BS in Business from The University of Tennessee ... NF

1
Risk!

• Paul Koza
• Vistakon Quality Engineering

2
Background

• Quality Engineer with Vistakon for 5 years
• BS in Business from The University of Tennessee
• MS in Mathematical Science from Clemson
  University
• Experience in transportation, pulp paper,
  plastics, and medical device industries

Risk approaches based upon collective writings of
Peter Bernstein
3
Why We Do The Things We Do

• Risk management Effective decision making
• Complex tools
• Catastrophic failures and breakdowns
• Far-reaching consequences

4

• You want a valve that doesnt leak and you try
  everything possible to develop one. But the real
  world provides you with a leaky valve. You have
  to determine how much leaking you can tolerate.
• - Arthur Rudolph, Saturn 5 Rocket Scientist

5
Contemporary Examples

• Amtrak derailment in Crescent City
• Enron Financial Collapse
• Domestic Anti-terrorism Procedures
• NFL Draft
• New Product Development (RD)
• Product Marketing Strategy
• Find a New Job vs. Stay Put

6
Conflict

• Management of a business is a process that
  constantly looks into the future.
• The future cannot be quantified because it is
  unknown.
• We can use numbers to quantify past events.
• To what degree should we rely on historic
  patterns to tell us about the future?
• What matters more
• The facts as we see them
• Our subjective beliefs about what lies hidden in
  time

7
Bottom Line

• The consequences of the choices we face should
  outweigh probabilities of the outcomes we expect.
• Decision makers have free will and make rational
  choices even when the future is uncertain.

8
A Walk Down Memory Lane
9
Approach 1 Blaise Pascal

• Pascal spent his life alternating between casinos
  and fleshpots followed by intense religious
  periods. Religion won in the end. Pascals last
  days were spent at the monastery of Port-Royal.
• Pascals Wager
• God is, or is he not. Which way should we
  incline? Reason cannot answer.

10

• Is an outcome in which God is more valuable
  than an outcome where God is not?
• Our guess about the probability of Gods
  existence doesnt help we have no method to
  test the hypothesis.
• Suppose you act as though God exists and lead a
  life of virtue. Suppose you are wrong and God is
  not. Youve passed up some fun, but gained some
  other rewards in the process.

11

• Now suppose you act like God is not. You enjoy
  life and place me above all else. Suppose you
  are wrong. You enjoy goodies in your lifetime,
  but suffer eternal damnation.
• The value of the bet that God is, is infinitely
  greater than the value of the bet that God is
  not. The probability that God is or God is not
  is irrelevant.

12
Business Application

• Product launch in a new country with a growing
  market for this product type.
• Probability of success is high but the market is
  competitive.
• Price is dominant variable product
  differentiation is difficult.
• Given interest rate spreads and the exchange
  markets optimistic outlook for this nations
  currency, you see no need to hedge the foreign
  currency at this time.
• Do you hedge or not hedge?

13

• Suppose you hedge and youre wrong exchange
  rates are stable. Although you incur the cost of
  hedging, you can still price the product
  correctly for the market, regardless of the
  exchange rate.
• Suppose you agree with the optimistic exchange
  market and dont hedge. But the currency
  depreciates and surprises the market. You will
  receive fewer for each unit sold in a market
  where raising the local currency price by even a
  little will put you out of business.
• You cannot afford to make this bet. The
  consequences of being wrong are too serious.
  Regardless of the exchange rates or the
  probabilities, maintaining a competitive local
  price is the single most important element in
  success.

14
Approach 2 Jacob Bernoulli

• The Bernoulli family was extraordinarily talented
  but also mean and nasty even with one another.
  When one family member and his son competed for
  the same prize from the French Academy of
  Sciences for work on planetary orbits, and the
  son won, the father was so infuriated that he
  threw his son out of the house.

15
Death and Taxes

• In a letter from Jacob Bernoulli to Gottfreid von
  Leibniz in 1703, Bernoulli wrote, It is strange
  that we know the odds of throwing a seven instead
  of an eight with a pair of dice, but we do not
  know the probability that a man of 20 will
  outlive a man of 60. Bernoulli wanted to
  conduct an experiment where he would compare a
  large number of pairs of men of various ages to
  see if he could deduce the probabilities from
  that evidence.

16

• Leibniz was not impressed. He replied to
  Bernoulli, Nature has established patterns
  originating in the turn of events, but only for
  the most part.
• We can never escape uncertainty. No mathematical
  model works perfectly. Statisticians are
  satisfied when a model works with only 5
  probability that its results are due to chance.
  But that still leaves 5 that we do not
  understand, cannot model, and can cause all kinds
  of mischief if we mechanically make decisions
  based on the model. No event is without cause.
  Assigning a probability to chance is the same as
  assigning a number to ignorance.

17

• Patterns repeat themselves only for the most
  part. Use risk management tools and the art of
  survival when forecasts about the unknown future
  turn out to be wrong.
• In the earlier example, the currency did
  depreciate, even though the probabilities were
  against it. The other part matters every bit as
  much as the most part.

18
Approach 3 Stephen Jay Gould

• Gould is an American evolutionary biologist. He
  was informed in his twenties that he suffered
  from mesothelioma, a deadly form of cancer. The
  median life expectancy was eight months. Gould
  faced this diagnosis from his training in
  Darwinian evolution a reality in which causes
  have effects but the variety of possible effects
  from any given cause is limitless. Consequently,
  the effects are not entirely predictable.
  Variation stands as the fundamental reality and
  calculated averages become abstractions.

19
Focusing on the mean ignores the events in the
tails
8 mo
0 mo
Infinity
Life Expectancy
20

• All of us depend too much on measures of central
  tendency we focus on the hole rather than the
  donut. Our decisions are based on trends,
  correlation coefficients, normal distributions,
  and above all the mean.
• The essence of risk management is the recognition
  of variation. Losses do not stem from average
  results but rather from deviations from the mean
  the outliers of distributions.
• Simplification lures us into a trap - it is
  impossible without measures of central tendency.

21

• Goulds Darwinian models argues that diversity in
  nature is so great and every event could lead to
  a large variety of outcomes that there is no such
  thing in nature that we can identify as the norm.
• In risk management, normal is not a state of
  nature but a state of transition and trend is not
  destiny.

22

• The positive message here is that variety is the
  spice of life. Take away variety and nothing
  remains but averages with zero standard
  deviations and targets always on the mark.
  Remove variety and we remove uncertainty.
• Variety is the essence of survival. All ships
  dont skink together, all stocks dont go up or
  down at the same time, different assets have
  different cyclical patterns.
• Without variation, life would not only be boring,
  but life would be risky. Variation makes risk
  management possible. It means that there is more
  than one basket in which to carry eggs.
  Therefore, society is willing to assume more risk
  if there are additional baskets.

23
Risk Management Tools

• Failure Modes and Effect Analysis (FMEA)
• Fault Tree Analysis
• Quality Function Deployment (QFD) House of
  Quality

24

Failure Mode Effect Analysis
Fail to Intent Root Cause Consequence Mitigation
Risk Assessment Action Plans Results Continuous
Improvement
25
Scope and Objective
Top Down

• Design Control
• Risk Assessment
• Risk Management
• Trouble Shooting (Fault Finder)

26
Failure Mode

• Type 1 Failure to perform specified function
• Type 2 Something you dont want something
  that is not supposed to be there

27
Cause

• Man
• Machine
• Method
• Material
• Environment

28
Effect

• Effect means consequence or impact
• Immediate Consequence
• Consequence of the consequence
• Consequence of the consequence of the consequence
• Cumulated Consequence ?Consequencen

29
Effect

• Product
• Local Effect
• Immediate effect effect on reviewed item or
  local area
• Next High Level Effect
• Effects on surrounding parts or next high level
  sub-assembly, or all effects between local and
  end product
• End Effect
• Effect on system, or effect on end product user

• Process
• Local Effects
• Immediate effect effect on local process area
• Downstream Process Effects
• Effect on downstream process is we cannot correct
  the situation immediately and stop the problems
• End Effect
• Effect on entire system or end product user

30
Mitigation

• Mitigation means What are you going to do about
  the situation?
• 1st Line of Defense
• Avoid or eliminate failure causes
• 2nd Line of Defense
• Identify or detect the failure earlier
• 3rd Line of Defense
• Reduce the impacts/consequences of failure

31
Risk Assessment

• Occurrence
• The likelihood that a failure occurs by a
  specified cause under current control
• Severity
• The impact(s) of failure
• Detection
• How early and effectively can we detect and
  correct the failure
• Risk Priority Number (RPN)
• The compounds of Occurrence, Severity, and
  Detection

32
Reaction Plan

• Are you satisfied with the situation? If not, do
  something mitigate again!
• How can I prove it to myself that I dont have
  the problem?
• Test plan how good is this test plan? Can I
  find and correct the situation? (Second line of
  defense)
• Can I avoid it totally?
• First line of defense
• You bought the farm How can I control the
  damage?
• Third line of defense
• Responsible Party
• Who is going to take action?
• When can they complete it?

33
Types of FMEAs

• Product FMEA also called Design FMEA (dFMEA)
• Process FMEA also called Manufacturing FMEA
  (pFMEA)
• Application FMEA also called User FMEA (aFMEA)
• Supplier Quality FMEA also called Material FMEA
  (mFEMA)
• Service FMEA also called Preventive Maintenance
  FMEA (sFMEA)
• Equipment FMEA

34
Bottom-Up Approach
35
Top-Down Approach

• Example Paint
• Homogeneous coverage for background
• Compatible with coating and surface
• Environmental resistance (5 years)
• Easy to apply
• Quick to dry
• Color appearance (opaque)

36
Common Mistakes and Traps

• Fill in the blanks only.
• Dont understand the scope and objective of FMEA
• Day dreaming
• Didnt go through the self-challenge process of
  design control
• Couldnt separate Failure Mode, Cause, Effect
• Mixed everything together. Argument for the sake
  of argument.

37
Common Mistakes and Traps

• Repeated itself
• Dog chases its own tail.
• Mitigation is not truly challenged
• Ranking criteria too loose
• Only identifying the problems but not the
  solutions. Or, couldnt control it, even if
  there is a solution. Control plan not in place.
• Do once, then keep in file
• Leaving Document rather than Living Document
• Lack of consistency

38
Thank you