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The Interaction between Operational Flexibility and Financial Flexibility

Author

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  • Boyabatli, Onur
  • Leng, Tiecheng

Abstract

This paper examines the interaction between operational flexibility and financial flexibility in a multi-product business unit that makes operational decisions based on financial resources provided by its parent company (or headquarters). We capture operational flexibility through investment in flexible technology and financial flexibility through higher availability of financial resources. We consider the flexible-versus-dedicated technology choice and capacity investment decisions of a two-product business unit under demand uncertainty in the presence of budget constraints. The unit operates under a capital budget for financing the capacity investment, and an operating budget, which is uncertain in the capacity investment stage, for financing the production. We investigate how financial flexibility in the capacity investment stage (as captured by the stringency of the capital budget) and financial flexibility in the production stage (as captured by the likelihood of having sufficient operating budget to fully cover the production cost) shape the optimal technology choice. We identify the critical role that the relative capacity intensity (the ratio of unit capacity cost to total unit capacity and production cost) of each technology plays. Our results have implications about how to deploy technologies with different capacity intensity profiles, which are shaped by automation level or plant location choices.

Suggested Citation

  • Boyabatli, Onur & Leng, Tiecheng, 2017. "The Interaction between Operational Flexibility and Financial Flexibility," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 11(1-2), pages 13-31, December.
    • Handle: RePEc:now:fnttom:0200000077
    DOI: 10.1561/0200000077
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    Cited by:

    1. Huda Saad Al Rashidi & Aktham A, AL Sarayreh, 2019. "Organizational Flexibility and Its Impact on the Service Quality: A Survey Study on Communication and Information Technology Regulatory Authority in Kuwait," International Journal of Human Resource Studies, Macrothink Institute, vol. 9(3), pages 116-134, December.

    More about this item

    Keywords

    Operational risk management; Contingency planning; Commodity price risk; Supply chain disrutpions;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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