Flexibility in an Aircraft Assembly PlantOverviewProblem StatementDesign ConsiderationsSources of UncertaintyDecision Analysis ModelDecision Analysis ResultsBinomial Lattice ModelBinomial Lattice ResultsHybrid ModelHybrid ResultsSensitivity of Political UncertaintyComparison of ModelsConclusionFlexibility in an Aircraft Assembly PlantESD.71 Final Application PortfolioAnna Massie12/15/2008OverviewIn fiscal year 2008, the US government approved $91.9 billion for procurement purposes, $33.8 billion of which to the Air ForceContractors to the DoD fulfill these acquisitions, including the purchasing of airplane tankersContractors have much to gain form such a contract, but there is still uncertainty in the total number of airplanes that will be demanded over the life of the contractProblem StatementThe contractor requires adequate facilities to manufacture and build these aircraftOne of the primary facilities necessary is the assembly plantThis project focuses on how flexibility in the design of the assembly plant can help a contractor in times of uncertaintyDesign ConsiderationsThe assembly plant can either be built at a fixed size, or designed with flexibility to allow for future expansionAdditional land and equipment bought initially to have flexibility of increasing production laterEach design has a separate cost and profit structure Flexibility FixedFixed Costs Year 1 $70M $40M Year 2-10 $40M $40M Marginal Cost per Plane $2.50M $3M Low supply fee $10M $10M Price per Plane $10M $10M Profit from decreasing size $3M NASources of UncertaintyUncertainty will cause the demand of aircraft to fluctuate from the baselineEconomic UncertaintyDemand fluctuates with the economy, as benchmarked by the DOW Jones Industrial AveragePolitical UncertaintyDemand increases during times of warDecision Analysis ModelTwo stages of five yearsAt the chance nodesDemand follows a demand probability distribution as found by analyzing joint demand distributions from the uncertainties At the initial decision nodesContractor could choose a fixed or flexible designAt decision node at year 5For flexible, contractor can decide to expand, decrease or keep production the sameExpected value is calculated after each nodeDecision Analysis ResultsObtain a higher expected value for the flexible design ($146 million) than for the fixed design ($142 million), but fixed design better under worst circumstances Flexible FixedExpected Value $146 $142Min $95 $106Max $188 $177B/C 1.52 1.5Binomial Lattice ModelEconomic uncertainty modeled through DOW Jones Industrial average pointsDOW average growth rate 2.5%, volatility 12.5%u=1.31, d=0.882, p=0.615Demand can be determined from this uncertainty by bucketing by DOW points0-5000 points: 6 aircraft/year5000-8000: 8 aircraft/year8000-10000: 10 aircraft/year10000-14000: 12 aircraft/year14000-20000: 14 aircraft/year20000+ points: 16 aircraft/yearBinomial Lattice ResultsThe contractor should decide to exercise flexibility at year 1Obtain a higher expected value for the flexible design ($156 million) than for the fixed design ($153 million) Flexible FixedExpected Value (year 10) $159 $153Expected Value (year 4) $68 $64Min $4 $14Max $91 $70B/C 1.51 1.69Hybrid ModelUsed lattice to model economic uncertainty combined with a two-stage decision analysis to model political uncertaintyAnalyzed two resultant scenariosBased off of Nestor Quispez-Asin’s Master of Science ThesisHybrid ResultsObtain a higher expected value for the flexible design ($192 million) than for the fixed design ($166 million)For flexible design, more beneficial to expand independent if there is or is not a warSensitivity of Political UncertaintyTested sensitivity of results to the probability that a war would occurFound flexible design always superiorComparison of ModelsPrimary parameters that changed results of models were the uncertainties, the cost and profit structure, and the put optionValue of flexibility varied from $4-$23 millionPut option most influential parameterContractor would lose significantly in first 5 years if not able to expandModel: Economic UncertaintyPolitical UncertaintyCosts/Profits Put Option EV FlexibleEV FixedTwo-Stage Modeled per 5 year periodModeled per 5 year periodModeled per 5 year periodEuropean $146 $142Lattice Modeled yearlyNot modeled Modeled yearly American $156 $148 Hybrid Modeled yearlyModeled per 5 year periodModeled Yearly American $192 $166ConclusionHybrid analysis most appropriate for model as it encompasses both political and economic uncertainty, and uses the American call optionModel would quickly explode with additional uncertainty factorsThe flexible design always better than the fixed design, but changes in the model could affect this
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