Decision trees are useful whenever we have to evaluate interdependent decisions that must be made in sequence and when there is uncertainty about events. For that reason, they are especially useful for evaluating capacity expansion alternatives given that future demand is uncertain. Remember that our main decision is whether to purchase a large facility or a small one with the possibility of expansion later. You can see that the decision to expand later is dependent on choosing a small facility now. Which alternative ends up being best will depend on whether demand turns out to be high or low. Unfortunately, we can only forecast future demand and have to incur some risks.
Modeling tool used to evaluate independent decisions that must be made in sequence.
A decision tree is a diagram that models the alternatives being considered and the possible outcomes. Decision trees help by giving structure to a series of decisions and providing an objective way of evaluating alternatives. Decision trees contain the following information:
- Decision points. These are the points in time when decisions, such as whether or not to expand, are made. They are represented by squares, called “nodes.”
- Decision alternatives. Buying a large facility and buying a small facility are two decision alternatives. They are represented by “branches” or arrows leaving a decision point. ...