De-risking Investments in Industrial Systems Using Real Options Analysis: Case of Phosphates Fertilizer Firm
Many industrial firms adopted a deterministic irreversible investment plans without any pro-active risk management strategy. The existing literature of the Supply Chain Design does not value the managerial flexibility as enabled by the Real Option (RO) th
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and Richard de Neufville2
EMINES – Mohammed VI Polytechnique University, 43150 Benguerir, Morocco [email protected] Institute for Data, Systems and Society, Massachusetts Institute of Technology, Cambridge, MA 02139, USA [email protected] 1
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Abstract. Many industrial firms adopted a deterministic irreversible investment plans without any pro-active risk management strategy. The existing literature of the Supply Chain Design does not value the managerial flexibility as enabled by the Real Option (RO) theory. However, this latter considers only single project and not adapted to supply chain investments. This opens a new area of research. Thus, this paper is concerned with providing a practical and novel framework for de-risking future investments of large-scale, capital-intensive interdependent industrial projects, in an uncertain and risky environment. The suggested framework is based on real option analysis and aims to integrate managerial flexibility in terms of “real options” to efficiently adjust the investment plans to the evolution of uncertainties over time, considering interdependencies between projects, while reducing downside risks and increasing potential opportunities. This framework has been tested to assess potential risks, define and value flexible strategies to deal with the construction delays and the cost overruns in the investment planning of phosphates fertilizer firm. The insights indicate that flexibility lead to higher expected performance while reducing downside risks and raising potential upside gains. Keywords: Managerial flexibility Risks Real options
Real Option Analysis Uncertainties
1 Introduction Complex industrial systems strategic planning involves capitalistic investments expenditures and depends upon the future evolution of the global market which is highly risky. Many firms adopt a deterministic irreversible investment plan without any proactive risk management strategy. This could lead the firm to considerable economic losses. This paper is concerned with providing a practical framework for de-risking future investments of complex industrial systems in an uncertain and risky environment, especially cost overruns and time construction delays. This problem may be significantly critical when investing in a commodity-based integrated chemical supply © IFIP International Federation for Information Processing 2020 Published by Springer Nature Switzerland AG 2020 B. Lalic et al. (Eds.): APMS 2020, IFIP AICT 591, pp. 418–426, 2020. https://doi.org/10.1007/978-3-030-57993-7_47
De-risking Investments in Industrial Systems Using Real Options Analysis
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chain such as oil and gas or phosphates-based mining and chemical industry. These industries invest in capital intensive projects whose value chains are usually vertically integrated from mining to distribution and include complex logistic infrastructure and multi-products chemical transformation facilities and infrastructures that are hieratically dependent. The most common approaches to deal with uncertainty in the strategi
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