Risk Priority Number (RPN)

Posted on September 30, 2010 by

3


Risk management weaves through multiple disciplines.  Addressing potential future events, both good and bad, is the focus of risk management.  There are two primary factors: 1) the probability of that event occurring and 2) the impact of that event occurring.  Take those two together (multiply) and a Risk Priority Number can be calculated.

For example the probability of a shipping delay during the busy holiday / Christmas season might be 25% or .25.  The impact on a project is moderate or a .5 on a 1.0 point scale.  The Risk Priority Number (RPN) is .125.   By contrast the probability of a layoff is low during that peak season or .1 but the impact could be far greater on production or a .9.  The RPN would be.09.  So if there are only sufficient resources to devote to one risk, that one would be shipping delay.

The RPN also is used in the Lean Six Sigma Failure Mode Effects Analysis (FMEA).  Another factor is added, detection ability.  FMEA then calculates Impact x Probabilty x Detection.  The result is a RPN .  So RPN makes its presence known in project management and lean six sigma

On a broader scale risk management is also a part of business analysis, IT compliance, information security, IT data center management, auditing and software development.  Risk management is a good example of the “Management Nexus” at work!