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Capacity
Capacity Decision
Decision with
with Time
Time Series
Series

AAmanufacturing
manufacturingcompany
companyisisbuilding
buildingaanew
newfacility
facilitywhere
wherethe
thecompany's
company'sproduct
productwill
willbe
bemanufa
manuf
must
mustdecide
decidehow
howmuch
muchcapacity
capacityto
tobuild
buildnow
nowin
inthe
theface
faceof
ofuncertainty
uncertaintyof
offuture
futuredemand.
demand.Each
Eachy
unless
demand
is
greater
than
capacity,
in
which
case
the
excess
demand
will
be
lost.
The
unless demand is greater than capacity, in which case the excess demand will be lost. Theunit
unitp
years.
The
plant
cost
is
$6
million
plus
a
random
multiple
of
capacity.
The
unit
production
cost
years. The plant cost is $6 million plus a random multiple of capacity. The unit production costisi
random
randomintercept.
intercept.Also,
Also,the
theunit
unitoperating
operatingcost
costisisrandom.
random.The
Themodel
modelassumes
assumesthat
thateach
eachof
ofthes
thes
but
it
could
be
modified
easily
to
let
them
change
through
time.
but it could be modified easily to let them change through time.

The
Thecompany
companyhas
has15
15years
yearsof
ofhistorical
historicaldemand
demanddata
datafor
forthis
thisproduct.
product.To
Togenerate
generatefuture
futuredata,
data,@
@
historical
data.
Several
processes,
including
MA1,
AR1,
and
MA2,
provide
similar
fits
to
the
historical data. Several processes, including MA1, AR1, and MA2, provide similar fits to thehistor
histo
historical
historicaldata,
data,ititisisdifficult
difficultto
toknow
knowwhich
whichof
ofthese
theseprocesses
processesisisbest
bestfor
forgenerating
generatingfuture
futuredata.
data.
the
Auto
Detect
feature
refuses
to
perform
automatic
detection.
Because
of
the
general
the Auto Detect feature refuses to perform automatic detection. Because of the generalupward
upward
option.)
option.)Therefore,
Therefore,one
oneof
ofthe
thegoals
goalsof
ofthis
thisexample
exampleisisto
totry
trydifferent
differenttime
timeseries
seriesprocesses
processesfor
forth
t
see
how
much
difference
the
time
series
process
makes
in
terms
on
the
results.
see how much difference the time series process makes in terms on the results.

RISKOptimizer
RISKOptimizerisisset
setup
upto
tomaximize
maximizethe
the10th
10thpercentile
percentileof
ofthe
theNPV
NPVof
ofannual
annualprofits,
profits,assuming
assumingt
beginning
of
year
1,
and
all
other
costs
and
revenues
occur
at
the
ends
of
the
respective
beginning of year 1, and all other costs and revenues occur at the ends of the respectiveyears.
years.
the
best-fitting
process,
MA1.
If
you
run
RISKOptimizer
one
or
times
(each
with
different
random
the best-fitting process, MA1. If you run RISKOptimizer one or times (each with different random
optimal
optimalsolutions,
solutions,but
butthey
theywon't
won'tbe
beidentical.
identical.Then
Thenififyou
yousubstitute
substitutethe
thebest
bestAR1
AR1or
orthe
thebest
bestMA
M
RISKOptimizer,
you
should
get
fairly
similar
results
to
MA1.
In
each
case,
the
optimal
capacity
RISKOptimizer, you should get fairly similar results to MA1. In each case, the optimal capacityan
a
neighborhood
neighborhoodof
of860,000
860,000and
and$1.7
$1.7million,
million,respectively.
respectively.So
Soititdoesn't
doesn'tseem
seemto
tomatter
mattertoo
toomuch
muchw
isisreasonable.
reasonable.But
Butall
allof
ofthese
thesetime
timeseries
seriesprocesses
processesare
areso
sovariable
variablethat
thatRISKOptimizer
RISKOptimizercan
cangive
give
example,
we
got
optimal
capacities
as
low
as
844,000
and
as
high
as
870,000
on
different
RISKO
example, we got optimal capacities as low as 844,000 and as high as 870,000 on different RISK
same
sameAR1
AR1process.
process.

Note:
Note: The
TheIndustrial
Industrialedition
editionisisrequired
requiredto
touse
usethe
theTime
TimeSeries
Seriesand
andRISKOptimizer
RISKOptimizerfeatures
featuresof
of@
@

ssproduct
productwill
willbe
bemanufactured
manufacturedover
overthe
thenext
next15
15years.
years.The
Thecompany
company
f future
of
futuredemand.
demand.Each
Eachyear
yearthe
thecompany
companywill
willproduce
produceto
todemand
demand
d will
nd
willbe
belost.
lost.The
Theunit
unitprice
priceof
ofthe
theproduct
productwill
willremain
remainconstant
constantin
inall
all
eeunit
production
cost
is
a
linearly
decreasing
function
capacity
with
unit production cost is a linearly decreasing function capacity withaa
umes that
sumes
thateach
eachof
ofthese
theseunit
unitcosts
costsremains
remainsconstant
constantthrough
throughtime,
time,

generate
generatefuture
futuredata,
data,@RISK's
@RISK'sTime
TimeSeries
SeriesFit
Fittool
toolisisused
usedon
onthe
the
similar
fits
to
the
historical
data,
and
because
of
the
small
e similar fits to the historical data, and because of the smallamount
amountof
of
generating
generatingfuture
futuredata.
data.(In
(Infact,
fact,there
thereisisso
solittle
littlehistorical
historicaldata
datathat
that
eeof
ofthe
thegeneral
generalupward
upwardtrend,
trend,ititisisaagood
goodidea
ideato
tocheck
checkthe
theDetrend
Detrend
e
series
processes
for
the
future
data,
run
RISKOptimizer
on
each,
me series processes for the future data, run RISKOptimizer on each,and
and
results.
results.

nual profits,
nnual
profits,assuming
assumingthat
thatthe
thebuilding
buildingcost
costisisincurred
incurredat
atthe
the
of
the
respective
years.
The
current
time
series
in
column
of the respective years. The current time series in columnFFisisfrom
from
hhwith
different
random
numbers),
you
should
get
fairly
similar
with different random numbers), you should get fairly similar
best
bestAR1
AR1or
orthe
thebest
bestMA2
MA2process
processfor
forMA1
MA1in
incolumn
columnFFand
andrun
run
the
optimal
capacity
and
10th
percentile
of
NPV
should
the optimal capacity and 10th percentile of NPV shouldbe
bein
inthe
the
m
to
matter
too
much
which
time
series
process
is
used
as
long
em to matter too much which time series process is used as longas
asitit
RISKOptimizer
can
give
different
results
on
different
runs.
For
RISKOptimizer can give different results on different runs. For
0,000
0,000on
ondifferent
differentRISKOptimizer
RISKOptimizerruns,
runs,and
andthese
thesewere
wereboth
bothfrom
fromthe
the

Optimizer features
KOptimizer
featuresof
of@RISK.
@RISK.

Decision and Inputs

Capacity
Cost to build
Unit production cost
Unit operating cost
Unit price
Discount rate
Historical data
Year
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0

900,000
#NAME?
#NAME?
#NAME?
$10.00
10%

Demand
526,000
548,000
624,000
527,000
539,000
568,000
641,000
612,000
568,000
580,000
630,000
657,000
667,000
713,000
810,000

Simulation model
Year
Demand
Units sold
1
#NAME?
#NAME?
2
#NAME?
#NAME?
3
#NAME?
#NAME?
4
#NAME?
#NAME?
5
#NAME?
#NAME?
6
#NAME?
#NAME?
7
#NAME?
#NAME?
8
#NAME?
#NAME?
9
#NAME?
#NAME?
10
#NAME?
#NAME?
11
#NAME?
#NAME?
12
#NAME?
#NAME?
13
#NAME?
#NAME?
14
#NAME?
#NAME?
15
#NAME?
#NAME?

Revenue
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?

Prod Cost
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?

Oper Cost
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
NPV

Profit
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?