Abstract
Flexible manufacturing systems (FMS) have been considered to be essential for manufacturers to succeed in the uncertain market place. Flexibility typically comes at a price and is only valuable as a hedge against environmental uncertainty. It is important to determine an appropriate level of flexibility in the production system while considering the tradeoffs between its costs and benefits. This paper proposes to apply a real option theoretic approach to the modeling and analysis of various types of uncertainty involved in an FMS's operational environment. In comparison with financial options, real options in the context of an FMS, namely, production options, are identified and accordingly a pricing model for production options is proposed based on the option theory. Based on the valuation of production options, a general framework of flexibility planning is formulated. The real option approach surmounts traditional discounted cash flow analysis based valuation methods that tend to ignore the upside potentials to an investment from management flexibility. The proposed model is tested in a refrigerator company that deals with high product variety and uncertain demand.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.