A Real Options Approach to Design for Quality Standards Considering Life Cycle of a Product

Flexibility is recognized as a valuable parameter for a manufacturing system. When valuing flexibility for quality standards of a production facility, there must be a tool to precisely justify the value delivered by the preferred standards. In this project, we have developed an options model that accounts for the demand dynamics during the product life cycle. We consider a manufacturing facility that employs a specific quality control chart. A second control chart with more strict standards is generated and the effectiveness of two control charts is analyzed with options framework considering the life cycle of the product. The options model is evaluated by lattice approach and the dynamic programming model. The results show that a set of appropriate levels of quality standards when adopted by a manufacturing system can be profitable for the firm.