Supply Chain¿s Flexibility: A real options approach

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The present investigation is about the process of decision making in supply chain management using a real options analysis framework. Specifically, we address issues regarding the optimal inventory level to hedge against demand uncertainties, the timing for equipment capacity implementation under market product mix complexity, the timing for workforce capacity reinforcement aiming market service requirements, and the decisions between integration and outsourcing in an uncertainty environment. Discrete and continuous time methodologies were used to identify the optimal value and timing of the options to adopt, when the demand is stochastic. Additionally, the effect of market requirements, such as product mix complexity and service level, were also taken into consideration. The increasing uncertainty in demand has promoted supply chains agility and flexibility, limiting the use of many of the traditional management techniques, because of their inability to incorporate the effects of uncertainty. Flexibility is clearly a competitive advantage that companies should have and therefore must be quantified.