Capacity under uncertain demand
A new plant, warehouse or line is justified on a forecast nobody fully trusts.
DecisionIs it better to build full scale now, build smaller and expand, or wait — and by how much?
Expertise 02 · Real options
A major investment is about to be approved on one forecast.
A new plant, warehouse or second source is usually justified on a single demand path. When demand, cost or disruption risk is uncertain, the right to wait, stage, expand, switch or exit is worth money.
When this approach is needed
Typical business situations
Case 1
Case 2
Market entry
Entering a new region or segment requires fixed investment ahead of uncertain volumes.
DecisionWhat is the value of a phased entry with clear expand-or-exit decision points?
Case 3
Second sources and switching
Qualifying an alternative supplier costs money every year, and is only used when something goes wrong.
DecisionWhat is the option to switch worth, and how much is it reasonable to pay to keep it?
Case 4
Automation timing
An automation investment depends on future labour costs and volumes.
DecisionWhen does it become worth committing, and what should trigger the decision?
What you receive
- Valuations of the competing strategies — commit now, defer, stage — including the option value
- Decision rules: the demand or cost levels at which to expand, wait or exit
- Sensitivity of the ranking to uncertainty, in terms a finance committee can review
- A link to the network design model, so timing and configuration are decided together
How an engagement runs
- FrameIdentify the decisions, the uncertainties that matter and the flexibility actually available.
- ModelRepresent the uncertainty as a lattice or scenario set calibrated to data and expert judgement.
- ValueSolve backward from the future, so every decision point uses the information available then.
- DecideTranslate the result into a recommended strategy and the triggers for the next decisions.
Reference
- Approach
- A standard NPV values a single path through an investment decision. When demand, cost or disruption risk is uncertain, the right to wait, build in stages, expand later, switch supply or exit has a measurable value. Real options analysis prices those rights, so a flexible design can be compared fairly with a commit-now plan.
- Core question
- Given real uncertainty, what is the right to wait, stage, expand, switch or abandon worth — and does it change which option is best today?
- Method
- Binomial and scenario lattices solved by backward induction; simulation-based valuation where several uncertainties interact; integration with network design optimisation.
- Evidence
- Real Options for Network Design values three strategies — commit now, wait, staged expansion — over a binomial demand lattice, and shows how the ranking changes as uncertainty grows.
- Related offer
- Network Flexibility Study.
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