principles for risk and uncertainty analysis and management, in a production assurance setting roger...
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Principles for risk and uncertainty analysis and management, in a production assurance setting
Roger Flage
PhD student on the RAMONA project(research tasks 1 and 4)
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Basis for this presentation
Aven, T. & Flage, R.Use of decision criteria based on expected values to support decision-making in a production assurance and safety setting.Reliability Engineering and System Safety, to appear.
Flage, R. & Aven, T.On treatment of uncertainty in system planning.Reliability Engieering and System Safety, to appear.
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Expected value decision criteria
How should we use the E[NPV] approach, with adjustments, in the decision-making process?
NPV Net Present Value
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The E[NPV]
T
tt
t
t
r
YENPVE
0 )1(
][][
Expected cash flow at year t
= E[Bt] – E[Ct]
Analysis period
Discount rate at year t
Bt benefits (revenues) at year tCt costs at year t
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Uncertainty reduction in system planning
Should we use predefined uncertainty interval categories to direct uncertainty reduction processes?
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Uncertainty reduction structure Prediction interval categories
Feasibility phase Concept development phase
Engineering phase
E1[Y] ± 40%
Y
± 30%± 20%
E2[Y]E3[Y]
Y Performance measure (e.g production downtime)
1%100qEYYP
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Uncertainty reduction structure Prediction interval categories
Feasibility phase Concept development phase
Engineering phase
E1[Y] ± 40%
Y
± 30%± 20%
E2[Y]E3[Y]
Y Performance measure (e.g production downtime)
1%100qEYYP
Use with care
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Some E[NPV] adjustments
TSNPVE S ,][ 0
][1.1][9.0][ ttt CEBEYE
0][ vNPVE
)][(][ fmifi rrErrE
6][ BCE
• Risk-adjusted discount rate
• Downward revision of benefits,upward revision of costs
• Safety margin
• Negative safety margin
• Cut-off periods
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Some E[NPV] adjustments
TSNPVE S ,][ 0
][1.1][9.0][ ttt CEBEYE
0][ vNPVE
)][(][ fmifi rrErrE
6][ BCE
• Risk-adjusted discount rate
• Downward revision of benefits,upward revision of costs
• Safety margin
• Negative safety margin
• Cut-off periods
Considerable arbitrariness
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Wrong assumptions
• All aspects of risk and uncertainty have been taken into account in the formulae
• There is no need for seeing beyond the formulae
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The main problem
Risk and uncertainties are represented by probabilities, but probabilities are not perfect tools for expressing risks and uncertainties.
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Decision situations
1. Known, “objective” probability distributions can be established
2. More or less complete ignorance
3. A situation between the two extremes 1) and 2)
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Approaches to arriving at a good decision
Decision criterion Decision
Analyses Managerial reviewand judgement
Decision
Basis for the analysesOther concerns
Analyses
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Uncertainty reduction in system planning
Should we use predefined uncertainty interval categories to direct uncertainty reduction processes?
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Uncertainty reduction structure Prediction interval categories
Feasibility phase Concept development phase
Engineering phase
E1[Y] ± 40%
Y
± 30%± 20%
E2[Y]E3[Y]
Y Performance measure (e.g production downtime)
1%100qEYYP
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Uncertainty reduction structure Prediction interval categories
Feasibility phase Concept development phase
Engineering phase
E1[Y] ± 40%
Y
± 30%± 20%
E2[Y]E3[Y]
Y Performance measure (e.g production downtime)
1%100qEYYP
Use with care
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Structural levels and planning guidance
Structural level
Plant or system
System
Subsystem, equipment and component
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Structural levels and planning guidance
Structural level Form of planning guidance
Plant or system Overall ideal goals
System Requirements related to expected performance
Requirements related to uncertainty about performance
Specifications related to design or operation
Subsystem, equipment and component
Requirements related to expected performance
Requirements related to uncertainty about performance
Specifications related to design or operation
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Structural levels and planning guidance
Structural level Form of planning guidance Specific examples and examples of attributes
Plant or system Overall ideal goals “No production losses”
System Requirements related to expected performance
Throughput availabilityDemand availability
Requirements related to uncertainty about performance
Prediction interval limitsLimit for variance of lost throughput
Specifications related to design or operation
CapacitySize and weightOperating temperature rangeMaintenance- Spare part needs- Manpower needs
Subsystem, equipment and component
Requirements related to expected performance
Mean time to failure (MTTF)Mean time to repair (MTTR)
Requirements related to uncertainty about performance
Reliability/availability at a specified time
Specifications related to design or operation
CapacitySize and weight…
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Structural levels and planning guidance
Structural level Form of planning guidance Specific examples and examples of attributes
Plant or system Overall ideal goals “No production losses”
System Requirements related to expected performance
Throughput availabilityDemand availability
Requirements related to uncertainty about performance
Prediction interval limitsLimit for variance of lost throughput
Specifications related to design or operation
CapacitySize and weightOperating temperature rangeMaintenance- Spare part needs- Manpower needs
Subsystem, equipment and component
Requirements related to expected performance
Mean time to failure (MTTF)Mean time to repair (MTTR)
Requirements related to uncertainty about performance
Reliability/availability at a specified time
Specifications related to design or operation
CapacitySize and weight…
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Structural levels and planning guidance
Structural level Form of planning guidance Specific examples and examples of attributes“No production losses”Throughput availabilityDemand availabilityPrediction interval limitsLimit for variance of lost throughputCapacitySize and weightOperating temperature rangeMaintenance- Spare part needs- Manpower needsMean time to failure (MTTF)Mean time to repair (MTTR)Reliability/availability at a specified timeCapacitySize and weight…
Plant or system Overall ideal goals
System Requirements related to expected performance
Requirements related to uncertainty about performance
Specifications related to design or operation
Subsystem, equipment and component
Requirements related to expected performance
Requirements related to uncertainty about performance
Specifications related to design or operation
Avoid unless a rationalecan be given
May be stated whenlevel of detail inplanning becomes high
Do not treat asabsolute limits
“Optimisation”(in a broad sense)
Feasib
ility a
nd
con
cep
td
evelo
pm
en
t ph
ase
sEn
gin
eerin
gp
hase
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Conclusions
• Be careful in using adjustments of expected values to reflect risk and uncertainties
• Use predefined uncertainty interval categories with care
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Situation 1Known, “objective” probability distributions can be established
Net benefit 0 1 10
Probability 0.90 0.09 0.1 E[NPV] = 0.09
Net benefit -1000 0 1 10
Probability 0.00001 0.90 0.09 0.1E[NPV] = 0.09
+ safety concerns
+ environmental issues
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Situation 2More or less complete ignorance
Net benefit -108 0 100 108
Probability 0.25 0.25 0.25 0.25E[NPV] = 25
1. E[NPV] poor prediction consider distribution
2. Poor basis for probabilities (knowledge based)
3. Even more extreme outcomes could occur
4. Uncertainties related to non-economic outcome dimensions• e.g. health problems for workers in 20-30 years
Little is gained by introducing a specific formulareflecting uncertainty and risk aversion
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Situation 3A situation between the two extremes (1) and (2)
How much weight to give to risk and uncertainties?
• The company’s attitude towards risk and uncertainty• The frame conditions, for example defined through taxes, regulations etc.• Compensation schemes (monetary or in kind)• Insurance and liability• Sustainability. Does the project assist in sustaining vital ecological functions,
economic prosperity and social cohesion?• Ethical concerns, for example related to equity and fairness• Political concerns…
A balanced perspective is required