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

concepts allows managers to introduce flexibility in their strategies, and to exploit uncertainties.Taking a second supplier to back-up in case of disruption constitutes a real option. It is possible tointroduce other real options in this project to add flexibility and increase the total value. Forexample, Chapter 6 shows that delaying the decision to invest in dual sourcing increases value as itpermits to observe changes over time and make the right decision at the right time. It is an optionon the decision to invest, and is called a compound option as this is a real option on another option.It exploits demand uncertainty.7.2.2 Rely on experts to deal with real option calculationsValuation of real options can be hard, depending in particular on how complex uncertain variablesand decision process are. And precisely, disruption events are relatively difficult to deal with. Itmay be useful to rely on experts who will master the different valuation methods that have beendeveloped since the beginning of research on real options.Advances in both computing power and understanding of option pricing over the last 20 yearsmake it easier now to analyze business strategy as a chain of real options.7.2.3 Put a lot of efforts on valuating inputs: this requires much time andwill condition the quality of the analysis.A lot of inputs are necessary to build in the model, and determining each of them generally requiresmuch work. In our simple dual sourcing model there are more than ten parameters and very few areobvious. For example, evaluating the costs of local suppliers demands an important work ofresearch to find alternate suppliers and ask them for their prices in normal situation and in case ofdisruption. The choice of an adequate discount rate is also difficult and there is no universallyaccepted method to help firms. In particular, the discount rate is generally considered as constantover time whereas it should be constantly adjusted to reflect the changes in the project level of risk.The disruption probability is also difficult to estimate as it includes many different risks that are notalways well known.73