Workforce agility for stochastically diffused conditions-A real options perspective

The essence of promoting workforce agility under stochastically diffused conditions is to maintain workforce intensity (workforce capacity per unit of production) at a relative stable level. We therefore model the decision problem for workforce planning as a series of sequential investments in workforce capacity during the product lifecycle. A real options valuation technique is used to optimize the design of workforce agility for maximum expected return in a stochastically diffused environment. The analysis demonstrates that a real options approach can be an important contributor towards agility, and the importance is magnified at higher levels of demand volatility. By measuring improved agility relative to other strategies, we demonstrate the advantages of the RO-based agility, such as the asymmetric attitudes towards risk exposure and profitability, and the robustness to high uncertainty. We illustrate that the RO-based workforce agility inherits the risk management capability of options, and thus it reduces substantially the sensitivity of production quality to market risks, allowing manufacturers to rapidly and economically adapt to the unexpected changes in the market.