Richard de Neufville Real Options in

Real Options in

Supply Chain Management

Richard de Neufville

Professor of Systems Engineering and of

Civil and Environmental Engineering

MIT

Options for Supply Chain Management

Massachusetts Institute of Technology

Richard de Neufville

May 28, 2003

?

Slide 1 of 28

Objectives of this presentation




To stress the role of flexibility in design and

management of supply chains

¨C It provides the means to adjust to the consequences

of inevitable risks




To define Options, as means to create flexibility

¨C Build upon their use in financial context

¨C Focus is on application to the design and then

effective management of the system over time




Take-away: ¡°options thinking¡± is crucial

Options for Supply Chain Management

Massachusetts Institute of Technology

Richard de Neufville

May 28, 2003

?

Slide 2 of 28

Outline

Managers need flexibility to respond to unexpected




This concept implies a deep change in way we

think about design of supply chain systems

¨C From: designing to specified circumstances

¨C To:

planning for a range of possibilities




Options analysis is way to value flexibility

¨C Builds upon options analysis as used in finance




Example from current work on disruptions

Options for Supply Chain Management

Massachusetts Institute of Technology

Richard de Neufville

May 28, 2003

?

Slide 3 of 28

Managers need flexibility




Both suppliers and customers need flexibility to

deal with unexpected changes




Aircraft industry has been selling options for

years, to benefit of airlines and manufacturers




Product modularity and platforms enhance

ability to adjust products to market demands




Short life cycles provide flexibility to recognize

manufacturing issues, to respond to design

changes requested by marketplace

Options for Supply Chain Management

Massachusetts Institute of Technology

Richard de Neufville

May 28, 2003

?

Slide 4 of 28

Flexibility for Disruptions




Managers frequently encounter disruptive

situations that demand, or would benefit from,

out-of-ordinary responses




Recent Examples:

¨C Key supplier cannot deliver (fire in a chip plant)

¨C Normal links broken (West Coast shipping strike)

¨C Product demand surges (hit fashion or holiday item)




Ability to respond quickly can be critical

¨C Nokia responded fast to chip plant fire, Ericsson

couldn¡¯t => Nokia was able to expand market share

significantly

Options for Supply Chain Management

Massachusetts Institute of Technology

Richard de Neufville

May 28, 2003

?

Slide 5 of 28

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