Abstract

http://ssrn.com/abstract=1722082
 
 

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Real Options at the Interface of Finance and Operations: Exploiting Embedded Supply Chain Real Options to Gain Competitiveness


Benjamin Avanzi


University of Montreal - Department of Mathematics and Statistics; University of New South Wales (UNSW) - Australian School of Business - School of Risk and Actuarial Studies

Isik Bicer


University of Lausanne - Faculty of Business and Economics

Suzanne De Treville


University of Lausanne - Faculty of Business and Economics

Lenos Trigeorgis


University of Cyprus - Department of Public and Business Administration; Columbia University - Columbia Business School

April 2, 2012

European Journal of Finance, in press

Abstract:     
Exploiting embedded supply-chain real options creates powerful opportunities for competitive manufacturing in high-cost environments. Rather than seeking competitiveness through standardization as is common to lean production, real-options reasoning explores opportunities to use supply-chain variability as a strategic weapon. We present an illustrative case study of a Swiss manufacturer of cable extrusion equipment supported by a formal real-options model that aids in valuing the embedded options that make up supply-chain flexibility: postponement, contraction, expansion, switching, and abandonment. Real-options reasoning provides a plausible retrospective rationale for the case firm's use of supply-chain flexibility that provided protection against competition from low-cost but less responsive competitors. Their intuitive real-options reasoning facilitated incorporating fuller information concerning volatility, flexibility, and control into choosing what products to make, in what quantity, and with work allocated to which supplier. The case study also highlights how competing through exploiting embedded real options requires a different managerial skill set than does competing through cost reduction: Skills such as customer communication, supplier management, and ability to ensure a smooth flow of production join the ability to reduce and control lead times as key sources of competitive advantage.

Number of Pages in PDF File: 22

Keywords: real options, supply chain strategy, supply chain risk

JEL Classification: D24, L64

Accepted Paper Series


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Date posted: December 11, 2010 ; Last revised: April 3, 2012

Suggested Citation

Avanzi, Benjamin and Bicer, Isik and de Treville, Suzanne and Trigeorgis, Lenos, Real Options at the Interface of Finance and Operations: Exploiting Embedded Supply Chain Real Options to Gain Competitiveness (April 2, 2012). European Journal of Finance, in press. Available at SSRN: http://ssrn.com/abstract=1722082 or http://dx.doi.org/10.2139/ssrn.1722082

Contact Information

Benjamin Avanzi
University of Montreal - Department of Mathematics and Statistics ( email )
Montreal, Quebec H3C 3J7
Canada
+1 514 343 6695 (Phone)
University of New South Wales (UNSW) - Australian School of Business - School of Risk and Actuarial Studies ( email )
Sydney, NSW 2052
Australia
Isik Bicer
University of Lausanne - Faculty of Business and Economics ( email )
Lausanne, 1015
Switzerland
HOME PAGE: http://www.hec.unil.ch/people/ibicer
Suzanne De Treville (Contact Author)
University of Lausanne - Faculty of Business and Economics ( email )
Internef 616
Lausanne, 1015
Switzerland
Lenos Trigeorgis
University of Cyprus - Department of Public and Business Administration ( email )
75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
00357 2 338762 (Phone)
00357 2 339063 (Fax)
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
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