1. ¹Delta Consulting Group, Inc., Occoquan, VA, USA
2. ²University of Missouri-Rolla, Rolla, MO, USA

Correspondence: T Zhao, Consultant, Delta Consulting Group, Inc., 310 Commerce Street, Occoquan, VA 22125, USA. E-mail: tzhao@delta-cgi.com

Received July 2004; Accepted January 2006; Published online 22 March 2006.

Abstract

This paper explores a case of flexible facility layout, in which the layout process can be carried out in a dynamic manner responding to changing demands. We consider a facility such as an office building that needs to partition its interior space into units of different sizes and allocate them to different users. Facing different demands, each of which requires a different space size, the management of the facility needs to constantly exercise managerial real options, such as partitioning a big unit to small units and merging small units to a big one. Modelling the demand uncertainties as stochastic processes, we use the Monte Carlo simulation and solve rolling two-stage stochastic programs over time to value the flexible interior layout. Through numerical tests, we demonstrate that effectively and timely exercising the managerial options can significantly increase profit and service quality. Focusing on the dynamic behaviour of the facility interior layout, the proposed options-based approach aims to improve facility management by proactive decision strategies. The approach may also be extended to facility expansion, maintenance and rehabilitation to increase service life and maintain service quality.