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# PMI RMP – PERFORM QUANTITATIVE RISK ANALYSIS QUIZ Question part 2

In the Monte Carlo simulation input values for the project risk variables are randomly selected to execute the simulation runs. Therefore, if a certain risk variable inputs are generated that validate the correlation between variables, the output will likely be of the expected value. So you need to consider that the quality of the results or the outputs of the Monte Carlo simulation software will rely on the quality of the inputs on the risk variables you are inserting as an input for this process. Now, step number five performing the simulation runs. This step typically done using a software, usually it’s from 500 to 1000 runs constitute a good sample size.

While executing the simulation runs, random values of risk variables are selected with the specified probability distribution. So usually you will perform this process between 501,000 times 501,000 runs based on randomly selections of the software. The last step will be statistical analysis of the simulation results. Each simulation brand represents the probability for current of risk event comulated probability distribution of all the simulation brands is plotted and it can be used to interpret the probability for the result of the project being above or below specific value. This simulated probability distribution can be used to assess the overall project risk.

Usually the results or the simulation results are represented in a table and on a s graph. So as a conclusion, the reliability, the credibility of the outputs of the Monte Carlo simulation depends on the accuracy of the rest variables on the range values and the correlation patterns. So that you should practice extreme cogent while identifying the correlation and specifying the range values which will be the inputs to the Monte Carlo simulation software. While performing the Monte Carlo simulation, it’s highly advisable to seek participation of the key project decision makers and key stakeholders.

Specifically while agreeing on the range values of the project risk variables and the probability distribution. If you are working as a project manager, you cannot decide especially for critical activities or high priority activities, the pessimistic and optimistic values for budget for durations, you need to seek participations of the key decision makers and the key stakeholders. This is all for now. About the Monte car assimilation. The following lecture will be only about the Monte Carlo simulation and how you should expect the exam questions about this technique. The second data analysis technique will be the sensitivity analysis.

It’s a technique used to analyze and compare the potential impacts of identified risks. Simply why you are using the sensitivity analysis technique to compare the potential impacts only impact of the identified risks. The analysis will result with a tornado diagram. So the tornado diagram is always the result of applying and sensitivity analysis on few risks of the project. It is used to graphically depict the results of those analysis risks are represented by horizontal bars and the longest and uppermost bar represented on the Tornado diagram is the rest or it’s the greatest risk on the project, while shorter horizontal bars beneath represents the lower rank.

Here’s an example of the Tornado diagram which is an output of the sensitivity analysis technique. Here are the threats and here are the opportunities. So manufacture reactors is the uppermost, it’s the longest and the uppermost bar. So this is the highest impact risk on the project, the manufacturer reactors. The following one will be the DCs may fail solution test. Then we have an opportunity that duplicate this test may not be required and the minimum impact opportunity will be here. And the minimum impact threat will be here. This is how we are going to read the Tornado diagram which is a result of the sensitivity analysis. Now, before we move to the following technique, I have an important concept which I need to explain the expected monetary value.

So the expected monetary value or the concept of the expected monetary value is used to determine what the overall probable circumstance will be as a result of the risk events. It’s a simple calculation of a value such as weighted average or expected cost or benefit when the outcomes are uncertain. A very simple formula. It’s the probability weighted average of all possible outcomes. It’s calculated as the expected monetary value equals the probability. The probability here will be a percentage multiplied by the impact. The impact will be in dollars or as a duration. This is the simple formula of the expected monetary value and you need to understand the difference between the expected monetary value formula and the risk score.

The risk score was a subjective evaluation of the risk scope. We were multiplying the probability rating from the Pi matrix by the impact rating also from the Pi matrix. Here we are going to have a figure. This figure is the probability as a percentage multiplied by the impact. It helps determine which risks need the most attention and should therefore move into the planned risk responses process. Now, after calculating the expected monetary value of the individual risks, you can’t apply this formula on each individual risk on the project. You should determine whether the expected monetary value of the project overall, which is called also the risk exposure, is within the accepted value, which is the risk threshold set by management.

It’s very important to find out the risk exposure or the total project expected monetary value as this figure will be compared to the accepted level of risk by the senior management and the key stakeholders on the project, which is the risk threshold. This is why it’s very important to define the risk attitudes of the key stakeholders while planning for risk management on the project. Here are a few notes before I solve few examples for opportunities, the expected monetary value is positive for the threats, it’s negative this is important, especially when you are doing the sum to find out the expected monetary value of the project.

Overall. The expected monetary value resulting number can express time or cost as the impact will be always in days, weeks or months, and the cost will be always in US. Dollars. The expected monetary value formula is very important in calculating the contingency reserve. So even though the formula is very simple, it’s just the probability multiplied by the impact. Yet the expected monetary value is the basis for the contingency reserve determination and calculation, which I’m going to explain in the following section. It’s the basis also for the decision tree analysis technique which I’m going to explain now. And it’s very important to find out the project risk exposure. It’s an easy formula to memorize.

Keep in mind that it will be used for a lot of exam questions in different ways. You may face questions asking for the expected monetary value of the cost. Time for a project over all must run individual risk. That time need to apply that the project expected monetary value or the project risk exposure equals the sum of all the expected monetary values of the identified risks. The individual rests on the project. But keep in mind when you are doing this sum, you need to give a negative sign for the threat, a positive sign for the opportunity. So here’s an example. While you are performing the quantitative risk analysis for the project with your team, one of the project risks has a 30% probability of happening.

So the probability of this risk is 30% and it will save the project \$50,000. If risk happens as it will save the project. So this is an opportunity, it’s not a threat. It will have a positive sign for the expected monetary value. What’s the expected monetary value of this risk event? Actually, this is the simplest application of the EMV formula. As this is an opportunity. It’s not mentioned clearly that it’s an opportunity, but it’s mentioned that it will save the project. So it’s an opportunity. It will have a positive expected monetary value. EMV equals P by I. The probability given in the question is 30% and the impact is given as well \$15,000. So the EMV value is a positive \$15,000.

Another example. Here you are managing a stadium construction project when two team members come to you with a conflict. The first team member is the construction manager who has identified an important project risk. You have a subcontractor. This is the risk that you have a subcontractor that may not deliver on time. The team estimates that there is 40% chance that the subcontractor will fail to deliver. So the probability of the first risk is 40%, with additional cost of \$15,250 to pay your engineers and site labor to do the work. And the delay of the subcontractor will cost the company an extra \$20,000.

So it’s a threat with a probability of 40% and the impact will be the sum of what you are going to pay for your engineers and site labor and the cost of the delay. So it’s the sum of these two figures. The conflict was with the engineering manager who points out an opportunity to save the project \$4,500 in the engineering cost with a chance of 65% of this opportunity to occur. So this is the second risk. It’s an opportunity with a probability of 65% and an impact of \$4,500 savings. In this scenario described in the question, what is the expected monetary value? So it’s a very simple question, even it’s worthy, it’s very simple. The first risk is a threat.

The probability is 40%. So you need to apply the formula p by I. The probability is 40% multiplied by the impact. The impact is what I’m going to pay for the engineers and the site labor and what is the cost of the delay. So it’s 15,000 plus 20,000. The emb of the threat will be \$14,100 with a negative sign. It’s a threat. Don’t forget the negative sign. The expected monetary value of the opportunity is 65% with an impact of \$4,500. So it’s \$2,925 doing the sum of these risks. The first one is a threat, the second one is an opportunity. The expected monetary value of the described scenario in this question will be a negative \$11,175. So even five risks were given in the question.

You need to apply the same procedure. This is the expected monetary value. It will be our basis to find out the contingency reserves. So I’m going to solve more examples in the following section. In the plan risk responsive process, the new technique now which will have the expected monetary value as the basis for it, is the decision tree analysis. The exact definition will be that it models of real situations and it’s used to see potential impacts of decisions. By taking into account the uncertainty of the associated risks, probabilities and impacts, it takes into account future events and trying to make a decision today. So this is the value of applying the decision tree analysis and quantitative risk analysis.

It will take into account future events to help you make decisions today based on the risks associated with these future events. It calculates the expected monetary value, but in more complex situations than the simple expected monetary value cases. It includes mutual exclusivity. It means that two events are said to be mutual exclusive. They will never both occur in a single trial. This is a decision three diagram showing the decision we need to make today. Shall we prototype on the project or not? Now, what are the future events you will consider in this example, if you will prototype, the prototype itself will cost you \$100,000.

And if you prototype, there’s 70% probability of success with a payoff or a benefit of making \$500,000. So this is the opportunity, the threat of the upper branch, which is the. Prototype will be 30% probability of failure with an impact of \$50,000. The other decision or the other branch do not prototype. So if you will not prototype you’ll have a zero cost with a 20% probability of success making \$500,000 and 80% probability of failure, which is a threat with a cost of negative \$250,000. This is exactly decision Three diagram. You are going to calculate the expected monetary value of the upper branch, which is prototype, and you will consider the cost of the prototype and you will calculate the expected monetary value of the other branch and select the best option.

Now, here is the first example. You are flying from one city to another. You have the option of using airlines A or airlines B. So we have two airlines based on the given information which flight you should take and what’s the expected monetary value of your decision. So shown in front of you we have the decision Three diagram. We have two flights. Flight A would take you from a city to another city with a ticket price of \$800. Now, if you decided to go for a Flight A, you have a probability of 90% to arrive on time and you have a ten person, even if it’s not mentioned always the sum of two branches should be 100%.

So it’s given that it’s 90% here, the probability of arriving on time automatically, the probability of arriving late will be 10% and if you arrive late the impact will be a loss of \$3,000. We have Flight B with a ticket price of \$200 and there is a 60% probability of arriving on time with a 40% probability of being late with an impact of \$3,000. So the question is asking about the right decision, the right flight you should select and what will be the EMV of your decision. By looking only on the ticket price, you will consider Flight A or sorry, you will consider Flight B, which is the lower price. So taking Flight A expected monetary value is the price of the ticket itself which is \$800 plus the EMV of being late, which is 10% probability by \$3,000. It is this brand.

There is nothing to calculate here as there is no impact. The only impact here is \$3,000 by 10% probability. So taking Flight A overall expected monetary value is \$1,100. While taking Flight B expected monetary value is 200, which is the flight ticket price plus 40% multiplied by \$3,000. The 40% is the probability of arriving late and the impact is the \$3,000. So the expected monetary value of taking Flight B will be \$1,400. So taking flight A is more safe. Even though the ticket price is higher, it will be more safe. So the right decision is taking Flight A. Even the price of the ticket itself is higher than Flight B. Emb of your decision is \$1,100.

So the expected monetary value and the decision three analysis help you to make a decision today to select Flight A based on the future evidence. Another example here a project manager is trying to determine to do the concrete works on site by creating his own team or to outsource a specialist company from outside head organization. So you are the project manager of a construction project and you have the concrete works scope and you are thinking about doing it in house by your own team or to outsource a third party. Based on this information provided in the diagram, what is the expected monetary value of his decision if he decided to do it by his own team.

So the decision today should we do the concrete works on our side by our own team or should we outsource a third party? If you decided to do it in house, you have a set up cost of \$10,000 with a failure percentage of 15 person and an impact of \$10,000. If it passed, there is no impact. The second choice is to outsource a specialist company with a failure percentage of 35% and an impact of \$18,000. That question is asking about the upper branch expected monetary value. It’s a very simple question. So we have two decisions either to do it or to outsource it. The expected monetary value of each will be as follows doing it by your own team the probability by the impact the probability we have is 15% as shown in the decision tree diagram and the impact is \$10,000.

So the EMV equals \$1,500. Outsourcing the concrete words P by I it’s 35%, by \$80,000 it’s \$28,000. So for sure it is better to do it by your own team. But don’t forget to consider the setup cost of doing it by your own team. In order to decide, you should add the setup cost of doing it by your own team as shown from the decision tree diagram. Doing it in house set up cost is \$10,000. So you need to add the \$10,000 to the expected monetary value of doing it in house. So the total expected monetary value will be \$11,500, which is still less than outsourcing. So it’s the best decision to do it in house with an EMV value of \$1,500. This is all for the decision three Analysis now, the last tool we have the influence diagrams.

I explained the influence diagrams in detail in the Identifier risks process. They are graphical AIDS to decision makings under uncertainty. Usually the influence diagram represents a project or a situation within the project as a set of entities, outcomes and influences between these entities together with the relationships and effects between them. Where the element in influence diagram is uncertain when there is a risk associated with an element on the influence diagram as a result of the existence of individual project risks or other sources of uncertainty. This can be presented in the influence diagrams using ranges of probability distributions. It display a decision problem with nodes representing the decision.

The objectives, chance variables, general variables and the influence of each on each other. It’s an influence diagram. We just need to lock on this influence diagram to know the relationships between the entities and the system components of this situation. Influence is represented by a directional arrow drawn between the notes within with an A to B. depection means that entity A will have an influence on entity B. This is all for the tools and techniques of the performed quantitative risk analysis. In the following lecture I’m going again to explain the multi car assuming and I will give you a few examples of the questions you will see in the example of this technique. Thank you so much. I will see you at the next lecture.