Valuation on flexibility in daily balancing between supply and demand in fresh beverage business: Based on real options approach

This paper examines the possibility of flexible adjustments to more efficient lot size in supply chain management (SCM) for fresh beverage production using real option approach (ROA). For deterioration, it is necessary for a supplier to produce just the same amount to demand of a buyer. However, a daily demand is not necessarily the suitable amount for a supplier. In a real case study of beverage, a supplier divides the demand into batch capacity (a basic unit shows a carton piece per a batch), each batch is produced up to the maximum piece except for last batch. The pieces in the last batch may not meet the maximum. This may yield salvage and/or inefficient production to the supplier as producer. The authors considered the condition of the pieces in last batch as uncertainty. ROA allows the buyer and the supplier to permit supplier´s option exercise to response to the demand uncertainty. In fact, the supplier was given the right to exercise options that can increase or decrease production pieces in last batch. The authors simulated the flexibility of options using sensitivity analysis in one period. As a result, options can increase the pieces, reduce the salvage cost and improve cost per one piece. In a future next study, authors want to examine that the impact of the exercise of options in a multi-period.