Drivers of Flexibility¶
Factors affecting flexible design vs immediate decision¶
| Factor | Comment Against Flexibility | Comment For Flexibility |
|---|---|---|
| Uncertainty | ||
| Benefits of Scale | Cheaper to produce at large quantity | Benefits not attained when set-up is under-utilized, which is common when set-up is made for larger capacity than requirement |
| Discount Rate | Cancels out benefits of scale Future investments are better in terms of NPV | |
| Learning | Efficiency improves with time & experience | |
| Competitive Gaming |
Manne’s Analysis¶
Analytic solution for simple case of constant linear growth
Provides simple demonstration of issues, by giving useful insight into trade-offs
- Optimal cycle time = most economical time between additions of capacity modules
- Cycle time defines model size (years * annual growth)
Interpretation¶
- Higher discount rate \(\implies\) small size of modules
- High discount rates reduce present value of future costs, which counteract benefits of scale
- Smaller \(\alpha\) \(\implies\) Larger benefits of scale
Results¶
Manne’s present cost versus cycle time
- Steep for small cycle times
- Quite flat at bottom for large cycle times
Learning Effects¶
