In the modern competitive environment, firms have to offer a variety of products to their customers in a cost effective manner. One way of achieving this goal is through the use of product platforms and product families. The choice of product materials and manufacturing processes has a significant effect on the ability to derive variants from these product platforms and families. Unfortunately, most economic analyses of materials selection rarely include the effect on the product family, and if they do they are viewed as static and passive investments. In reality, the decision to produce an additional variant is a “right, but not an obligation” — it can be viewed as a real option. A methodology to value the option of producing a follow-on variant product for an a posteriori (or bottom up) product family is proposed. This method uses inputs that are readily available for most product development teams. An automotive instrument panel beam case study is used to illustrate the method. Results from the case study show that while the follow-on variant option did not affect the relative economic preference of the materials, the value of the options associated follow-on variants accounted for a significant portion of total development project value. Valuations performed using both the binomial and Black-Scholes methods did not show significant differences between the methods. Material and manufacturing process characteristics are shown to have an effect on follow-on variant option value. The product lifetime and annual production volume of the follow-on variant are shown to have significant effects on option value. Initial variant product lifetime and underlying asset risk are shown to have less of an effect on option value.
- Design Engineering Division and Computers in Engineering Division
Incorporating the Option Value of Product Family Variants in Material and Process Selection
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Johnson, MD, & Nanda, A. "Incorporating the Option Value of Product Family Variants in Material and Process Selection." Proceedings of the ASME 2009 International Design Engineering Technical Conferences and Computers and Information in Engineering Conference. Volume 8: 14th Design for Manufacturing and the Life Cycle Conference; 6th Symposium on International Design and Design Education; 21st International Conference on Design Theory and Methodology, Parts A and B. San Diego, California, USA. August 30–September 2, 2009. pp. 1101-1109. ASME. https://doi.org/10.1115/DETC2009-87493
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