CHAPTER 6, Practice Problems 1 – 4, 6 Solutions

Problem 1: Top administrators in a university hospital have approved a project to

improve the efficiency of the pharmaceutical services department by the end of the fiscal
year to satisfy new state regulations for the coming year. However, they are concerned
about four potential threats: (1) The cost to implement the changes may be excessive, (2)
The pharmacists may resist the changes, (3) The project may run much longer than
expected and not be ready for the coming fiscal year, (4) The changes might reduce the
quality of drug care in the hospital. The likelihood and negative impact of each threat
have been solicited from the managers by a three-round Delphi process and are as
follows, based on a seven-point scale where seven is the most likely and most negative
impact:

Construct a risk matrix and identify what you would consider to be the “critical,”
“monitor,” and “ignore” threats. Explain your reasoning. Recommend and justify a risk
response for each threat.

6
Threat 2
Problem 1:Problem 1:Probability

5
Threat 1

4
Threat 4

3
Threat 3

1 2 3 4 5 6 7

Impact
Legend:

Critical
Monitor
Ignore

Threat 1: The threat of costs being excessive could occur. Actually, the probability is somewhat
high. This can be transferred to an outsourcing provider to help reduce this threat.

Threat 2: The likelihood of the users resisting changes could cause major problems. This is
somewhat likely to happen, but can be avoided if they are given an alternative and consulted in
advance.
Threat 3: The project may run longer than expected. This isn’t highly likely, but this can be
transferred by outsourcing the project.

Threat 4: The changes may reduce the quality of care in the hospital. The probability is
satisfactory because the improvements brought about by the new system may not be
significant. If the quality decreases, the impact could be fairly significant, thus the hospital may
need to mitigate this threat by including more users in the planning.

Problem 2: The project manager for the project in Problem 1 has estimated the
probabilities of not detecting the risks in time to react to them as follows, again on a
seven-point scale: Threat 1: 4, Threat 2: 1, Threat 3: 3, Threat 4: 6. Construct a FMEA
table to determine which risks are now the “critical,” “monitor,” and “ignore” threats.
How have they changed from Problem 1? Why? Does this new ranking seem more
realistic?

Threat Severity Likelihood Inability to detect RPN

#1 3 5 4 60
#2 5 6 1 30
#3 4 3 3 36
#4 7 4 6 168

The main thing that changes when using this approach is that threat #2 drops significantly from
“critical” to possibly “ignore.” This is mostly due to the lack of inability to detect. Threat #2 is
somewhat severe and the likelihood is great, but since the threat is relatively easy to detect, it
can be mitigated early and possibly even removed. Thus, this is a much more realistic
evaluation of the threats than just creating a risk matrix.

Problem 3: You might not have realized it, but getting a college degree is a project.
Assume you are in a degree program in college and are concerned about getting your
degree. Create a fishbone (cause–effect) diagram, with “failure to get degree” as the
problem outcome. Identify at least four possible threat risks for this problem to occur.
Then for each threat list at least three reasons/factors for how that threat could
conceivably come to pass. Finally, review your diagram to estimate probabilities and
impacts of each threat to getting your degree. Based on this analysis, what threats and
factors should you direct your attention to, as the project manager of your project to get
your degree.
Problem 4: The yearly demand for a seasonal, profitable item follows the distribution
below:

A manufacturer is considering launching a project to produce this item and could

produce it by one of three methods:

a. Use existing tools at a cost of $6 per unit.

b. Buy cheap, special equipment for $1,000. The value of the equipment at the end of
the year (salvage value) is zero. The cost would be reduced to $3 per unit.

c. Buy high-quality, special equipment for $10,000 that can be depreciated over four
years (one fourth of the cost each year). The cost with this equipment would be only $2
per unit.

Set up this project as a decision tree to find whether the manufacturer should approve
this project, and if so, which method of production to use to maximize profit. Hint:
Compare total annual costs. Assume production must meet all demand; each unit
demanded and sold means more profit.
 p = .20 $1,200

p = .30 $3,600
p = .40
$7,200
p = .10
$2,400
$14,400

Existing tools

$800
p = .20

p = .30 $2,100
Cheap equipment
p = .40 $4,000
p = .10
$1,300
$8,200

High-quality equipment

$900
p = .20
$1,950
p = .30
p = .40 $3,400
p = .10
$1,050
$7,300

Based on the analysis, the manufacturer should approve the purchase of the high-quality,
special equipment for $10,000. As a result, significant savings should occur.
Problem 6: Medidata Inc. has identified three risk opportunities for their new
medical database project. One is an opportunity to extend the database to include
doctors as well as hospitals. This has a probability of a 3 and an impact on their
profitability of a 3 on a 1–5 scale, where higher numbers are greater values of
probability and profitability. Another is the opportunity to extend the database to
other countries, particularly in Europe. For this, the probability is ranked only a 2
but the profitability impact is considered to be 4 due to the higher social interest
by European governments. Last, they might be able to interest nonusers such as
pharmaceutical firms in using, or perhaps buying, their data. Here the probability
is more certain, a 4, but the profitability would be only a 2. Construct an
opportunity risk matrix, identify the “critical,” “monitor,” and “ignore”
opportunities, and recommend risk responses for each opportunity.

P 5
r
o 4
3
b
a 3
1
b
i 2
2
l
i 1
t
y
1 2 3 4 5

Impact
Legend:

Critical
Monitor
Ignore

Opportunity 1:

You could “accept” this risk and enjoy the benefits derived from it. To increase the potential for
more impact, you could enhance the risk by providing more training.

Opportunity 2:

You could “accept” this risk and enjoy the benefits derived from it. To increase the potential for
more impact, you could further exploit the database.

Opportunity 3:

You could “accept” this risk and enjoy the benefits derived from it. To increase the potential for
more impact, you could share the data by increasing sales.