Volume 38, Issue 3 (May 2010)
Decision Model for Global Manufacturing and Operating Flexibility: Real Options Approach
This study develops the batch production model of single firm, N sale points, single goods, and adding transport cost of N sale points, which choose one production from N production location (N countries, respectively), and applies the real options approach (ROA) to determine the value of locating production in N countries. A closed-form solution of the optimal transfer threshold value and expected arrival time concerning the firm’s decisions to transfer production location by the ROA and net present value (NPV) method and the continuous-time model optimization problem are derived. Moreover, we get the parameters of how to reciprocally influence optimal transfer threshold values among N countries. Next, given the values of 88-piece parameters in the research model, we can get optimal transfer threshold values from country-0 to country-1, country-2, and country-3, respectively, and more important insights such as that real exchange rate volatility influences expected arrival time for a firm that decides to transfer the production location by the ROA and NPV and the optimal transfer threshold value for a firm that decides to transfer the production location by the ROA. We give an example to explain how to operate this model, and a useful summary of insights is provided for global operation managers.