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

European Journal of Finance, 2013, Volume 19, Issue 7-8, pages 760-778

22 Pages Posted: 11 Dec 2010 Last revised: 7 Jul 2015

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies; University of Montreal - Department of Mathematics and Statistics

Isik Bicer

École Polytechnique Fédérale de Lausanne

Suzanne de Treville

University of Lausanne - Faculty of Business and Economics

Lenos Trigeorgis

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

Date Written: April 2, 2012

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.

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

JEL Classification: D24, L64

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, 2013, Volume 19, Issue 7-8, pages 760-778. Available at SSRN: https://ssrn.com/abstract=1722082 or http://dx.doi.org/10.2139/ssrn.1722082

Benjamin Avanzi

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

UNSW Sydney, NSW 2052
Australia

University of Montreal - Department of Mathematics and Statistics ( email )

Montreal, Quebec H3C 3J7
Canada
+1 514 343 6695 (Phone)

Isik Bicer

École Polytechnique Fédérale de Lausanne ( email )

EPFL - TOM
Odyssea 2.01, Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/isik.bicer

Suzanne De Treville (Contact Author)

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

Anthropôle 3073
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)

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

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