WCSE

The Optimal Timing of Cross-training under Demand Uncertainty: A Real Options Approach

Abstract— Improving labor flexibility through cross-training is one of the effective ways to respond to demand fluctuation. In this paper, the optimal timing of cross-training is investigated considering demand uncertainty, and labor flexibility is measured by redundancy level. Cross-training can be treated as investment in labor flexibility, so a trinomial lattice based on real options valuation is employed to model the evolution of demand. A stochastic dynamic programming model is formulated. With a numerical example, the proposed approach is proved to be effective in finding the optimal training plan with the consideration of all possible demand scenarios. Results of the numerical example also provide a way to estimate the value of labor flexibility.

Index Terms— cross-training, labor flexibility, redundancy level, real options.

Jie Lian
School of Economics and Management, Xi'an University of Technology, China
Yi Xu
School of Economics and Management, Xi'an University of Technology, China
Yue Li
School of Economics and Management, Xi'an University of Technology, China

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Cite: Jie Lian, Yi Xu, Yue Li, " The Optimal Timing of Cross-training under Demand Uncertainty: A Real Options Approach, " WCSE 2022 Spring Event: 2022 9th International Conference on Industrial Engineering and Applications, pp. 325-330, Sanya, China, April 15-18, 2022.