## Sensitivity Analysis

We've converted our spreadsheet model to a **risk analysis model**, run a Monte Carlo simulation with **Risk Solver**, and examined the full range of outcomes for Net Profit through statistics and percentiles, charts and graphs. Now we can begin to take steps towards **risk management**: Using the model to determine how we can reduce the chance of a loss -- and increase the chance of a (larger) profit.

The **Sensitivity tab** in the Uncertain Function displays a **Tornado chart** that shows you how much Net Profit (cell F10) changes with a change in the uncertain variables -- our integer uniform distribution at cell F4, and the triangular distribution for Unit Cost at cell F7. In this model there are only two uncertain variables, but in a large model with many such variables, it’s usually not obvious which ones have the greatest impact on outcomes such as Net Profit. A Tornado chart highlights the key variables, as shown below:

Our Unit Cost at cell F7 is **negatively correlated** with Net Profit, as expected: Higher Unit Costs leads to lower Net Profits. Notice that our integer uniform distribution at cell F4 is **positively correlated** with Net Profit: What does this mean?

Since we used =CHOOSE(F4,B4,B5,B6) for Sales Volume, on each trial where F4 is 1 we use 100,000 units sold; when F4 is 2 we use 75,000 units sold; and when F4 is 3 we use 50,000 units sold. The fact the F4 is positively correlated with Net Profit is telling us that **we make higher profits when the market is slow**, not when it's hot. Our typical Selling Price is lower when the market is hot, and the increased Sales Volume doesn't make up for this.

The **state of the market** is outside of our company and our direct control. But our **production costs**, while variable and uncertain, are more subject to our control. Having seen that our Net Profit suffers in a hot market because of the narrow margin we have between our typical Selling Price and our Unit Cost, we're motivated to try to improve this situation.We want to ask **"what if our (uncertain) Unit Costs could be reduced?"** -- in the presence of our uncertain Sales Volume and Selling Price. **Risk Solver** empowers us to ask and answer exactly this question, as shown on the next page.

**< Back to: Statistics and Percentiles**

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**Next: Interactive Simulation with Charts and Graphs >**** **