Application of Analytic Hierarchy Process (AHP) in shipyard project investment Risk Recognition[1]
Application du Procèssus hiérarchique analytique (PHA) dans l’identification des risques de l'investissement dans un projet de chantier naval
YAO Hui-li[2]
LIAN Chun-guang[3]
LIN Shi-zhong[4]
BAI Jing-xian[5]
SUN Hong-xia[6]
Abstract: Risk Recognition
is an important part in shipyard project risk management. The purpose of this
paper is to explain how to identify risks by means of AHP. Firstly, we analyzed
briefly the superiority of AHP in shipyard project risk Recognition; secondly, expounded the basic steps of risk Recognition
based on AHP in shipyard project investment; then we proposed the principle and
tips of applying AHP in identifying project risks by demonstrating a case of shipbuilding
base. To prove the validity of AHP, we have identified the risk factors of the Shipyard
project that mentioned in the case above, and have also calculated the
influence weights taxis of dominating risk factors to the general risk.
Key
words: Shipyard
Project Investment; AHP; Risk Recognition; Risk Factors
Résumé: L’identification des risques est un élément important de la gestion des risques dans un projet de chantier naval. Le but de ce document est d'expliquer comment identifier les risques en utilisant les techniques du PHA. Tout d'abord, nous avons analysé brièvement la supériorité de du PHA dans l’identification des risques d’un projet de chantier naval, ensuite, expliqué les étapes de base de l’identification des risques fondée sur PHA dans l’investissement dans un projet de chantier naval, puis nous avons donné quelques principes et des conseils sur l'application du PHA dans l'identification des risques du projet en démontrant un cas de la construction d’un chantier de construction navale. Pour prouver la validité du PHA, nous avons identifié les facteurs de risque du projet de chantier naval mentionné dans le cas ci-dessus, et nous avont également calculé l’influence des facteurs de risque dominants pour le risque général.
Mots-Clés: investissement dans un projet de chantier naval; PHA; identification de risqué; facteurs de risque
1. INTRODCTION
Shipyard project investment is Money committed to the shipyard project for future income, in order that the investor can achieve the prospective return. Due to the complexity of shipyard projects and the uncertainty of its external environment, it is very likely to increase the possibilities of profit loss which caused by inconsistency between actual earnings and expected earnings in the process of operating. Thus make investment projects with larger risk. Therefore, risk management of investment project, it is very necessary, and the important prerequisite for effective risk management is accurately risk Recognition, risk Recognition is the most important part in the processes of risk management .in a project, the biggest risk is that it cannot identify the risk. through investigation, decomposition of risk Recognition, discuss all possible risk factors in a project. each risk factor is an impact factor, each factor for the whole project risk degree of influence is different, the main task of risk Recognition is, in numerous factors, after screening, find out the main factors of these factors ,and to the whole project risk degree of influence. Shipyard investment projects, the technology is complex, broad, is a complex giant system, which makes the shipyard project risk become fuzzy, uncertainty, difficult to definition and quantify accurately, and AHP is of a kind of simple, flexible and practical multi-criteria decision method to complex and fuzzy quantitative analysis of qualitative problem. by combining the characteristics of shipyard project, probes into the project using analytic hierarchy process (AHP), and the risk Recognition shipyard comprehensive as possible steps in identifying risks, the risk factors for projects in accordance with weights was presented.
2. THE BASIC PRINCIPLE AND APPLICATION STEPS OF AHP
The Analytical hierarchy process (AHP) is a structured technique for dealing with complex risk decisions, and also it is a simple and practical method of modeling. The basic principle of it is to disintegrate firstly and then integrated. firstly, according to the nature of the problem and in order to achieve the goal, having the problem analysis hierarchical, divided it into different factors, then according to the relationship between the factors, according to different levels combine factors together, forming a multi-layer analysis structure model, then to sort out and synthesize the experts’ subjective judgments, attributed it to the lowest layer (risk factors) relative to the whole project at the highest level (general risk) of the relative importance weights scheduling problem.
2.2 Application of analytic hierarchy process (AHP) in risk Recognition
2.2.1 Model the problem as a hierarchy containing the general risk(goal), the risk factors(alternatives)for influencing it, and the sub-risk(criteria) for dominating the alternatives
To project risk, as Hierarchy systematically identify risk factors, and methodical, risk factors, according to the hierarchical control subordinate must construct a hierarchical structure model. The model number and problems of complex hierarchical and detailed analysis relevant, not restricted, and each level of each element dominated factor generally can not exceed nine, otherwise it will increase the difficulty of pairwise comparison.
2.2.2 Establish priorities among the elements of the hierarchy by making a series
of judgments based on pairwise comparisons of the elements
On the same level of various factors, according to the results of expert consultation, by using 1 ~ 9 scale on the importance of a factor in pairs, any two factorsand, will be compared as to how important they are to the decision makers , with respect to the factor they attached to. And is the ratio of and, all comparison results for paired comparisons are judgment matrix. matrix A is reciprocal matrix, match conditions ,and.
2.2.3 Establishing the sequence hierarchy and Check the consistency of the judgments
Firstly,work out the characteristic vector
that maximum eigenvalue of judgment matrix corresponds to,W normalized processing,Then,we can
obtain the relative importance weights of each factor in the same hierarchy to
the factors above they affiliated with. It can establish the sequence
hierarchy.
However, by using the method of
pairwise comparison to structure judge matrix, can objectively reflect the
different Impact of a pair of factors, when it comes to Integrated all the
results of comparison, there is a certain degree of consistency. Therefore,
when maximum eigenvalue was worked out,
it is necessary to inspect judgment matrix A
whether serious inconsistencies by, in order to decide whether to accept A r or not. The procedures of consistency check are as follows:
(1) According to formula (1) calculate
the consistency index CI;
(1)
(2) Look-up corresponding mean
index of stochastic consistency. for n=
1... 11, corresponding to the corresponding value as shown in Table 1.
(3) According to the formula to calculate the
consistency ratio, if, the consistency of the judgment matrix is acceptable, or to
make proper judgment matrix again.
2.2.4 Make hierarchy total taxis and check its consistency
If the hierarchy B includes m factors,and the number is,their weight coefficient of hierarchy total taxis are . And set the lower hierarchy is C, which includes n factors,the sequence hierarchy of these factors to is (if ignore,), to calculate the hierarchy total taxis of factors in hierarchy C,and it is ,according to formula (2),we can obtained the value of :
(2)
So that they can get weights of factors in the lowest hierarchy to top target factor, make clear influence degree of risky factors to whole risk, which will provide scientific basis for decision-making in shipyard project risk management.
Hierarchy total taxis should be also consistency checked because if comprehensive investigation, all hierarchys of the consistency is likely to accumulate, in the final analysis results will be serious inconsistency.
Assume the pairwise comparison matrix in Hierarchy C,which its index of sequence hierarchy is,(),corresponding mean index of stochastic consistency is, (have been worked out), in that way,the ratio of stochastic consistency can be worked out by formula(3):
(3)
If , the
judgments showed acceptable consistency.
3. APPLICATION ANALYSES
It is not suitable to identify risk factors by using one method only, for a large-scale shipyard project, we should adopt various methods to implement integrated risk Recognition. Firstly, we’d better decompose complex system of shipyard project into small simple systems that easy to identify by the use of the principle of fault tree analysis, this process of decomposing is based on the target of risk Recognition and the character of project. The result of decomposing have to match request of AHP, if this happen then, we form judgment matrix table directly according to the risk factor structure formation. Secondly, by expert scoring, forming a judgment matrix. The following sequence hierarchy, total taxis and corresponding consistency check will be finished by using compute program based on MATLAB. Therefore, in the part of empirical research, the dominating assignment is to comprehensive scientific identify project risk factors and make expert grading accurately.
In order to learn risky factors scientifically and comprehensively
in risk Recognition, we follow such a train of thought: firstly, from the
horizontal ,we divide shipyard project into two parts of input and output, and collect
the risk factors involved in the input and output, Secondly, make an
on-the-spot investigation the external risk factors that influence the input
and output, such as the policy factors, the exchange rate, etc. Then, in
accordance with the vertical sequence of project construction, production and
operation period collected various risk analysis, with its comprehensive and
systematic project risk factors Recognition.
3.1 Project example analysis
A shipbuilding base locates in the estuary of Yangtze River. The length of its bund line is 1,500 meters, which covering an area of about 207 million square meters. The first-stage construction of Project including two docks that their scale is 300 thousands ton-class and 250 thousands ton-class, and the production capacity in shipbuilding to design is 180 million tons, specific plans of production capacity program is three ships in 250 thousand DWT, five ships in 150 thousand DWT , and three ships in 100 thousand DWT. What’s more,the construction period of project is 4 years, the investment of construction is 3.9 billion Yuan,and the investment of circulating fund is 40.3 billion Yuan. The ship orders mainly come from overseas ship-owners.
3.1.1 Risky factors Recognition of shipyard project
The Project construction cycle is long, and makes great demand of capital investment, so the project will undertake great cost of capital, and the complexity of technology of shipyard project, involving widely, total investment is not easy to control, construction project cycle changes, etc are likely to happen ,what’s more, the shipbuilding industries coupled with periodic characteristics and shipyard project fixed asset specificity, makes the shipyard project faces great risk in construction process. And in actual operations, shipyard project involves many risk factors, the ship has multiple price fluctuation, orders, prices of raw materials and labor costs, depreciation rates drop, bank interest rate and international exchange rate fluctuations, various cause the boat not pay will influence project expected returns.
According to the information mentioned
above, we identify risks as the Table 2 shows.
In Table 2, we list the risk factors involved in the project comprehensively and systematically, but project manager’s energy and attention are limited, so we’d better to reduce the cost of risk Recognition as appropriate as possible, thus we neither possible nor necessary to analyze all factors one by one in the project. Based on the evaluation of risk factors, which from Risk analysis report on the shipbuilding industry Investment (2006~2008), and feasibility study for XX Shipyard project, We screen some factors low degree of risk and some factors can be transfer by means of insurance approach, by Inducting and coordinating the main risk factors, we construct a hierarchical structural model, as shown in Figure1.
Figure 1 doesn’t display the potential
risks that involved in this project, but it can actually tell the risk factors
that directly influence the investment yield. Evaluating the project investment
risk is defined as estimate the possibility and the degree of negative
deviation between the actual investment yield and planned business benefits. Obviously,
in this project, investment inflation risk and production cost risk will immediately
influence the inputs condition; marketing risk is directly relevant to project yield;
the monetary risk will have an effect on the situation of inputs and outputs: in
the process of inputs, a significant portion of shipbuilding equipment as well
as quite a big part of raw material and ship Auxiliary equipment in production
operation are imported, in the process of outputs, the ships product basically
orders by the overseas ship-owners, both will inevitably involve to the
exchange rates, particularly in recent years our country started the exchange
rate reform, exchange rate fluctuation will inevitably affect the project
income greatly because the ship transaction amount is huge.
3.1.3 Construct judgments matrix based on expert evaluating
Firstly,
we make the tab of judgment matrix based on the
hierarchical structure model of figure 3.1 above, secondly, we invite Ship
Technological Economics
experts to Fill out the forms. Then, normalize
processing the Weights given by experts, and the final
judgment matrix to form, as shown in table3 to table 7.
We
adopted the compute Program AHPmain.m that based on MATLAB software to calculate the
results. The compute Program is written according to the principle and
procedures of AHP, if in use, just input the judgment matrix in conformity with corresponding program format, on the Debug menu tap Run then we will get
the operation results. It shows from operation that this Program is stable and reliable,
and easy for operation. The
operation results when input the judgment matrix 3~7, as the
figure2, 3 shows.
Results show that risk factors such as Changes
in working capital investment (0.0909) Fluctuations in raw material prices (0.1061),
Fluctuations in Auxiliary equipment prices (0.0909), Fluctuations in ship
prices (0.1705), Fluctuations in ship orders (0.1023), Foreign exchange
fluctuation (0.142), had relatively great impact on general risk of project
investment, and project manager should give enough attention to them. In
production, the project manager should be strict with financial management
system, and establish the cooperation relations with the raw material supplier,
improve efficiency and reduce the cost of shipbuilding, by these means to
prevent and dissolve the risks, if conditions allow, also can through long-term
foreign exchange and foreign exchange trading and swaps method to avoid the
foreign exchange risk of shipbuilding and unnecessary loss.
3.2 Tips of Application of AHP in Risk Recognition
Apply the AHP method in shipyard
project risk Recognition, realized risk factors taxis, make the investor able
to hold the key point in the process of risk management, which beneficial to
improving the scientificalness of risk administration. However, what must pay
attention is, if elects the risk factors is unreasonable, and its definition is
ambiguous, or the relations among factors are not in harmony, which will reduce
the quality of risk Recognition with AHP, premise even presents wrong Recognition
result. Therefore,the premises of identifying project risk by means of AHP, one
is make sure the rationality of hierarchical structure, which need us grasps
the dominating risk factors when decomposes the system of project, act with a
well-defined objective in mind; The other is construct judgment matrix must
combine with the characteristic of project, and, It is much better to use the Delphi
method to obtain expert evaluation, this is helpful to enhance the accuracy of judgment
matrix.
4. CONCLUSION
In this paper, we introduce AHP method
in shipyard project investment risk Recognition, and take a shipbuilding bases
as case analyses the application of AHP. By using AHP, not only being able to
get the quantitative affect weight of each risk factor to the general risk, but
also can distinguish out the main risk factors in project, it will establish
solid basis for risk measuring and risk management. However, in view of the
result of risk Recognition is rough, so in shipyard project risk management,
apply AHP to identify risk can be regarded as a basis step, if want to evaluate
the risk perfectly, we should better make use of the techniques based on
computer simulation.
References
LI Wen-ying. Application of AHP Analysis in Risk Management of Engineering Projects [J].Journal Beijing University of Chemical Technology (Social Sciences Edition), 2009, (1):46-48, 66.
Mirela Iloiu, Diana Csiminga. (2007). Investment Risk, Analysis and Decision [J]. Fascicle of Management and Technological Engineering, Volume VI (XVI), 2007, 2438-2441.
SONG Fei, ZHAO Fasuo. (2008). Application of Analytical Hierarchy Process and MATLAB Program for Risk Analysis of Underground Engineering[J]. Journal of Earth Sciences and Environment, Vol.30 (3):292-296.
ZHENG Jian-hua. (2005). Recognition & Measure of Investment Project Risk [J]. Journal of Jinan University (Philosophy and Social Sciences), (4):27-31,140.
Tables and Figures
Table 1: Consistency index RI
n |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
… |
RI |
0 |
0 |
0.52 |
0.89 |
1.12 |
1.26 |
1.36 |
1.41 |
1.46 |
1.49 |
1.52 |
… |
Table 2: Classification
of Risks and Risky Factors
|
|
|
Risky factors |
Results |
Inputs |
Construction |
Project risk |
natural
disasters, project design modify |
construction
period extended even stopped |
Risk of
investment inflation |
cost of
installing equipment, purchase and management |
project total
cost inflation |
||
Risk of
Project quality |
construction
quality will not pass the appraisal, disqualification in trial production |
Defer
commissioning |
||
Production risk |
Risk of
production cost |
Fluctuations
in the Prices of raw materials, auxiliary equipment, labor; increase in
administrative cost |
reduces
profits of project |
|
Technology
risk |
Lack in
technical reserves, low level in Employee Skill, depreciation of equipment
acceleration |
defect in
quality of ship product |
||
Risk of
production period |
Raw materials
and auxiliary equipment in short supply |
delay in ship
delivering |
||
Outputs |
Market risk |
Marketing
risk |
ships cost
and ship orders fluctuate,supply-and- demand dynamics |
influence
Project income |
Risk of
deliver the ships |
abandon ship |
influence
Project income |
||
External factors |
Financial
risk |
Monetary risk |
ROE and ROI
fluctuate |
reduce
Project income |
Financing
risk |
environment
change of Ship financing |
abandon ship
or Normal payment failure |
||
Industrial policy |
Policy risk |
financial
restraint、adjustments to tax rates |
added to the
hardship of Financing |
|
Risk of
admittance |
Industry
access threshold go up、policy
of Project Acceptance tighten |
Follow-up
investment and alter the design of project |
||
manufacturing
technique |
Standard on
shipbuilding change, IMO modify product standards and norms of ship |
Follow-up
investment and alter the design of project |
Table 3: A-B Judging Matrix
A |
B1 |
B2 |
B3 |
B4 |
B1 |
1 |
4/7 |
2/3 |
4/5 |
B2 |
7/4 |
1 |
7/6 |
7/5 |
B3 |
3/2 |
6/7 |
1 |
6/5 |
B4 |
5/4 |
5/7 |
5/6 |
1 |
Table 4: B1-C Judging Matrix
B1 |
C1 |
C2 |
C3 |
C1 |
1 |
1/2 |
1/3 |
C2 |
2 |
1 |
2/3 |
C3 |
3 |
3/2 |
1 |
Table 5: B2-C Judging Matrix
B2 |
C4 |
C5 |
C6 |
C7 |
C4 |
1 |
7/6 |
7/5 |
7/3 |
C5 |
6/7 |
1 |
6/5 |
2 |
C6 |
5/7 |
5/6 |
1 |
5/3 |
C7 |
3/7 |
1/2 |
3/5 |
1 |
Table 6: B3-C Judging Matrix
B3 |
C8 |
C9 |
C8 |
1 |
5/3 |
C9 |
3/5 |
1 |
Table 7: B4-C Judging Matrix
B4 |
C10 |
C11 |
C10 |
1 |
5/3 |
C11 |
3/5 |
1 |
Figure
1: Hierarchical structure of Risk
analysis on shipyard project
Figure
2: The Result of Consistency Check
Figure 3: Weights of Risk Factors
Editor: John Healy
[1] This paper is funded by Commission of science, Technology and Industry for National Defence, (D0720060387)
[2] School of Economics and Management, Jiangsu University of Science and Technology, Zhenjiang, China.
Professor and Doctor, involved in research on topics about business expansion and risk management.
[3] School of Economics and Management, Jiangsu University of Science and Technology, Zhenjiang, China;
He is currently a master student. The master study is entitled: Risk Assessment for Shipyard Projects investment.
[4] Technology Research and Economy Development Institute, CSSC, China;
Engineer and Ph. D. Graduate Student, research on topics about Ships economic.
[5] School of Economics and Management, Jiangsu University of Science and Technology, Zhenjiang, China.
[6] School of Economics and Management, Jiangsu University of Science and Technology, Zhenjiang, China.
* Received 6 June 2009; accepted 20 August 2009
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