The impact of the product mix on the value of flexibility

Jens Bengtsson and Jan Olhager

Omega, 2002, vol. 30, issue 4, 265-273

Abstract: Product-mix flexibility is one of the major types of manufacturing flexibility, referring to the ability to produce a broad range of products or variants with presumed low changeover costs. The value of such a capability is important to establish for an industrial firm in order to ensure that the flexibility provided will be at the right level and used profitably rather than in excess of market requirements and consequently costly. We use option-pricing theory to analyse the impact of various product-mix issues on the value of flexibility. The real options model we use incorporates multiple products, capacity constraints as well as set-up costs. The issues treated here include the number of products, demand variability, correlation between products, and the relative demand distribution within the product mix. Thus, we are interested in the nature of the input data to analyse its effect on the value of flexibility. We also check the impact at different capacity levels. The results suggest that the value of flexibility (i) increases with an increasing number of products, (ii) decreases with increasing volatility of product demand, (iii) decreases the more positively correlated the demand is, and (iv) reduces for marginal capacity with increasing levels of capacity. Of these, the impact of positively correlated demand seems to be a major issue. However, the joint impact of the number of products and demand correlation showed some non-intuitive results.

Keywords: Capital; budgeting; Flexible; manufacturing; Options; Output; mix (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0305-0483(02)00034-8
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jomega:v:30:y:2002:i:4:p:265-273

Ordering information: This journal article can be ordered from
http://www.elsevier.com/wps/find/supportfaq.cws_home/regional
https://shop.elsevie ... _01_ooc_1&version=01

Access Statistics for this article

Omega is currently edited by B. Lev

More articles in Omega from Elsevier
Bibliographic data for series maintained by Catherine Liu ().