Dynamic Strategic Planning
Casablanca, Morocco
March 23-28, 2009
Course Overview
General Information
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Instructor: Richard Roth
email: rroth@mit.edu
Course Website
http://msl1.mit.edu/mib, then click on Morocco 2009
Text: Applied Systems Dynamics by R. deNeufville,
Chapters 13 – 20, but focused on 15-17
(chapters are available on the website)
Based on MIT course 3.57: Dynamic Strategic
Planning & research at the MIT Materials Systems
Laboratory
Class Structure
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Each Day Will Have Three Parts
– Lecture
– Problem Session
– Working Session
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Lectures will review & introduce new topics
Problem sessions will reinforce topics through
selected problems
Working sessions will focus on development of
the case assignment
Course Outline/Schedule
Date
Lectures
Problem
Session
Working Session
Monday
March 23
Course Introduction
Impact of Uncertainty
Business Case
Requirements
Group Business Case
Selection
Tuesday
March 24
Process Based Cost Modeling
Review of Business
Case Requirements
Develop Cost Models
for Business Case
Wednesday
March 25
Dynamic Strategic Planning/
Decision Trees
Decision Tree
Problems
Market Analysis for
Business Case
Thursday
March 26
Probability Assessment/
Bayes Theorem
Bayes Theorem &
Multi-period
Decision Problems
Plant Sizes & Prices for
Business Case
Friday
March 27
Value of Information
Perfect & Sample Information
Information
Problems
Finalize Business Case
Analysis
Saturday
March 28
Presentations of Business Cases
Course Requirements & Grading
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Business Case Group Presentation (30%)
– Presentation in class on Saturday describing the
recommended business strategy
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Individual Final Report (30%)
– Students will turn in an INDIVIDUAL final report describing
the groups business case analysis and their
recommendations
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Homework (20%)
– Each working session will have a short assignment
addressing the business case topic for that day. Each
student must turn in their own homework assignment,
although the answers can be developed as a group
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Class Participation (20%)
– During General Class Sessions
– Group Participation
Introduction to Uncertainty
Why is Uncertainty Important?
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Uncertainty EXISTS!!!
– No amount of analysis can eliminate the fact that future
events are uncertain.
– But uncertainty can be understood and prepared for.
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Uncertainty Impacts Results
– Outcomes of strategic decisions is strongly influenced by
future events which CANNOT be fully predicted
– Therefore, methods that incorporate uncertainty into the
decision making process yield better results
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Uncertainty Comes in Many Forms
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Market Uncertainty
Cost Uncertainty
Technological Uncertainty
Etc.
Examples of Uncertainty: Predicting Automotive Production
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Predictions of automobile
production during the
product planning stage
are highly inaccurate
Predictions can vary by
as much as 200% from
the actual production
This can have a major
impact on:
– Costs
– Designs
– Profitability
Impact of Inaccurate Forecasts/Predictions
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Poor predictions lead to
excess capacity
– More investment made
than was required
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Poor predictions lead to
poor capacity utilization
– Under utilized equipment
leads to high costs
Other Examples of Uncertainty: Oil Prices
120
1994$/BARREL
100
80
ACTUAL
1981 FORECAST
1984
60
1988
1992
1995
40
20
0
1975
1980
1985
1990
1995
2000
2005
2010
More Predictions for Oil Prices
$300.00
$250.00
1994$/BARREL
$200.00
ACTUAL
AVERAGE
$150.00
IPE
HIGHEST
LOWEST
$100.00
$50.00
$0.00
1980
1985
1990
1995
2000
2005
2010
2015
2020
Impact of Uncertainty on Costs
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Uncertainty in underlying factor prices
– Raw material costs
– Energy costs
– Etc.
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Technological/Process Uncertainty
– Uncertainty production conditions
• Process cycle times
• Downtimes
• Etc.
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Market Uncertainties
– Uncertain demand
– Uncertain production levels
Market Uncertainty & The Impact on Costs
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Structural reasons why market uncertainty
impact costs
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Economies of Scale
Economies of Scope
Capacity Utilization Issues
Etc.
Fixed & variable costs behave differently under
market uncertainty
Dedicated vs. non-dedicated equipment behave
differently under market uncertainty
Fixed vs. Variable Costs
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Variable Costs
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– Equipment Investments
– Tooling Investments
– Building Investments
Raw Materials
Labor
Energy
Etc.
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Generally variable costs
scale with the number of
parts to be produced
Market uncertainty has no
impact on unit costs
– Each unit requires the
same level of variable
costs regardless of the
number produced
Fixed Costs
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Generally fixed costs
involve one time spending
that does not change with
the number of parts to be
produced
Market uncertainty has a
strong effect on fixed cost
portion of unit costs
– Investments are spread
across the number of
products produced
Unit Cost
Economies of Scale
Fixed Costs
Variable Costs
Production Volume
Unit Cost
Low Fixed Cost Lead to Reduced Impact of
Production Volume
Fixed Costs
Variable Costs
Production Volume
Dedicated vs. Non-Dedicated Equipment
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Dedicated Equipment:
– Equipment that can only be used to produce a single
product
– For example: Tooling, Part specific production
systems,…
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Non-Dedicated Equipment:
– Equipment which can be used to make multiple
products
– Usually used in combination with part specific tooling
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Market uncertainty has a large impact on
products that use a lot of dedicated equipment
– Low market demand leads to low production and
therefore low capacity utilization
Unit Cost
Capacity Utilization Impacts Unit Costs
Full
Utilization
Overtime
Capacity Utilization
Impact of Market Conditions on Unit Costs
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Market size affects unit cost
– Due to economies of scale
– Strongest impact on products/processes with high
levels of fixed costs
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Market uncertainty affects unit cost
– Due to issues of capacity utilization
– Strongest impact on products/process with high levels
of dedicated investments
Course Assignment:
Develop A Business Case for a New Business Venture
with Explicit Consideration of Market Uncertainty & Its
Impact on Production Costs
Case: Business Plan Development
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For a new business venture of your choosing
– Determine optimal business size
– Price of product
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Practical limitations for this course:
– Business size/price fixed for the first period (5 years)
– After first period opportunity to expand, stay same, close the
business
– Business must have significant fixed costs (otherwise
the decision about size is not very relevant)
– Demand for the product must show some price
sensitivity (otherwise always ask for a high price)
Business/Case Requirements
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You MUST select a business with high levels of
fixed costs which are dedicated to the production
of your product.
This will ensure that market uncertainty affects unit costs
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You MUST select a product where the
market/demand is highly sensitive to the price of
the product.
This will ensure that market uncertainty cannot be easily
compensated for simply by raising prices
Business Case Tools
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Cost Modeling
– Essential to understand costs of the product as a
function of the business size (plant planned capacity)
and actual production volume (market size)
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Decision Trees (tree04_v3.xls)
– Tool to investigate the choices of plant sizes &
product prices
– Tree04_v3.xls is provided as a tool for this analysis
(see website)
Cost Modeling
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Cost model must have the following features:
– Production capacity (representing plant size)
– Actual production volume (amount actually produced
in response to the market demand)
– Unit cost of the product
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Model development
– Based on information about the product
manufacturing
– Use of costskel.xls or simple_cost.xls as a template if
necessary (see website)
Decision Tree
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Tree04_v3.xls provided for case analysis
– Considers 3 possible plant sizes and 2 possible prices
– Considers decisions over two five year periods
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Development of alternate tree structures
possible using Tree_plan, although students are
strongly encouraged to use Tree04_v3 due to
time constraints of the course