decision tree analysis - pmi
TRANSCRIPT
© 2013 Dr. Kenneth F. Smith, PMP Project Management Fundamentals Slide 1
DECISION TREE ANALYSIS
Dr. Kenneth F. Smith, PMP PMI (Honolulu Chapter)
June 2013
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 2
Consider Alternative Solutions
Slide 3
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 4
Which of the several possible courses of
action could be pursued?
Bias in solutions?
Consultants;
Others in
Community
Are there alternative
ways to achieve them ?
Higher / lower technology?
Less risk?
Faster / slower
implementation?
Less / more cost?
Greater / lesser chance of
sustainability?
Change in behavior?
© 2013 Dr. Kenneth F. Smith, PMP Project Management Fundamentals Slide 5
The Decision Tree Technique
for weighing & considering
PROJECT SCOPE
Alternatives
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 6
Identify the BASELINE Situation & Any
ALTERNATIVES (With Additive Costs),
and arrange them as separate Branches
of the “Tree”
Baseline
Alt “A” $
Alt “B” $$
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 7
Identify the EXPECTED RESULTS anticipated
from the Baseline, and the Alternatives
Baseline
Alt “A”
Alt “B”
Expected
Results
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 8
IDENTIFY THE RISK SITUATION
Baseline
Alt “A”
Alt “B”
Risk
Situation
Expected
Results
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 9
IDENTIFY PROBABILITY OF OCCURRENCE
Baseline
Alt “A”
Alt “B”
Risk Situation &
Probability Expected
Results % Probability of
Happening
% Probability of NOT
Happening
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 10
REPEAT FOR ALL ALTERNATIVES
Baseline
Alt “A”
Alt “B”
Risk Situation &
Probability Expected
Results % Probability
% NOT
% Probability
% Probability
% NOT
% NOT
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 11
IDENTIFY IMPACT -- EXPECTED OUTCOME
Baseline
Alt “A”
Alt “B”
Risk Situation &
Probability Expected
Results %
% Not
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 12
IDENTIFY ANTICIPATED PAYOFF FOR
EACH POSSIBLE OUTCOME
Baseline
Alt “A”
Alt “B”
Risk Situation &
Probability Expected
Results %
% Not
1 TOTAL COST
2 TOTAL
BENEFIT &
3 NET BENEFIT
For Each Possible
Outcome
© 2013 Dr. Kenneth F. Smith, PMP Project Management Fundamentals Slide 13
DECISION TREES
Options
Options
&
Probabilities
&
Probabilities
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 14
CALCULATE EXPECTED MONETARY VALUE (EMV)
for EACH OPTION -- Baseline & Alternatives
Baseline
Alt “A”
Alt “B”
Risk Situation &
Probability Expected
Results %
% Not
WORK
BACKWARDS:
1 Multiply the NET
BENEFIT of the
Outcome by its
Probability
2 Add the Results for
each ALTERNATIVE
EMV $ + $
EMV $ + $
EMV $ + $
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 15
CALCULATE BENEFIT-COST RATIO (BCR)
BCR = EMV of Alternative - EMV of Baseline
Cost of Alternative
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 16
Repeat for All Alternatives
BCR = EMV of Alternative - EMV of Baseline
Cost of Alternative
SELECT THE BEST OPTION
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP
MAPPING & COMPUTING “EMV”
Slide 17
PMBOK
Example
NOTE: Alternatives
Only; No Baseline
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 18
PMBOK EXAMPLE 2 Risk Probabilities: Build or
Upgrade Plant for Increased Customer Demands?
1
Build a New &
More Efficient
Plant
2
Upgrade
Existing Plant
SITUATION:
Anticipate
Increased
Demand for
Electricity by
Customers in a
New Area*
Estimated
Cost $120 m
Estimated
Cost $50 m
ALTERNATIVES RISK SCENARIO
PROBABILITY
Peak Service
Demand
Max Service
Demand
Low
Demand
Low
Demand
60 %
60 %
40 %
40 %
ESTIMATED
NET REVENUE*
NET
VALUE
(ER – EC)
$200 m
$90 m
$120 m
$60 m $10 m
$70 m
-$30 m
$80 m
*After Operating Costs --
based on relative efficiencies
of the respective plants *NOTE: Existing Plant incapable of meeting any Increased
Demand for Electricity by Customers in the New Area
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 19
PMBOK EXAMPLE: Computation of Expected
Monetary Value (EMV)
1
Build a New &
More Efficient
Plant
2
Upgrade
Existing Plant
SITUATION:
Anticipate
Increased
Demand for
Electricity by
Customers in a
New Area
Estimated
Cost $120 m
Estimated
Cost $50 m
ALTERNATIVES RISK SCENARIO
PROBABILITY
Peak Service
Demand
Max Service
Demand
Low
Demand
Low
Demand
60 %
60 %
40 %
40 %
NET
VALUE
$10 m
$70 m
-$30 m
$80 m
(P x NV)
$48 m
-$12 m
$4 m
$42 m
EMV =
$46 m
EMV =
$36 m
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 20
DECISION TREE 3 Risk Probabilities : Build /
Upgrade to meet Increased Customer Demands?
1
Build a New &
More Efficient
Plant
2
Upgrade
Existing Plant
SITUATION:
Anticipate
Increased
Demand for
Electricity by
Customers in a
New Area*
Estimated
Cost $120 m
Estimated
Cost $50 m
ALTERNATIVES RISK SCENARIO
PROBABILITY
Peak Service
Demand
Max Service
Demand
Medium
Demand
Medium
Demand
Low
Demand
Low
Demand
30 %
30 %
10 %
10 %
60 %
60 %
ESTIMATED
NET REVENUE*
NET
VALUE
(ER – EC)
$600 m
$400 m
$200 m
$350 m
$100 m
$250 m
$50 m
$200 m
$300 m
$80 m
$280 m
$480 m
*After Operating Costs --
based on relative efficiencies
of the respective plants *NOTE: Existing Plant incapable of meeting any Increased
Demand for Electricity by Customers in the New Area
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 21
DECISION TREE 3 Risk Options: Computation
of Expected Monetary Value (EMV)
1
Build a New &
More Efficient
Plant
2
Upgrade
Existing Plant
SITUATION:
Anticipate
Increased
Demand for
Electricity by
Customers in a
New Area
Estimated
Cost $120 m
Estimated
Cost $50 m
ALTERNATIVES RISK SCENARIO
PROBABILITY
Peak Service
Demand
Max Service
Demand
Medium
Demand
Medium
Demand
Low
Demand
Low
Demand
30 %
30 %
10 %
10 %
60 %
60 %
NET
VALUE
$50 m
$200 m
$300 m
$80 m
$280 m
$480 m
(P x NV)
$144 m
$168 m
$8 m
$5 m
$120 m
$90 m
EMV =
$215 m
EMV =
$320 m
Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP
Risk IMPACT Planning
Slide 22
Later we will look again at
Major Overall Risks
in terms of their impact on
the Project
Schedule & Budget
and use the Decision Tree Analysis
to estimate the size of a
Management Reserve “Buffer”