A Real Options Model for Workforce Cross-Training

Abstract

In this article, we propose using a real options framework to model and financially value a cross-training policy. The cross-training policy involves a dynamic investment on workforce flexibility. We model it as an approximation of an American call option using binomial lattices. Value stems from the merit of dynamic cross-training compared with the deterministic case using traditional discounted cash flow techniques. This work is discussed in the context of a volatile production system characterized by product dynamics, labor dynamics, task heterogeneity and workforce heterogeneity. Results suggest that cross-training based on the real options approach is dependent on the production capability and the level of workforce heterogeneity. Thus, valuing workforce flexibility using real options has strategic utility beyond that of the net present value approach.

Department(s)

Engineering Management and Systems Engineering

Keywords and Phrases

Approximation Theory; Competition; Investments; Personnel; Productivity; Public Policy, Cash Flow; Cross-training Policy; Labor Dynamics; Product Dynamics; Personnel Training

International Standard Serial Number (ISSN)

0013-791X

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2005 Taylor & Francis, All rights reserved.

Publication Date

01 Jan 2005

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