Hedging future uncertainty: A framework for obsolescence prediction, proactive mitigation and management

Component obsolescence in the “high-tech” electronics industry has become a problem that cannot be ignored. Although recent attention has been given to component obsolescence, in general this issue is still dealt with reactively. This often results in sustainment of a long-life system such as ships, airplanes, power plant, and space based programs to be extremely costly. In addition, delayed schedules, extended downtimes, and technology lags are common occurrences in approaches that deal with obsolescence as it occurs. In wake of the rapid pace of technology innovation, turbulent markets and growing globalization, developing proactive approaches for dealing with obsolescence is a necessity for companies to remain competitive in the marketplace. Thus this dissertation focuses on three fundamental objectives that highlight the importance, provide new insight, and offer solutions to the problem of component obsolescence. The first objective concentrates on the importance of prediction models in determining the life cycle of a component. Obsolescence prediction is key in identifying the items most vulnerable and allows the company to effectively hedge against future uncertainty long before the problem arises. The second objective concentrates on proactive management approaches. This is accomplished through a case study with an industry partner. The purpose of an obsolescence management strategy is to ensure that, issues of obsolescence are anticipated, identified, analyzed, mitigated, reported, and dealt with in a cost effective and timely manner. In addition, it provides life cycle “support and guidance” to the management team. Dealing intelligently with flexibility and uncertainty is characteristic of the Real Options Pricing approach. Thus, the third objective concentrates on options pricing as a decision making tool for mitigating the effects of obsolescence. Making strategic decisions about when to invest, what technology to invest in, waiting until a future point in time when a new technology may be available, are all complex questions to answer. Real options pricing offers a novel approach to addressing issues of obsolescence in sustainment based technologies. Thus this dissertation demonstrates that obsolescence prediction, proactive management and mitigation and the use of real options is key in determining optimal decisions and staying competitive in the “high-tech” electronics industry