Real Options inSupply Chain Management.ppt

Richard de Neufville Professor of Systems Engineering and of Civil and Environmental Engineering MIT Real Options in Supply Chain Management Objectives of this presentation To stress the role of flexibility in design and management of supply chains It provides the means to adjust to the consequences of inevitable risks To define Options, as means to create flexibility Build upon their use in financial context Focus is on application to the design and then effective management of the system over time Take-away: “options thinking” is crucial Outline Motivation by Example Managers need flexibility to respond to unexpected This simple concept implies a deep change in way we think about design of these systems From: designing to specified circumstances To: planning for a range of possibilities Options is the formal way of defining and analyzing flexibility Builds upon options analysis as used in finance Managers need flexibility They frequently may encounter disruptive situations that demand, or would benefit from, out-of-ordinary responses Recent Examples: Key supplier cannot deliver (fire in a chip plant) Normal links broken (West Coast shipping strike) Product demand surges (hit fashion or holiday item) Ability to respond quickly can be critical Nokia responded fast to chip plant fire, Motorola couldn’t = Nokia was able to expand market share significantly Flexibility = Insurance, Opportunity One way to view flexibility is as “insurance”, the capability to avoid bad outcomes Another: readiness to capitalize on opportunities [ these are like ‘puts’ and ‘calls’ – see later] Either way, flexibility requires prior preparation Backup suppliers or alternative designs Commitments by manufacturers for extra capacity Capacity to re-deploy supply chain Flexibility thinking = Mental Shift Building flexibility into system requires a mental shift in framing of supply chain Problem viewed as managing risk over range of circumstances, not as traditional view of optim