4/5/011 Pain Points in Material Procurement Price Volatility Timely Availability Limited Storage Space Competitive Bidding Contractors’ Producers’ Over.

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Presentation transcript:

4/5/011 Pain Points in Material Procurement Price Volatility Timely Availability Limited Storage Space Competitive Bidding Contractors’ Producers’ Over capacity due to 9 years of expansions

4/5/012 Price Volatility Steel accounts for 20% and lumber 17% of ENR's Building Cost Index Lumber: Hefty quota on Canadian lumber (34% of U.S. market) raised prices for 33% in 1996 and 20% in early part of Price then collapsed in summer of 1998, rebounded significantly in 1999 and tumbled again in 2000 due to over capacity. Steel: Price peaked in summer 1998 before import drives it down 13% in Then anti- dumping duties, increase in nickel prices, and strong demand in Asia, Europe and North America drives it back up before diving again due to over capacity

4/5/013 Availability In order to produce more steel, mills who are at full capacity, adopts longer runs. Lead time is as long as 6 months. Competitive Bidding As many as 10 contractors bidding 5% margin for a big project and 2-2.5% margin for a small one—lower than yield of risk free treasure bonds

4/5/014 Options Option is the right but not the obligation to do certain things Similar to financial options, real options provide a decision maker flexibility to adapt his future actions to market conditions in order to capture upside potential while limit downside loss.

4/5/015 Potential Types of Real Options Options to defer delivery in case weather is bad or there is a delay in obtaining building permits, signing off of a design, the predecessor step, etc. Option to alter scale of procurement when market changes Option to switch to substitute products in fast- track projects

4/5/016 Benefits of Real Options Risk sharing similar to insurance. Contractors pay small premium to suppliers minimized risks. Payment is smoothed out, reducing financial distress, and delivery is accurate due to better capacity planning. Locking in prices without hassle of inventory due to flexibility of options.

4/5/017 Deliverables Final CIFE Technical Report on types of materials and types of real options applicable One to two journal articles at the conclusion of the research Web documentation of the ongoing and finished research At least one workshop for CIFE members Real-life supply contracts if time allows

4/5/018 Future Plans Seeks further funding from NSF and Sweden