| Flexibility allows firms to compete more effectively in today's world of substantial uncertainty. The full benefit of flexibility requires a reaction to events as they unfold. The real options approach seeks to quantify the value of flexibility.; The goal of this research is to build real option valuation models to investigate the issues of flexibility surrounding complex decisions of manufacturing operations. We develop modeling approaches for valuing real options without and with switching costs, and without and with a time lag for the implementation of the switching decision. Further we develop solution procedures for univariate and multivariate problems using lattices and Monte Carlo simulation. We present three applications of real options where we value the flexibility of using control charts, outsourcing, and a supply chain network design with uncertain exchange rates. |
