4.5.1 Extracting Value from Uncertainty: A Methodology for Engineering Systems Design

Abstract

AbstractDesigners and managers of new investments in engineering systems look for ways to add value to their programs. One fundamental way to do this is by taking advantage of uncertainty. Although uncertainty is usually seen as negative in most investment projects, it can also increase performance if flexibility is incorporated into the system to capture upside opportunities, and reduce losses in case of downside events. This paper introduces a design methodology that adds value to engineering systems by considering flexibility at an early conceptual stage. It provides screening tools to find areas where flexibility can be incorporated at the engineering, operational, and management decision levels. In engineering and operations, technical modifications need to be done within the system to acquire the flexibility exercisable by managers. One example is the ability to expand or contract product output as demand fluctuates. At the management decision level, no explicit modification is needed, such as the ability to abandon the project altogether. The methodology incorporates screening tools based both on qualitative historical studies (GPS, B‐52, etc.) and quantitative Design Structure Matrices representing the engineering system (Bartolomei et al. 2006; Kalligeros 2006; Kalligeros, de Neufville 2006). The design process also provides a set of quantitative tools to assess the financial value of flexibility based on Real Options Analysis and simulation models (de Neufville et al. 2006; Kalligeros 2006; Kalligeros, de Neufville 2006). These give managers and designers discriminating tools with which to choose the most valuable flexibilities to implement in the engineering system. The methodology represents a practical procedure for understanding where flexibility can be found and incorporated into all areas of engineering system design. We present a case application to the design of a new hydrogen production and storage system: Fusion Island (Cardin 2006; Nuttall, et al. 2005).