Probabilistic simulation analysis of risk potential in cost management programs

ABSTRACT

Today's business leaders recognize that advanced decision making capabilities using simulation techniques can directly improve their organization's performance. In this case study, CGN will describe how we helped a large equipment manufacturer identify areas of potential risk within their portfolio of cost management initiatives for a new product line. In order to define the interdependencies between multiple cost initiatives, their relevant business processes and their subsequent business drivers, a sophisticated understanding of prevailing market conditions was necessary. The case study will explain how the simulation model was designed to analyze the variation of individual business drivers such as steel prices, currencies, labor rates, machine reliability etc., and then predict the potential for success or failure of the overall cost management program using probability distributions. Finally, the paper will demonstrate how intelligent input and output reports can provide a degree of scalability to such simulation models and thus, allow for incorporation of future initiatives.