The Real Option Value of Operational and Managerial Flexibility in Global Supply Chain Networks

Abstract

The analysis and the coordination of global supply chain networks is of great interest to managers of globally operating firms. This tutorial addresses important issues related to the management of global manufacturing and distribution networks. In particular, the benefit of operational and managerial flexibility is examined in the context of the coordination of a multi-stage supply chain network and the deployment of real options. We demonstrate i) that the value of operational flexibility can be exploited, e.g., through global coordination, transfer pricing and knowledge transfer, and ii) that the option value of managerial flexibility can enhance the firm’s shareholder value and reduce its downside risk exposure, e.g., through distribution postponement or stochastic recourse. A well published Harvard case study is utilized to illustrate how these benefits and option values can easily be quantified. In teaching and in practice, global supply chain network analysis can be supported effectively through the use of spreadsheet add-ins, such as Monte Carlo simulation and (non-linear) optimization tools. We discuss briefly the differences between operational and financial hedging. The corresponding spreadsheet models can be downloaded by accessing the following Internet address: http://www.whu.edu/prod.