Many companies establish collaborative relationships (CRs) with suppliers either alongside or in preference to purchasing parts through a process of competitive bidding (CB). CRs over flexibilities and options arising mainly from the ‘looseness’ of the contractual relationship. One significant decision element confronting a firm intending to engage in a CR is when to enter such a relationship and when to abandon it. This paper develops a model that focuses on such timing issues. It provides an optimal timing valuation approach to establishing/abandoning a CR that incorporates differential learning rate payouts. To achieve this, a real options’ frame of reference is adopted that enables a formal analysis of the contingencies embedded in a CR. A standard illustration of the application of the model is provided.
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