Risk and Uncertainty (3) Flashcards
What is a sensitivity analysis?
Describe any technique whereby decision options are tested for their vulnerability to changes in any “variable”
Examples of a variable in sensitivity analysis?
Expected sales volume
Sales price per unit
Material costs
Labour costs
Approach to sensitivity analysis (Calculating)
Calculating maximum percentage change in variable before decision would change
Approach to sensitivity analysis (Assessing)
Assessing if decision would change if a variable changed by x% of estimate
What does sensitivity analysis concentrate on?
Management attention on variables that are most important for the decision under review
Sensitivty analysis strength (understand)
Easy to understand
Sensitivty analysis strength (highlights variables)
Highlights key variables which are crucial to success of the project, once identified these can be closely monitored
Sensitivty analysis limitations (multiple variables)
Assumes all changes are independent. In reality multiple variables are likely to chance simultaneously
Sensitivty analysis limitations (amount of change)
Only identifies the amount of change required in one variable, does not assess probability of that change occurring
Sensitivty analysis limitations (decision rule)
Does not offer a clear decision rule
What is a simulation model?
Numbers are linked to probability distributions so number chosen would occur with the same probability that real-life event would occur
Where can simulation be used?
For estimating queues in shiops, as this depends on two uncertainties