What are the nature and sources of risks in projects? What are the nature and purpose of risk assessment? How can firms choose risk mitigation strategies? What is the relation between risk assessment for projects and the most effective risk mitigation strategies? How do firms reach forecasted financial targets through quality management and statistical methods? The answers to these questions are critical to effective formulating and executing a successful risk mitigation strategy that equates marginal cost to marginal benefit of risk reduction. Additionally, optimal risk mitigation strategy reduces the known probability and incidence of risks associated with projects and increases the profit producing capacity of the company.
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This article will analyze the most current and relevant research in the field of effective project risk assessment, and optimal mitigation strategies. Each risk mitigation strategy comes with its own set of costs and advantages. The objective function of risk mitigation strategies is to maximize the net benefits they bring. In practice, the optimal risk mitigation strategy equates marginal cost with marginal benefits of risk mitigation by minimizing the impact of project risks while increasing the capacity to generate profit for the enterprise. Project risk measured by the standard deviation of the project is the weighted mean of possible deviations from the anticipated value (mean). The standard deviation for a project is the likelihood that an unpredicted situation or event could negatively affect the project, and prevent it from being completed in the manner it was planned.
Project risks, such as financial risk, are based on a weighted average , or a the possibility of variations from the expected outcomes. This is based upon historical data. Therefore, companies must be aware of the causes and nature of variations to formulate effective risks mitigation strategies consistent with the profile of the firm which will allow it to achieve forecasted financial targets through quality control and statistical strategies.
Certain risks in projects aren’t adverse. Certain risks, such as new approaches or methods to complete an activity or favorable circumstances like lower costs on certain products, can help reduce risk and help facilitate project completion. Positive circumstances and events are referred to as opportunities, but they must remain project risks that could lead to deviations (mean)
Some Operational Directions
Certain risks in projects cannot be effectively mitigated. In order to develop and implement efficient strategies to mitigate risk in projects, firms must develop a culture of analysis and continual improvement. Companies can’t implement or manage what isn’t understood. They also cannot determine and analyze what they don’t know. Also, they don’t discern what they believe. Therefore, companies must constantly examine what they anticipate through the development and implementation of a robust assessment model that guides the gathering and analyzing relevant reliable and up-to-date data.
Variation sources and types
In the field, the identification of variation sources for projects is crucial for quality improvement. A variety of methods for identifying source of variation are based on the linear fault model. This is a type of model that shows the relationship between the quality of products and process flaws is linear. In actual practice, a lot of quality measurements are nonlinearly related to process faults. The most important aspect of process characterization is to determine and quantify various kinds of sources of variations to ensure that they are minimized.
Furthermore, the capability to identify and reduce the variance in the process provides firms with an advantage in the market, allowing them to provide top-quality products to their clients on the international market and also to meet forecasted financial goals through quality management and statistical strategies. Traditional quality control relies on statistical process control (SPC) to detect variations and anomalies in product and process measurements. This method of quality control does not give specific operational guidelines for identifying the sources of variation, which is a critical step toward variation reduction and the risk mitigation strategies for derivative projects.
Furthermore, the availability of project and process assessment information as well as the criticality of problems caused by process and project variations led to the development of innovative methodologies for identifying the sources of variation. If the variation is due to common causes the process is control-stable and therefore reliable. That means that, by analyzing the patterns of operation firms can forecast what it will do in the near future, i.e. always within control limits. In the case of special causes-exceptional variation, the process is not controlled, unstable and therefore unpredictable. Also basing its decisions on the current pattern, a firm is not able to predict how the process will operate in the future.
There are numerous sources of variation, but also various types. Common cause variation refers back to random variability inherent in the process. Special causes or assignable reasons for variations are primarily due to particular circumstances. The two types variation are controlled variation and uncontrolled variation. Controlled variation is defined by a steady and predictable pattern of change over time. This kind of variation is random and exhibits a steady degree of fluctuation. Uncontrolled variation can be described as a pattern of variation that is able to change over time and can be unpredictable.
The concept of controlled/uncontrolled variation is critical in determining if a process is stable and in control. If a procedure is running with consistency and predictability way, it’s considered stable and under control. This means that the average process value is consistent, and the variance is controlled. If the variation is uncontrolled-process is not under control, either the expected value of the process (mean) isn’t uniform or the variation in the process changes or both.
Risk Assessment and Mitigation Strategies
In real life managing risks in projects is a method that incorporates risk assessment and mitigation plan for identifiable and predictable risks. The risk assessment process for a project involves both the identification and evaluation of potential risks that are based on probabilities. Risk mitigation strategies aim to reduce or eliminate negative or adverse effects of risk events. The process of identifying risk is method of thinking that is both creative and systematic. Innovative thinking requires constantly seeking out new ideas and identifying creative solutions to problems. And systems approach entails capability to anticipate and comprehend the consequences of risks associated with projects and mitigation strategies across the entire organization.
There is evidence from studies in the academic literature that suggest that companies should strive to eliminate, minimize, or minimize uncontrolled variation during process characterisation. Risks are still unknown at the planning stage because they haven’t yet occurred. However, the firm must eventually deal with a few of the expected risks. There are four fundamental strategies for managing project risks:
1. Risk Prevention: The most effective option for a company to do to reduce the risk of a project is to avoid it. If a company can stop risks from occurring and it does not negatively impact the project. One of the most efficient ways to minimize risk in a project is to simply walk away, however this might not be a viable alternative. Most risk-reducing techniques rely on tried and tested methods, but not using innovative methods. However, new methods can have better outcomes. Risk avoidance is usually efficient, but it is not always practical.
2. Risk Reduction: In the event that a firm can’t avoid risk, it is able to mitigate or minimize the impact. This means taking some actions that reduce the risk of damage to the project. The best practices in the industry include the effective utilization of management information systems, earlier detection systems , and warning systems.
3. Risk Transfer One of the most effective ways to handle a project risk is to make a payment to a third party to accept the risk. The most commonly used method to accomplish this is with insurance or reinsurance.
4. Risk sharing: This involves partnering with other firms to share responsibility for dangerous activities. When the other firm has the expertise and unique capabilities to take on the project’s risks it’s a great idea to collaborate with them.
5. Risk retention refers to the deliberate assumption of risk by a company. If a business is not able to eliminate or reduce, transfer or transfer project risk, it must retain/accept certain or all of the risk. The most commonly used method to accomplish this is via self-insurance, co-payments or deductibles.
In the end it is true that there are always benefits and costs in every business decision and strategy. Companies must weigh the advantages and costs of mitigation strategies and assess risk-based projects to determine if the advantages outweigh the risks. The best mitigation strategy is one that equates marginal cost to marginal benefit in a ceteris paribus manner.