The Source - Quantifying the Value of Flexibility

"Semper Gumby," an unofficial adaptation of the U.S. Marine Corps motto Semper Fidelis, might well be the watchwords for businesses struggling to adjust to constantly shifting demands of the marketplace.

Borrowing the Latin for "always" from the leatherneck pledge to be always faithful, the adapted version recognizes the importance of flexibility like that displayed by the lovable green clay figure that was introduced nearly five decades ago by TV’s Howdy Doody.

Flexibility in business allows an organization to meet shifting customer expectations while it controls costs, keeps delays and disruptions to a minimum, and maintains high performance standards. One way of defining flexibility is your ability to keep your options open for as long as possible. To build in the capability to postpone decisions until more information comes in usually requires additional capacity or widened choice of operational channels.

Ebbs and Flows
If demand for your product or service is subject to unpredictable ebbs and flows — or even wild swings — the more quickly you can respond to that shift, the better able you are to compete. But flexibility like that comes at a price. Is it worth it?

Customary tools for analyzing the benefits of equipment purchases look at performance and capacity improvements to be expected from the investment and calculate the length of time it will take to recover the cost of the investment.

Since potential gains from improved flexibility are difficult to quantify, these assessments may underestimate the benefit of the upgrade in capacity. But new analytic tools developed by researchers at Penn State University and the Center for Army Analysis offer a way to assess mathematically the value of flexibility.

The study, authored by Army analyst William Tarantino and Penn State professors Elena Katok and Terry P. Harrison, explores the potential of simulation techniques to account for the effect flexibility can have on cash flow in a capital purchase.

A Case Study
The team tackled the problem of a company providing the aviation industry with customized updates of flight information. Unpredictable dips and surges in demand come with the territory when your business is keeping flight manuals current on airport runway configurations, approach paths, radio frequencies, and other information essential to pilots.

To deal with the uncertainty, the company relied on a manual final assembly staffed by temporary workers, and shipments were often late.

To assess the benefits of acquiring an expensive new piece of equipment to automate final assembly, the researchers developed a computerized optimization model using hypothetical demand scenarios. Their formula levied a heavy penalty for delays, offering
a tangible measure of the price of inadequate flexibility.

By factoring in the benefit of flexibility, the analysis showed that the equipment would pay for itself in six months instead of the six years suggested by conventional analysis relying only on expectations for performance and capacity improvements. Following the study, the company acquired the new equipment and realized the predicted benefits on schedule.