PMI RMP – PERFORM QUANTITATIVE RISK ANALYSIS QUIZ part 3

4. MONTE CARLO SIMULATION IN ADVANCED.

Hi and welcome back again. So in this lecture, I’m going to explain the Monte Carlo simulation in more detailed approach. I’m going to show you a few examples of the questions you will see in the PMI Rmp exam. For the PMI Rmp exam, you should expect like ten questions about this technique. Modeling and Simulation as part of the Monte Carlo Simulation so again, the Monte Carlo simulation is a detailed computer intensive simulation approach that allows people to account for risk and quantitative analysis and decision making techniques. It determines the value and probability of possible outcomes of a project objective, such as the project schedule or the cost, budget or cost estimate.

Usually the multicardo simulation is performed for the schedule objective and for the budget objective. It computes the schedule or cost estimate many times, like from 500 to 1000 tons, using inputs drawn at random from ranges specified with probability distribution functions, triangle distribution and beta distribution for schedule activity durations or coastline items. So, the inputs for the Monte Carlo simulation software will be from the triangle distribution and the beta distribution I explained in the previous lecture. During a Monte Carlo simulation, values are sampled at random from the input probability distributions.

Each set of samples is called an iteration and the resulting outcome from that sample is recorded. And it does this hundreds or thousands of times, and the result is a probability distribution of possible outcomes. So now I’m going to show you a real life scenario. For example, let’s assume we have the following three point schedule data, which represents the time taken for each activity. We have a project with six activities as shown in front of you for this table. Activity one is the requirement with a pessimistic 20 days, most likely twelve and optimistic eight days. The second activity is the design.

The three point estimates are given the same for the development, activity testing, activity documentation and project management. So, overall, we have six activities or six tasks on this project. The pessimistic most likely and optimistic estimate is given for each activity. So, this case scenario for this project is to take 72 days. The worst case scenario is to take 205 days for its completion. We are going to use this information or this data as an input for the Monte Carlo simulation software to run it for 10,000 times, taking random inputs from these three figures for each activity. Now, we run the Monte Carlo simulation for 10,000 runs or 10,000 iterations.

The probability distribution function to predict the time taken for each activity was chosen as per distribution and the results is shown in front of you right now. This is the Monte Carlo simulation results. You need to focus here as well. For example, the probability of completing the project with 119 days as 35%, the probability of completing the project with 131 days as 70% and so on. All these figures will be in between 72 days and 205 days now, if you look at the cumulative result carefully you will notice that there is only 5. 2% probability of finishing the project within 105 days. Let’s go to this table here here is the 105 days 104.

9 with 5% only what does that mean? It means that out of the 10,000 tons or iterations of the Monte Carlo simulation only 520 results would be less than or equal to 105 days. This is the percentage. This is from where we got the 5. 2%. It’s 520 results or runs out of the 10,000 iterations on similar basis at the p 50. P 50 means a probability of 50%. Let’s go. Here the probability of 50% is 124. 3 days. Here is the 50% and here is the 124 days. This means that there is 50% probability of completing the project with 124 days. This is how we are going to read the results. Of the Monte Carlo simulation. From the original data, the most likely estimate is 118 days. Here is the 118 days with around 31%.

Now, if senior management asks for duration to have a minimum 80% confidence level, this is an important you need to treat the confidence level exactly as you are reading the probability of risk so now the most probably is finishing the project with 118 days but the senior management wants to increase the confidence level. From 31% to 80% confidence level. As you can see, to have approximately 80% confidence level, you would need 135. 5 days, approximately 136. Let’s refer back here is the 80% with 135. 56, it’s almost 136. So if the senior management wants to increase the confidence level from 31% to 80%, I need to increase the contingency reserves. It means that you need 18 days of contingency reserves.

From where I got these 18 days, it’s 136 -118 to have 80% confidence level of meeting the schedule object the total reserves for time could be the difference between the project schedule estimate after risk response planning and the 100% like the schedule will find by doing the Monte car assuming of the project. Some people will not pick the 100%. Some people will pick like me. I will pick the 85% or 90% as the highest confidence leveled depending on how safe management wants or needs the estimate to be. Now, how does the questions of the Monte Car simulation be like in the PMI Rmp exam you are managing a project which is expected to finish on April 4, 2009 as a result of performing the Monte Carlo simulation.

For your project completion date you got the chart you will see in the next slide. Based on this chart, answer the following questions so here we have four questions first of all, what’s the probability of finishing the project on April 28, 2009? The second question what’s the average date of completing the project? The third question what’s the needed contingency reserve? If the confidence eleven increased from 40% to 55%, what’s the probability of achieving the planned completion date. This is the Monte Carlo simulation result. Here we have the heads or the iterations. We have done like 1200 runs. Here are the percentages, the probabilities, or you can’t call them the confidence levels and the dates.

So the first question what’s the probability of finishing the project on April 28? Let’s refer back and let’s look for April 28. It’s here, april 28, 2009, it’s 80%. The probability of completing the project on April 28 is 80%. The second question what’s the average date of completing the project? The question asked about the average date you need to look for the 50% probability. The 50% probability? Yes, it’s here. So the average date of completing the project is ten appraised 2009. The third question what’s the needed contingency reserve of the confidence level increased from 40% to 55%. So the senior management or the executive management requested to increase the confidence level of the project accomplishing the from 40% to 55%.

Why from 40%? Because the expected finished date is April 4. April 4 is here. So April 4, 2009, it’s 40%. But the executive management is requesting a confidence level of 55 person. So from 40 to 55, you need to increase the date from 4 April to 12 April. You need to consider the difference between these two dates to find out the required additional contingency reserve. The last question was the probability of achieving the planned compensation date. The planned completion date is here. It’s April 4, 2009. So April 4, 2009 probability is 40% only. Question number one. Referring to the chart, it’s 80% probable to finish the project on April 28, 2009. The second question what’s the average date? I all told you, the average date is always 50% probable.

So referring to the chart, the date is 10 April. Let’s refer back to the chart. At 50%. It’s 10 April. The third question, at 40%, the senior management requested to increase the confidence level from 40 to 55. So at 40% it’s April 4, 2009. At 55. It’s April 12. So the required additional contingency reserve is eight days, which is the difference between these two dates. The last question what’s the probability of finishing the project at April 4? Referring back to the chart, at April 4 is 40%. These are four questions which you might see in the PMI Rmp exam. Another example. Here you are managing a project where the Monte Carlo simulation results are given in the table below.

What’s the average completion date of the project? As the question is asking about the average completion date, you need to check the 50% probability. So here we have a column with the probability of success from 5% to 50%. And here is the date. And here it’s from 55% till 100%. The question is asking about the average completion date. The average is at the 50% percentage is 14 March 2003. So the average completion date of this project is 14 March 2003. The questions you will see the PMI rmp exam regarding the Monte Carlo simulation will not be more complex than the examples I supplant in this lecture. This is all for the Monte Carlo simulation. Thank you so much. Looking forward to see you at the next lecture.

5. OUTPUTS

Hi and welcome back again. Now what are the outputs once we are done with all these tools and techniques? I explained in the previous lecture, first of all, and actually it’s the only output we have is the project documents updates, the only project document which will be updated as an output. This process will be the risk report, updated to reflect the results of the quantitative risk analysis. Now what are the updates of the risk report? Once you are done with the quantitative risk analysis process, these updates are important. You need to memorize for the PMI Rmp exam. First of all, you will have an assessment of the overall project risk exposure.

I explained earlier that the risk exposure can be calculated based on the total expected monetary value of all the individual project risks. Now, how we are going to reflect the assessment of the overall project risk exposure? First of all, chances probabilities of the project success, indicated by the probability that the project will achieve its key objectives given the identified individual project risks and other sources of uncertainty. So we can reflect the overall risk exposure with chances of the project success and the project success means you are meeting the project objectives.

The second measure will be the degree of inherent variability remaining within the project at the time the analysis was conducted, indicated by the range of possible project outcomes. It will be represented as a range of the possible outcomes. This is the first update in the risk report assessment of the overall project risk exposure. The second update will be the detailed probability analysis of the project. The key outputs of the quantity to risk analysis process are presented usually on S curves like the output from the Monte Carlo simulation, terraino diagrams and criticality analysis.

The possible results may include the amount the initial amount of the contingency reserves needed on the project, what is the required reserve on the project initial amounts or initial estimates only because the final estimates will be an output of the plan risk responses process. The second result the major drivers of the overall project risk with the greatest influence on uncertainty in project outcomes, identification of individual project risks, or other sources of uncertainty that have the greatest effect. The third update will be a prioritized list of quantified individual project risks.

This list identifies the risks that are most likely to cause trouble, to affect the critical path, or that need the most contingency reserve of the project. It can be easily determined by sensitivity analysis, as explained earlier. Using the sensitivity analysis, the tornado diagram, the uppermost bars will have the highest impact on the project. The fourth update will be trends and quantitative risk analysis. As this process is repeated during the project planning and when changes are proposed, changes to the overall risk of the project can be tracked and trends can be seen. The last update will be the recommended risk responses.

The risk responses will be planned and documented as a part of the following process plan risk responses yet if there is any recommendation of the risk responses, it can be documented here as a risk report update. After quantitative risk analysis is performed, the risk report may include suggested responses to overall project risks and individual project risks. These recommendations can be used as an input to the planned responses process. So these are the five updates of the risk report as an output of the quantitative risk analysis process. This is all for the outputs. This is all for this lecture. Thank you so much. I will see you at the following lecture.

6. STEPS TO FOLLOW IN PERFORM QUANTITATIVE RISK ANALYSIS

Hi and welcome back again. So what are the steps you need to follow by performing the quantitative risk analysis? First of all, determine what methods of quantitative risk analysis to use. We have a lot of methods which I explained in this section. You need to determine what are the methods you are going to use, who will be assessed time to use these methods, and how you are going to perform these quantitative methods. The second step will be to determine the quantified, probability and impact of each risk. We need to have a numerical representation of the probability and the impact of each identified risk on the project.

The third step to determine which risks warrants a response in the following process plan risk responses process determine which activities include risks that warrant a response in the planned risk responses process determine the level of risk the project currently has. Then determine how much the project will cost and how long the project will take if no further risk management actions are taken to reduce the project risks. And the last step will be to determine the probability of achieving the cost or schedule objectives of the project. These are the seven steps of performing the quantities of risk analysis. Thank you so much. I will see the following lecture.

7. SUMMARY

Hi and welcome back again. So as a summary I’m going to highlight a few concepts here. First of all, remember that the only process which can be skeptical of the seven risk management processes is the performing quantitative risk analysis. So you need to determine while planning for the risk management on the project, whether the performed quantitative risk analysis is worth the time and effort for your project. And as I explained earlier, this will depend on the complexity and the priority of the project. The focus of the performing quantitative risk analysis process is to numerically analyzing the probability and impact of each identified risk. Use various methods to quantitatively assess probability and impact.

Monte Carlo simulation is very important, but you cannot replace the entire risk management process. The expected monetary value of an individual risk is the probability times the impact. That’s simple formula EMV equals p by i, but the applications of this formula are very important as a part of the decision tree analysis, as a part of the contingency reserves. I’m going to explain in the following lecture. In the following section, sorry you can prove how likely you are to complete the project by any date or cost before even you start the project. This is the core value, the core benefit of the quantitative risk analysis process and you can predict the most probable time and cost for the project before you start.

Quantitative risk analysis should be repeated after planning responsible process to determine if the lower amount of risk in the project is within the acceptable project time and cost requirements. This is a very important point. Once you are done with the plan risk response to the process, you will mitigate some risks, you will avoid some others. So you need to perform again the quantitative risk analysis to find the risk exposure. Figure to check if the current risk level on the project is acceptable for the key stakeholders or not by comparing it to the risk threshold. Now, a few tricks for quantifying the project risks. Make sure you have clearly defined activities and risks so the probability and impact can be calculated.

Analyze opportunities separate than threats so they both get adequate attention. Most of the people focus only on the threats you need to analyze both. Use a combination of methods for identifying probability and impact to get truthful estimates. Build historical information about the risks and their probability and impact for use on future projects and at the end, list the total expected monetary value threats and opportunities for each activity and the person assigned to each activity on the Bar chart. The Bar chart which you will use in your project to monitor the status and the schedule of the project. This is all for the quantitative risk analysis process. Thank you so much. You will have a quiz of 20 questions now. I will see you after the quiz.