HOW TO USE QUANTITATIVE RISK ANALYSIS? A DETAILED GUIDE
Risk analysis is the process of analysing and identifying potential issues that may or may not have any negative effect on the progress of a company. Companies use this process to take initiatives to avoid and mitigate the risks. It is not only important but vital for companies to assess the risk and sort out the most suitable strategies to reduce the adverse effects of an upcoming event. Broadly, you can conduct risk analysis in two ways: qualitative as well as quantitative risk analysis.
Qualitative risk analysis measures threats and estimates the likelihood of an event occurring. In contrast, quantitative analysis assigns numerical values to risks by taking into consideration the quantifiable data. This article will only focus on the quantitative risk analysis for assessing the future threats or minimising the adverse effect of an upcoming event.
Quantitative risk analysis- A brief introduction:
By definition, quantitative risk analysis is the process of numerically investigating the overall effect of identified single project risk. It is an evidence-based analysis that quantifies the quantifiable data, such as logistics, costs, staff sick days, and completion time.
It aims for a high-level assessment of risk factors; thus, often performed after a qualitative risk analysis. It is a more reliable approach than qualitative risk assessment as it allows stakeholders to make decisions more easily.
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Different methods of quantitative risk analysis:
The term quantitative risk analysis not only refers to one specific research method; rather, it is a category of analysis style. You can choose any method that can bring you closer to your destination. The first step must be to select the right method of quantitative risk assessment.
1- Expected monetary value (EMV) risk analysis:
It is the simplest form of quantitative risk analysis. To perform this analysis, you must have an expected cost of a risk and the probability of that risk. The number of the data analysis process, advice of experts, and personal experiences matter a lot in this method.
2-Monte Carlo Risk Analysis:
It creates a range of potential outcomes; thus, it is the most useful method if you have to make decisions related to the project duration or yield production. Here, the highest probability is assigned to the outcome that one expects to occur shortly.
3-Decision Tree Risk Analysis:
This method helps analysts to make decisions if a number of options are available. The number of trees in this analysis are equal to the number of options available and their associated cost. Thus, by following a chain and summing all the costs, you can select the option with the lowest risk.
4 -Three Point Risk Analysis:
This method is useful for the type of risk analysis that aims to determine the expected cost of a risk in a proposed project. The estimation of the most optimistic cost, likely cost, and the most pessimistic cost are three main steps of this type of analysis.
To make a triangle, you just need to add three values and divide them by three. In this way, you can calculate the risk analysis by measuring three main points.
5-Sensitive Risk Analysis:
When we talk about the estimation of uncertainty, sensitive risk analysis is the most appropriate method to achieve the aim. Sensitive risk analysis identifies which point or risk factors are the highest contributor to uncertainty.
By identifying sensitive components, this method allows us to calculate uncertainties and make risk estimation more accurate.
After selecting the most appropriate method of risk analysis, you can follow some important steps that are more or less similar in all types of quantitative risk analysis.
Steps to perform quantitative risk analysis:
Regardless of the type of business, you are holding on to, quantitative risk analysis can help you better assess the circumstances and risks associated with it. By following these simple steps, you can calculate all potential risks to your business.
1- Find the areas of uncertainty:
No matter what type of analysis you select for risk analysis, overlooking potential areas of risk and uncertainty is not recommended. To find the areas of uncertainty, you must know all steps or phases of a project. It allows you to list down all potential risks at each phase and move on to the next step.
2-Calculate the cost of each risk factor:
Step one ends by giving us a list of all potential risks associated with a project. At this step, you must have to calculate the cost of each risk. Variable cost estimation is a difficult process; thus, you can also calculate the average cost for each risk, which is a relatively easy process.
3- Measure the probability of each risk:
Step number three in the quantitative risk analysis is the estimation of the probability of a chance to occur. The two most important elements that allow you to determine probability are research and experience.
The better you get command of these steps, the greater will be the chances of getting more accurate probability results.
4-Quantify the expected cost of each potential risk:
After finding the probability, here again, you need to find the expected cost of the potential risk you identify by calculating probability.
It is as easy as calculating the estimated cost of each error by taking into account its probability.
5- Make a decision based on this assessment:
Last but not least is to make decisions based on the assessment. You can search for different policies and methods to reduce and eradicate the potential risks related to a project.
All in all, quantitative risk analysis is important to get ready for all types of situations that a company may have to face on taking new initiatives. It allows stakeholders to make informed decisions. There are five main types of analysis under the umbrella of quantitative risk assessment:
1) Expected monetary value (EMV) Risk Analysis, 2) Monte Carlo Risk Analysis,3) Decision Tree Risk Analysis,4) Three Point Risk Analysis,5) Sensitive Risk Analysis.On the same ground, to use any of these types of analysis, you can follow the steps described in detail. As a final note, quantitative risk analysis allows you to follow a series of steps to better interpret the situation to make a decision having sustainable benefits for a business.