Decision & Risk Analysis for Industrial Biotechnology
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Transcript of Decision & Risk Analysis for Industrial Biotechnology
Engineering | Architecture | Design-Build | Surveying | Planning | Geospatial Solutions
Decision & Risk Analysis (D&RA)
For Industrial Biotechnology
Copyright © 2017 Merrick & Company - All rights reserved.
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What is D&RA?
Decision & Risk Analysis (D&RA) is a decision making tool
Screens a variety of options and bring greater clarity and value to each decision
Accounts for
Risk
Incomplete information
Complexity
Reveals where the really important uncertainties exist
Increases the rate at which valuable information is accrued
Industrial Biotechnology (IB) processes frequently use novel processes with high complexity and uncertainty. D&RA can mitigate and provide guidance throughout the design.
Copyright © 2017 Merrick & Company - All rights reserved.
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Uncertainty in Novel Processes
Uncertainty is a lack of information.
Risk is the potential impact of making decisions without that information.
The D&RA “tornado” diagram depicts uncertainties ranked by potential impact to the decision criteria.
The larger the range, the larger combined risk and potential upside.
Tornado diagrams determine which variables warrant special attention (risk management).
Copyright © 2017 Merrick & Company - All rights reserved.
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What Can D&RA Do For You
Use a consistent, established method of analysis to make better decisions.
Guide research and engineering, make better decisions sooner, identify and manage risk, boost project economics, see the big picture!
D&RA recognizes there are very few things we know for certain but we can be confident they will fall within a range.
Time
After D&RA
UsefulInformation
Uncertainty &Probability ofRisk
After D&RA
D&RA
Copyright © 2017 Merrick & Company - All rights reserved.
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D&RA Process Details
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Example: IB Technology Selection
What is the problem?
What are the issues that created this problem?
What are the distinct alternatives?
A typical IB process flow with unknowns:
Biosolids
Feedstock
Pretreatment
Technology?
Core
Process
Product
Co-Product
Waste
Processing?Waste
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Example: IB Technology Selection
Alternatives
Core Process will require one of three viable pretreatment technologies
FeedstockTechnology
A, B, or C
Core
Process
Product
Co-Product
Processing waste from Technology A, B, or C will
have different capital and operating requirements.
Technologies A, B, and C have different capital and
operating requirements to process Feedstock.
Waste Processing
A, B, or CWaste
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Framing
Define Objective
Determine the best Front-End Technology to integrate with the Core Process and determine the optimal plant size to use as the basis for the front end design package.
Major Constraints
Feedstock supply and product demand
Capital cost
Waste output (environmental regulations)
Decision Criteria
Choose the technology and plant size that provides the highest “expected” IRR that satisfies the model assumptions and major constraints.
Copyright © 2017 Merrick & Company - All rights reserved.
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Modeling
Determine the inputs to the financial model
Develop model of influence between the inputs
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Modeling
Use probability to define risks and ranges of uncertainty for all model inputs
10% probability (P10)
real value is less than P10
50% probability (P50)
real value is less than P50
real value is more than P50
90% probability (P90)
real value is less than P90
The P10/50/90 values are
based on data,
experience, and intuition
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.00 0.20 0.40 0.60 0.80 1.00
Pretreatment Conversion
Cumulative Probablity Curve
P10
P50
P90
0.09
0.27
0.52
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Analysis: What is a Tornado Diagram?
What happens if we change the value of one variable, but keep all others the same (at their P50 values)?
Pretreated Feed Recovered
Electricity Pricing
Product RecoveryEfficiency
Pretreatment Conversion
Total Installed Cost
Feedstock Pricing
Feedstock Composition
Product Pricing
20yr After-Tax NPV Millions
Low High
Default
Inverse
RelationshipP90
P90
Copyright © 2017 Merrick & Company - All rights reserved.
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Analysis: Monte Carlo
The diagram on the right shows a simple tree of possibilities
~ 3 iterations / 2 variables
Monte Carlo Analysis = generate a really big tree
~ 1000 iterations
IRR vs many variables
Probability Distributions
Pretreatment
Conversion = .09
Pretreatment
Conversion = .27
Pretreatment
Conversion = .52
Cap Cost = $10M
Cap Cost = $15M
Cap Cost = $30M
Cap Cost = $10M
Cap Cost = $15M
Cap Cost = $30M
Cap Cost = $10M
Cap Cost = $15M
Cap Cost = $30M
IRR = 6%
IRR = 3%
IRR = 1%
IRR = 17%
IRR = 12%
IRR = 8%
IRR = 32%
IRR = 24%
IRR = 15%
E[IRR] = 3.3%
E[IRR] = 12.3%
E[IRR] = 23.7%
IRR vs two variables
E[IRR] = A+B+C
3
A
B
C
E[IRR] = 13.1%
E[IRR] = Expected IRR = Probabilistically weighted average
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Make Decisions
We’ve made the decision to…
The major risks are…
How to manage these?
The major upsides are…
How to capitalize on these?
We should focus our efforts on…
Copyright © 2017 Merrick & Company - All rights reserved.
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View The World Differently
In summary, D&RA is a decision making tool that…
Is a consistent, established method of analysis
Comprehends risk, incomplete information and complexity
Provides better decisions and direction sooner
Provides in-depth understanding of the issues
Reveals what’s important
Aligns team around common goal(s)
Forces us to look at the world differently
“I would give my life for the simplicity on the other side of
complexity.”
– Oliver Wendell Holmes