The value of jumboization in transportation ships: A real options approach

Abstract

In the presence of budget constraints, “jumboization,” has been adopted as a practical solution to meet increased transportation needs. By jumboization, we mean increasing the capacity of a ship by extending its length at a future date. There are, however, two kinds of jumboization: Fixed design (retrofitting) and flexible design. With fixed design, the initial construction cost is lower, but the subsequent jumboization cost is higher. With flexible design, the initial construction cost is higher, but the subsequent jumboization cost is lower. In this article, for both designs, we build and analyze economic decision models, and show how to value the option to jumboize. Our framework utilizes a stochastic optimal control approach that considers the volume of transportation needs (the demand) as an underlying uncertain factor. Under the criterion of cost savings maximization, we determine optimal threshold demand level to jumboize. Through analytical and numerical analyses, we obtain conditions under which the flexible design is preferred over fixed design, and vice versa. A comprehensive, illustrative example is also provided.

Keywords:

• Engineering design
• flexibility in engineering design
• jumboization
• vehicle capacity expansion
• real options

Acknowledgments

The authors thank Dr. Gül Okudan-Kremer for all her input in this paper

Additional information

Funding

The authors thank John B. Slater Fellowship in Sustainable Design & Manufacturing for the financial support, and note that this material is based upon work supported by the National Science Foundation under DUE 1504912.

Notes on contributors

Fikri Kucuksayacigil

Fikri Kucuksayacigil received a PhD degree in operations research from Iowa State University in 2018. He is currently a postdoctoral researcher in the School of Global Policy and Strategy at the University of California San Diego. His areas of study include net-zero carbon emission strategies for western states, dynamic capital investments in power systems, and flexibility in engineering systems.

K. Jo Min

K. Jo Min is John B. Slater Fellow in Sustainable Design & Manufacturing and Associate Chair of Undergraduate Education in the Industrial and Manufacturing Systems Engineering Department at Iowa State University. His research areas include stochastic optimal control for sustainable energy, design, and supply chains.