LAI Paper Series: “Lean Product Development for Practitioners”: Risk Management in Lean PD
Author(s)Oehmen, Josef; Rebentisch, Eric
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The two core challenges of risk management are finding the optimum balance a) between the cost of carrying risks vs. the cost of mitigating risks and b) between a risk that is taken with a certain development project and the return that is expected from the project. A complete absence of risk management will minimize the cost of risk mitigation measures – no backup development capacity, no review meetings, no quality control incur no direct cost. However, the project becomes very vulnerable towards uncertainties: If a development task turns out to be more complex than previously anticipated and no backup capacity can be brought to bear, the entire project might be delayed and cost incurred through idle capacities, penalty payments towards the customer for delays or opportunity cost for lost customers and market share. The same may happen for less-than-perfect coordination between different engineers and departments, or erroneous designs that would otherwise have been uncovered in review meetings or quality checks. On the other hand, excess backup capacity, reviews and quality controls bind more resources and cost more money than they save. Good risk management helps to strike the right balance between minimizing risk and the cost of doing so. After minimizing the overall risk as much as is sensible, the question remains what the right level of risk is that is still acceptable for a project to be attractive. While the goal for every single project is to minimize its overall risk, projects are in general exposed to different levels of uncertainty: Some might involve more innovative technologies or technologies that the company is not familiar with; some might address new markets where the exact customer requirements are unclear; and others might just be a lot bigger than usual and therefore have a much more significant impact if they fail. The goal is to find projects that have the right balance of risk and return, as would be the case with any other investments (e.g. a portfolio of stocks and bonds).
risk management, carrying risks, mitigating risks, lean, product development, risk
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