service sensitive anaylasis is a subset of formulating logistical strategy
Answers
One simple example of sensitivity analysis used in business is an analysis of the effect of including a certain piece of information in a company's advertising, comparing sales results from ads that differ only in whether or not they include the specific piece of information.
Explanation:
What is Sensitivity Analysis?
The technique used to determine how independent variable values will impact a particular dependent variable under a given set of assumptions is defined as sensitive analysis. It’s usage will depend on one or more input variables within the specific boundaries, such as the effect that changes in interest rates will have on a bond’s price.
It is also known as the what – if analysis. Sensitivity analysis can be used for any activity or system. All from planning a family vacation with the variables in mind to the decisions at corporate levels can be done through sensitivity analysis.
Sensitivity analysis works on the simple principle: Change the model and observe the behavior.
The parameters that one needs to note while doing the above are:
A) Experimental design: It includes combination of parameters that are to be varied. This includes a check on which and how many parameters need to vary at a given point in time, assigning values (maximum and minimum levels) before the experiment, study the correlations: positive or negative and accordingly assign values for the combination.
B) What tfo vary:The different parameters that can be chosen to vary in the model could be:
a) the number of activities
b) the objective in relation to the risk assumed and the profits expected
c) technical parameters
d) number of constraints and its limits
C) What to observe:
a) the value of the objective as per the strategy
b) value of the decision variables
c) value of the objective function between two strategies adopted
Measurement of sensitivity analysis
Below are mentioned the steps used to conduct sensitivity analysis:
Firstly the base case output is defined; say the NPV at a particular base case input value (V1) for which the sensitivity is to be measured. All the other inputs of the model are kept constant.
Then the value of the output at a new value of the input (V2) while keeping other inputs constant is calculated.
Find the percentage change in the output and the percentage change in the input.
The sensitivity is calculated by dividing the percentage change in output by the percentage change in input.
This process of testing sensitivity for another input (say cash flows growth rate) while keeping the rest of inputs constant is repeated until the sensitivity figure for each of the inputs is obtained. The conclusion would be that the higher the sensitivity figure, the more sensitive the output is to any change in that input and vice versa.
Methods of Sensitivity Analysis
There are different methods to carry out the sensitivity analysis:
Modeling and simulation techniques
Scenario management tools through Microsoft excel
There are mainly two approaches to analyzing sensitivity:
Local Sensitivity Analysis
Global Sensitivity Analysis
Local sensitivity analysis is derivative based (numerical or analytical). The term local indicates that the derivatives are taken at a single point. This method is apt for simple cost functions, but not feasible for complex models, like models with discontinuities do not always have derivatives.
Mathematically, the sensitivity of the cost function with respect to certain parameters is equal to the partial derivative of the cost function with respect to those parameters.
Local sensitivity analysis is a one-at-a-time (OAT) technique that analyzes the impact of one parameter on the cost function at a time, keeping the other parameters fixed.
Global sensitivity analysis is the second approach to sensitivity analysis, often implemented using Monte Carlo techniques. This approach uses a global set of samples to explore the design space.
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