Workforce agility for stochastically diffused conditions—A real options perspective

Abstract

Workforce agility is commonly described as a strategy that facilitates profitability in rapidly changing, and uncertain production environments. Agility should be distinguished from the shorter term concept of flexibility, which relates to daily operational issues. A lack of workforce agility has been reported as one of the main reasons that some enterprises have difficulty keeping pace with markets and technological changes. Much of the workforce agility research is at the conceptual level, and where there is a dearth of quantitative modeling and analysis. The essence of promoting workforce agility under stochastically diffused conditions is to maintain workforce intensity (workforce capacity per unit of production) at a relative stable level. We therefore model the decision problem for workforce planning as a series of sequential investments in workforce capacity during the product lifecycle. A real options valuation technique is used to optimize the design of workforce agility for maximum expected return in a stochastically diffused environment. The analysis demonstrates that a real options approach can be an important contributor towards agility, and the importance is magnified at higher levels of demand volatility. By measuring improved agility relative to other strategies, we demonstrate the advantages of the RO-based agility, such as the asymmetric attitudes towards risk exposure and profitability, and the robustness to high uncertainty. We illustrate that the RO-based workforce agility inherits the risk management capability of options, and thus it reduces substantially the sensitivity of production quality to market risks, allowing manufacturers to rapidly and economically adapt to the unexpected changes in the market.