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Optimal production strategy under demand fluctuations: Technology versus capacity

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Author Info

  • Yang, L.
  • Ng, C.T.
  • Cheng, T.C.E.

Abstract

This paper provides a comparative analysis of five possible production strategies for two kinds of flexibility investment, namely flexible technology and flexible capacity, under demand fluctuations. Each strategy is underpinned by a set of operations decisions on technology level, capacity amount, production quantity, and pricing. By evaluating each strategy, we show how market uncertainty, production cost structure, operations timing, and investment costing environment affect a firm's strategic decisions. The results show that there is no sequential effect of the two flexibility investments. We also illustrate the different ways in which flexible technology and flexible capacity affect a firm's profit under demand fluctuations. The results reveal that compared to no flexibility investment, flexible technology investment earns the same or a higher profit for a firm, whereas flexible capacity investment can be beneficial or harmful to a firm's profit. Moreover, we prove that higher flexibility does not guarantee more profit. Depending on the situation, the optimal strategy can be any one of the five possible strategies. We also provide the optimality conditions for each strategy.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 214 (2011)
Issue (Month): 2 (October)
Pages: 393-402

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Handle: RePEc:eee:ejores:v:214:y:2011:i:2:p:393-402

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Web page: http://www.elsevier.com/locate/eor

Related research

Keywords: Production Investment analysis Flexible manufacturing systems Manufacturing;

References

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  1. Jan A. Van Mieghem & Maqbool Dada, 1999. "Price Versus Production Postponement: Capacity and Competition," Management Science, INFORMS, vol. 45(12), pages 1639-1649, December.
  2. Mills, David E, 1984. "Demand Fluctuations and Endogenous Firm Flexibility," Journal of Industrial Economics, Wiley Blackwell, vol. 33(1), pages 55-71, September.
  3. Donald Gerwin, 1993. "Manufacturing Flexibility: A Strategic Perspective," Management Science, INFORMS, vol. 39(4), pages 395-410, April.
  4. Fluet, Claude & Phaneuf, Louis, 1997. "Price adjustment costs and the effect of endogenous technique on price stickiness," European Economic Review, Elsevier, vol. 41(2), pages 245-257, February.
  5. Krysiak, Frank C., 2008. "Prices vs. quantities: The effects on technology choice," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1275-1287, June.
  6. Krishnan S. Anand & Karan Girotra, 2007. "The Strategic Perils of Delayed Differentiation," Management Science, INFORMS, vol. 53(5), pages 697-712, May.
  7. Manu Goyal & Serguei Netessine, 2007. "Strategic Technology Choice and Capacity Investment Under Demand Uncertainty," Management Science, INFORMS, vol. 53(2), pages 192-207, February.
  8. Fraser, R W, 1984. "Demand Fluctuations, Inventories and Flexibility," Australian Economic Papers, Wiley Blackwell, vol. 23(42), pages 105-11, June.
  9. Gupta, Yash P. & Goyal, Sameer, 1989. "Flexibility of manufacturing systems: Concepts and measurements," European Journal of Operational Research, Elsevier, vol. 43(2), pages 119-135, November.
  10. Roller, Lars-Hendrik, 1990. "Proper Quadratic Cost Functions with an Application to the Bell System," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 202-10, May.
  11. Ravi Anupindi & Li Jiang, 2008. "Capacity Investment Under Postponement Strategies, Market Competition, and Demand Uncertainty," Management Science, INFORMS, vol. 54(11), pages 1876-1890, November.
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Cited by:
  1. Yang, Liu & Ng, C.T., 2014. "Flexible capacity strategy with multiple market periods under demand uncertainty and investment constraint," European Journal of Operational Research, Elsevier, vol. 236(2), pages 511-521.

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