Analysis of Project Management

Business (Project Management) Make vs. Buy Decision Tree Analysis A great deal of the process and practice of risk management encompasses delving into the future, making an attempt to comprehend what might take place and whether it is of significance. The decision tree analysis is incorporated and contained within the PMBOK® Guide as one of the methods of project management and quantitative risk analysis (Hutlett, n.d).

In definition, a decision tree is a graphical demonstration of conceivable resolutions to a decision centered on a number of particular situations and circumstance. It is termed a decision tree as it commences with a single root, which thereafter diverges and divides into a number of resolutions, similar to the way a tree has branches. There is great benefit and advantage that decision trees offer (Milosevic, 2003).

This is because not only are they beneficial graphics that facilitate in perceiving what one thinks, but also because forming a decision tree necessitates a methodical, acknowledged thought process (Goodpasture, 2004). Time and again, the major restraint of our decision making is that we can only choose from the acknowledged substitutes. Decision trees assist in formalizing and reinforcing the brainstorming procedure so we can ascertain more prospective resolutions (Goodpasture, 2004).

Risk is defined as an event that has a probability of occurring, and could have either a positive or negative impact to a project should that risk occur. Project risk is one of the hardest project components to plan for and the project contains significant risks as well as already being behind schedule (Project Management Institute, 2013). The main utility of decision trees is to consolidate the planning process of arriving at a decision.

Since at the beginning of a project, the risk variable is highest, all factors that might or might not occur need to be accounted for and provisions thereto made, keeping the actual financials in view. External risks that might occur by way of new taxation issues, the volatility of the currency value, and regulatory norms and statutes may arise at any stage of the project cycle. The internal risks are generally taken care of through fixed contract pricing to reduce the effect of variations.

The advantage of the project under consideration is that environmental issues, leanings towards newer (and latest and improved) technology and increased demand support the cause of product sales, making it easier to arrive at the financial decision. As a thumb rule, the way of arriving at the total cost of risk is by first ascertaining the cumulative sum of possibility of each potential risk and then adding all such individual factors, followed by multiplying this value with the consequences of the risk occurrences.

One important aspect while accounting for risks is to minimize the effect of any negative impact of a risk wherever applicable. This is achieved by maximizing the positive outcomes of any risk occurrence while in the planning stage. The strategy used for diluting the negative impacts and extracting the maximum out of any risk is to identify risks, monitor new risks, and go through the cycle of improving the positives continually throughout the project cycle. Such strategizing is then called Control Risks.

By taking pre-emptive steps at the beginning of the project cycle to evaluate, identify and mitigate or maximize positives, the successful implementation of a project can be planned. The decision tree provides a simplified way of accumulating all such factors and arriving at the pragmatic decision regarding a project, thereby choosing the logical path of implementing the project. (PMBOK 5) In this particular case, the decision tree is purposed to make a make or buy decision.

The project manager has to make a decision as to whether to invest and buy the soaps or invest and manufacture the soaps by the company itself. Specifically stated, a decision is being made whether to invest $1,568,000 in the manufacturing process of the soaps or simply invest in $608,000 to purchase the soaps from a different supplier and sell them. In the decision to manufacture the soap, there is also the decision making as to whether to accelerate the process or continue with the timeline that was already set.

For either of these decisions, the demand is in fact uncertain and as a result has to be taken into account. For example, with respect to these two decisions, strong demand requires an investment of about $2,200,000 for accelerating the manufacturing process while sticking to the initially set schedule has a strong demand that leads to $1,200,000. This is largely because of lack of maximization and utilization of the capacity within the company and also making the most of the demand that is there.

At the end of every branch within the decision tree, the diagram illustrates the net effect of the payoffs with the costs having been subtracted. In addition, for each and every decision branch, the determination of the general Expected Monetary Value (EMV) of the decision to be made is undertaken (Project Management Institute, 2013). In this particular make or buy decision tree, it is the decision of manufacturing the soap that has the higher.