Super Bowl XLVIII Prop Bets and Monte Carlo Simulation

There are a number of applications for risk analysis software and Monte Carlo Simulation, and most offer insight into solving pretty serious situations like public health, workplace safety, budgets, etc. From time-to-time, we find utilizations are less “mission critical” and more “cool.” Such is the case with Dr. Wayne Winston’s use of Palisade’s @RISK. Winston is a professor at the University of Houston, a sports probabilities expert and longtime user of @RISK. In a guest blog post in Risk Management Monitor, Palisade Vice President Randy Heffernan explored Winston’s utilization of Monte Carlo simulation, in relation to so-called “prop bets" for this Sunday's Super Bowl. From the article:

Most bets are relatively straightforward; however, if you’ve ever been to Las Vegas to watch the big game, you’ll find Super Bowl wagers are taken to an entirely different—and more complex—level. In addition to traditional wagers, you’ll find an almost unlimited number of proposition—or “prop”—bets that can stray into more peripheral aspects of the game. Consider the following prop bets from last year’s Super Bowl between the Ravens and 49ers:

  • Who will win Super Bowl MVP?
    Winning bet: Ravens’ QB Joe Flacco at 11/4 odds
     
  • What color will the Gatorade (or liquid) be that is dumped on the winning coach?
    Winning bet: Clear/water at 7/4 odds
     
  • Will Alicia Keys’ rendition of the national anthem be over/under 2:15?
    Winning bet: Over, at 2:42

In the article, Randy offers a comparison of Winston and Vegas’ confidence regarding the number of touchdown passes Broncos quarterback Peyton Manning will throw against the Seahawks on Sunday.

» Read Randy’s full article in Risk Management Monitor

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This Month: Introductory Risk & Decision Analysis Software Demonstrations in Four Different Languages

Introduction to Risk & Decision Analysis using @RISK & The DecisionTools Suite This month we are offering our Introduction to Risk and Decision Analysis using @RISK and the DecisionTools Suite webcast in a variety of languages including German, French, Portuguese and English.

Our Regional Sales Managers and Trainers have designed these webcasts to provide an entry-level introduction into probabilistic analysis and will show how Monte Carlo simulation and other techniques can be applied to your everyday business analyses. If you build models in Excel then Palisade solutions can almost certainly help you to make more informed decisions, right from your desktop.

Sign up today for the webcast presented in the language of your choice!

Deutsch:
Einführung zur Risiko - & Entscheidungsanalyse
mit @RISK und der DecisionTools Suite

11. Februar 2014 - 10:00 am CET
(9:00 am UTC/GMT, 4:00 am EST)
» Jetzt kostenlos registrieren

Français:
Introduction a l’analyse des Risques et décisions
avec @RISK et DécisionTools Suite

11 février 2014 - 10:00 am CET
(9:00 am UTC/GMT, 4:00 am EST)
» Inscrivez-vous gratuitement

English:
Introduction to Risk and Decision Analysis
using @RISK and the DecisionTools Suite

13 February 2014 - 11:00 am CET
(10:00 am UTC/GMT, 5:00 am EST):
» Register Now for Free

Português:
Análise Quantitativa de Risco Utilizando o
@RISK e o Decision Tools Suite

21 de fevereiro 2014 - 10:00 am Brasília Time
(1:00 pm UTC, 2:00 pm CET)
» Inscreva-se grátis

Também em Português, AMANHÃ:
Simulações de Séries Temporais com o @RISK
7 de fevereiro 2014 - 10:00 am Brasília Summer Time
(12:00 Noon UTC, 1:00 pm CET)


These webinars will explore some of the ways in which organizations are applying Palisade tools. From oil and gas, insurance and finance through to healthcare, defense and construction, @RISK and the other tools in the DecisionTools Suite enhance the decision making capabilities of some of the world’s most successful companies.

For nearly 30 years, Palisade software and solutions have been used to make better decisions. Cost estimation, NPV analysis, operational risk registers, portfolio analysis, insurance loss modeling, reserves estimation, schedule risk analysis, budgeting, sales forecasting, and demand forecasting are just some of the ways in which the tools are applied. The webinar will demonstrate how easy – and necessary – it is to implement quantitative risk analysis in any business.

If you would prefer to join us for a more in depth Training be sure to check out this previous post: Start the New Year Right with Palisade Risk & Decision Analysis Software Training

 

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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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Palisade's Monte Carlo Simulation Software Featured in Quality Magazine

Palisade Corporation got a shout-out in the August edition of Quality Magazine, a monthly business publication serving the quality assurance and process improvement needs of more than 64,000 manufacturing professionals. The article, “Simulation City” by Michelle Bangert, discusses Monte Carlo simulations and how they can be used in a variety of industries and situations.

Randy Heffernan, Vice President of Palisade is quoted in the story, explaining why companies use simulation software. “A lot of times, it comes out of a larger cost-cutting or waste reduction at the company as well as quality improvement,” he said in the piece. He goes on to explain that software like @RISK can help reduce material waste and the time, and that the cost and availability of a material can have a huge impact on production. “The risk of not having what you need when you need it is big,” Heffernan said. “But this is not intuitive…There is an assumption that raw material is just there waiting for you. But that’s not really true.”

The article continues, “with global supply chain issues caused by the floods in Thailand a few years ago or the tsunami in Japan, more people are becoming aware of the supply chain risks and the related quality of manufacturing. 'How do you maintain quality in the face of uncertain suppliers?” Heffernan asks. Though companies can find backup suppliers, they don’t want to use too many in order to maintain economies of scale. This is where software can step in to help find a solution.'”

The software can provide models using three different suppliers, such as sourcing 70% from supplier number one and seeing the uncertainty level.  “Software can do those calculations for you,” Heffernan said. “There’s no way people can do that manually.”

Read the original article here.

See also: "Risk Analysis Will Drive Better Decisions Across the Supply Chain" in Supply Chain Digital magazine

 

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Palisade's Decision Tools Used At Shanghai's Top University

Palisade prides itself of software tools that can be easy to use and multi-use. Professor Li, of the University of Michigan – Shanghai Jiao Tong University Joint Institute, provided some enthusiastic feedback on Palisade products in a recent case study.

Prof. Li 's research includes complex engineering system design and optimization, decision-making and optimization theory. Li uses Palisade's @RISK tools into his research and courses at Jiao Tong University. In his research, Li routinely uses @RISK, PrecisionTree, TopRank, and StatTools to do specific calculations in system design process, enabling him to analyze his ability to guarantee original design performance while changing different variables. He also uses the tools to perform decision analyses for system users.

Li says that he compared @RISK to other research software on the market, including Matlab. While Matlab and similar software offer some of the risk and decision analysis functionality found in Palisade’s software, researchers have to add their own code to access this level of functionality, taking considerable effort and time. In contrast, Palisade risk and decision analysis software simplifies these functions so that they are easy to use, and allows the creation of comprehensive data models.

Using DecisionTools for Product Pricing and Engineering Design
Prof. Li gives two examples on how the software is used in his teaching and research. The first involves a study of pricing risk and decision-making when introducing a new product to the market. Many factors affect the price of a new product, such as raw material and production labor costs. Li wanted to determine how large an impact these factors would have on a product's final price. Using Monte Carlo simulation, Li was able to find the relative influence of each variable. The whole approach was simple and intuitive. In another example, Li used the software to determine the influences of various factors on tolerances in car engine design. By using Palisade’s DecisionTools Suite, Li was able to save a lot of time, completing the procedures with just two or three commands.

Short Learning Curve
Prof. Li has found that the DecisionTools Suite enables students to perform highly flexible case analysis and decision analysis of any issues that may be encountered in a system. Students are able to grasp a number of related concepts with greater ease, while gaining powerful tools to facilitate solving practical problems. In Prof. Li’s research, Palisade has provided excellent support for the calculations and optimization required in areas like engine design and decision-making support theory, thus saving huge amounts of time and effort. Says Prof. Li, "You can now complete what originally took you 20 hours to do in as little as a single hour!"

Read the original case study here.

This case study is also available in Chinese: 上海交大开设DecisionTools 和@RISK软件课程并获得成果

See also: Some Uses of Decision Support Software

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At King’s College, @RISK is used to Evaluate the Economic Impact of Medical Interventions

Dr. Sadmir Ciketic, Research Fellow in Health Economics at King’s College London has been using Palisade’s @RISK since his postgraduate days. His research in health economics and public health involves economic evaluation of healthcare programs and quantifying risks and uncertainties to evaluate the economic impact of medical interventions, such as the costs and benefits/harms of new medications, new or existing treatments and medical technologies.
 
 
According to Dr. Ciketic, Palisade’s DecisionTools Suite provides good estimates for the adverse outcomes and risks associated with new interventions or medical drugs introduced into the market. The Suite’s @RISK especially comes in handy for complex simulations and parameter uncertainties in modeling economic evaluations of medical interventions for making policy decisions. The software allows him to change the different assumptions of critical estimates in practice—for example, using a different distribution or a different method of sampling and simulation of results. Typically, quality of life estimates are derived from clinical trials and systematic reviews and as such these data already have a varying degree of confidence associated with them. This is especially of importance in solving the economic problem of limited resources in the public health arena. This is where the DecisionTools Suite and @RISK join in. Through Monte Carlo simulation, models can account for a whole range of possible outcomes, and indicate how likely they are to occur, providing crucial estimates that can be interpreted and used in policy and decision-making.
 
“In my current area of work for King’s College London, I mainly use quantitative analysis,” said Dr. Ciketic. “The two most common examples of the distributions that I use include the beta distribution for the quality of life estimates and gamma distribution for cost estimates. The use of these distributions is justified due to the fact that quality of life parameters in the model are binomial data---mainly probability parameters in the model ranging in values from 0 to 1, while the cost data are non-negative and in many cases skewed. Due to the fact that cost is represented in Bayesian statistics (discrete) by a Poisson distribution, the gamma distribution is a conjugate to the Poisson and as such is constrained on the interval 0 to positive infinity.”
 
Dr. Ciketic also attends presentations and events organized by Palisade on a regular basis. He said, “There is always something new to learn and something that is very useful in relation to @RISK, and all the other DecisionTools Suite tools. It’s a complete suite of programs that are suited for many professions from science, finance, government, health and many other areas. I like the fact that Palisade has this broad level of use that is relevant in all aspects of life. ”
 
 
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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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Risk Analysis Solutions at LEGO Pave the Way for Inventive New LEGO Toys

LEGO Group has always been a trendsetter in the toy industry, perhaps due to its ability to both take on, and manage, risk.  Earlier this year, we covered how LEGO Group uses Palisade's @RISK to help it manage much of the risk it faces. The software helped the company consolidate its risk portfolio via Monte Carlo Simulations--evaluating the possibility of threats such as competitor infringements, currency risk and vendor breakdowns.

By looking at the chances of worst-case scenarios and comparing them to the risk tolerance that the company has set itself, the company could determine if it was able to take more aggressive policies.

Thus far, LEGO Group has been doing some exciting new approaches to product development; including the LEGO Cuusoo project, which is essentially a LEGO-only Kickstarter website. Users submit ideas for new types of LEGO sets and gather supporters for the project. All projects with 10,000 supporters or more are reviewed quarterly by LEGO.  The authors of the ideas selected by the company to become a new LEGO product receive a 1% royalty of  the total net sales of the product. Successful Cuusoo products include LEGO Minecraft, a LEGO Mars Rover, and, the latest, a LEGO Back to the Future set.

With Palisade's @RISK as a key tool in the LEGO Group's Enterprise Risk Management framework, the company was able to make informed strategic decisions and grow LEGO Group's profits at an impressive rate.


See Also: @RISK from Palisade plays key role in LEGO’s Enterprise Risk Management strategy

 

 

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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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Why Use Decision Tree Analysis?

Life is full of tough choices. Most of us muddle through them using best guesses and gut feelings. But have you ever wondered if there might be a more sophisticated way to make decisions? Many businesses, researchers, and organizations have asked the same question, and turned to decision tree analysis.

Decision trees for decision analysis, in PrecisionTreeDecision trees are quantitative diagrams with nodes and branches representing different possible decision paths and chance events. This helps you identify and calculate the value of all possible alternatives, so you can choose the best option with confidence. This technique applies to almost any industry and field; it can help oil companies determine optimal testing and drilling strategies, help medical researchers determine the best tests and procedures to maximize a patient's recovery, or help a law firm decide on the best litigation strategy in a legal dispute.

How does this tool work? Decision trees let you visually map out complex, multi-layered decisions in a sequential, organized manner. This helps you identify all possible alternatives and choose the best option. This formal structure represents decisions and chance events that are linked in sequence from left to right. Decisions, chance events, and end results are represented by nodes and connected by branches. The result is a tree structure with the "root" on the left and various payoffs on the right. Probabilities of events occurring and payoffs for events and decisions are added to each node in the tree. Palisade's  PrecisionTree software creates decision trees  and influence diagrams in Mircosoft Excel, allowing you to  identify all possible alternatives and choose the best option.

PrecisionTree is a part of Palisade's DecisionTools Suite, an integrated set of programs for risk analysis and decision making under uncertainty that runs in Microsoft Excel. The DecisionTools Suite includes @RISK for Monte Carlo simulation, PrecisionTree for decision trees, and TopRank for “what if” sensitivity analysis. In addition, the DecisionTools Suite comes with StatTools for statistical analysis and forecasting, NeuralTools for predictive neural networks, and Evolver and RISK Optimizer for optimization. All programs work together better than ever before, and all integrate completely with Microsoft Excel for ease of use and maximum flexibility.

See also: Some Uses of Decision Support Software

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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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Indian Media covers Palisade Case Study

Palisade was proud to recently be involved in a successful case study by L&T Institute of Project Management in India, which we covered in this blog previously.  With the help of Palisade's @RISK software, the Institute was able to help engineering outsourcing firms pinpoint risks that might hamper project success.

Other media outlets took notice.  APN News, an Indian online newsource, covered the project, as did the Telegraph, the largest circulated English daily in Eastern India.  The India Infoline news service, part of the IIFL Group, (a leading financial services company in India) also covered the story. Analytics India Magazine, a web-based publication which serves the needs of analytics professionals in India, covered the case study in full.  L&T's work was also reported on in Money Life, an Indian online webzine covering finance and economics.

The L&T Institute's cutting edge work on risk analysis as it relates to the engineering outsourcing industry has clearly made an impression on those media outlets covering the Indian business and financial world. This doesn't come as a surprise to those of us at Palisade, who understand the importance of risk management.

Dr. Chakradhar Iyyunni, Deputy General Manager and Faculty at the L&T Institute of Project Management pointed out  that "as the Indian engineering outsourcing industry matures, new service offerings emerge and the cost pressures and virtualisation of work increases, we need to develop more customised and scientific approaches to project management and delivery in order to enhance the competitiveness of engineering services organisations in India."

Project risk management analysis using Monte Carlo simulation promises to allow for rapidly emerging economies, like India's, to hone their project management strategies to better compete in the global economy.

Read the Case Study: Larsen & Toubro Institute of Project Management Uses @RISK to Develop Project Delivery Schedule Identification Methodology for Engineering Outsourcing Assignments

See also: Project Risk Management Strategies Help Indian Engineering Outsourcing Firms

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Project Risk Management Strategies Help Indian Engineering Outsourcing Firms

India has become a key provider of outsourced engineering serices for companies around the world. Larsen & Toubro Limited (L&T) is a major engineering and manufacturing company in the Indian private sector. The L&T Institute of Project Management conducts education and research in project management, and used @RISK  to help engineering outsourcing firms to pinpoint risks that might impede project success.

While the Indian engineering outsourcing industry has proven itself in the global playing field, the complexity of software applications has grown along with customer expectations--greatly increasing the type of risks that could significantly impact the growth and reputation of the engineering outsourcing industry. These risks include service provider's inability  to use the latest technologies due to proprietary reasons or other companies having an unseen competitive advantage.

Cultural mismatches or lack of synergy between expectations of sales and delivery teams can also lead to uncertainty, as can personal interactions and processes, organisational structures of service providers and customers, trust between teams, continuous on-boarding and attrition of personnel, etc.. Furthermore, gaps in technical understanding and alignment of project objectives across outsourcing and customer teams also add to uncertainty.

All of these factors can impact project scope and delivery schedules that can greatly impact customer satisfaction. Thus, the L&T Institue of Project Management conducted a study using @RISK to find a methodology that would allow these companies to best manage these risks.

“We chose @RISK for its ease of use and compatibility with Microsoft Excel,” said Dr Chakradhar Iyyunni, Deputy General Manager and Faculty at the L&T Institute of Project Management. “@RISK imports all the analysis into Excel, which means that we can use all the formulae in the software alongside all the @RISK features – a powerful combination for statistical analysis.”

Using a three-point estimation (optimistic, most likely and pessimistic), the team was able to construct probability distributions in @RISK to represent the uncertainty.

The analysis showed that at a 90% confidence level, an engineering project team could complete the work in 887 man-hours as if the project was being undertaken for the first time. For a 95% confidence level, the man-hours required would be 902 hours. This estimate could be used for repeat projects. 107 of these 902 hours could be used for contingency and a partial use of these hours would likely be acceptable to the client at the time of pre-project approval for billing. However, for a 99% confidence level, the team would require 925 hours to complete the project including 130 hours for contingency and a partial use of these hours would be acceptable to the client (pre-project approval) for billing as a trade-off to adhering to a stricter schedule.

This study concluded that this kind of three-point estimation using Monte Carlo simulation was a better way of creating robust project delivery schedules as opposed to a detailed risk analysis exercise, especially for short duration projects that are the norm in the engineering outsourcing industry.

Read the case study: Larsen & Toubro Institute of Project Management Uses @RISK to Develop Project Delivery Schedule Identification Methodology for Engineering Outsourcing Assignments

See also: The Economics of Supply Chain Risk Management using @RISK

 

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Unsafe Seafood? Monte Carlo Analysis Finds Increased Cancer Risk Due to Arsenic-heavy Seafood

While finding risk analysis solutions is important for companies and businesses, it is paramount when it comes environmental and human health. Simulations that help evaluate risk are crucial in helping scientists understand, and try to mitigate some of the threats living organisms face. Take, for example, a new study to be published in August 2013 that measures the  probabilistic risk of arsenic consumption via seafood by people living in the southwestern region of Taiwan.
 
Arsenic is a known poison and carcinogen that occurs in both organic and inorganic compounds. Organic arsenic compounds tend to be less toxic, while inorganic is more so.  Inorganic arsenic compounds tend to come from industrial and agricultural sources, which can make its way into the enviornment and lead to its eventual uptake into the foodchain.
 
In this study, the researchers had to tackle both the variability  of arsenic levels in the seafood, as well as individual consumption habits. Using Monte Carlo simulation, they were able to conduct an assessment of exposure to arsenic, finding that arsenic consumption from five types of fish and shellfish for the 95th percentiles falls below the threshold set by the Food and Agriculture Organization and the World Health Organization, however,  it exceeds the target cancer risk. According to the authors of the paper, “this study demonstrates the importance of the individual variability of seafood consumption when evaluating a high exposure sub-group of the population who eat higher amounts of fish and shellfish than the average Taiwanese.”  
 
Palisade's @RISK Monte Carlo simulation software can be used to conduct the types of analyses used in this study, yielding key probabilities for risk of disease and environmental concerns.
 
 
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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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Turbines Get a Second Wind: Scenario Analysis Proves New Design Reduces Carbon Emissions

Renewable technologies are on the rise as the world shifts to a low carbon economy and attempts to reduce dependence on fossil fuels. For the United Kingdom, wind power may become a cornerstone of their energy mix, with the UK possessing the largest offshore wind capability in Europe, overtaking Denmark in 2009 to become the leading country for installed offshore wind capacity.

Currently, the dominant design for large, grid-connected wind turbines is the classic windmill--a three blade rotor with a horizontal rotating axis. However, a new design, which involves a vertical axis wind turbine (VAWT), has  advantages over horizontal axis alternatives: it can capture the wind from any direction, plus the rotor equipment is located at base level, making it is simpler and less costly to install and maintain.

The Energy Technologies Institute (ETI), a UK-based company formed from global industries and the UK government has tackled several projects looking at new turbine design and concepts for offshore wind. One is the Novel Offshore Vertical Axis (NOVA) project, a UK-based consortium launched in January 2009 to look at the feasibility of a NOVA turbine.

ETI used @RISK as a scenario analysis tool to evaluate the potential reduction in greenhouse gases that could be achieved through the installation of NOVA wind turbines, compared to conventional horizontal axis wind turbines (HAWTs) for offshore power generation. After conducting Monte Carlo simulations, the study found that the increased power rating of the NOVA turbines compared to current HAWTs would provide considerable reductions in lifetime greenhouse gas emissions. More specifically, the estimated lifetime emissions were 521 kt CO2e for the conventional design and 419 kt CO2e for NOVA turbines. Thus, this new spin on turbine design may be a key part of improving global carbon emission reduction.

» Novel Offshore Vertical Axis (NOVA) project

See also: Offshore windfarms – a financially feasible source of energy? Risk simulation software provides answers.

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Manure into Money: Risk Analysis Solutions Pay Off

The energy market has shifted, ushering in an era where so-called wastes are being re-examined, and the desire for energy security and clean/green energy sources is rising. Rudd Asset Management (RAM), an energy consulting company specializing in cost-effective solutions and project risk management strategies, recently helped a large horse racing and competition complex that wanted to develop “green” policies that made economic sense. By using Palisade DecisionTools Suite, RAM determined that converting stall bedding and manure waste into renewable energy was a feasible, cost-effective solution—helping the complex turn a waste-disposal problem into a profit.

To begin with, RAM did a review of gasification of waste materials  from a number of nearby tracks. The ultimate goal was simple: get a win-win by changing a negative to a positive. Convert an increasing waste expense to a sustainable source of “green” renewable energy.

Unsurprisingly, the uncertainties were numerous. Variables that had to be considered included: cost to gasify the “fuel”; the cost of gathering the multiple fuel supplies; the cost to generate the power; the value of combined heat and power thermal energy; the quantity of fuel available each year, the energy used by the facilities each year; and the alternative costs to purchase the power from the local utility. RAM opted to use the Palisade DecisionTools Suite for the statistical analysis.

In this case, because the simulation determined that the wholesale power price drove the value, RAM next needed to confirm that the price was truly accurate. By focusing on variables with the most impact, RAM was able to  do a review in a lot less time, while getting better accuracy. The simulation results from the scenario analysis show the project is feasible, with an Internal Rate of Return of > 15 %, a Debt Coverage Ratio of > 2, and a Net Present Value positive within 5 years that would be robust after tax cash flows.

 “Palisade DecisionTools software is a great tool for our process,” says Mark Rudd, RAM President. “We help the client make better decisions more quickly using the power of Monte Carlo simulation and useful statistics.”

» Case Study: @RISK Helps Turn Waste Into Energy

» See also: Monte Carlo Simulation for Environmental Risk Analysis

 

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Palisade Global Risk Conferences Advance Best Practices in Risk Management

Join us next week in London and Frankfurt.

In the last few months, nearly 1,000 professionals from around the world have gathered to push the boundaries of risk analysis through the Palisade Risk Conference series. Since March, Palisade Risk Conferences have been held in Santiago, Chile; São Paulo, Brazil; Johannesburg, South Africa; Tokyo, Japan; and Shanghai, China. Decision makers from industry and academia have presented dozens of real-life case studies, applying sophisticated quantitative techniques in new and exciting ways. These innovative approaches use Monte Carlo simulation, optimization, decision trees, and other techniques found in Palisade’s @RISK and DecisionTools Suite software to solve a wide range of pressing problems.

2013 Palisade Risk ConferencesSome examples include:

  • Using stochastic modeling for financial analysis in the mining industry
    Presented by Collahuasi Mining Co
  • Assessing the financial viability of new projects
    Presented by the Brazil National Development Bank
  • Risk assessment of capital projects in the power industry
    Presented by PricewaterhouseCoopers
  • Achieving optimal inventory levels to minimize cost
    Presented by Mitsubishi Chemical Company
  • Risk assessment of food safety imports
    Presented by the Shanghai Food and Drug Administration
  • Probabilistic risk analysis of cross-border oil projects
    Presented by Sinopec

Join us next week in London and Frankfurt! Upcoming dates:

 » 2013 Palisade Risk Conference Series

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