A Survey of State-of-the-Art Methodologies and a Framework for Identifying and Valuing Flexible Design Opportunities in Engineering Systems

Flexibility in design increases the expected value of an engineering system, as demonstrated by numerous case studies. By adapting flexibly to uncertain events, operators capture additional value when upside opportunities occur (e.g. demand or price is higher t han expected), and reduce losses in case of downturns. Very often engineers work to satisfy fixed design requirements based on analysts’ forecasts of uncertain variables affecting value. If reality is more favorable than projected, the system may not capture additional benefits from uncertainty. In reverse, it may suffer big losses during downsides. Flexibility is the main tool to deal with uncertainty; it captures upside opportunities, and protects from downside events, thus its importance for design. Explicit considerations of flexibility lead to more informed, and thus better investment decisions. This paper surveys existing state-of-the-art methodologies for identifying and valuing flexible design opportunities in complex systems. It emerges from the observation that several analytical methods exist to identify and value technical sources of flexibility. The current state of the field is however not clear on which methods are best suited depending on the design problem at hand, the system under study, and other contextual elements such as the economic sector, the uncertainty types, audience, etc. Different problems may require different methods to add value through flexibility, hence the need to organize the field in a coherent whole for real-world practitioners. The paper paves the way to the development of a framework to choose appropriate analytical tools to identify and value flexible design opportunities, depending on the engineering system under consideration. The proposed framework is to be developed through applications of existing methods to real-world case studies in various industries. 1 PhD candidate, Engineering Systems Division, E40-252, 77 Massachusetts Ave, [email protected] 2 Professor, Engineering Systems Division, E40-245, 77 Massachusetts Ave, [email protected] Working Paper July 2008 © Cardin, de Neufville, 2008 2