The Theory Of Real Options And Its Application To Production Capacity Management

With the rapid development of economic and trade, the market competition is fierceday by day and enterprises have to face a more complex world. Most successfulenterprises suggest that flexibility is an important and indispensable factor for enterprisesto survive and develop in this dramatically changeable environment. Therefore, the use ofadvanced theory and methods to assess the flexibility of production systems has importanttheoretical and practical significance.Real Options is a new and promising investment evaluation method. Compared withtraditional investment evaluation method, the character of real options theory is that italways considers the irreversibility, the uncertainty and the flexibility of investment. So itcan measure the value of the flexibility and help manager decrease its potential losingaccording to his design-making exploring.The article discussed the application of real option thought and approach toproduction systems to make up the deficiency of traditional methods that are unable to fitthe uncertain environment. This article reviews the real options theory and the flexibilityof the production systems, and analyze the flexibility’s optional characteristics and statesthat utilizes of the real options approach in the production systems is feasible. And thenestablish a real options decision-making model in view of volume flexibility. Finally, itpoints out some issues needed to focus on when applies real options to productionsystems.