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Sensitivity Analysis (Placeholder)

 

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Sensitivity Analysis is the process of determining the impact a particular variable has on the overall performance of something.

It is usually discovered by building a spreadsheet model of whatever the business or project is.

By way of example, the variables in the spreadsheet might be:

  • cost per unit of part 1
  • cost per unit of part 2 and
  • cost per unit of part 3
  • and their respective impact on gross profit

To work out the part whose change in price will have the greatest impact on gross profit, change each of them by (say) 10% while holding the others at the same value.

The impact of each on the gross profit will be different.

The business model you have constructed is most "sensitive" to the variable that changed the gross profit the most when you did the experiment.

That then is likely the one to focus on first because it has the greatest impact.

Indirectly, the 80/20 Rule (see the Amazing 80/20 Rule article) arrives at much the the same conclusion that most impact is done by just a few variables.

Starting with the most sensitive input variable means you move as quickly as possible to growth in output. 

Alternatively, if you don't want to upset things too much, you might work with the least sensitive variable.

 

 

 

 

 

 

 

 

 

 

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