Pub Date : 2020-01-22DOI: 10.1080/0013791x.2020.1716126
Y. Yatsenko, N. Hritonenko, S. Boranbayev
Abstract This paper studies the cost-minimizing serial asset replacement problem under changing operating and replacement costs. Technological improvements affect these costs in different ways, which leads to different duration of sequential replacement cycles of the same asset. Therefore, a firm should optimize a chain of consecutive asset replacements using available information about future costs. We offer a novel multi-cycle algorithm for making such replacement decisions and prove that it converges to the infinite-horizon solution when the number of cycles increases. Important qualitative properties of the obtained optimal non-equal-life replacement strategies are derived, and practical recommendations are discussed.
{"title":"Non-equal-life asset replacement under evolving technology: A multi-cycle approach","authors":"Y. Yatsenko, N. Hritonenko, S. Boranbayev","doi":"10.1080/0013791x.2020.1716126","DOIUrl":"https://doi.org/10.1080/0013791x.2020.1716126","url":null,"abstract":"Abstract This paper studies the cost-minimizing serial asset replacement problem under changing operating and replacement costs. Technological improvements affect these costs in different ways, which leads to different duration of sequential replacement cycles of the same asset. Therefore, a firm should optimize a chain of consecutive asset replacements using available information about future costs. We offer a novel multi-cycle algorithm for making such replacement decisions and prove that it converges to the infinite-horizon solution when the number of cycles increases. Important qualitative properties of the obtained optimal non-equal-life replacement strategies are derived, and practical recommendations are discussed.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"339 - 362"},"PeriodicalIF":1.2,"publicationDate":"2020-01-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791x.2020.1716126","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42804989","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-01-20DOI: 10.1080/0013791x.2020.1712508
K. Min, L. Lilienkamp, J. Jackman, C. Wang
Abstract For critical and strategic materials such as a rare earth element or crude oil, we study a supply chain consisting of an intermediary/producer facing a highly volatile market to its customers and a local supplier at a different region subject to a fixed term supply contract. By viewing the opportunity to sign this contract as a real option, we construct a supply contract model and analytically derive the optimal contract-signing threshold price from the intermediary/producer perspective. Based on this threshold, we show how the relationship among the threshold price, lead time, and contract duration results in a classification of the supply chain’s preferences for lead time length, and to concrete guidelines for using the lead time and contract duration as tradable negotiation tools for supply chain contracts.
{"title":"Supply contracts for critical and strategic materials of high volatility and their ramifications for supply chains","authors":"K. Min, L. Lilienkamp, J. Jackman, C. Wang","doi":"10.1080/0013791x.2020.1712508","DOIUrl":"https://doi.org/10.1080/0013791x.2020.1712508","url":null,"abstract":"Abstract For critical and strategic materials such as a rare earth element or crude oil, we study a supply chain consisting of an intermediary/producer facing a highly volatile market to its customers and a local supplier at a different region subject to a fixed term supply contract. By viewing the opportunity to sign this contract as a real option, we construct a supply contract model and analytically derive the optimal contract-signing threshold price from the intermediary/producer perspective. Based on this threshold, we show how the relationship among the threshold price, lead time, and contract duration results in a classification of the supply chain’s preferences for lead time length, and to concrete guidelines for using the lead time and contract duration as tradable negotiation tools for supply chain contracts.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"266 - 287"},"PeriodicalIF":1.2,"publicationDate":"2020-01-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791x.2020.1712508","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47529865","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-01-20DOI: 10.1080/0013791x.2020.1712509
F. Mariscal, T. Reyes, E. Sauma
Abstract We study the value of adding flexibility to Transmission Expansion Planning (TEP) projects from the perspective of a social planner using real options. Due to the deregulation of electricity markets, TEP projects currently face multiple uncertainties. These uncertainties often cause traditional project valuation methods to recommend sub-optimal investment decisions. Additionally, to incorporate the effects of uncertainties on the valuation of TEP projects, current literature rely on some critical simplifications that do not fit well with the real operations of a power market. This paper models the power market in a realistic way by combining an equilibrium model, to assess the power market equilibrium that the TEP project will generate, with a valuation model based on real options, to incorporate the value of flexibility. The methodology is applied to determine the value of adding capacity expansion flexibility to a portion of the rigid TEP project that connects the main two interconnected systems in Chile since 2018. Our results show that, in this case, adding flexibility increases the net expected social welfare by $14.03 million. Several sensitivity analyses confirm that this flexibility has more value when uncertainty is higher and/or investment costs are lower.
{"title":"Valuing flexibility in transmission expansion planning from the perspective of a social planner: A methodology and an application to the Chilean power system","authors":"F. Mariscal, T. Reyes, E. Sauma","doi":"10.1080/0013791x.2020.1712509","DOIUrl":"https://doi.org/10.1080/0013791x.2020.1712509","url":null,"abstract":"Abstract We study the value of adding flexibility to Transmission Expansion Planning (TEP) projects from the perspective of a social planner using real options. Due to the deregulation of electricity markets, TEP projects currently face multiple uncertainties. These uncertainties often cause traditional project valuation methods to recommend sub-optimal investment decisions. Additionally, to incorporate the effects of uncertainties on the valuation of TEP projects, current literature rely on some critical simplifications that do not fit well with the real operations of a power market. This paper models the power market in a realistic way by combining an equilibrium model, to assess the power market equilibrium that the TEP project will generate, with a valuation model based on real options, to incorporate the value of flexibility. The methodology is applied to determine the value of adding capacity expansion flexibility to a portion of the rigid TEP project that connects the main two interconnected systems in Chile since 2018. Our results show that, in this case, adding flexibility increases the net expected social welfare by $14.03 million. Several sensitivity analyses confirm that this flexibility has more value when uncertainty is higher and/or investment costs are lower.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"288 - 320"},"PeriodicalIF":1.2,"publicationDate":"2020-01-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791x.2020.1712509","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47889315","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-01-02DOI: 10.1080/0013791X.2019.1593570
I. Szilágyi, Z. Sebestyén, T. Tóth
Abstract Project ranking based on project value is an essential management task for organizations that face resource bottlenecks. Project value focuses on the hard elements of projects that can be expressed in monetary terms. In the petroleum exploration business, however, there is also soft information, like effects on corporate liquidity, advantages of compliance with the strategic goals, or learning potential and organizational development, which may change the ranking hierarchy. The aim of this research is to provide a solution for incorporating industry-based selected soft data in the project ranking process. The process is illustrated with a case study. We took the structured system of criteria identified from the petroleum industry.
{"title":"Project Ranking in Petroleum Exploration","authors":"I. Szilágyi, Z. Sebestyén, T. Tóth","doi":"10.1080/0013791X.2019.1593570","DOIUrl":"https://doi.org/10.1080/0013791X.2019.1593570","url":null,"abstract":"Abstract Project ranking based on project value is an essential management task for organizations that face resource bottlenecks. Project value focuses on the hard elements of projects that can be expressed in monetary terms. In the petroleum exploration business, however, there is also soft information, like effects on corporate liquidity, advantages of compliance with the strategic goals, or learning potential and organizational development, which may change the ranking hierarchy. The aim of this research is to provide a solution for incorporating industry-based selected soft data in the project ranking process. The process is illustrated with a case study. We took the structured system of criteria identified from the petroleum industry.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"66 - 87"},"PeriodicalIF":1.2,"publicationDate":"2020-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2019.1593570","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43983487","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-01-02DOI: 10.1080/0013791X.2019.1571145
A. Baykasoğlu, Kemal Subulan, Hülya Güçdemir, Nurhan Dudakli, Derya Eren Akyol
Abstract Due to successful applications of revenue management in the airline industry, in recent years, there has been a growing interest to adopt revenue management in make-to-order (MTO) manufacturing systems. Several interrelated decision problems such as order acceptance/rejection, short-term capacity planning, due date assignment, and order scheduling need to be studied simultaneously in order to manage revenues effectively in MTO manufacturing systems. Both the producer’s and customer’s requirements need to be taken into account through some negotiation mechanisms that are sensitive to the service-level reputation of the manufacturing companies. In this article, we propose a new dynamic bid price–based revenue management model that considers all of the aforementioned decision problems simultaneously. A simulation optimization approach is utilized in order to determine the best possible values of control parameters for bid price, due date assignment, and price increment/reduction mechanisms. The performance of the proposed integrated revenue management model is tested on both a hypothetical example and a real problem of a bridal gown company. The computational results show that the proposed model provides significant improvements in total revenue compared to other static and dynamic bid price policies.
{"title":"Revenue management for make-to-order manufacturing systems with a real-life application","authors":"A. Baykasoğlu, Kemal Subulan, Hülya Güçdemir, Nurhan Dudakli, Derya Eren Akyol","doi":"10.1080/0013791X.2019.1571145","DOIUrl":"https://doi.org/10.1080/0013791X.2019.1571145","url":null,"abstract":"Abstract Due to successful applications of revenue management in the airline industry, in recent years, there has been a growing interest to adopt revenue management in make-to-order (MTO) manufacturing systems. Several interrelated decision problems such as order acceptance/rejection, short-term capacity planning, due date assignment, and order scheduling need to be studied simultaneously in order to manage revenues effectively in MTO manufacturing systems. Both the producer’s and customer’s requirements need to be taken into account through some negotiation mechanisms that are sensitive to the service-level reputation of the manufacturing companies. In this article, we propose a new dynamic bid price–based revenue management model that considers all of the aforementioned decision problems simultaneously. A simulation optimization approach is utilized in order to determine the best possible values of control parameters for bid price, due date assignment, and price increment/reduction mechanisms. The performance of the proposed integrated revenue management model is tested on both a hypothetical example and a real problem of a bridal gown company. The computational results show that the proposed model provides significant improvements in total revenue compared to other static and dynamic bid price policies.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"27 - 65"},"PeriodicalIF":1.2,"publicationDate":"2020-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2019.1571145","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41596535","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-01-02DOI: 10.1080/0013791X.2019.1642430
C. Koschnick, J. Hartman
Abstract Traditional warranty analysis focuses on the reliability of a product and offers warranty designs that compensate a consumer if the item fails. We introduce the concept of a performance-based warranty (PBW) that guarantees that a product will operate at or above some baseline level of performance, such as a minimum energy efficiency for an appliance. We illustrate how consumer behavior can change in the presence of a PBW and define the parameters for which a manufacturer may increase revenue. Finally, we present an algorithm to solve for the optimal PBW design given a consumer’s belief about the expected performance of the product.
{"title":"Using performance-based warranties to influence consumer purchase decisions","authors":"C. Koschnick, J. Hartman","doi":"10.1080/0013791X.2019.1642430","DOIUrl":"https://doi.org/10.1080/0013791X.2019.1642430","url":null,"abstract":"Abstract Traditional warranty analysis focuses on the reliability of a product and offers warranty designs that compensate a consumer if the item fails. We introduce the concept of a performance-based warranty (PBW) that guarantees that a product will operate at or above some baseline level of performance, such as a minimum energy efficiency for an appliance. We illustrate how consumer behavior can change in the presence of a PBW and define the parameters for which a manufacturer may increase revenue. Finally, we present an algorithm to solve for the optimal PBW design given a consumer’s belief about the expected performance of the product.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"1 - 26"},"PeriodicalIF":1.2,"publicationDate":"2020-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2019.1642430","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47979442","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-12-28DOI: 10.1080/0013791x.2019.1707923
Borliang Chen
Abstract A government-subsidized private participation in infrastructure (PPI) project is a solution to attract private investors to invest in financially non-viable infrastructure projects with high social benefits. A government-subsidized PPI project comprises three financing sources: government subsidy, equity, and debt. For government-subsidized PPI projects, the government subsidy level must be determined before the optimal debt ratio can be determined. A government subsidy level that is too low may lead to the project being non-bankable for financial institutes and a level that is too high may result in high excess returns for project investors. This paper develops cooperative game models, which are multiple–variable game models, to determine optimal solutions for four major decision variables – the government subsidy, tariff, debt ratio, and interest rate for project negotiation for PPI projects. This three–party game model is developed to identify terms and conditions that optimize the total benefits of financially non-viable PPI projects, which can lead to successful PPI project negotiations. The Kaohsiung cable car project in Taiwan is used for demonstration purposes. The results of the analysis show that optimal solutions for the three financing sources - government subsidy, equity, and debt - can be determined by the models.
{"title":"Optimal capital structure of government-subsidized private participation in infrastructure projects","authors":"Borliang Chen","doi":"10.1080/0013791x.2019.1707923","DOIUrl":"https://doi.org/10.1080/0013791x.2019.1707923","url":null,"abstract":"Abstract A government-subsidized private participation in infrastructure (PPI) project is a solution to attract private investors to invest in financially non-viable infrastructure projects with high social benefits. A government-subsidized PPI project comprises three financing sources: government subsidy, equity, and debt. For government-subsidized PPI projects, the government subsidy level must be determined before the optimal debt ratio can be determined. A government subsidy level that is too low may lead to the project being non-bankable for financial institutes and a level that is too high may result in high excess returns for project investors. This paper develops cooperative game models, which are multiple–variable game models, to determine optimal solutions for four major decision variables – the government subsidy, tariff, debt ratio, and interest rate for project negotiation for PPI projects. This three–party game model is developed to identify terms and conditions that optimize the total benefits of financially non-viable PPI projects, which can lead to successful PPI project negotiations. The Kaohsiung cable car project in Taiwan is used for demonstration purposes. The results of the analysis show that optimal solutions for the three financing sources - government subsidy, equity, and debt - can be determined by the models.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"321 - 338"},"PeriodicalIF":1.2,"publicationDate":"2019-12-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791x.2019.1707923","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41501197","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-11-26DOI: 10.1080/0013791x.2019.1680784
B. Klebanov
Abstract In this paper we describe an approach for calculating the rates of return of investments whose timing is uncertain. In the framework of the approach, we calculate the expected value of the rate of return. We extend the deterministic Endpoints and Modified Dietz rate of return models by viewing the investments transaction timings as random variables. Our main working assumption is that the transaction timings are uniformly distributed in a certain time interval. We study a series of new rate of return models that have a wide range of practical applications. Our results generalize some well-known rate of return formulas, including the renowned Modified Dietz formula. The models introduced in this paper provide one-period rates of return compliant with the Global Investment Performance Standards (GIPS) requirements. They can be used for GIPS-compliant calculations.
{"title":"Rates of return of investments whose timings are specified by a probability distribution","authors":"B. Klebanov","doi":"10.1080/0013791x.2019.1680784","DOIUrl":"https://doi.org/10.1080/0013791x.2019.1680784","url":null,"abstract":"Abstract In this paper we describe an approach for calculating the rates of return of investments whose timing is uncertain. In the framework of the approach, we calculate the expected value of the rate of return. We extend the deterministic Endpoints and Modified Dietz rate of return models by viewing the investments transaction timings as random variables. Our main working assumption is that the transaction timings are uniformly distributed in a certain time interval. We study a series of new rate of return models that have a wide range of practical applications. Our results generalize some well-known rate of return formulas, including the renowned Modified Dietz formula. The models introduced in this paper provide one-period rates of return compliant with the Global Investment Performance Standards (GIPS) requirements. They can be used for GIPS-compliant calculations.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"363 - 380"},"PeriodicalIF":1.2,"publicationDate":"2019-11-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791x.2019.1680784","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47893881","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-10-02DOI: 10.1080/0013791x.2019.1679474
{"title":"Call for Wellington Award Nominations","authors":"","doi":"10.1080/0013791x.2019.1679474","DOIUrl":"https://doi.org/10.1080/0013791x.2019.1679474","url":null,"abstract":"","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"64 1","pages":"387 - 387"},"PeriodicalIF":1.2,"publicationDate":"2019-10-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791x.2019.1679474","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41994319","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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