Proactive Design¶
Stages of Analysis¶
| Stage | NPV | |
|---|---|---|
| Base case | Consider base case design, for fixed objective (mission, specifications) | |
| Recognize reality of uncertainty | - This may lead to different results due to system non-linearities - Capacity constraints systematically limit profit from good opportunities, while we suffer fully from risks - Error of forecasts - Distribution of possible outcomes of reality (volatility and uncertainty) | Lowest |
| Incorporate flexibility | - Adjust project actual needs, based on how future develops, and intelligently develop system over time - Run a Monte Carlo simulation of all possibilities, and then identify what is the best initial case, and what flexibility is optimal | Highest |
| Multi-dimensional valuation | Not just expected NPV, but also other summary statistics of the possible NPVs from the simulations | |
| Conclusion | Don’t accept consequences of distribution of uncertainties - Avoid/reduce downside effects - Take advantage of opportunities - Reduce initial costs |
Example: Mall Parking¶
Requirement: Major garage serving mega-mall
Actual demand uncertain, due to
- Population growth, demographics
- Mall success probability
- Competition
Engineering design assumes a fixed forecast!
Optimizing base case¶
Find highest value design, by looking at each major design alternative. No
Recognizing uncertainty¶
Costs may be easy to estimate, as contracts will give fixed bids.
However, demand is highly uncertain, especially as we proceed to the future
Introducing flexibility into design¶
Multi-Dimensional Valuation¶
Conclusion¶
Build the mall in a way that we start out only 4 floors, but make the foundation and etc in a way that we can expand to the initial number of floors as required, even though this is more expensive than just building foundation capable for 4 floors.