Risk-analytic approaches to the allocation of defence operating funds

We develop two risk-analytic approaches for allocating operating funding among defence organization activities. In one, termed the priority method, activities are put in rank order and as many high-priority activities as possible are undertaken while ensuring that the budget holder’s probability of overspending his budget is acceptably small. In the second, termed the knapsack method, there are two kinds of activities: must-do activities and optional activities. Optional activities are selected using a nonlinear integer program that maximizes the value of the optional activities while keeping the probability of overspending sufficiently low. Both approaches are applied in the context of the Department of National Defence in Canada.