Rethinking Lead Time Reduction Investment: A Real Options Perspective

2 Pages Posted: 29 Nov 2008

See all articles by Suzanne de Treville

Suzanne de Treville

University of Lausanne - Faculty of Business and Economics; Swiss Finance Institute

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration; King's College London; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies

Date Written: November 26, 2008

Abstract

Although it is generally agreed that companies are better off with shorter manufacturing lead times, investment in lead time reduction is often difficult to justify using traditional project valuation techniques such as net present value (NPV). In this article, we suggest that evaluating investment in lead time reduction from a real options perspective facilitates quantification of the value of manufacturing flexibility brought about by lead time reduction, particularly the value of the option to time production commitment based on better demand information. This flexibility is significant when demand is volatile. We also present examples to demonstrate how options inherent in lead time reduction can have synergistic effects with related investments, such that a combination of such investments may have positive value even when the NPV of the individual investments is negative.

Keywords: flexible manufacturing systems, real options analysis, manufacturing lead time, supply chain design, supply chain decision structure

JEL Classification: L23, M11, L60, F30, G30

Suggested Citation

de Treville, Suzanne and Trigeorgis, Lenos and Avanzi, Benjamin, Rethinking Lead Time Reduction Investment: A Real Options Perspective (November 26, 2008). UNSW Australian School of Business Research Paper No. 2008ACTL16. Available at SSRN: https://ssrn.com/abstract=1307548 or http://dx.doi.org/10.2139/ssrn.1307548

Suzanne De Treville (Contact Author)

University of Lausanne - Faculty of Business and Economics ( email )

Anthropôle 3073
Lausanne, 1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
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)

King's College London ( email )

Strand
London, WC2R 2LS
United Kingdom

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies ( email )

UNSW Sydney, NSW 2052
Australia

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