Strategic options in re-engineering of a manufacturing system with uncertain completion time

Re-engineering of an extant manufacturing process entails dynamic engineering decisions and continuous value build-up with a high degree of uncertainty in completion time. Due to such uncertainty, the underlying project often cannot reach its design target in time. Therefore, upon updated assessment of remaining time to completion, the manager of the re-engineering project may opt to either continue or stop the project. A pre-determined terminal payoff can be realized if the project is completed as planned, while partial payoff can be salvaged if the project is stopped short. In this paper, we address such strategic options in re-engineering of manufacturing system with reference to a realistic manufacturing application. We formulate the strategic engineering option problem (SEOP) by an optimal stopping model with an objective of maximizing expected total profit. We show that the optimal policy for SEOP is either a bang-bang control or a two-band control, depending on the nature of the underlying value build-up process. The managerial implications of such optimal policy and their applications are reported. The solution for an optimal option policy translates to a second-order free-boundary problem which in general renders no closed-form analytical solutions. Numerical tests with real data are conducted.