Enterprise Risk Management at Russian telecoms giant, MegaFon

Every year, the eight regional branches of Russian mobile network operator MegaFon are required to undertake a major planning and accounting exercise for the 12 months ahead. Each branch states the risks it faces, such as competition, changes in legislation that will require it to operate differently, price increases and changes to staffing costs. They also calculate how much each budget will be over or under the forecast.  

The risk management team at MegaFon’s headquarters amalgamates the information from each of its offices and simulates possible scenarios using a model using @RISK. The variables within these models are analysed in order to identify and mitigate against the five critical factors most likely to significantly affect the company’s gross revenue.

In addition, @RISK shows realistic minimum, best case and median budget figures and the probability of their occurrence. These are compared to the budget plans to determine whether the forecast is too aggressive or not ambitious enough. Overall, the management team can see whether their desired revenue is achievable.

At the same time, MegaFon needs to plan for the continuous upgrading of its network. Projects include building new antenna, installing the latest equipment and laying fibre optic cable. In 2012, MegaFon took the decision to invest in a large data centre construction project.

Two potential locations were shortlisted and the management team used the DecisionTools Suite to make an informed decision on the optimal one. TopRank was used to perform sensitivity analysis to identify the factors in each location that would have the most influence over the total cost of the project. @RISK was then applied to forecast how these critical factors might change. This allowed MegaFon to understand the most likely Net Present Values (NPVs) for each possible location and identify the risks for building or not building (i.e. opportunity cost) each data centre.

Using the DecisionTools Suite enables MegaFon to integrate risk management within its budgeting and investment planning processes. This provides the company’s management team with transparency and understanding about the risks involved in planning, and therefore facilitates decision-making without guesswork. As a result, the company can maximise capital expenditure efficiency.

» Read the case study: Enterprise Risk Management programme at Russian telecoms giant MegaFon

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Global Risks 2014 report Illustrates an Evolving Global Risks Landscape

You don't have to be a risk manager to know that the world faces a range of rapidly changing challenges. But how exactly are these risks changing, and which ones are the most likely, or the most impactful? The World Economic Forum attempts to answer these questions. The Swiss-based independent international organization  aims to improve the state of the world by engaging public, private, and academic leaders  to shape global, regional and industry agendas.

The Forum recently published their 2014 Global Risks Report, which analyzes a survey of over 700 leaders and decision-makers on 31 selected global risks. Survey respondents were asked directly to nominate their risks of highest concern, which placed economic and social issues firmly at the top.

The Risk Report distilled down the survey responses into  the five risks considered most likely and most impactful since 2007 (see below).

As the table illustrates, environmental risks, such as climate change, water scarcity, and extreme weather events have become more prominent since 2011, while health-related risks (pandemics and chronic disease) have become less so. Geopolitical risks such as global governance failure, are now less concerning  than socioeconomic risks (income disparity, unemployment, fiscal crises, etc.).

Cyber attacks are also featured prominently in the matrix, along with the breakdown of critical information infrastructure, reflecting the increasing digitization of economies and societies and their dependence on information and data.

Just as The World Economic Forum aims to help leaders and societies make decisions that will benefit the global community, Palisade's risk management software aims to support  managers and decision makers as they plan for changes to come.

Evolving Global Risks Landscape 2007 - 2014, World Economic Forum Global Risks Report

Click to view the expanded image.
Source: Global Risks reports 2007-2014, World Economic Forum.

 

See also: Using Risk Analysis to measure the impact of climate change

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Lufthansa wins prestigious award for Risk Control tool built using @RISK

Palisade continues to make an impact overseas – this time, @RISK was used by the German airline company, Lufthansa, the largest airline in Europe. In 2012 alone, Lufthansa planes carried over 103 million passengers. 

Last April, Lufthansa received an award from the International Controllers Association for building a risk control tool which aided in planning and risk management of aviation business trends. @RISK played a key role in Lufthansa's work, and Palisade is proud to have contributed to this award-winning work.

See the original article (in German) here.

See also:   Palisade's Risk Analysis Solutions at Work in China

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Custom Solutions within the Insurance Sector: Catastrophe and Large Loss Simulation Model

Insurance companies are now encouraged by regulation to perform assessment of their own risk exposure. Monte Carlo simulation, and particularly @RISK are extremely useful in performing assessments that can be used not only to satisfy regulators, but also to improve financial risk management within the company.

Waszink Actuarial Advisory in collaboration with Palisade's Custom Development Team created this Catastrophe and Large Loss Simulation Model to provide an output that includes the aggregate loss gross and net of reinsurance, and the reinsured loss.

In this example, an application was created using @RISK to generate the aggregate loss resulting from multiple large or catastrophic losses occurring within a given period of time. Aggregate losses are determined gross and net of any Excess of Loss Reinsurance.

Parametric distributions for frequency and severity of loss gross of reinsurance must be specified by the user. Frequency and severity are assumed to be mutually independent.

In addition, the user can specify an Excess of Loss Reinsurance program. The following features of the reinsurance program must be specified:

  • Number of layers
  • Limit and retention by layer
  • Reinsurance premium by layer
  • Number of reinstatements by layer;
  • Reinstatement premium as percentage of reinsurance premium

The output includes the aggregate loss gross and net of reinsurance, and the reinsured loss.

More example of Custom Development:

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Join us NEXT WEEK in Las Vegas for our last event of our 2013 Palisade Risk Conference Series!

 

Join leaders from CH2M Hill, Intel, BorgWarner, Blue Cross, and More!
Mandalay Bay Resort and Casino, November 20-21, 2013

It’s not too late -- contact us now if you are interested in attending next week’s event in Las Vegas!

The Palisade Risk Conference offers four tracks of learning over two days, plus the chance to set up individual free Expert Sessions with our consultants to review your own risk models.

Industry experts will present a selection of real-world case studies about innovative approaches to managing risk and uncertainty in a wide range of business applications. Here’s just a sample:

The event will also include practical software workshops and training classes presented by Palisade trainers, consultants, and software engineers. We’ll explore exciting new features in @RISK and DecisionTools Suite software that make risk modeling and analysis more accessible – and powerful – than ever.

“Great conference and very useful for a new user like myself. This saved me a lot of time in climbing the learning curve.”
          - Jeff Passmore, Senior Liability Strategist
            Standish/BNY Mellon

“We saw and discussed methods that directly apply to our problems, and learned to build upon them to come up with solutions.”
          - Michael Watson, PMP, Senior Staff
            Integrated Planning, Lockheed Martin

 » View the conference schedule
 » Quantify the value of attendance for your company


 
Contact Palisade for a special registration rate:

 

 

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"Risk Analysis and Oil Production Curves" in 'Oil & Gas Monitor'

Oil & Gas Monitor

The use of risk analysis in the oil and gas industry can take many forms. Whether it’s safety risk, economic risk or schedule-based risk, it is critical to know what risk factors exist and the likelihood that they may occur. Doing so allows decision-makers to plan in a manner that will ensure the highest attainable rate of success.

In his most recent Oil & Gas Monitor article Risk Analysis and Oil Production Curves, Palisade's Oil and Energy Industry Consultant, Rafael Hartke, invites us to learn more about modeling oil production curves in face of uncertainty. He focuses on the production curve risk of a single oil well by exploring how risk factors affect the production curve and some common mistakes one should avoid when modeling production curves of oil projects. Read the full article to find out how deterministic models using most likely values or using expected values, compare to a probabilistic method using distribution functions and Monte Carlo simulation.

 

Risk Analysis and Oil Production Curves

 

In his next Oil & Gas Monitor article, Rafael will discuss what happens when dealing with the production curve of a group of wells and the statistical differences between a single well and a portfolio.

See also:

"Decision Trees and the Value of Flexibility II"  in Oil & Gas Monitor: Taking another look at "Bad" projects

"Application and Benefits of Risk Analysis for Decision Making in the Oil Industry" in Oil & Gas Monitor

"Practical Challenges of Implementing Risk Analysis in Oil Companies" in Oil & Gas Monitor

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Radio App gets Risk Analysis Solutions from Palisade

How will a new technology or venture fare in an unestablished  or unclear market? Palisade’s @RISK software can help answer that question, and did so for the new mobile app called Omny by 121Cast, which allows users to manage their online listening of internet radio and other audio services for total customization.

The app, a venture under the stewardship of the Australian venture capital firm Adventure Capital, was used as an study example by researchers Dr Clint Steele and Kourosh Dini of Australia’s Swinburne University of Technology , and Darcy Naunton of Adventure Capital to test @RISK’s capability of resolving business model uncertainties.

Some of the unknowns of the app’s business plan included market size, speed of adoption, resources needed to develop the application and related services for market segments, optimum pricing, effectiveness of promotions, and size of the organic market. Identifying the sources of potential randomness was just the start. The model needs to be set up in such a way that when random fluctuations in the inputs occur, they have the correct effect upon the outputs. Unfortunately, many business plans and their financial models are not usually put together in such a way. Often, fixed numbers that “seem right” to the entrepreneur are allocated to each cell within a spreadsheet. The model will balance, but if one changes a cell value for, say, the market size, then the other cells are unlike to change much. If they do, then it will unlikely be in a logical manner. An increase in sales, for example, may not cause a corresponding increase in operations costs, asset purchased, or administration costs.

Creating accurate models for these relationships was the first step. This was easy for the typical issues. The relationship between market size and the cost of customer support is a good example. However, other relationships are trickier to model. For instance, how does an increase in sales affect the position of an app in an app store listing? To figure this out, the team used @RISK to create a model with distributions specified by percentiles. @RISK also helped the entrepreneurs use ‘coevolution’ to design a business plan--coevolution occurs when a problem becomes clearer after a person engages in solving it. “Because you have to create a model that allows for the flow of variances, a lot more thought needs to go into how the proposed business will run,” says Darcy Naunton, the capital venture manager on the project. “I now know a lot more about this business than I ever would have otherwise.”

As the case study explains, new ventures will always have unknowns. “It is what entrepreneurs do – deal with uncertainty. However, @RISK can be used to eliminate uncertainty about the sensitivity of the business model to expected randomness. This is different from removing uncertainty, or randomness, entirely – that’s impossible. But by mitigating some of the guesswork around the sensitivity of a business plan to various external fluctuations, an entrepreneur can now focus uncertainty management skills on a smaller area and apply those skills more intensely.”

Read the original case study here.

See also: Incorporating Project Risk Management Strategies in your Enterprise

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Hitachi taps Palisade RDK Software to help manage Supply Planning

Hot off the heels of recent success in China, Palisade continues to establish a reputation for excellence in Eastern markets—this time in Japan. Hitachi Solutions East Japan, Ltd., a core IT company of the Hitachi Group, which employs some 400,000 people worldwide, has selected Palisade’s @RISK Developer Kit to help manage supply planning. 

With its headquarters in Sendai City in Miyagi Prefecture, Hitachi Solutions East Japan Ltd. is responsible for data and risk analysis of supply chain management, production, and sales & inventory planning and management. Analyzing these elements can be tricky, particularly when it requires forecasting demand and prices of raw materials. Using the @RISK Developer kit, Planning Department Research Division Head Masaru Tezuka and his team were  able to do these analyses.

There are a wide variety of risks in the manufacturing industry, including fluctuating variables such as demand, price, and foreign exchange. For demand fluctuation, supply is determined by demand forecasts. If the forecast underestimates demand, a supply shortage results, causing the company to miss opportunities to increase sales. If the forecast overestimates demand, inventory or disposal costs may follow. Price and currency fluctuations are also important factors for risk management in the manufacturing sector, and the improvement of forecast accuracy through risk analysis is essential to mitigate these risks.

For these problems, Hitachi wanted to develop a high level stand-alone GUI (graphical user interface) to visualize production and inventory conditions, while also incorporating @RISK’s excellent risk analysis functions. @RISK’s Developer Kit made it easy to tailor the program to Hitachi’s needs and desires. Through the use of tornado diagrams, Hitachi was able to understand the effects on profitability based on which product is produced or sold at what time, and observe the overall situation for each product.

In his case study for Palisade, Dr. Tezuka concludes, “It is crucial to develop strong risk forecasting and risk analysis…@RISK is a critical part of that process.”

Read the case study here.
 

See also: Palisade's Risk Analysis Solutions at Work in China

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Palisade Software Aids Business and Research in Japan

First Palisade made its mark in China--now we're establishing success in Japan. Two recent case studies detailed the use of Palisade's @RISK software by both a major Japanese company, Hitachi Solutions East Japan, and a researcher at the University of Tokyo illustrate how our easy-to-use software can benefit businesses and academics across the world.

The Hitachi case study details how executives at the manufacturing company used @RISK Developer Kit to analyze supply chain and inventory management. They created a stand alone graphical user interface to visualize production and inventory conditions, while also incorporating @RISK’s excellent risk analysis functions. @RISK’s Developer Kit made it easy to tailor the program to Hitachi’s needs and desires.

At the University of Tokyo, Professor Katsuaki Sugiura at the Laboratory of Global Animal Resource Science used @RISK to  improve the surveillance program for bovine spongiform encephalopathy--otherwise known as mad cow disease, in beef production in Japan.

Read the case studies in English here and here.

Both of these reports are available in Japanese on the Palisade website:

See also: Palisade's Risk Analysis Solutions at Work in China

o improve the surveillance program for BSE in beef production, - See more at: http://blog.palisade.com/blog/risk-and-opportunity#sthash.0W8NnwG8.dpuf
o improve the surveillance program for BSE in beef production, - See more at: http://blog.palisade.com/blog/risk-and-opportunity#sthash.0W8NnwG8.dpuf

 

 

ta and risk analysis of supply chain management, production, and sales & inventory planning and management. Analyzing these elements can be tricky, particularly when it requires forecasting demand and prices of raw materials. Using the @RISK Developer kit, Planning Department Research Division Head Masaru Tezuka and his team were  able to do these analyses. - See more at: http://blog.palisade.com/blog/risk-and-opportunity#sthash.0W8NnwG8.dpuf
ta and risk analysis of supply chain management, production, and sales & inventory planning and management. Analyzing these elements can be tricky, particularly when it requires forecasting demand and prices of raw materials. Using the @RISK Developer kit, Planning Department Research Division Head Masaru Tezuka and his team were  able to do these analyses. - See more at: http://blog.palisade.com/blog/risk-and-opportunity#sthash.0W8NnwG8.dpuf

 

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Managing Risks in New Green Building Technologies

Green construction is on the rise, and for good reason. The move to conserve energy and shrink carbon footprints continues to permeate both consumer and commercial behavior. Because buildings represent a significant portion of global energy and water usage, making new construction more environmentally-friendly is a strategic area to address. However, as the expansion of green initiatives continues, there are new, unforeseen risk factors to be addressed.

A recent Wall Street Journal article, featuring commentary from Palisade Vice President Randy Heffernan, took a closer look at this trend. The piece delved into the risks associated with green building materials and alternative energy sources. One way to combat those factors is through the utilization of risk analysis software powered by Monte Carlo simulation, which is the basis of @RISK. Randy addressed this point in the article:

“When you bring in elements such as new and often more expensive building materials or building features that are more weather-dependent—like solar and green roofs—the uncertainty of the entire project is compounded. Overall, we see growing awareness about the need to quantify as much as possible and account for the inherent risks using probabilistic approaches.”

Green construction is likely to expand with new construction projects.  Organizations will certainly need to be prepared to tackle the expected and unexpected risks that come with it. Being able to uncover risks and determine the probability that they may or may not occur will place green construction organizations in a position to plan accordingly.

» Read "Are There Red Flags in Green Construction?" on the WSJ website

See also: "Assessing the Risk of Cleantech Projects" on Altenergymag.com, featuring FutureMetrics case study

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@RISK and DecisionTools Suite 6.2 Now Available

Offers Improvements to Excel Developer Kit Automation, Russian Translation

New version 6.2 of @RISK and the DecisionTools Suite is now shipping.

Version 6.2 offers a variety of improvements and now is localized for Russian, in addition to the previously available English, Chinese, French, German, Japanese, Portuguese, and Spanish.

Get Your Upgrade
If you have a current maintenance plan, you can upgrade at no charge on our website.

     » Upgrade now with maintenance

If you do not have current maintenance or aren’t sure, contact Palisade.

New XDK Functionality and Documentation
@RISK, PrecisionTree, Evolver, StatTools, and NeuralTools offer an Excel Developer’s Kit (XDK), which allows you to automate and customize the tool within Excel using Excel’s built-in VBA programming language. The XDK for @RISK has been updated to include new functionality for the automation of @RISK graphs and simulation filters, as well as several additional improvements.

For most products, the XDK now includes a new “Automation Guide” to help you get started quickly. In addition, new videos and example files have been added to all XDKs to help you use this powerful feature.

     » See XDK videos

Improved Simulation Startup Time for Project Models
The time required to initialize a simulation of models from Microsoft Project has been dramatically reduced for most cases. The improvement is most significant in models with many tasks.

Russian Translation
All products have also been translated into Russian. This is in addition to the other languages available for the DecisionTools Suite: Spanish, Portuguese, German, French, Chinese, Japanese, and English.

Other Enhancements
Version 6.2 also includes maintenance fixes and improved messaging for software updates. In addition, the @RISK graphics engine now has the ability to display graphs using logarithmically scaled axes.

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Palisade Publishes New Book: Energy Risk Modeling, by Professor Roy Nersesian

One of Palisade’s most vocal supporters in the higher education sector is Professor Roy Nersesian, who teaches energy courses at Columbia University's School of International and Public Affairs. Roy not only utilizes Palisade solutions in the classroom, but he has written a series of books published by Palisade on risk modeling. His latest offering, Energy Risk Modeling, examines how @RISK, PrecisionTree and Evolver are utilized by a wide range of traditional and alternative energy industries.  A sampling of topics covered include:

A sampling of topics include:

  • Modeling payoffs of oil drilling, using both PrecisionTree and @RISK
     
  • Analyzing the economics of a Liquefied Natural Gas (LNG) export project where uncertain variables (cost of natural gas extraction, cost of liquefaction, cost of transportation and the price of LNG in the intended foreign market) are modeled and simulated in @RISK.
     
  • Optimizing an oil refinery to maximize profits and valuing a real option of purchasing a coal-fired plant using Evolver, shown to have a greater predictive efficacy than Excel’s built-in Solver.
     
  • Modeling solar panel and wind turbine power outputs by factoring cloud cover, temperature, time of day and wind speed, while optimizing said uncontrollable energy sources with uncontrollable demand to closely match daily energy demand with power generated.
     
  • Projecting hydropower output in terms of percent capacity using rainfall, evaporation and dam leakage as probabilistic variables.

There is an almost endless stream of potential risk factors to be considered by decision-makers in the energy sector, and Energy Risk Modeling clearly demonstrates how Palisade solutions can assist in planning for and avoiding potentially disastrous obstacles. More real-life examples of Palisade’s utilization in the energy sector can be found on Palisade’s case study page.

» Join us on September 19th for a complimentary live webcast with Roy Nersesian about Energy Risk Modeling
 
» Read more about Energy Risk Modeling

» More about Professor Nersesian, his courses, and publications

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As Hydropower Moves to Small Dams, Big Dams use Risk Analysis Solutions to Meet Energy Conservation Goals

When alternative energy sources are discussed, hydroelectricity typically isn’t mentioned before solar, wind, or biofuel. Hydroelectricity, which generates power through dams and river currents, is a power source more associated with the first half of the 20th century. That said, there are still areas that rely heavily on hydroelectricity, such as British Columbia, Canada. BC Hydro, which utilizes @RISK to develop energy conservation strategies, supplies 90 percent of the province’s electricity.  
 
In a recent Risk & Insurance article by Gregory DL Morris, the future of hydroelectricity was considered, highlighting BC Hydro’s transition away from large traditional dams to smaller, “run-of-river” dams. Larger dams are often less efficient and more expensive to maintain, as pointed out by Basil Stumborg, a decision analysis expert at BC Hydro. In the article, Stumborg mentioned that @RISK is utilized in the effort to calculate risk factors in aging dams, which assists in the development of energy conservation strategies: 
 
"There is a huge incentive for utilities such as BC Hydro to encourage energy conservation. But while the motivation is there, it is often difficult to know whether these ambitious targets can be achieved. We have been using Palisade's risk analysis software @RISK to communicate complex analyses, and have been able to set very aggressive energy conservation goals.”
 
"From a risk-management point of view, we have found we can build risky things into your plan, but you have to know what your red flags are, and when to use your off ramps," he said.
 
As hydroelectricity scales down to smaller, more efficient dams, it is exciting to see @RISK playing a part in making BC Hydro’s traditional dams more energy efficient.
 
 
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Cost Risk Analysis Example Movie: Palisade's Custom Development Team uses @RISK's XDK for this custom application

Here is an example of a custom application written by Palisade Custom Development using @RISK's XDK in Excel. In this example, @RISK is used for cost risk analysis and estimation.  The application prompts the user for a three-point estimate for each cost item in the project as a way to recognize uncertainty in these cost elements.  A risk register is created using a simply colored grid interface.  Next, because in real life costs are seldom independent of each other, the user is able to set up correlations between related cost elements.  Finally, the user can define external risk events that will affect the total cost of the project. Automation takes the shape of an Excel add-in, which is shown to the user as a new Excel ribbon.

 

 

Custom Development in Excel

Palisade Custom Development has written applications for insurance, cost estimation, retirement planning, oil and gas prospecting, portfolio risk management, schedule-cost risk analysis and more – all utilizing @RISK technology in Excel. This means we can create risk analysis solutions for you using a range of powerful analytics, including Monte Carlo simulation, decision trees, statistics, neural networks, and optimization. In each case, the interface is customized to include only what the users need, hiding unused @RISK functionality and preventing user access to the underlying model logic. You can also automate processes like reporting, generating only the charts and data you want. The result is a tailored application ready to roll out to your workgroup. 
 

New XDK Functionality and Documentation in version 6.2

Excel Developer’s Kits (XDK) automatically come as part of the DecisionTools software which includes, @RISK, PrecisionTree, Evolver, StatTools, and NeuralTools. XDKs allow you to automate and customize the tool within Excel using Excel’s built-in VBA programming language. In @RISK 6.2, the XDK has been updated to include new functionality for the automation of @RISK graphs and simulation filters, as well as several additional improvements. For most  products, the XDK now includes a new “Automation Guide” to help you get started quickly. In addition, new videos and example files have been added to the XDKs to help you use this powerful feature.

» See XDK videos

 
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See how a customized Retirement Saving template assesses the performance of a portfolio in future years

Here is an example of a custom application written by Palisade Custom Development using @RISK's XDK in Excel. In this example, @RISK is used to analyze the investment of funds for retirement planning.  The application prompts the user for profile characteristics of the client and portfolio parameters. 

Once the information is entered, the application runs an @RISK simulation to assess the performance of the portfolio in future years as well as the effects of various withdrawal rates after retirement.  Results are presented in tables and graphs.

This video demonstrates how easy it is to utilize this Custom Application:
  1. Define Profile Parameters
    The user inputs the profile characteristics of the individual whose profile is to be modeled. 
     
  2. Define Model Parameters
    The next step is to add the probability distributions for the return of each of the investments. 
     
  3. Simulate and View Results
    Observe multiple simulations and view the custom reports that are provided.
     
Automation takes the shape of an Excel add-in, which is shown to the user as a new Excel ribbon. 
 

Custom Development in Excel

Palisade Custom Development has written applications for cost estimation, retirement planning, oil and gas prospecting, portfolio risk management, and more – all utilizing @RISK technology in Excel. In each case, the interface is customized to include only what the users need, hiding unused @RISK functionality and preventing user access to the underlying model logic. You can also automate processes like reporting, generating only the charts and data you want. The result is a tailored application ready to roll out to your workgroup. Because the application is in Excel, the training required for users is minimal. XDKs come with the DecisionTools software PrecisionTree, StatTools, NeuralTools, RISKOptimizer, and Evolver as well as @RISK. This means we can create risk analysis solutions for you using a range of powerful analytics, including Monte Carlo simulation, decision trees, statistics, neural networks, and optimization. 
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Money-saving Meds: Researchers Use Pharmaceutical Risk Assessment to Determine New Drug's Cost-Cutting Benefits

In the April issue of the International Journal of Nephrology and Renovascular Disease, researchers from  the DaVita Clinical Research in Minneapolis, MN used Palisade's @RISK software to develop a cost-offset model that cuts costs for end-stage renal disease treatment using an innovative pharmacological treatment.
 
Currently, about 400,000 end-stage renal disease (ESRD) patients in the US undergo dialysis three or more times per week. The costs for these treatments are staggering—with 85% of patients relying on Medicare as the primary payer, the estimated amount spent on their care is $29 billion.
 
One of the major portions of this cost come from metabolic maintenance medications--the kidney is responsible for both regulating phosphorus levels and red blood cell production. But dialysis is unable to mimic these particular behaviors of a healthy kidney—thus, ESRD patients can suffer from significant anemia, as well as bone and mineral deregulation, resulting in calcium being deposited in arteries instead of bone, with associated increases in clinical events such as fractures and cardiovascular and cerebrovascular events. Thus, patients must use oral phosphate binders to decrease their serum phosphorus levels, and receive regular injections of epoetin alfa (an erythropoiesis-stimulating agent [ESA]) to stimulate red blood cell production, as well as intravenous (IV) iron. All told, oral and injectable medications account for more than half of outpatient dialysis expenses.
 
An experimental oral phosphate binder, ferric citrate, has been found to both manage serum phosphate levels and increase measures of iron and iron storage in the blood, indicating that this single drug may have multiple benefits: treatment as an oral phosphate binder medication and iron source in ESRD patients with anemia. Thus the authors of the study developed a budget impact model estimating the monthly cost associated with the use of ferric citrate in the treatment of hyperphosphatemia with the added benefit of treating iron deficiency associated with ESRD anemia, versus the cost of other currently available phosphate binders. The model was constructed from the perspective of a US managed care plan.
 
 
Monte Carlo simulations were used to address the high uncertainty of the cost-offset model parameters using @RISK. The simulation showed that for each patient with ESRD, a managed care organization, such as Medicare, will likely save between US$104 and US$184 (90% confidence interval) per month with ferric citrate use. These savings translated into a monthly savings of between US$52,164 and US$92,186 (90% confidence interval) per 500 ESRD patients when ferric citrate was compared to other conventional phosphate binders (Figure 2). The monthly model input variables were projected out to determine annual cost estimates. An additional Monte Carlo simulation demonstrated (at 90% probability) that a provider serving 500 dialysis patients could save between US$626,000 and US$1,106,000 annually with the use of ferric citrate.
 
With the help of @RISK, the researchers were able to prove that this promising new drug could help reduce expenses for a health care system that's desperate for cost reductions.
 
Read the original study here.
 
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How to Create a Custom Application for Stock Portfolio Optimization, Right in Your Spreadsheet

This is an example of the use of @RISK automation applied to stock portfolio optimization. It is a custom application written by Palisade Custom Development using @RISK’s XDK in Excel. 

The steps outlined in the Stock Portfolio Optimization example movie:
  1. Obtain Price & Weight Data
    The user will first define a portolfio of stocks. 
     
  2. Run Analysis & Review
    The next step is to run the analysis for the returns of each security. 
     
  3. Fit Data & Simulate
    The third step is to obtain the distributions that fit the historical return of the portoflio. Distributions of 10 will be used as a base for prediting gains or losses using a simulation. 
     
  4. Optimize & Generate Efficient Frontier
    The last step is to run the optimization process and maximize the portfolio's mean return, given certain constraints. Another feature available is to get the Efficient Frontier of the portfolio.
Automation takes the shape of an Excel add-in, which is shown to the user as a new Excel ribbon. 
 

Custom Development in Excel

Palisade Custom Development has written applications for cost estimation, retirement planning, oil and gas prospecting, portfolio risk management, and more – all utilizing @RISK technology in Excel. In each case, the interface is customized to include only what the users need, hiding unused @RISK functionality and preventing user access to the underlying model logic. You can also automate processes like reporting, generating only the charts and data you want. The result is a tailored application ready to roll out to your workgroup. Because the application is in Excel, the training required for users is minimal. XDKs come with the DecisionTools software PrecisionTree, StatTools, NeuralTools, RISKOptimizer, and Evolver as well as @RISK. This means we can create risk analysis solutions for you using a range of powerful analytics, including Monte Carlo simulation, decision trees, statistics, neural networks, and optimization. 
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Free Webcast this Thursday: "Modeling Multi-Staged Investments with @RISK" with Eric Torkia

Register now for a free webinar to be presented by Eric Torkia. Don't miss this opportunity for inside tips from a successful consultant who uses Palisade risk and decision analysis software solutions to address current problems in financial risk analysis.

"Modeling Multi-Staged Investments with @RISK"

Free webcast this Thursday, 25 July 2013
11am EDT

When planning a multi-staged investment such as new product development or the deployment of a new asset consisting of multiple stage gates, the consequences on analyzing NPV risk are substantial. This free live webcast will show you how to model multiple gates as well as their impact on financial performance. Also presented in this model are how to assess completion stages and probabilities of investment success:

  • Overview of traditional discounted cash flows versus expanded NPV
  • Understanding and modeling product pipelines
  • Integrating expert judgment/opinion into your predictions
  • How to combine multiple staged investments into an optimized investment portfolio

We will discuss these topics as well as present practical models and applications using @RISK.

» Register now for the free webcast "Modeling Multi-Staged Investments with @RISK"

About the Presenter

Eric Torkia, MASc is a senior management consultant/trainer and business analyst. He has collaborated with some of the world's most recognized organizations to ensure the optimal design and delivery of enterprise systems, analytics as well as new forecasting and decision making processes.

Eric combines a unique set of skills and competencies revolving around performance, risk and change management to bring about durable business performance improvements: Financial and project based valuations, Project Risk Analysis on 1+ billion dollar projects, Performance Management business analysis and consulting, Spreadsheet Modeling and VBA automation for simulation, forecasting and optimization, Change Management consulting and training and instructional design relating to the adoption and implementation of enterprise analytics.

Eric’s academic background includes a Master’s degree in information systems management from the University of Québec in Montreal as well as a BBA in international marketing and management from Northwood University Florida.

» View the complete webcast schedule, and see past presentations in the Archive

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Stability of the Ohio River Locks and Dam Determined Utilizing @RISK

The Greenup Locks and Dam system is critical to a number of companies in the coal, petroleum, iron and steel companies that transport their materials along the Ohio River. In basic terms, a locks and dam system traps and contains water in a mechanism that transports large vessels past an area where the river is unnavigable. More than 62 million tons of materials pass through the Greenup Locks and Dam annually, with that number expected to increase to more than 113 million tons by 2030.

In 2011, a study utilizing Monte Carlo simulation and @RISK was commissioned to analyze the internal stability of the system’s middle wall, which forms the water barrier separating two lock chambers. The study set out to answer three specific questions:

  • What is the probability of unsatisfactory performance throughout the planning horizon, through the year 2070?
  • When is rehabilitation work anticipated to be necessary?
  • What should be done to insure continued safe operation of the locks?

The results from the study allowed the owners of Greenup Locks and Dam to accurately forecast when certain monoliths would need repair, based on their current level of stability. Having that critical insight ensured the creation of a repair timetable that would still allow the system to remain open, and keep the flow of materials—and the economies of critical industries—moving.

» Case Study: Stability of the Ohio River Locks and Dam Determined Utilizing @RISK

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PricewaterhouseCoopers deals with uncertainty head on, using Corridor Budgeting

PricewaterhouseCoopers put together a beautiful video about the Corridor Budgeting program, developed by Tobias Flath and Michael Hofmann. Corridor Budgeting is a methodology combining planning, business management, and risk management in order to prepare for a range of possible outcomes, and thereby generate a more realistic picture of the future.

Palisade's DecisionTools Suite is an integral part of this program. As explained in the video: "We identify the factors underlying variables and ranges that impact on financial results. The Corridor is regularly analyzed and validated, giving visibility into any gaps or delta between target bandwidths and actual figures. Specially designed software then aggregates these bandwidths and event risks to paint an accurate picture of possible scenarios."

The video depicts modeling with Monte Carlo simulation: "A simulation models the total risk exposure. The width of the curve indicates the level of uncertainty. The height shows the likelihood that an event will occur, giving senior executives insights into the full spectrum of future possibilities, and making it easier to make the right decisions."

The video concludes, "Corridor Budgeting allows businesses to forecast more realistically, and prepare more effectively for what's to come, equipping them to face the future, however it turns out." It's a simple and beautiful explanation of how risk and decision analysis are a central part of business decisions today.

See PwC's Corridor Budgeting video here:

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