IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v231y2013i1p182-189.html
   My bibliography  Save this article

A real options approach to labour shifts planning under different service level targets

Author

Listed:
  • Fernandes, Rui
  • Gouveia, Borges
  • Pinho, Carlos

Abstract

Firms that experience uncertainty in demand as well as challenging service levels face, among other things, the problem of managing employee shift numbers. Decisions regarding shift numbers often involve significant expansions or reductions in capacity, in response to changes in demand. In this paper, we quantify the impact of treating shifts in workforce expansion as investments, while considering required service level improvements. The decision to increase shifts, whether by employing temporary workers or hiring permanent employees, is one that involves significant risks. Traditional theories typically consider reversible investments, and thus do not capture the idiosyncrasies involved in shift management, in which costs are not fully reversible. In our study, by using real options theory, we quantify managers’ ability to consider this irreversibility, aiming to enable them to make shift decisions under conditions of uncertainty with the maximum level of flexibility. Our model aims to help managers make more accurate decisions with regard to shift expansion under service level targets, and to defer commitment until future uncertainties can be at least partially resolved. Overall, our investigation contributes to studies on the time required to introduce labour shift changes, while keeping the value of service level improvements in mind.

Suggested Citation

  • Fernandes, Rui & Gouveia, Borges & Pinho, Carlos, 2013. "A real options approach to labour shifts planning under different service level targets," European Journal of Operational Research, Elsevier, vol. 231(1), pages 182-189.
  • Handle: RePEc:eee:ejores:v:231:y:2013:i:1:p:182-189
    DOI: 10.1016/j.ejor.2013.05.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221713003925
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ejor.2013.05.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Azmat, Carlos S. & Widmer, Marino, 2004. "A case study of single shift planning and scheduling under annualized hours: A simple three-step approach," European Journal of Operational Research, Elsevier, vol. 153(1), pages 148-175, February.
    2. E. Brandão, Luiz & Dyer, James S. & Hahn, Warren J., 2012. "Volatility estimation for stochastic project value models," European Journal of Operational Research, Elsevier, vol. 220(3), pages 642-648.
    3. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, "undated". "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
    4. A Corominas & J Ojeda & R Pastor, 2005. "Multi-objective allocation of multi-function workers with lower bounded capacity," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 56(6), pages 738-743, June.
    5. Saman Majd & Robert S. Pindyck, 1989. "The Learning Curve and Optimal Production under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 331-343, Autumn.
    6. James R. Dorroh & Thomas R. Gulledge & Norman K. Womer, 1994. "Investment in Knowledge: A Generalization of Learning By Experience," Management Science, INFORMS, vol. 40(8), pages 947-958, August.
    7. Pinker, Edieal J. & Larson, Richard C., 2003. "Optimizing the use of contingent labor when demand is uncertain," European Journal of Operational Research, Elsevier, vol. 144(1), pages 39-55, January.
    8. Higle, Julia L. & Corrado, Charles J., 1992. "Economic investment times for capacity expansion problems," European Journal of Operational Research, Elsevier, vol. 59(2), pages 288-293, June.
    9. Huang, Ming-Guan, 2009. "Real options approach-based demand forecasting method for a range of products with highly volatile and correlated demand," European Journal of Operational Research, Elsevier, vol. 198(3), pages 867-877, November.
    10. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    11. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    12. McClean, Sally, 1991. "Manpower planning models and their estimation," European Journal of Operational Research, Elsevier, vol. 51(2), pages 179-187, March.
    13. Thompson, Gary M. & Goodale, John C., 2006. "Variable employee productivity in workforce scheduling," European Journal of Operational Research, Elsevier, vol. 170(2), pages 376-390, April.
    14. James L. Paddock & Daniel R. Siegel & James L. Smith, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 479-508.
    15. Bengtsson, Jens, 2001. "Manufacturing flexibility and real options: A review," International Journal of Production Economics, Elsevier, vol. 74(1-3), pages 213-224, December.
    16. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
    17. Lieberman, Marvin B., 1989. "Capacity utilization: Theoretical models and empirical tests," European Journal of Operational Research, Elsevier, vol. 40(2), pages 155-168, May.
    18. Dangl, Thomas, 1999. "Investment and capacity choice under uncertain demand," European Journal of Operational Research, Elsevier, vol. 117(3), pages 415-428, September.
    19. Kyle J. Mayer & Jack A. Nickerson, 2005. "Antecedents and Performance Implications of Contracting for Knowledge Workers: Evidence from Information Technology Services," Organization Science, INFORMS, vol. 16(3), pages 225-242, June.
    20. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    21. Oliva, Rogelio, 2003. "Model calibration as a testing strategy for system dynamics models," European Journal of Operational Research, Elsevier, vol. 151(3), pages 552-568, December.
    22. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 753-777.
    23. Benaroch, Michel & Webster, Scott & Kazaz, Burak, 2012. "Impact of sourcing flexibility on the outsourcing of services under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 219(2), pages 272-283.
    24. Dellaert, Nico & de Kok, Ton, 2004. "Integrating resource and production decisions in a simple multi-stage assembly system," International Journal of Production Economics, Elsevier, vol. 90(3), pages 281-294, August.
    25. F.I. Ugwuowo & S.I. McClean, 2000. "Modelling heterogeneity in a manpower system: a review," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 16(2), pages 99-110, April.
    26. Purkiss, Clive, 1981. "Corporate manpower planning: a review of models," European Journal of Operational Research, Elsevier, vol. 8(4), pages 315-323, December.
    27. Hyun-Soo Ahn & Rhonda Righter & J. Shanthikumar, 2005. "Staffing decisions for heterogeneous workers with turnover," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 62(3), pages 499-514, December.
    28. Qin, Ruwen & Nembhard, David A., 2010. "Workforce agility for stochastically diffused conditions--A real options perspective," International Journal of Production Economics, Elsevier, vol. 125(2), pages 324-334, June.
    29. Jacobs, Bas, 2007. "Real options and human capital investment," Labour Economics, Elsevier, vol. 14(6), pages 913-925, December.
    30. X Zhu & H D Sherali, 2009. "Two-stage workforce planning under demand fluctuations and uncertainty," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(1), pages 94-103, January.
    31. John R. Birge, 2000. "Option Methods for Incorporating Risk into Linear Capacity Planning Models," Manufacturing & Service Operations Management, INFORMS, vol. 2(1), pages 19-31, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Raquel J. Fonseca & Luísa Cunha, 2023. "Real options in health insurance decisions: the Portuguese ADSE system," SN Business & Economics, Springer, vol. 3(6), pages 1-17, June.
    2. Andrea Borenich & Peter Greistorfer & Marc Reimann, 2020. "Model-based production cost estimation to support bid processes: an automotive case study," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 28(3), pages 841-868, September.
    3. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Spiros H. Martzoukos & Nayia Pospori & Lenos Trigeorgis, 2024. "Corporate investment decisions with switch flexibility, constraints, and path-dependency," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1223-1250, April.
    2. Qin, Ruwen & Nembhard, David A., 2010. "Workforce agility for stochastically diffused conditions--A real options perspective," International Journal of Production Economics, Elsevier, vol. 125(2), pages 324-334, June.
    3. Liu, Yu-Hong & Jiang, I-Ming, 2019. "Optimal proportion decision-making for two stages investment," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 776-785.
    4. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
    5. Seiji Harikae & James S. Dyer & Tianyang Wang, 2021. "Valuing Real Options in the Volatile Real World," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 171-189, January.
    6. Qin, Ruwen & Nembhard, David A., 2012. "Demand modeling of stochastic product diffusion over the life cycle," International Journal of Production Economics, Elsevier, vol. 137(2), pages 201-210.
    7. Bulan, Laarni T., 2005. "Real options, irreversible investment and firm uncertainty: New evidence from U.S. firms," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 255-279.
    8. Laarni T. Bulan, 2005. "Real options, irreversible investment and firm uncertainty: New evidence from U.S. firms," Review of Financial Economics, John Wiley & Sons, vol. 14(3-4), pages 255-279.
    9. Abadie, Luis M. & Chamorro, José M., 2008. "Valuing flexibility: The case of an Integrated Gasification Combined Cycle power plant," Energy Economics, Elsevier, vol. 30(4), pages 1850-1881, July.
    10. Gabriel P. Mathy, 2020. "How much did uncertainty shocks matter in the Great Depression?," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 14(2), pages 283-323, May.
    11. Della Seta, Marco & Gryglewicz, Sebastian & Kort, Peter M., 2012. "Optimal investment in learning-curve technologies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1462-1476.
    12. Konstantinos Drakos, 2006. "A note on uncertainty and investment across the spectrum of irreversibility," Applied Economics Letters, Taylor & Francis Journals, vol. 13(13), pages 873-876.
    13. Sels, A.T.H., 2006. "Foreign direct investment as an entry mode. An application in emerging economies," Other publications TiSEM 583ca9b5-1691-425d-8f77-0, Tilburg University, School of Economics and Management.
    14. Alvarez, Luis H.R., 2011. "Optimal capital accumulation under price uncertainty and costly reversibility," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1769-1788, October.
    15. Glover, Brent & Levine, Oliver, 2015. "Uncertainty, investment, and managerial incentives," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 121-137.
    16. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    17. Luis H.R. Alvarez E., 2006. "Irreversible Investment, Incremental Capital Accumulation, and Price Uncertainty," Discussion Papers 4, Aboa Centre for Economics.
    18. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    19. Driouchi, Tarik & Bennett, David & Simpson, Gary, 2010. "A path-dependent contingent-claims approach to capacity investments," European Journal of Operational Research, Elsevier, vol. 201(1), pages 319-323, February.
    20. Abel, Andrew B. & Eberly, Janice C., 1997. "An exact solution for the investment and value of a firm facing uncertainty, adjustment costs, and irreversibility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 831-852, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:231:y:2013:i:1:p:182-189. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.