o Program DATA TreeAge Software 6 Service A convenient way to lay out the steps of a capacity problem is through the use of decisioy trees. The tree format helps not only in understanding the problem but also in finding x solution, A decision 1ree is a schematic model of the sequence of steps in a problem and the conditions and consequences of each step. In recent years, a few commercial software pack ages have been developed to assist in the construction and analysis of decision trees. These packages make the process quick and easy. Decision trees are composed of decision nodes with branches to and from them, Usually ‘squares represent decision points and circles represent chance events, Branches from decision points show the choices available to the decision maker; branches'from chance events show the probabilities for their occurrence. In solving decision tree problems, we work from the end of the tree backward to the star of the tree. As we work back, we calculate the expected values at each step. In calculating the expected value, the time value of money is important ifthe planning horizon is long. ‘Once the calculations are made, we prune the tree by eliminating from each decision point all branches except the one with the highest payoff. This process continues to the first deci- sion point, and the decision problem is thereby solved. ‘We now demonstrate an application to capacity planning for Hackers Computer Store. The exhibits used to solve this problem were generated using a program called DATA by TreeAge Software. (A demonstration version of the software, capable of solving the problems given in this chapter, is included on the book DVD.) EXAMPLE 112: Decision Trees, ‘The owner of Hackers Computer Store i considering what todo with his business over the next ive years. Sales growth over the past couple of years has been good, but sales could grow substantially if majorele- tronics firm is builtin his area as proposed. Hackers" owner sees three options. The firsts to enlarge his cur- rent store, the second isto locate at anew sit, and the third i o simply wait and do nothing. The decision toexpand or move would take litle ime, and, therefore, the store would not lose revenue. I nothing were {done the fist year and strong growth occurred, then the decision expand would be reconsidered. Waiting longer than one year would allow competition to move in and would make expansion no longer feasible. ‘The assumptions and conditions are as follows: 1. Strong growth as a result of the increased population of computer fanatics from the new elec: tronics fim has a 55 percent probabil Strong growth with anew site would give annual returns of $195,000 per year. Weak growth with 4 new site would mean annual relums of $115,000. 3. Strong growah with an expansion would give annual returns of $190,000 per year. Weak growth With an expansion would mean anual returns of $100,000. 4, At the existing store with no changes, there would be returns of $170,000 per year if there is song growth and $105,000 per yea ‘5. Expansion atthe curren site would cost $87,000. 6. The move tothe new site would cost $210,000 7. If growth is strong and the existing site is enlarged during the second year, the cost would still be $87,000. 8. Operating costs forall options are equal sowth is weak. We construct a decision wee to advise Hackers’ owner on the best action. Exhibit 11.3 shows the ecision tre for this problem. There ae two decision points (shown with the square nodes) and three chance occurrences (round nodes).Decision Tree for Hackers Computer Store Problem ” Song growth ‘Revenue-Move_Cost Move 5 \ Wek 00 even Move Cast rn song pom Revenue spin, Cos 3S a es Hk BOWEN _ og Revenne-Expansion_Cost % a et -Revenve-Expansion Cost seg owe Revenue Decision Tee Analysis Using DATA (TreeAge Software, Ine.) LN vena Egan = HE) 380 IRE ow ene pana = HE] 080 a 0350] Hackers Computer Sor “The values ofeach altemative outcome shown on the right ofthe diagram in Exhibit 114 are calcu: lated as follows Acrennarive Revenue cost awe Mowe to new location, strong growth stogo00 x Sys Seragc0 785000 Move to new location, weak growth Snp000 x5 y's S2ac00 $365.00 expand store. tone Brwrth sigoo0a x Sys $8000 —$86g000 Expand store, weak growth Sooo x sys $8700 Satg000 | De nathing now strong growth expand nest year Srocco xtyr+ $87,000 $84g000 §$190000 > 4 ys Do nothing now, strong growth do not expandinent year STO000x 5yrs SO ‘850000 0 nathing now, weak growth Si0g000% 5ys $0 $525,000 Working from the rightmost alleratives, which are associated with the decision of whether to expand, we see thatthe alternative of doing nothing has # higher value than the expansion alternative. ‘We therefore eliminate the expansion in the second year alternatives. What this means is that if we do nothing in the fist year and we experience strong growth, then in the second year it makes no sense to expand. [Now we can calculate the expected valves associated with our current decision alternatives. We sim- ply multiply the value of the altemative by its probability and sum the values. The expected value for the alternative of moving now is $585,000. The expansion alternative has an expected value of '$660.500, and doing nothing now has an expected value of $703,750. Our analysis indicates that our best decision is o do nothing (both now and next year)!