40
0.2 90 0.2 56E2 52 millions E3 66
millions
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Savage, Minimax Criterion
Table 2
Table 3 Regret Table
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Laplace Criterion
Table 17-2
Table 17-4
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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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Developing and Using Payoff Tables
Establishing the procedure to follow
Construct the Payoff table
Decision-making under complete uncertainty
Decision-making under certainty
Decision-making under risk
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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Decision Tree Example (Fig. 17-3)

• A Manufacturing Example the probability of each
  combination of manufacturing process
• A product can be manufactured using Machine A or
  Machine B
• Machine A has a 40 chance of being used, and
  machine B has 60
• Both machines use either process C or D
• When machine A is selected, process C is selected
  80 of the time, and the process D 20
• When machine B is selected, process C is selected
  30, and process D 70

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Decision Tree Example (Fig. 17-3)
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Expanded Tree Example (Fig. 17-4)

• A Make or Buy Decision Example
• Make the product
• Purchase a new machine (35,000)
• Market good 70 of time, 80,000 profit
• Market poor 30,000 profit
• Subcontract out the work
• Administration cost 5,000
• Market good 50,000 profit
• Market poor 15,000 profit

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Expanded Tree Example (Fig. 17-4) (continue)
Subcontract
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Summary

• Risk Management
• Concepts
• Definition
• Tolerance
• Next - Risk Management Process

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Question?

• Answers
• Email linm_at_ipfw.edu
• http//www.etcs.ipfw.edu/linm