Being able to make the right decisions about your products/services can have a major impact on the future of your organization. Having an organization that can make necessary adjustments before the impact is too great is a goal of most companies. Being able to gauge sensitivity across a great number of variables can help make this goal a reality. Analysis of sensitivity is a tool for management that is utilized in all types of fields. These include finance, manufacturing, engineering, biology, and more.
Overview: What is sensitivity?
Sensitivity can most easily be defined as the degree of impact that measurable changes in input variables have on the output.
5 benefits and 1 drawback of sensitivity
Analyzation of sensitivity can have a number of benefits as well as drawbacks:
Benefit 1: Forecasting
In the analysis of sensitivity, there is an in-depth look at independent and dependent variables. Their movements as well as their relationships and effects on each other are carefully examined. The cause and effect of these relationships being established can help with forecasting.
Benefit 2: Strengthening of weaknesses
By analyzing sensitivity across several variables, you can spot the variables that may exhibit weakness. Measures can then be taken to strengthen these weaknesses.
Benefit 3: An aid in making decisions
Sensitivity analysis provides you with important data that can aid in decision-making for your business.
Benefit 4: Quality
Sensitivity can have a major effect on quality improvement efforts. Finding those variables that have a major effect on outputs can lead to improvements in the quality of products for your customers.
Benefit 5: Resource Allocation
The analysis of sensitivity can sort out where strengths and weaknesses lie in an organization’s resources. This can be a vital tool in determining where to best focusing resource allocation.
Drawback 1: Primarily looks at variables individually
Analyzing sensitivity tends to look at variables individually and their effects on output, but could potentially miss how all aspects have effects on each other as a whole.
Why is sensitivity important to understand?
Sensitivity is important to understand for the following reasons:
A stable process
It is important to have an understanding of sensitivity so that you can determine how much of it is acceptable in your processes. Too much sensitivity can be an indicator of an unstable process.
Design issues
You should have a good understanding of sensitivity as it could be an indicator of flaws in the design that will need to be addressed and remedied.
A major factor early in the design process
Being able to determine the sensitivity to various factors early in the design process is a major factor in a project’s success. Catching sensitivity issues early can save a lot of time and money.
An industry example of sensitivity
An organization is considering an overhaul and remodel of its main manufacturing plant. It is expected that the entire project will take a total of three months. There is some concern among stakeholders as to if this will have too big of an effect on the profitability of the company for the year. A financial analyst is brought on to determine the sensitivity of the remodeling to the company’s yearly profit.
3 best practices when thinking about sensitivity
Here are some practices to keep in mind when thinking about sensitivity:
1. Use with other tools
While analyzing sensitivity is an extremely useful tool, it should generally not be solely relied upon. It is best served when used with other measurement tools.
2. Be sure the data you are working off of is correct
Sensitivity analysis is based on data and the assumptions of management. If this information is faulty, your analysis of the sensitivity will also be faulty.
3. Make sensitivity an early factor
Gauging sensitivity should be an early part of the process.
Frequently Asked Questions (FAQ) about sensitivity
Why is the analysis of sensitivity necessary?
It is crucial to sound decision-making.
What are some other names for sensitivity analysis?
It can also be known as stress testing and what-if analysis.
What is the main goal of analyzing sensitivity?
It helps organizations determine where vulnerabilities exist.
What is the difference between sensitivity analysis and scenario analysis?
Scenario analysis focuses on what scenarios are the most advantageous or the most detrimental. In contrast, sensitivity analysis studies how sensitive different scenarios are to modifications in input variables.
Sensitivity and its Impact on Decision-Making
Being able to properly analyze sensitivity is crucial to making the right decisions for an organization. Being able to catch potential issues early is extremely important, and therefore, understanding how to gauge sensitivity should not be overlooked.
