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Capacity Expansion for Random Exponential Demand Growth with Lead Times

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Author Info

  • Sarah M. Ryan

    ()
    (Department of Industrial and Manufacturing Systems Engineering, Iowa State University, Ames, Iowa 50011-2164)

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    Abstract

    The combination of demand uncertainty and a lead time for adding capacity creates the risk of capacity shortage during the lead time. We formulate a model of capacity expansion for uncertain exponential demand growth and deterministic expansion lead times when there is an obligation to provide a specified level of service. The service level, defined in terms of the ratio of expected lead-time shortage to installed capacity, is guaranteed by timing each expansion to begin when demand reaches a fixed proportion of the capacity position. Under this timing rule, the optimal facilities to install can be determined by solving an equivalent deterministic problem without lead times. Numerical results show the effects of the demand parameters and lead-time length on the expansion timing. The interaction of timing with expansion size is explored for the case when continuous facility sizes are available with economies of scale.

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    File URL: http://dx.doi.org/10.1287/mnsc.1030.0187
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 50 (2004)
    Issue (Month): 6 (June)
    Pages: 740-748

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    Handle: RePEc:inm:ormnsc:v:50:y:2004:i:6:p:740-748

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    Related research

    Keywords: geometric Brownian motion; infinite-horizon expected discounted cost; service-level constraint; proportional reserve policy;

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    Cited by:
    1. Georgiadis, Patroklos & Athanasiou, Efstratios, 2013. "Flexible long-term capacity planning in closed-loop supply chains with remanufacturing," European Journal of Operational Research, Elsevier, vol. 225(1), pages 44-58.
    2. Julka, Nirupam & Baines, Tim & Tjahjono, Benny & Lendermann, Peter & Vitanov, Val, 2007. "A review of multi-factor capacity expansion models for manufacturing plants: Searching for a holistic decision aid," International Journal of Production Economics, Elsevier, vol. 106(2), pages 607-621, April.
    3. Ornella Tarola, 2010. "Public Utilities: Privatization without Regulation," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 4(1), pages 062-078, March.

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