Real options is the science of investments applied to decision-making
that enables optimal trade-offs between future uncertain benefits and
near-term costs. Boeing has developed and patented a set of strategic
investment decision-modeling methods and tools, based on option
techniques used in the capital markets. These methods and tools
appropriately value investment and risk of opportunities while assessing
the likelihood of future events, and aid decision makers in designing
strategies that select high-benefit outcomes while minimizing risks.
Sophisticated manufacturing process ("event-driven") simulation software
enables Boeing to create scenarios of future fabrication and assembly
processes and associated costs for new airplane types, such as the
DreamLiner 787. Cost distributions arise because of the uncertainty in
defining a still technologically-immature processes involved in
fabrication and assembly. Embedded in the process simulation is a
business case ("time-driven") simulation with discounted cost cashflows,
learning curve effects and investments. The business case creates the
objective function to maximize profitability over a range of fabrication
and assembly scenarios. The combination of event- and time-driven
simulation techniques results in a more sophisticated approach to
"business engineering" decision-making to determine optimal MR&D
investments that minimize total non-recurring and recurring cost
outcomes.
The investments are targeted towards both recurring and non-recurring
manufacturing technologies to shape a desired outcome. Investment
effectiveness is the improved value of the outcome, as quantitatively
determined through the simulation, for the amount of investment capital.
A portfolio of technology projects can be ranked according to investment
effectiveness, and return versus risk. Real options provides the
method to evaluate the various cash-flow distributions to justify the
worthiness of the investments in the technology portfolio.
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