Valuing the flexibility of flexible manufacturing systems
Name
MIT-EL-88-006WP-19486345.pdf
Size
1.08 MB
Format
Adobe PDF
Checksum (MD5)
afab7bcaa3fb55d2eb0d79e8e8633243
Author(s)
Kulatilaka, Nalin
Date Issued
1988
Publisher
MIT Energy Lab
Series/Report no.
MIT-EL
88-006WP
Abstract
This paper studies a topical issue: Flexible Manufacturing System (FMS)
justification. We contend that current evaluation methods fall short of
capturing a key advantage of an FMS: the value of flexibility. We identify
various benefits of FMS that arise from the ability to switch between modes of
production, and in particular, we model the value derived from the ability to
better cope with uncertainty. A model to capture this value must solve for
the value of flexibility together with the dynamic operating schedule of the
production process. We present a stochastic dynamic programming model that
captures the essential elements of this problem. A numerical example further
demonstrates the optimal mode switching decision rules.
This research has several important managerial implications. It
emphasizes the importance of ex ante economic justification of flexible
manufacturing systems and proposes a way to modify existing capital budgeting
techniques to incorporate the special features of flexibility. As the value
of flexibility depends inherently on the design of the manufacturing system,
the design and justification stages must be conducted simultaneously. We also
show how to include other operating decisions in the valuation model. These
can include the investment timing or the decision to temporarily shut down or
to abandon the project entirely.
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