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Comparing Decision Making Using Expected Utility, Robust Decision Making, and Information-Gap: Application to Capacity Expansion for Airplane Manufacturing Iowa State University Capstones, Theses and Creative Components Dissertations Summer 2018 Comparing Decision Making Using Expected Utility, Robust Decision Making, and Information-Gap: Application to Capacity Expansion for Airplane Manufacturing Krishna Sai Varun Kotta Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/creativecomponents Part of the Industrial Engineering Commons Recommended Citation Kotta, Krishna Sai Varun, "Comparing Decision Making Using Expected Utility, Robust Decision Making, and Information-Gap: Application to Capacity Expansion for Airplane Manufacturing" (2018). Creative Components. 26. https://lib.dr.iastate.edu/creativecomponents/26 This Creative Component is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. It has been accepted for inclusion in Creative Components by an authorized administrator of Iowa State University Digital Repository. For more information, please contact [email protected]. Comparing Decision Making Using Expected Utility, Robust Decision Making, and Information-Gap: Application to Capacity Expansion for Airplane Manufacturing by Krishna Sai Varun Kotta A thesis submitted to the graduate faculty in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE Major: Industrial and Manufacturing Systems Engineering Program of Study Committee: Cameron A. MacKenzie, Major Professor Gary Mirka The student author, whose presentation of the scholarship herein was approved by the program of study committee, is solely responsible for the content of this thesis. The Graduate College will ensure this thesis is globally accessible and will not permit alterations after a degree is conferred. Iowa State University Ames, Iowa 2018 Copyright © Krishna Sai Varun Kotta, 2018. All rights reserved. ii DEDICATION I dedicate this thesis to my parents Mr. Srinath Kotta and Mrs. Annapurna Kotta and my sister Ms. Alekya Kotta, without whose support, this work would not have been possible. You have always believed in me and for that I will forever be thankful. iii TABLE OF CONTENTS Page DEDICATION .................................................................................................................... ii TABLE OF CONTENTS ................................................................................................... iii LIST OF FIGURES ............................................................................................................ v LIST OF TABLES ............................................................................................................ vii NOMENCLATURE ........................................................................................................ viii ACKNOWLEDGMENTS ................................................................................................. ix ABSTRACT ........................................................................................................................ x CHAPTER 1. GENERAL INTRODUCTION ................................................................... 1 CHAPTER 2. PROBABILISTIC METHODS FOR LONG-TERM DEMAND FORECASTING IN THE AVIATION INDUSTRY ......................................................... 6 2.1 Introduction ................................................................................................................... 6 2.2 Demand Forecast Models .............................................................................................. 7 2.2.1 Brownian Motion (BM)......................................................................................... 7 2.2.2 Geometric Brownian motion (GBM) .................................................................... 8 2.2.3 Modified Geometric Brownian Motion ................................................................. 9 2.3 Application: Demand Forecast for Boeing Airplanes ................................................. 10 2.3.1 Boeing 737 Demand Prediction .......................................................................... 10 2.3.2 Boeing 777 Demand Prediction .......................................................................... 14 iv 2.4 Conclusions ................................................................................................................. 21 CHAPTER 3. COMPARING DECISION MAKING MODELS FOR CAPACITY EXPANSION OF AIRPLANE MANUFACTURING UNDER UNCERTAINTY ......... 23 3.1 Introduction ................................................................................................................. 23 3.2 Application of Decision Making Models ................................................................ 23 3.2.1 Model Settings ..................................................................................................... 23 3.2.2 Expected Utility ................................................................................................... 25 3.2.3 Robust Decision Making ..................................................................................... 28 3.2.4 Information-Gap .................................................................................................. 34 3.3 Comparison between the decision-making models ..................................................... 38 3.4 Conclusions ................................................................................................................. 40 CHAPTER 4. GENERAL CONCLUSIONS .................................................................... 44 APPENDIX ....................................................................................................................... 47 A.1 Background and literature review ............................................................................... 47 A.2 Decision-Making Models for Aviation Industry with Deep Uncertainty ................... 50 A.2.1 Capacity Planning Model with Uncertain Demand ............................................ 50 A.2.2 Decision Space ................................................................................................... 54 A.2.3 Decision-making Models.................................................................................... 55 REFERENCES ................................................................................................................. 59 v LIST OF FIGURES Page Figure 1.1: Historical orders for the Boeing Commercial airplanes ........................................ 1 Figure 1.2: Historical orders for the Airbus Commercial airplanes ........................................ 2 Figure 2.1: Annual orders for Boeing 737 .............................................................................. 11 Figure 2.2: Difference in the number of orders for the Boeing 737 in adjacent years ........... 11 Figure 2.3: Q-Q plot for the difference in the annual orders of Boeing 737 .......................... 12 Figure 2.4: Demand prediction with 90% confidence for Boeing 737 model for the next 20years ............................................................................................................... 14 Figure 2.5: Annual orders for Boeing 777 .............................................................................. 15 Figure 2.6: Q-Q plot of the log of the ratio of successive orders of Boeing 777 airplane...... 16 Figure 2.7: Prediction of annual orders for Boeing 777 with 90% confidence over the next 20 years – traditional GBM approach ........................................................ 17 Figure 2.8: Prediction of annual orders for Boeing 777 with 90% confidence over the next 20 years– modified GBM approach – (2017 as baseline) .......................... 18 Figure 2.9: Prediction of annual orders for Boeing 777 with 90% confidence over the next 20 years– modified GBM approach – (2005 as baseline) .......................... 20 vi Figure 3.1: Certain equivalence for different strategies based on the expected utility model .................................................................................................................. 26 Figure 3.2: Optimal strategy to build each hangar in the EU model as risk tolerance changes ............................................................................................................... 27 Figure 3.3: Optimal strategy for different z in RDM model with a risk-neutral attitude ........ 30 Figure 3.4: Optimal strategy for different z in RDM model with risk tolerance of $2 million ................................................................................................................. 31 Figure 3.5: Optimal strategy for different z in RDM model with risk tolerance of $2.47 million ................................................................................................................. 32 Figure 3.6: Optimal strategy for different z in RDM model with risk tolerance of $3 million ................................................................................................................. 32 Figure 3.7: Optimal strategy according the info-gap model for different expected profit ..... 34 Figure 3.8: Relationship between required profit and maximum α ........................................ 36 Figure 3.9: Sensitivity of info-gap model by varying initial µD1 ............................................. 37 vii LIST OF TABLES Page Table 2.1: Parameters for Brownian motion – Boeing 737 .................................................... 12 Table 2.2: Parameters for the Geometric Brownian motion –
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