Valuing the flexibility of flexible manufacturing systems

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.