JSSM  Vol.3 No.4 , December 2010
Volatility Forecasting of Market Demand as Aids for Planning Manufacturing Activities
Abstract: The concepts and techniques designed and used for pricing financial options have been applied to assist in scheduling manufacturing activities. Releasing a manufacturing order is viewed as an investment opportunity whose properties are similar to a call option. Its value can be considered as the derivative of the market demand mirrored in the selling price of the manufactured products and changes over time following an Itô process. Dynamic programming has been used to derive the optimal timing for releasing manufacturing orders. It appears advisable to release a manufacturing when the unit selling price come to a threshold P* given by the relation P* = β/(β–1) C with C = unit cost price. β is a parameter whose value depends on the trend parameter α and the volatility σ of the selling price, the discount rate ρ applicable to the capital appreciation relevant to the business context under consideration. The results have been successfully applied to the evolution of the quarterly construction cost index in France over ten years.
Cite this paper: nullJ. Briffaut and P. Lallement, "Volatility Forecasting of Market Demand as Aids for Planning Manufacturing Activities," Journal of Service Science and Management, Vol. 3 No. 4, 2010, pp. 383-389. doi: 10.4236/jssm.2010.34045.

[1]   R. Elliott and E. Kopp, “Mathematics of Financial Markets,” Springer Finance, 2004.

[2]   S. Thomassey, “Méthodologies de la Prévision des Ventes Appliquée à la Distribution Textile,” (In French) Thèse D’automatique et Informatique Industrielle, Lille 1, 2002.

[3]   J. C. Hull, “Options, Futures and Other Derivatives,” (Chapter 12), Prentice Hall, 2005.

[4]   T. L. Saaty and J. M. Alexander, “Thinking with Models (Chapter 3) ,” Pergamon Press, Oxford, England, 1981.

[5]   P. Lévy, “Processus Stochastiques et Mouvement Brow- nien,” 2ème Edition, Gauthier Villard, Paris, 1965.

[6]   F. Black and M. Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, Vol. 81, No. 3, May - June 1973.

[7]   K. Ito, “On Stochastic Differential Equations,” Memoirs American Mathematical Society, 1951.

[8]   R. E. Bellman, “Dynamic Programming,” Princeton Unversity Press, New Jersy, 1957, Dover Paperback Edition 2003.

[9]   A. K. Dixit, “Optimization in Economic Theory (Chapter 11),” Oxford University Press, 1990.

[10]   A. K. Dixit and R. S. Pindyck, “Investment under Uncertainty (Chapter 5),” Princeton University Press, New Jersy, 1994.

[11]   B. B. Mandelbrot and R. L. Hudson, “The (mis) Behaviours of Markets (Chapter 2),” Profile Books Ltd., London, 2004.

[12]   J. Lévy Véhel et Chr. Walter, “Les Marchés Fractals (In French), ” PUF 2002.