Unit 4: Parking Garage Case Example, Video 4: Adding Flexibility

Key Takeaways

at this point i'm going to talk about the third element of the garage case we already started with the idea of what the deterministic engineering design was then we saw how that analysis led to a wrong estimate of the value and in fact the wrong design once we accounted for the reality of uncertainty now let's think how we can be proactive about this design and we're going to do that by introducing flexibility what does that mean the flexibility is the ability to adjust the project to the actual needs according to the future how the future develops in particular it means that if the future is very positive in terms of demand and you'd like to have greater capacity that you have the capability of adding that if needed uh we it also presumes that we are managing this project we just don't create it then say there it's off on its own it's on autopilot no we have a system and we manage it appropriately so it's very important to understand that if we want to deliver the value of a design it's not only what we do at the beginning but how we manage the project as it encounters different situations and has to deal with different possibilities and opportunities how do we do this for the garage for the garage case what we do is we enable the addition of more capacity that is it has to have the strength to carry more loads it has if you want fat columns with more strength of them it has to have bigger foundations to carry the loads on the soil and it has to have a building system that you can easily add to in this case a precast situation you build it off-site can bring it in and can expand it with a minimal closure of the garage during the expansion period so that you have the ability to add floors and what happens now let's think about how we're going to analyze this with the simulation process here is a spreadsheet of it and this is the one for four floors now what we have here i'll won't explain in the detail how it works but i'll give you the idea of it is that we have a forecast here and this is a simulated forecast that is sometimes the top number of the forecast will be uh up sometimes it'll be down it'll be up and down over time and that's what we observe then we think about how we would exercise the flexibility that's available in terms of intelligent management so if the demand is not increasing we do not add the capability if the extra floors in particular if the demand however does increase then it looks like we'd be valuable to have more floors on it we add them so in we've embedded in here uh through what's called if statements that looks at what's been happening and what would be the intelligent thing to do and for each simulation that we run we factor that in and calculate the value so we do this for thousands of times a couple thousand in this particular analysis and we look at sometimes you expand because it's desirable sometimes you do not expand we look at the combination and figure out the overall expected value so um where does that lead us it leads us as we look at all the possibilities one story two story and so forth with and without the flexibility that the optimal design in this particular case with these numbers is not six stories which was a deterministic sign not the five stories which is the risk averse avoiding the downside approach where you recognize the uncertainty but it's four stories but four stories with the ability to expand when needed so observe what's happening you've built it smaller so it didn't cost as much as having five or six stories even though you had strong foundations so it's less exposure to the downside but you build it so that you get five six seven or eight stories if the demand occurred so here is the summary of the design results so that on the one hand we have the different possibilities and their performance over time and we have the value at the end so what we observe here is that the four-story building is the most productive one and we might have thought that the deterministic design with a value of six million was better but that result is a sham because given this uncertainty we will never get that result as the expected value its expected value will be lower and in fact in the case of uns the reality case with the uncertainty is we'll get only about three million with it as the value as compared to what we get so let's think about what's happening here we built it smaller less cost of the beginning less possibility of loss on the other hand we can build it up as much as seems appropriate in the particular conditions without a we have favorable demand and we can make more of value so let's look about what it is how we think about this overall for this particular design case so we need to have a multi-dimensional evaluation why multi-dimensional because since we have a distribution one number one value for it is not describing what's happening you care not only about the average you care about how bad can get how good can it get what's the possibilities in this particular case that we see that the uh the several factors that we're looking at in terms of the initial investment that we how much money do we have to put down to start the process it is lower for the flexible design because we build it smaller so what's the expected value of it it's very much larger than otherwise because we can take advantage of the good things and avoid the bad things and con in in that same way the maximum value we can get is larger the minimum value that we might be forced to accept is smaller so that it's good in all cases so everything is better why how did that happen that is we have not had a technological breakthrough in this case it is not a more sophisticated or advanced design it is because we have changed the design approach from we've changed the framing of the problem that instead of going to saying we're designing it for a fixed view of the future we folk and instead of focusing on this mythical and this fairy tale future that in fact will not be the exact case we change from that to managing the realistic uncertainties of the life by having the flexible design and therefore can adjust to the conditions and in that way have an overall better solution now in this case the flexible design was better on four counts that as i mentioned that may not always happen sometimes the situation is not so uniquely favorable but it's the kind of thing could happen because it's built in to the way of approaching it is less downside more upside lower cost than beginning overall it's a win-win at less cost you