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Flexible facility interior layout: a real options approach

Author

Listed:
  • T Zhao

    (Delta Consulting Group, Inc.)

  • C-L Tseng

    (University of Missouri-Rolla)

Abstract

This paper explores a case of flexible facility layout, in which the layout process can be carried out in a dynamic manner responding to changing demands. We consider a facility such as an office building that needs to partition its interior space into units of different sizes and allocate them to different users. Facing different demands, each of which requires a different space size, the management of the facility needs to constantly exercise managerial real options, such as partitioning a big unit to small units and merging small units to a big one. Modelling the demand uncertainties as stochastic processes, we use the Monte Carlo simulation and solve rolling two-stage stochastic programs over time to value the flexible interior layout. Through numerical tests, we demonstrate that effectively and timely exercising the managerial options can significantly increase profit and service quality. Focusing on the dynamic behaviour of the facility interior layout, the proposed options-based approach aims to improve facility management by proactive decision strategies. The approach may also be extended to facility expansion, maintenance and rehabilitation to increase service life and maintain service quality.

Suggested Citation

  • T Zhao & C-L Tseng, 2007. "Flexible facility interior layout: a real options approach," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(6), pages 729-739, June.
    • Handle: RePEc:pal:jorsoc:v:58:y:2007:i:6:d:10.1057_palgrave.jors.2602189
    DOI: 10.1057/palgrave.jors.2602189
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    References listed on IDEAS

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    1. Mokhtar S. Bazaraa & Jamie J. Goode, 1975. "A Cutting-Plane Algorithm for the Quadratic Set-Covering Problem," Operations Research, INFORMS, vol. 23(1), pages 150-158, February.
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    Cited by:

    1. Gutiérrez, Óscar, 2020. "On the definition of the investment-uncertainty relationship," Journal of Economics and Business, Elsevier, vol. 112(C).
    2. Chung-Li Tseng & Tong Zhao & Chung Fu, 2009. "Contingency estimation using a real options approach," Construction Management and Economics, Taylor & Francis Journals, vol. 27(11), pages 1073-1087.

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