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.