A Portfolio Theory Approach to Identify Risk-efficient Enablers of Change in Global Production Networks

Abstract

In recent years, due to the shift of markets and the global competitive environment companies have attempted to increase efficiency by operating in globally distributed production networks. But these networks have often grown historically neglecting a future-oriented strategy. Nowadays, the consideration of investments into these complex, hierarchical and heterogeneous network structures is in companies’ focus. This so-called migration planning has become a complex decision-making problem. Here, changeability is increasingly referred to as a factor of success. Adequate methods are needed to operationalize and quantify the costs but also the benefits and consequently the profitability of change enabling measures. But the determination of the optimal degree of changeability is crucial to enable flexible and fast migrations of the network configuration. However, currently there is no approach in the literature which values the reduction potential with regard to migration costs by investments in enablers of change or even accelerators of change under uncertain future developments of key drivers of change. By developing a method to monetarize occurring time expenses of planning, implementation and ramp-up activities for the migration of the network configuration the presented approach describes how these migration costs can be estimated and major cost drivers be influenced through investments in enablers or accelerators of change. Furthermore, the resulting cost savings are contrasted with the investment expenditures to determine the return on investment of the respective enablers and accelerators. Based on the principals of modern portfolio theory in a last step bundles of enablers and accelerators are built to minimize the risk of misinvestments and to establish an efficient and tailor-made implementation plan based on the decision maker's risk preferences.