The goal of analysis should provide leadership with insight into risk and uncertainty and guidance on actions that can be taken. However, common analysis methods of using point estimates to generate forward-looking business plans disregard uncertainty and ignore risk.
In this presentation, you will learn how to incorporate uncertainty directly into a decision support application. The results is a range estimate with likelihoods of exceeding thresholds based on assumption values, providing leadership with the insight into uncertainty and actions that can be taken to reduce risk.
1. Introduction to Simulation:
The Athematic of Uncertainty
May 15th, 2014
We
will
get
started
3
–
5
minutes
past
the
hour
“Our
culture
encodes
a
strong
bias
either
to
neglect
or
ignore
VARIATION.
We
tend
to
focus
instead
on
measures
of
central
tendency,
and
as
a
result
we
make
some
terrible
mistakes,
o>en
with
considerable
prac?cal
import[ance].”
-‐Stephen
Jay
Gould,
naturalist,
1941-‐2002
Presented by:
Andrew Pulvermacher
Director | Decision Sciences
2. in/drewpulvermacher
Agenda
Value
of
Simula?on
Modeling
• What
is
it…
• Why
you
need
it…
• When
would
you
us
it…
• How
to
use
it…
• Which
Sim
Product
to
use…
• Who
uses
it…
3. in/drewpulvermacher
REASON FOR BEING
1:
Cure
for
the
Flaw
of
Averages
2:
Embed
UNCERTAINTY
3:
Enable
Risk
Management
MEANINGFUL
INFORMATION
6. What-‐If
What
Utilization
Rate
should
we
maintain
to
maximize
profit?
Profit
per
Unit: 10.00$
Missed
Order
Cost (5.00)$
Plant
Capacity: 100
Utilization
Rate: 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Units
Produced -‐
10
20
30
40
50
60
70
80
90
100
Product
Profit -‐$
100$
200$
300$
400$
500$
600$
700$
800$
900$
1,000$
Cost
of
Missed
Orders -‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
Profit -‐$
100$
200$
300$
400$
500$
600$
700$
800$
900$
1,000$
6
What-‐If
Analysis
on
Steroids
*With
beneficial
side
effects
Input
Variable
Target
TradiHonal
What-‐If
SimulaHon
Input:
#
to
7. 7
What-‐If
Analysis
on
Steroids
*With
beneficial
side
effects
TradiHonal
What-‐If
SimulaHon
Outputs
=
Meaningless
Inputs
=
Misleading
Inputs
=
‘Mimic’
Real-‐World
Outputs
=
StaHsHcally
Meaningful
• Talk
in
terms
of
Probability
• Terms
of
Achieving
• Likelihood
of
Failure
• BeRer
idea
of
what
to
EXPECT
$#&!
8. 8
SCENARIO
Today:
May
15,
2014
Submit
Sales
Forecast
for
Black
Friday
Event
Why
don’t
we
use
simulaHon…
9. WHY
SIMULATION?
What
will
Black
Friday
sales
volume
be?
$5.5
B
80%
Confidence
Level
$8.2
B
$3.9
B
Which
es?mate
do
we
use?
(6
months
from
now….)
POINT
ESTIMATE
RANGE
trying
to
hold
people
accountable?
establishing
a
budget?
defending
an
audit
of
how
it
was
generated?
Leadership
does
not
have
permission
to
be
uncertain!
10. 10
“If
a
man
will
begin
in
certain1es
he
shall
end
in
doubts;
but
if
he
will
be
content
to
begin
in
doubts
he
shall
end
in
certain1es.”
-‐Sir
Francis
Bacon
11. Es?mate
$5.5
B
Combine
a
point
esHmate
with
a
likelihood
esHmate
Chance
of
Missing
|
35%
WHY
SIMULATION?
What
will
Black
Friday
sales
volume
be?
12. ASK
YOURSELF…
MENTAL
BREAK
Blackjack
Dealer
HIT
70%
of
busHng
Stay
65%
of
busHng
14. CORE
CONCEPT
Uncertainty
<>
Risk
UNCERTAINTY
does
not
equal
RISK.
By
recognizing
uncertainty
exists
and
by
modeling
uncertainty
(simula8on),
you
know
enable
decision
makers
to
bejer
manage
RISK.
15. Es?mate
$5.5
B
Chance
of
Missing
|
35%
WHY
SIMULATION?
Combine
a
point
esHmate
with
a
likelihood
esHmate
$3.9B
$5.5B
$8.2B
10%
35%
90%
Black
Friday
Sales
Forecast
16. 16
What-‐If
Analysis
on
Steroids
*With
beneficial
side
effects
What-‐If
What
Utilization
Rate
should
we
maintain
to
maximize
profit?
Profit
per
Unit: 10.00$
Missed
Order
Cost (5.00)$
Plant
Capacity: 100
Utilization
Rate: 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Units
Produced -‐
10
20
30
40
50
60
70
80
90
100
Product
Profit -‐$
100$
200$
300$
400$
500$
600$
700$
800$
900$
1,000$
Cost
of
Missed
Orders -‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
-‐$
Profit -‐$
100$
200$
300$
400$
500$
600$
700$
800$
900$
1,000$
Input
Variable
TradiHonal
What-‐If
SimulaHon
75%
chance
producHon
will
be
less
than
100
units.
17. in/drewpulvermacher
REAL WORLD RISKS
Pa?ent
Flow
Mee?ng
an
Order
Due
Date
Tampering
with
a
Stable
Process
Modeling
Customer
Loyalty
Long-‐Term
Value
of
a
Customer
Reducing
Churn
Inventory
Modeling
Es?ma?ng
Dynamic
Market
Share
Warranty
Costs
for
a
Product
When
would
you
use
SimulaHon
Modeling…
Corporate
FP&A
26. 26
26
SimulaHon
Modeling:
TODAY
Building Risk Management at Lego
August 5, 2013
Today,
the
sophis?ca?on
of
LEGO’s
Enterprise
Risk
Management
(ERM)
framework
is
widely
recognized.
It
is
one
of
the
foremost
companies
to
use
Monte
Carlo
simula?on
to
quan?fy
risk
and
present
key
risk
informa?on
to
its
board
of
directors
for
decision-‐making
purposes.
This
gives
the
company
a
true
understanding
of
the
vola?lity
that
it
believes
is
inherent
in
its
ac?vi?es,
in
order
that
it
can
act
to
pre-‐empt
it.
27. in/drewpulvermacher
YOU CAN DO THIS
& PerformanceG2 WILL HELP
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Trees
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