A real-option approach to flexibility planning in reconfigurable manufacturing systems

Reconfigurable manufacturing systems (RMS) are a new class of manufacturing systems aiming at combining the high throughput of dedicated manufacturing lines with the flexibility of flexible manufacturing systems. An RMS can simultaneously manufacture a large variety of product types in unpredictable quantities while maintaining mass production efficiency. Flexibility typically comes at a price and is only valuable as a hedge against environmental uncertainty. It is important to determine an appropriate level of flexibility in the reconfiguration of production systems while considering the tradeoffs between its costs and benefits. This paper develops a real-option theoretical model that provides insights into flexibility planning in an RMS. A practical method is presented to assist the justification of an RMS in deciding how to influence its operating environment and choose right reconfiguration technologies in order to maximize the performance measure of profitability. The real-option approach surmounts traditional discounted cash-flow-analysis-based valuation methods that tend to ignore the upside potentials of an investment from management flexibility. The proposed model is tested with a real-life RMS installed for the Printed Circuit Board (PCB) assembly of mobile phones with a high level of variety.