appendix b risk analysis using crystal ball 2000 1 operations management for mbas third edition...
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Appendix B Risk Analysis Using Crystal Ball 2000
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OPERATIONS MANAGEMENTfor MBAs Third Edition
Prepared byE. Sonny Butler
Georgia Southern University
Meredith and Shafer
John Wiley and Sons, Inc.
Appendix B
Risk Analysis Using Crystal Ball 2000
Appendix B Risk Analysis Using Crystal Ball 2000
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Introduction
The effective management of operations requires the ability to deal with a fair amount of uncertainty.
Effective decision making requires an ability to manage the ambiguity that arises in situations with less than perfect information.
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Risk Analysis
To better understand the implications associated with uncertain information.
The essence of risk analysis is to make assumptions about the probability distributions associated with key parameters and variables and to use Monte Carlo simulation models based on these distributions to evaluate the desirability of certain managerial decisions.
The objective is to illustrate to the manager the distribution or risk profile of the outcomes associated with the decision.
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Considering Uncertainty in Project Selection Decisions
Company management has identified the following two options: 1) shift to a Windows-based platform from
its current Unix based platform, or 2) stick with a Unix-based platform.
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Windows-based platform Windows, the new server hardware
could cost as little as $100,000 or as much as $200,000.
Cost to upgrade and convert its software to Windows is $300,000 with a range of $275,000 to $500,000.
Employee training costs are estimated to range between $9,000 to $15,000, with the best guess being $10,000.
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Stay With Unix
New server hardware will most likely cost $110,000, but could cost as little as $80,000 or as much as $210,000.
Software conversion and upgrade costs are expected to be $300,000 but could be as low as $250,000 and as high as $525,000.
Employee training costs should fall between $8,000 to $17,500 with a best guess of $10,000.
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Three Estimates for Each Variable
1. Optimistic cost
2. Most likely cost
3. Pessimistic cost
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Two Web-Server Options
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A B CWindows UnixPlatform Platform
Hardware cost $125,000 $110,000Software conversion cost $300,000 $300,000Employee training $10,000 $10,000Total Project Cost $435,000 $420,000
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Crystal Ball’s Distribution Gallery
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Triangular Distribution Dialog Box
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Define Forecast Dialog Box
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Frequency Chart for Total Project Costs (Windows-based platform)
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Frequency Chart for Total Project Costs (Unix-based platform)
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Descriptive Statistics for Windows-Based Platform Project
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Descriptive Statistics for Unix-Based Platform Project
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Calculating the Probability that the Windows Project’s Total Cost Exceeds $575,000
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Calculating the Probability that the Unix Project’s Total Cost Exceeds $575,000
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Spreadsheet to Investigate Project Budget
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A B C D E F G HWage Rate ($/hour) 60Total Cost $79,200 =B1*B10
Phase TimeRequirements Planning 80 Normal distribution with mean of 80 and std. dev. Of 15.Design 160 Normal distribution with mean of 160 and std. dev. Of 25.Prototype Development 320 Normal distribution with mean of 320 and std. dev. Of 70.Final Development 640 Normal distribution with mean of 640 and std. dev. Of 100.Test 120 Normal distribution with mean of 120 and std. dev. Of 20.Total Time 1320 =SUM(B5:B9)
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Normal Distribution Dialog Box
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Changing the Lower Bound of a Distribution
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Frequency Chart for Total Project Costs
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Summary Statistics for Total Project Cost
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Calculating the Probability that the Project’s
Total Cost Exceeds $85,000
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Software Engineer Time Required
Phase Average Time (hours)
Standard Deviation
Requirements Planning
80 15
Design 160 25
Prototype
Development 320 70
Final Development 640 100
Test 120 20
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