Optimization Tool for Risk

Transcription

1 Optimization Tool for Risk Management Chris S. Adams, PMP Presentation at Recession Proof PDU s for PMPs Seminar sponsored by Journey Consulting March 29, 2011

2 Agenda Introduction An Idea in an Early Stage Risk Management and Prioritization Optimization General Background Risk Management Optimization an Approach Excel Solver as a Tool Example Caveats Q&A 2

3 The Full Title Excel Solver Optimization Tool for Risk Management Using a Linear Programming Approach with Consideration for Ill- Defined and Bad Behaving Irregular Quadratic Functions in Multi-Dimensional Space (Including Time Warps and the Black Hole Theory) 3

4 The Full Title (Bold Only) Excel Solver Optimization Tool for Risk Management Using a Linear Programming Approach with Consideration for Ill-Defined and Bad Behaving Irregular Quadratic Functions in Multi-Dimensional Space (Including Time Warps and the Black Hole Theory) The Bills? 4

5 Introduction This is an idea in an early stage It is basically sound, but I have no real example yet You may have suggestions for enhancement (Welcomed!) I would like to retain the book and movie rights 5

6 Risk Management and Prioritization Are there any PMPs in the audience? What do we know about the general steps of risk management? Plan for risk management (process and tool) Identify and categorize risks Assess qualitatively Assess quantitatively Plan responses Monitor and control 6

7 Risk Management and Prioritization Are there any PMPs in the audience? What do we know about the general steps of risk management? Plan for risk management (process and tool) Identify and categorize risks Assess qualitatively Assess quantitatively Plan responses Monitor and control The output leads to prioritization..we can t focus on everything 7

8 Prioritization Two dimensions: probability and impact L/M/H or 1 to 10 or 0 to 100 For most projects, this is fine. KISS principle is a good one! However, some projects may need or want more 8

9 Prioritization What if A manager wants a more quantified statement (say, in dollars) of the amount of risk and the amount of possible reduction? Your resources (people, money) are limited in the actions to be taken to reduce risk? There is a physical limit on the reduction possible for a risk? 9

10 Optimization General Background A digression My degree is in Operations Research and Industrial Engineering Operations Research uses math to provide optimal or near optimal solutions to complex decision-making problems Year of degree: 10

11 Operations Research How many of you have heard of any of this? Linear Programming Simulation Queuing Theory Game Theory Markov Chains Think about some real-life examples Airline scheduling (planes, crews) Disneyworld attraction lines and Fastpass Checkout lines at a bank or supermarket Hmmmm.even something called critical path analysis 11

12 Operations Research The Traveling Salesman Problem Shortest Path? 12

13 Operations Research The Traveling Salesman Problem Shortest Path? HELP!!! 13

14 Operations Research Linear Programming Make decisions, based on Optimizing (Maximize or Minimize) something (target) Subject to constraints (limits) Constraints could be, for example Money available Time Capacity 14

15 Operations Research (O.R.) One day, recently (O.R.) (P.M.) (Catalyst) Note the environmental consideration 15

16 Risk Management Optimization an Approach Assuming you can quantify the risk and actions Decide which actions to take, considering. Our target or objective is to minimize the risk (or maximize the amount of risk reduction) Subject to constraints The amount that a given risk can be reduced The amount of resources you can spend on risk reduction 16

17 Excel Solver as a Tool There is a tool that can help! 17

18 Excel Solver as a Tool There is a linear programming optimization tool called Solver It is a free add-in to Excel (it s not there automatically) It s simple to obtain (details later) and easy to use Our risk tables are often in Excel anyway It may enhance your performance 18

19 Example Start with a traditional risk matrix Identify and assess the risks The key fields are the probability (P) and impact (I) Probability must be between 0 and 1 Impact needs to be quantified (normally, dollars) Assume a cost there is a negative impact on your project But you could have a negative sign for a positive risk! The first calculation is the expected value of the risk: P x I In the spreadsheet, the fields of input required are in yellow 19

20 Example Columns F,G,H describe how much we can reduce the risk and at what cost Column F: Percent that the expected value can be decreased Column G: At what investment cost per reduction? Column H: Limit on units of reduction..how many times can we do the reduction? Example: perhaps we can reduce a risk by 0.3 (30%) for $4K, and we can do it twice (invest $8K to get 60% reduction). But we can t do it 3 times (90% reduction for $12K). So we would put a 2 in column H. Column H is an example of a constraint 20

21 Example The total investment cost is calculated in column L The only other entry required by the user is the limit on total investment in risk reduction. This is another constraint The blue box (auto calculation) measures the difference between original and new expected value of risks. This is our optimization target. We want to maximize this difference 21

22 Example Now we re ready to solve the problem Select the Data tab Click the Solver selection on right side of toolbar. A gray panel will appear Click the Solve box. Then click OK

23 Example The answers are in the green cells How many units of each risk reduction should be chosen to Maximize the reduction Given the constraints 23

24 Example You can make adjustments in your inputs to try what ifs You can save different scenarios Try a simple example. See if it makes sense to you Our operators are standing by to assist 24

25 Caveats You must be able to quantify the probability and impact But it need not be precise..how about order of magnitude? You must be able to estimate the investment and the result of the investment Linearity is assumed The limits on amount of reduction (column H) help this assumption Sometimes I get fishy answers Example: It didn t behave with constraints on benefit/cost ratios ( Strike-through added as a warning) 25

26 Caveats When you insert additional lines for risks, Copy over formulas from previous line for Col. D and J-P Copy and edit conditional format for Col. G (change reference cells) Check the formulas in the Solver gray box to ensure that you ve defined the correct cells for the constraints, target, and decision Garbage in, garbage out 26

27 Adding in the Solver Tool to Excel This is a one-time action for each copy of Excel Put this PowerPoint deck in show mode Open the Excel workbook (last slide) and save to your computer Read me tab in the Excel example gives instructions 27

28 Q&A Questions? Suggestions? 28

29 Thank you! 29

30 Generic Excel Workbook with Solver Example for Risk Management In show mode, click the icon to open the workbook, and save a copy to your computer. Risk Mgt Using Solver 30

31