Valuation of Procurement Flexibility in the Machinery and Equipment Industry Using the Real Option Approach

The increasingly uncertain business environment requires the necessity to implement more flexibility in companies. Unfortunately, companies being specialized in engineer-to-order production cannot use safety stocks which are generally used in make-to-stock productions to secure flexibility. Therefore, an alternative approach has to be developed to facilitate procurement flexibility for these companies. In this paper, firstly the current situation of production networks of machine tool and equipment manufacturers will be described. Secondly, the shortcomings of current approaches for intercompany coordination will be discussed. Finally, the real option approach will be examined as a mean to evaluate the benefits of procurement flexibility.