Flexibility and decision making

This paper presents a formal treatment of flexibility by using decision theory in a two-period decision problem. It is supposed that each action at the first period has a flexibility measure the number of options open at the second period. The model presented assumes that uncertainty exists in the loss functions of the decision problem and shows how this uncertainty gives rise to a consideration of flexibility as a criterion in the decision process. The tradeoff of flexibility against an expected loss calculated using a preliminary model is shown. A simple manufacturing example is used to illustrate the ideas.