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Chap 11.4 Perform Quantitative Risk Analysis

https://www.slideshare.net/anandbobade/chap-110-project-risk-management-overview-143496876
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Chap 11.4 Perform Quantitative Risk Analysis

  1. 1. Chapter 11 – Project Risk Management PMP Trainer: Anand BobadePMBOK 6th Edition, 2019, All rights reserved. Perform Quantitative Risk Analysis SIXTH EDITION
  2. 2. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Perform Quantitative Risk Analysis - Definition Why Quantitative Risk Analysis? Perform Quantitative Risk Analysis: ITTO What is probability? What is Decision tree analysis & EMV. What is tornado diagram? Review 11.4 Perform Quantitative Risk Analysis
  3. 3. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Project Risk Management Processes Plan Risk management Identify Risk Perform Qualitative Risk Analysis Perform Quantitative Risk Analysis Plan Risk Response Implement Risk Monitor Risk P MC P P P P E
  4. 4. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Numerically analyzing the effect of identified risks on overall project objectives. It produces quantitative risk information to support decisions. Perform Quantitative Risk Analysis Prioritized Risk (Qualitative Analysis) Quantitative Analysis Impact on project objectives
  5. 5. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Purpose of this process: Determine which risk events warrant a response. Determine overall project risk (risk exposure). Determine quantified probability of meeting proj. objectives. Determine cost and schedule reserves. Identify risks requiring the most attention. Create realistic & achievable cost, schedule, or scope targets. Perform Quantitative Risk Analysis -> Why?
  6. 6. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) This process can be skipped, if Risks doesn’t require this approach. PM may not consider this process due to insufficient data to develop analysis models. There is no need to perform in depth Risk analysis for every project. PM should exercise expert judgment to decide on the need. Availability of Time & budget should be consider to decide. Perform Quantitative Risk Analysis -> Not mandatory
  7. 7. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Perform Quantitative Risk analysis-> ITTO Expert Judgment Data Gathering Interpersonal and team skills Representation of uncertainty Data analysis Project Management Plan Project documents Enterprise environmental factors Organizational process assets Project document updates Inputs Tools & Techniques Outputs
  8. 8. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Project Management Plan Project documents Enterprise environmental factors Organizational process assets Perform Quantitative Risk Analysis->Inputs
  9. 9. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Project Management Plan Perform Quantitative Risk Analysis->Inputs Risk Management plan Schedule baseline Scope Baseline Cost Baseline
  10. 10. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Risk Management plan • Provides guidance, methods & tools to be used in quantitative risk analysis. • Resource, Schedule & Budget requirements. • Stakeholder - Roles & Responsibilities Perform Quantitative RA->Inputs->RMP Project Management Plan
  11. 11. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Project documents Assumption log Basis of estimates Cost estimates Cost Forecasts Duration Estimates Milestone list Resource requirements Risk Register Risk Report Schedule forecasts Perform Quantitative Risk Analysis->Inputs
  12. 12. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Risk Register • List of prioritized Risks (from Qualitative analysis). • Root Cause. • Potential Response Perform Quantitative RA->Inputs->Risk Register Project documents
  13. 13. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) EEF Provide insight & context to the Risk analysis: Industry studies of similar projects Risk Databases from industries Perform Quantitative RA->Inputs->EEF
  14. 14. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) OPA Influence quantitative Risk analysis. Information from previous projects: Similar completed Projects. Perform Quantitative RA->Inputs->OPA
  15. 15. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Expert Judgment Data Gathering Interpersonal and team skills Perform Quantitative Risk Analysis->T&T Representation of uncertainty Data analysis
  16. 16. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Expert Judgment Expertize should be considered from groups or individuals with specialized knowledge in quantitative risk analysis. Translating the information on individual project risks in terms of probability and impact into numeric inputs Selecting the most appropriate representation of uncertainty to model particular risks. Section of modeling techniques (simulation, sensitivity analysis, decision tree analysis, influence diagrams). Interpreting the outputs of quantitative risk analysis and preparing risk report. Perform Quantitative Risk Analysis->T&T->Expert Judgement
  17. 17. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Data Gathering Interviews • Experience & Historical data. • Quantify probability & impact of Risk. • Document rational of risk ranges & assumptions. Perform Quantitative Risk Analysis->T&T->Data Gathering Data based on Expert Opinion Likelihood of completing the project
  18. 18. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Interpersonal and team skills Facilitation Perform Quantitative RA->T&T->Interpersonal and team skills • Establish a clear understanding of the purpose of the Risk related workshop • Build consensus among participants • Ensure continued focus on the task Facilitator responsibilities:
  19. 19. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Representation of uncertainty Where the duration, cost, or resource requirement for a planned activity is uncertain, the range of possible values can be represented as probability distribution Most commonly used distributions are Triangular Normal Lognormal Beta Uniform or discrete Perform Quantitative RA->T&T->Representation of uncertainty
  20. 20. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Representation of uncertainty What is Probability? • Probability is measurement of likelihood of occurrence of any event. Example: • Toss a coin, it will show heads or tails. • 50% -50% chance of showing heads or tails. What is probability? • Probability of showing heads or tails is 50% (or 1/2). Perform Quantitative RA->T&T->Representation of uncertainty
  21. 21. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Representation of uncertainty Probability Formula & Example: • = “Number of favourable” / “Total number of events” Probability of an event happening Perform Quantitative RA->T&T->Representation of uncertainty • = (Number of favourable events)/(Total number of events) Probability of showing heads Total number of events = 2 [Coin can show heads or tail ] Total number of favourable events = 1 = ½ = 50%
  22. 22. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Representation of uncertainty Probability Example3: For given project, Probability of completing one Task on time is 90%. What is probability of completing all scheduled task on time? Perform Quantitative RA->T&T->Representation of uncertainty Task 1 Task 2 Task 3 Task 4 =100*0.90 = 90% =90*0.90 =81% =81*0.90 =72% =72*0.90 =65% Probability of Individual Tasks 90% 90% 90% 90% Probability of combined tasks One Task (90%) Two Tasks (90% of prev.) Three tasks (90% of prev.) All tasks (90% of prev.)
  23. 23. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Data analysis Sensitivity analysis Decision Tree analysis Simulation Influence diagrams Perform Quantitative Risk Analysis->T&T->Data analysis
  24. 24. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Sensitivity Analysis: • Also called as Tornado Diagram. • These are special type of bar charts. • Determine which Risk have most potential impact on the Project. Perform Quantitative Risk Analysis->T&T->Data analysis Positive ImpactNegative Impact Useful for comparing relative importance of variables. The longer the bar the greater the sensitivity of project objective to the factor. The factor that have greatest impact is located at the top. Risks/Category are listed Vertically Assists PM in focusing on most critical risks of project. Sort & prioritize risks according to their impact. Data analysis
  25. 25. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Data analysis Expected Monetary Value (EMV) Analysis: • It calculates average outcomes, when the future includes scenarios that may or may not happen. • It is used in decision tree analysis. It is used to convert the risk into a number. Assists PM to calculate the contingency reserve. Helps compare a risk with other risks. Perform Quantitative Risk Analysis->T&T-> Data analysis It helps in selecting choice which involves less money to manage risks. In general, it can be used to select profitable business solution.
  26. 26. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Data analysis Expected Monetary Value: = Probability X Impact Perform Quantitative Risk Analysis->T&T-> Data analysis Reserve analysis Below are 3 risks with Probabilities & Impact. What is the total cost of managing these risks? Risk Probability (P) Impact (I) EMV (P * I) Hardware may cost more 10 % - 10,000 - 1,000 Licenses cost may increase 20 % - 6,000 - 1,200 Resource cost may reduce 90 % + 2,000 + 1,800 Total Cost of all Risks: = (-1000)+(-1200)+(1800) - 400
  27. 27. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Decision Tree & EMV Example 2: Decide weather to build new CAR manufacturing plant or upgrade existing based on demand. Note: In first example Project costs are not given. 1 Cost of Building a new plant 120 M 2 Cost of Upgrading plant 50 M Chance of Strong Demand: 60% # Demand scenario Possible revenue A New plant - Strong Demand 200 M B New plant - Week Demand 90 M C Upgrade – Strong Demand 120 M D Upgrade – Week Demand 60 M Perform Quantitative Risk Analysis->T&T->QRA&MT Data analysis
  28. 28. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Decision Tree & EMV Example 2: Perform Quantitative Risk Analysis->T&T->QRA&MT Build / Upgrade New Plant Investment= 120M Strong Demand (60%) Revenue=200M Week Demand (40%) Revenue=90M Upgrade plant Investment= 50M Strong Demand (60%) Revenue=120M Week Demand (40%) Revenue=60M Net path value=200-120 = 80M Net path value=90-120 = (- 30M) Net path value=120-50 = 70M Net path value=60-50 = 10M
  29. 29. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Decision Tree & EMV Example 2: Perform Quantitative Risk Analysis->T&T->QRA&MT Build / Upgrade New Plant Investment= 120M Strong Demand (60%) Revenue=200M Week Demand (40%) Revenue=90M Upgrade plant Investment= 50M Strong Demand (60%) Revenue=120M Week Demand (40%) Revenue=60M Net path value=200-120 = 80M Net path value=90-120 = (- 30M) Net path value=120-50 = 70M Net path value=60-50 = 10M Upgrade EMV=0.60 ($80M) +0.40(-$30) = $36M EMV =0.60 ($70M) +0.40($10) =$46M
  30. 30. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) EMV Calculation using table. Perform Quantitative Risk Analysis->T&T->QRA&MT Demand scenario: Chance of Strong Demand: 60% Build New Plant: $120M Upgrade plant: $50M Node Demand Given Revenue Node value based on Demand A New plant - Strong Demand (60%) 200 M 200M-120M=80M New Plant: EMV=0.60 ($80M) +0.40(-$30) = $36M B New plant - Week Demand(40%) 90 M 90M-120M=-30M C Upgrade – Strong Demand (60%) 120 M 120M-50M=70M Upgrade plant: EMV =0.60 ($70M) +0.40($10) =$46MD Upgrade – Week Demand (40%) 60 M 60M-50M=10M
  31. 31. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Modeling & simulation: • Uses model that translates specified detailed uncertainties into their potential impact on project objectives. • Performed using Monte Carlo technique. Perform Quantitative Risk Analysis->T&T->QRA&MT A project model is computed many times with input values chosen at random for each iteration. 12% chance - project will complete in 41 million 75% chance - project will complete in 50 million Data analysis
  32. 32. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Data analysis Influence diagrams: • A graphical representation of situations showing causal influences, time ordering of events and other relationship among variables and outcome Identify factors that influence individual project risks? Then, perform analysis of the probability distributions effecting these influences Determine combined total of these influences on the probability and impact of the individual project risk Perform Quantitative Risk Analysis->T&T->Data analysis
  33. 33. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Project Document Update Perform Quantitative RA->Outputs
  34. 34. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Project Document Update Risk Report Assessment of overall project risk exposure – Reflected in two key measures: •Chances of project success, given the identified individual project risks and other uncertainties •Variability remaining within the project, indicated by the range of possible project outcomes Detailed Probabilistic analysis of the project– S-curves, tornado diagrams, and critical analysis may include: •Amount of contingency reserve needed •Identification of individual project risks, other uncertainty that has the greatest effect on the critical path •Major drivers of overall project risk Perform Quantitative RA->Output->Project Doc. updates Prioritized list of individual project risks Trends in quantitative risk analysis results Recommended risk responses
  35. 35. PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com) Why Quantitative Risk Analysis? Perform Quantitative Risk Analysis: ITTO What is probability? What is Decision tree analysis & EMV. What is tornado diagram? Modeling & simulation Risk Report Perform Quantitative RA -> Review

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