Author: Shannon Kelly

Free Webcast tomorrow: Business Forecasting and Simulation

Business Forecasting and Simulation using @RISK & The DecisionTools Suite, Part 1

Glen Justis, Experience on Demand
10 July 2014, 11am EDT
Register Now – free registration

Business Forecasting and Simulation using @RISK & The DecisionTools Suite is a three-part series covering leading practices in the use of Monte Carlo-based models and simulations to improve business decisions, forecasting, and risk management.

This first installment of the series will explore the basics of Monte Carlo analysis, with particular emphasis on why, in many cases, it is necessary to apply simulation-based methods to produce correct business analysis results. The relative roles of sensitivity analysis and scenario analysis will also be addressed. These concepts will be covered in manner that highlights how @RISK and other components of the Palisade DecisionTools Suite work with Microsoft Excel.

The 2nd webcast (August 14th) will cover leading practices in applying @RISK in enterprise risk management, including treatment of operational risks, use of risk registers, and applications for project risk management, including Microsoft Project-related features.

The 3rd webcast (September 18th) will feature a case study of an actual company in a selected industry (TBD), where business simulation and risk analysis using the power of @RISK is showcased in a commercial setting.

Presenter: P. Glen Justis

Glen Justis is a partner at Experience on Demand, a broad-based business consulting firm based in St. Louis, Missouri. Over his twenty-eight year career in consulting and industry, Glen has established an outstanding reputation for assisting clients with issues where strategy, economics, and risk management intersect. He has conducted and/or overseen over one hundred individual client projects, encompassing private, publicly-traded, governmental, not-for-profit, and cooperative entities.

Mr. Justis previously served as a Director in the Governance, Risk, and Regulatory Strategies practice of Deloitte & Touche LLP. His work at Deloitte focused on capital investment decisions, business intelligence, risk management strategy and analytics, and corporate development. Prior to joining Deloitte, he led multiple practice areas at R. W. Beck, Inc. connected with commodity markets and risk management where he successfully served utilities, energy companies, industrials, and financial institutions directly and through supervision of consulting teams.

He holds an MBA with honors and a Bachelor of Science in Nuclear Engineering, and has completed executive education programs through The Wharton School and the American Association of Collegiate Schools of Business Bridge Program. Mr. Justis is a member of the adjunct faculty at Webster University in St. Louis, delivering courses relating to strategy, finance, operations, and project management.

Monte Carlo Simulation and Manufacturing featured in Quality Magazine

A recent article written by Palisade's vice president, Randy Heffernan, explores a variety of applications of Monte Carlo simulation in the manufacturing sector, such as: minimizing pilot programs, enterprise resource planning, supply chain continuity and potential financial losses. By utilizing simulation software such as @RISK, risk factors are revealed that would have otherwise taken stakeholders by surprise.

» Read "Monte Carlo and Manufacturing" in Quality Magazine
   (Requires free registration)

Kewpie Corporation and the University of Tokyo Employ @RISK to Ensure Safety of Eggs

Liquid eggs are used as an ingredient in many foods around the world. The risk of Listeria bacteria in eggs, which can lead to illness or even death, is a serious threat to a crucial food source. Kewpie Corporation, one of Japan’s largest food ingredient manufacturers and a major egg product producer, teamed up with the University of Tokyo’s Graduate School of Agricultural and Life Sciences Research Center for Food Safety to develop a growth model of bacteria in liquid eggs in order to increase their understanding of the risks. The researchers used Palisade’s @RISK software to accurately measure the risks, resulting in vital findings for the food safety industry.

From its inception, Kewpie has followed the spirit of “Good products are only made from good ingredients,” and that food safety is something that must always be strived for to the best of their abilities, as explained by Miho Okochi, who is part of Kewpie Corporation’s R&D Center Food Safety Division Microbial Laboratory. “In our laboratory we focus on technology and research of microorganisms necessary in product development, and microorganisms that may contaminate products,” he explained.

Okochi explained how they learned about @RISK: “We heard about the software from a university professor who was researching food safety. It is used in the risk assessment of food microbiology and becoming more widely used in Japan.” @RISK has a number of benefits, he said. It has been adopted in many industries, it uses industry standard Microsoft Excel, and the spreadsheet files can even be opened by computers without @RISK installed. In the food safety industry there are a number of users, and the availability of training in Japanese from Palisade is a great benefit. The @RISK software is also available in Japanese.

» Read the full case study.

Copenhagen Risk Conference covered in “Global Banking & Finance Review”

Global Banking & Finance Review covers the Palisade Copenhagen Risk Conference to be held on March 31st, 2014 at the Bella Sky Comwell Hotel. 

Real-world case studies offering insight into managing risk and uncertainty will be presented by companies including 2L Consulting, Deloitte, The LEGO Group, Technical University of Denmark and Visual Reporting APS.

There will also be practical software training classes presented by Palisade trainers, consultants, and software engineers as well as one-to-one consulting sessions to discuss specific decision modeling challenges.

» Read the complete article here.

Schedules Announced for Risk Conferences in Copenhagen, Amsterdam, and Dubai

Presenters include Deloitte Risk Services,
Royal HaskoningDHV, Lego Group, DSM,
Saudi Aramco, Kuwait Petroleum

In their ninth year, the Palisade Risk Conferences have become “must attend” events for quantitative risk and decision analysis professionals. The schedules are set for Copenhagen, Amsterdam, and Dubai. Each day promises a full slate of intensive software training by Palisade trainers, in-depth looks at risk modelling from industry experts, networking opportunties, and the chance to review your own model with Palisade consultants.

Copenhagen, 31st March
Amsterdam, 3rd April
Dubai, 8th April

Other 2014 dates include Bogotá, Madrid, Perth, Brisbane, London, Frankfurt, Johannesburg, and Melbourne, with more dates to be announced soon.

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

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

@RISK for Cost and Schedule Risk using Risk Registers (with example model)

@RISK can be used in conjunction with MS Project and Excel to model the schedule and cost risks inherent in large, complex projects. This example demonstrates the use of @RISK to build a complete model of the construction of a new commercial venue. The model includes uncertainty in task times, a Risk Register for calculating contingencies, and a link to real-time cash flows in an NPV calculation model.

@RISK Project Management Example Models@RISK probability distributions have been assigned to the durations of several tasks in the schedule, some with a distribution and others using Risk Categories. The uncertain task times are assumed to be uncorrelated.

A Risk Register lists three possible risk events that could impact the project schedule and costs. By using the RiskProjectAddDelay function, these risks introduce schedule delays and associated costs. Specifically, this function allows the model to generate new tasks dynamically, depending on whether the risks occur or not. Changes are reflected at run time only, so it is necessary to run a simulation to see the impact and results of the Risk Register.

The example also contains a model of cash flows that leads to the NPV of the project. In particular, the project costs create a Timescaled Data report. This collects the total cumulative costs during a simulation. After a simulation, you can see the total cumulative costs for the project as they grow over time.

The other reports generated are the NPV and the Contingency for the Risk Register, at different confidence levels. Finally, the cash flow also includes a Revenue Adjustment calculation that takes the portion of the year in which Sales are initiated and applies a discount to the predicted annual revenue.

 » Download the model. (Requires @RISK 6.x Professional or higher)
 » Download a trial of @RISK 6.1 Industrial

See also: Contingency Calculation in Cost Risk Analysis

Tip: Interpreting the y axis in @RISK histograms

Q. In the histograms of my @RISK distributions and results, what do the numbers on the vertical axis mean? Can I make the scale more user friendly?

A. The default scale is probability density. This is adjusted so that the areas (height × width) of all the bars add up to 1.

You may prefer a relative frequency scale, where the height of each bar equals the proportion of the distribution that falls within that bar. To set relative frequency, click the histogram icon at the bottom of the window. See the blue highlight in this illustration:

Histogram showing probability density

A drop-down appears with your formatting choices. Select relative frequency — that's all there is to it!

Relative Frequency Histogram

You'll find more about probability density and relative frequency in this Knowledge Base article.

Q. Can I change the default, so that @RISK always shows histograms in relative frequency?

A. Absolutely! In Utilities » Application Settings » Simulation Graph Defaults, change Preferred Distribution Format to Relative Frequency.

Application Settings for Relative Frequency

Click OK, and answer Yes to the confirming prompt. This setting will affect all input and output histograms in all your models. Naturally, you can still use the histogram icon at the bottom of any graph to change the format of that graph.

Palisade’s Tech Support Team

Palisade’s Tech Support Team addresses common questions in this blog. For support, current customers can write to support@palisade.com.

Other online resources for Technical Support, include:

In this blog, you’ll find common issues that TS has addressed recently, in a Q&A format.