Flexibility and Operating Options
Most firms would like to build flexibility in their investment projects to be able to do several alternative things in different ways. The flexibility built into the investment projects involves a set of options. For example, a power generation company may either build a thermal power plant or a gas power plant or a power plant that could operate on both coal and gas. Building a plant that runs on both coal and gas will be quite expensive, but management will have the flexibility of using either gas or coal depending the fuel prices. The company will gain significantly when the prices of coal and gas are unrelated and vary considerably. The extra cost to create the manufacturing flexibility may be quite valuable to the company.
When company will benefit from the flexibility when it can choose from different raw materials to make the same product or it can use the same material to manufacture different products. Oil refineries and chemical plants quite often face these situations. Operations resulting from flexibility would prove to be very valuable when input or output prices fluctuate enormously. Companies need manufacturing flexibility to maintain their market shares and competitive position in highly fluctuate and unpredictable markets. For example, the quick changes in fashions have made it very difficult for the ready-made garments industry to meet the consumers’ changing demand without the flexibility of changing product-mix quickly. To meet the challenge and to have manufacturing flexibility, a large number of companies have invested heavily in sophisticated computer controlled machines that can easily handle product-mix changes almost instantly.
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