FLEXIBILITY IN DESIGN - Title Page - MIT

de Neufville + Scholtes D R A F T September 30, 2009demands is well established. Judgment about which criteria to apply is a management decision.From an analytic perspective, we can easily program any management decision rule into theanalysis. 5 We can therefore anticipate the range of outcomes and the future performance of thesystem.The flexible design can indeed be far superior. Consider for example the flexible designof the garage with an initial build of 4 levels that incorporates the ability to expand incrementallyup to 9 levels. To value this design, we have to agree on a criterion for expansions, a contingencyplan. In this example, our decision rule was to add another level whenever demand exceedscapacity for two years in a row. As Table 3.6 shows, the flexible design is preferable on allcounts to the fixed alternatives.[Table 3.6 about here]The flexible design delivers much greater Expected Net Present Value than the bestalternative fixed design, 2.1M compared to 0.3M. This kind of result is common, as caseexamples demonstrate throughout the rest of the book. By building small, flexible design lowersthe risk of bad performance: less invested means less can be lost. By incorporating the ability toexpand easily, it allows the system managers to take advantage of favorable opportunitieswhenever they appear. Both actions lead to greater expected value. Correspondingly, they alsolower the Value at Risk and raise the Value at Gain. The target curves in Figure 3.12 shows thiseffect graphically. The NPV target curve for the 4-level flexible design mirrors the performance ofthe 5-level fixed design in low demand scenarios but moves to the curve for the 6-level fixeddesign in high demand scenarios. Both avoiding losses and increasing possible gains move thetarget curve the right, towards better performance.[Figure 3.12 and Box 3.6 about here]Most remarkably, flexible designs often cost less than the inflexible designs. Thisresult is truly important that runs against the intuition that flexibility always costs more. Toappreciate this fact, it is important to create a fair comparison between the designs that we mightimplement: the flexible or the inflexible design. The basis for comparison is the initial investmentwe might make, between the initial capital investments (CAPEX). The comparison needs to bebetween what one might actually decide, not what the structure looks like. Thus, we need tocompare the following possible decisions:• The choice to build an inflexible design means that we have to build it larger thanimmediately needed, so that we can benefit from future growth -- thus the 5-levelsolution;• The choice of the flexible design allows us to build only for immediate needs, as thisdesign allows us to add levels as needed – thus the 4-level solution.Part 1: Chapters 1 to 3 Page 53 of 69