Value-based risk management in defense projects pricing with a robust optimization approach

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Date

2015

Author

Aker, Kerime Özge

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In this study, we address the bid pricing problem of a defense company facing with supply chain and financial risks due to long-term project planning. Creating shareholder value has become a quite popular topic in business as value-adding companies are the only ones to survive in the market. We formulate the problem as a value-based performance and risk management model through robust optimization approach in order to cope with various ambiguities over project lifecycle with possible discrete scenario set. Several project attributes identified as having critical importance for the company are employed in the bid pricing problem objective function using a multi-attribute utility function. The aim of our model is then to obtain the maximum weighted utility for a project with the related risk factor and probability of winning so as to use our solution methodology as a decision support tool in the bidding operations of the company. In our formulation, the bid pricing problem is treated as a problem of value creation for the shareholders under a risky environment. We therefore propose an approach to find the optimal bid price which will maximize the total utility gain by combining integrated risk factors and probability of winning, while maximizing shareholder wealth under uncertain conditions in the total utility function as well. Since probability of winning and a winning bid price value create a trade-off for the bid for the company, our robust approach aims to find the best possible bid price by considering this trade-off while refraining from possible financial losses.

Subject Keywords

Risk management., Robust optimization., Project management., Armed Forces

URI

http://etd.lib.metu.edu.tr/upload/12619000/index.pdf
https://hdl.handle.net/11511/24995

Collections

Graduate School of Natural and Applied Sciences, Thesis

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Citation Formats

K. Ö. Aker, “Value-based risk management in defense projects pricing with a robust optimization approach,” M.S. - Master of Science, Middle East Technical University, 2015.