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Solving the Capacity Optimization Problem under Demand Uncertainty

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  • Jan Vlachý

    (Czech Technical University, Prague and City University of Seattle)

Abstract

This paper provides theoretical and practical insight into the solution of the investment project optimization problem under uncertainty. A case study recommends the use of statistical simulation, which is shown to be a powerful, practical, flexible and comprehensive tool for managerial decision-making purposes, even as it takes into account exogeneous uncertainty, as well as endogeneous processes structurally vested in the project. Results show that excess capacity may have a value exceeding its cost, which can be assessed either through comparison of available variants, or by carrying out a full optimization. From the theoretical point of view, the relationship of the problem to real-option analysis is investigated in more detail. Even though it obviously does contain real options, in principle, as various project alternatives differ in terms of their flexibility to alter operating scale, the proposed solution clearly surmounts some of the limitations of prevalent realoption models.

Suggested Citation

  • Jan Vlachý, 2009. "Solving the Capacity Optimization Problem under Demand Uncertainty," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 12(34), pages 97-116, (4).
    • Handle: RePEc:rej:journl:v:12:y:2009:i:34:p:97-116
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    References listed on IDEAS

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    More about this item

    Keywords

    capital budgeting; capacity optimization; real options; statistical simulation;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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