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Evaluating Investments in Flexible On-Demand Production Capacity : a Real Options Approach

Title data

Freitag, Bettina ; Häfner, Lukas ; Pfeuffer, Verena ; Übelhör, Jochen:
Evaluating Investments in Flexible On-Demand Production Capacity : a Real Options Approach.
In: Business Research. (2019) . - pp. 1-29.
ISSN 2198-2627

Official URL: Volltext

Abstract in another language

Ongoing digitalization of production accelerates trends like mass customization, ever shorter lead times, and life time cycles of products. Thereby, industrial companies face increasingly fluctuating demand that complicates an appropriate production capacity planning. On the other hand, the comprehensive digitalization of production environments favors, amongst others, the dynamic integration of flexible external on-demand production capacity provided by specialized external capacity providers (ECPs). To enable the usage of on-demand production capacity, industrial companies may require significant upfront investments (e.g., for inter-organizational information systems, planning and organizational processes, employee training). The objective of this paper is to develop a model that evaluates such enabling upfront investments from the perspective of a manufacturing company. To consider flexibility of action, we apply real options analysis in a discrete-time binomial tree model and weigh these so-called expansion options to related cash outflows. In addition, we evaluate our model by means of a simulation and sensitiv-ity analyses and derive insights for both researchers and practitioners. The insights gained by our model present a profound economic basis for investment decisions on upfront investments in flexible on-demand production capacity.

Further data

Item Type: Article in a journal
Refereed: Yes
Keywords: Investment Evaluation; On-demand Production Capacity; Volume Flexibility; Real Options Analysis; Expanded Net Present Value; Digitalization
Institutions of the University: Research Institutions
Research Institutions > Affiliated Institutes
Research Institutions > Affiliated Institutes > Fraunhofer Project Group Business and Information Systems Engineering
Research Institutions > Affiliated Institutes > FIM Research Center Finance & Information Management
Result of work at the UBT: No
DDC Subjects: 000 Computer Science, information, general works > 004 Computer science
300 Social sciences > 330 Economics
Date Deposited: 22 Oct 2019 07:06
Last Modified: 13 Dec 2019 07:17
URI: https://eref.uni-bayreuth.de/id/eprint/52811