A Real Options Approach to Implement Supply Chain Flexibility under Outsourcing Conditions

Document Type : Original Article

Authors

1 M.Sc. Student, Faculty of Engineering, Ain Shams University, Egypt; Engineer, Al Khorayef Petroleum, Egypt.

2 Prof., Design and Production Engineering Department, Faculty of Engineering, Ain Shams University, Egypt.

3 Assistant Prof., Design and Production Engineering Department, Faculty of Engineering, Ain Shams University, Egypt.

Abstract

Supply chain flexibility has long been recognized as an important strategic and operational characteristic of manufacturing systems and organizations. In general, supply chain flexibility allows firms to compete more effectively in a world of short product life cycles, rapid product development, and substantial demand and/or price uncertainty. Outsourcing option is one of the most important strategic decisions which can improveorganization’s supply chain flexibility. A real options approach is a tool, which can estimate the value of flexibility and is used to determine the optimum strategy to manage this flexibility. The main objective of this paper is to develop a simulation model to evaluate the option value of outsourcing and examine its effect on supply chain flexibility using real options approach. The proposed model demonstrates the application of real options approach to value outsourcing option in order to enhance the organization’s supply chain flexibility through four variables: price, quality, delivery, and switching ability. Several examples through different scenarios are presented, carried out and simulated using Monte Carlo simulation. The proposed approach gives
decision makers a way to choose the appropriate outsourcing strategy based on an integrated view of market dynamics.

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