Capacity Reservation for Capital-intensive Technologies: An Options Approach
Arguably the central problem in operations research and management science (OR/MS) addressed by e-Business is better coordination of supply and de mand, including price discovery and reduction of transactions costs of buyer seller interactions. In capital-intensive industries like chemicals and steel, the out-of-pocket costs of excess capacity and the opportunity costs of underuti lized capacity have been important factors driving the growth of exchanges for improving demand and supply coordination through e-Business platforms. Stefan Spinler addresses in his dissertation one of the most interesting aspects of this evolution for OR/MS, the parallel development of long-term and short-term markets for capacity and output, accompanied by a range of exotic options and forwards as the basic mechanisms supporting transac tions. This is a fascinating research topic because it builds on the powerful framework of real options, while connecting directly to key operations deci sions (capacity planning, staffing, maintenance, and so forth) of the plants and technologies whose output is the focus of contracts. From the perspec tive of practice, the use of these contracting mechanisms, as facilitated by a new breed of B2B exchanges, represents an opportunity for further improving supply chain performance and capital asset productivity.
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allocation analysis analyze arg max assumed assumption Buyer's Problem buyer's utility call option competing technology contingency contracts contract and spot contract market Corollary correlation between spot decision demand uncertainty derived determine Economic electricity equilibrium quantity expected spot price flexibility forward contract function futures market game theory given hedging Huchzermeier impact increasing industry investment Jensen's inequality Lemma limit long-term contract Lufthansa Cargo Management Science marginal cost marginal WTP market session market set-up Newsvendor Non-Perfect Correlation number of options obtain opportunity cost Optimal contract optimal number optimal reservation fee optimal reservation quantity options on capacity Partial Options Execution Perfect Correlation price and utility probability distribution Proof purchase quantity Q real options reservation fee risk-sharing Sect short-term spot consumption spot market consumption spot price P3 state-contingent execution fee strategy supplier Supply Chain supply contracts Theorem theory transaction costs Ui(Q valuation of options yield management yields