Managing Risks of Supply-Chain Disruptions: Dual ... - CiteSeerX

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The most counterintuitive lever is the one that consists in increasing the uncertainty of expectedcash flows. Managers tend to view all forms of risk as bad, but higher uncertainty increases thevalue of flexibility and therefore the option value. For example, let’s assume that a person hasacquired a spare tire for his car, which will allow him to make a replacement in case of flat. Thisoption has a value for the driver if he uses his car in the city of Boston. If ever he considers takinghis car during his holydays in Mexico where roads are less kept, the risks of flat are higher and hisspare tire becomes even more valuable.If Black and Scholes valuation formula is only valid for a limited set of real options (manyassumptions are embedded in this model; the option may be exercised only at maturity, there isonly one source of uncertainty, the underlying pays no dividends etc….), the qualitative results onProactive Flexibility remain true for all kind of real options.4.3.2 Option Portfolio ManagementThis paragraph provides with a framework to help firms manage dynamically their options, anddecide when to exercise or on the contrary defer or abandon the option. This is the result of thework from Luehrman (1998).He defines an option space that is determined by 2 different metrics:- Volatility which is equal to “the per-period standard deviation in asset returns (uncertainty)multiplied by the square root of the option’s time to expiration (duration).”- “Value-to-cost ratio” which is equal to “the present value of the asset (stock price or presentvalue of cash flows) divided by the present value of the expenditure required to exercise theoption (the exercise price of the option at the option’s expiration date, discounted back to presentvalue using the appropriate risk-free rate).”Real option value increases with volatility and value-to-cost ratio. As the ratio tends to decreaseover time (the present value of the exercise price increases), this framework represents the trade-offbetween the costs of exercising that go up over time and volatility (if volatility is high, deferringallow managers to learn about business conditions or competitors’ actions, and they can optimizeas circumstances change).As shown in Figure 4.3 this option space is divided in 6 regions; it allows firms to characterize and46
update their option management strategy.Source: Courtney, “20/20 Foresight, Crafting Strategy in an Uncertain World”, Harvard BusinessSchool Press, Boston, Massachusetts, (2001)Figure 4.3: Six-Region Option Portfolio Management Framework- Region 1 represents projects whose value-to-cost ratio is greater than one, and where there is novolatility (either the time has run out or there is no uncertainty as for cash flows). The NPV of animmediate full commitment is positive and firms should exercise the option.- In region 2, the value-to cost-ration is greater than one, the NPV of an immediate fullcommitment is also positive, but the volatility is higher. Firms should consider exercising rightaway the option only if it is too costly to keep the option alive and if there are too many risks of“competitive preemption”. This will constitute a big bet, as volatility is high.- In region 3 the NPV, the value-to cost-ration is greater than one, the NPV of an immediate fullcommitment is negative, and the volatility is high. Firms should wait to exercise the option due47
Page 1: Managing Risks of Supply-Chain Disr
Page 4 and 5: AcknowledgementsI would like to exp
Page 6 and 7: 4.2.5 Conclusions .................
Page 8 and 9: List of FiguresFigure 1.1: Strategy
Page 11 and 12: Chapter 1Introduction.Modern supply
Page 13 and 14: - Levels 2 and 3--between these two
Page 15 and 16: 5. In terms of implementation, Forr
Page 17 and 18: Some articles focus precisely on di
Page 19 and 20: 2.3 Secure the Supply-ChainThere ar
Page 21 and 22: 1) Firms need to build a resilient
Page 23 and 24: at ports and airports and along the
Page 25 and 26: 2.6 Conclusions- Increase the secur
Page 27 and 28: The most adapted approach (single V
Page 29 and 30: suppliers’. The main objective of
Page 31 and 32: Some people continue to think that
Page 33 and 34: For example, there is no market for
Page 35 and 36: 4.1.3 Option ValueJust like a finan
Page 37 and 38: - I0: initial investmentThe problem
Page 39 and 40: Re plicating portfolio in the up st
Page 41 and 42: Let’s consider a portfolio compri
Page 43 and 44: The differential equation is quite
Page 45: value of the cash flows of the proj
Page 49 and 50: Chapter 5OptionModeling Dual-Sourci
Page 52 and 53: We will describe the firm’s curre
Page 54 and 55: investment costs are denotedIMainSu
Page 56 and 57: 5.4 Programming on MatlabTo solve t
Page 58 and 59: Chapter 6Results of the ModelThis c
Page 60 and 61: uses the main supplier its profits
Page 62 and 63: drivers - in particular at the time
Page 64 and 65: what will happen. To hedge this dem
Page 66 and 67: 6.5 Conclusions- Real options allow
Page 68 and 69: market share from its competitor.7.
Page 70 and 71: = 0.99 * ($100) + 0.01* (-$200)= $9
Page 72 and 73: Table 7.1: Assumption on Parameter
Page 74 and 75: 7.2.4 Exploit at maximum real optio
Page 76 and 77: developed “ a general simulation
Page 78 and 79: (13) Lee, H.L., Wolfe, M. (2003),
Page 80 and 81: and Supply Management Course.(38) Z
Page 82 and 83: to reserve for the future, by maxim
Page 84 and 85: APPENDIX B: PARAMETER VALUES USED T
Page 86 and 87: normal or in disruption.The program
Page 88 and 89: -----------------------------------
Page 90 and 91: -----------------------------------
Page 92 and 93: % Probability of going from (m,k,j)
Page 94 and 95: -----------------------------------
Page 96 and 97:
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elsevalue.DecOneNormal=3;end-------
Page 100 and 101:
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