IDEAS home Printed from https://ideas.repec.org/a/bla/popmgt/v32y2023i9p2740-2757.html
   My bibliography  Save this article

Capacity planning with limited information

Author

Listed:
  • Vic Anand
  • Ramji Balakrishnan
  • Srinagesh Gavirneni

Abstract

Limited information about the demand for some of the resources needed to produce goods and services (e.g., incomplete and imperfect bills of materials) forces firms to use heuristics when planning resource capacity. We examine the performance of five heuristics: two drawn from practice, two that modify observed approaches, and one motivated by theory. We measure performance as the ratio of the expected cost of supply–demand mismatch from using a heuristic to the value in the full‐information solution. Numerical analysis shows that a simple heuristic that is common in practice—plan rigorously for a few “driver” resources with high‐quality information and use ratios (e.g., 0.25 indirect labor hours per machine hour) to project the capacities for the remaining “non‐driver” resources—is robust and efficient. Using more than one driver resource to plan for the same non‐driver resource delivers significant gains. Reducing measurement error with respect to the consumption of driver resources dominates the gain from reducing errors in other aspects. Indeed, with high measurement error, collecting information that reduces other sources of error could decrease overall performance. Finally, a greedy algorithm of choosing the most expensive resources as drivers is optimal.

Suggested Citation

  • Vic Anand & Ramji Balakrishnan & Srinagesh Gavirneni, 2023. "Capacity planning with limited information," Production and Operations Management, Production and Operations Management Society, vol. 32(9), pages 2740-2757, September.
  • Handle: RePEc:bla:popmgt:v:32:y:2023:i:9:p:2740-2757
    DOI: 10.1111/poms.14004
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/poms.14004
    Download Restriction: no

    File URL: https://libkey.io/10.1111/poms.14004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Dangl, Thomas, 1999. "Investment and capacity choice under uncertain demand," European Journal of Operational Research, Elsevier, vol. 117(3), pages 415-428, September.
    2. Vic Anand & Ramji Balakrishnan & Eva Labro, 2017. "Obtaining Informationally Consistent Decisions When Computing Costs with Limited Information," Production and Operations Management, Production and Operations Management Society, vol. 26(2), pages 211-230, February.
    3. Ramji Balakrishnan & Stephen Hansen & Eva Labro, 2011. "Evaluating Heuristics Used When Designing Product Costing Systems," Management Science, INFORMS, vol. 57(3), pages 520-541, March.
    4. Ebru K. Bish & Qiong Wang, 2004. "Optimal Investment Strategies for Flexible Resources, Considering Pricing and Correlated Demands," Operations Research, INFORMS, vol. 52(6), pages 954-964, December.
    5. Hui Zhao & Chuanhui Xiong & Srinagesh Gavirneni & Adam Fein, 2012. "Fee-for-Service Contracts in Pharmaceutical Distribution Supply Chains: Design, Analysis, and Management," Manufacturing & Service Operations Management, INFORMS, vol. 14(4), pages 685-699, October.
    6. Yehuda Bassok & Ravi Anupindi & Ram Akella, 1999. "Single-Period Multiproduct Inventory Models with Substitution," Operations Research, INFORMS, vol. 47(4), pages 632-642, August.
    7. Jan A. Van Mieghem, 2003. "Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 269-302, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jan A. Van Mieghem, 2007. "Risk Mitigation in Newsvendor Networks: Resource Diversification, Flexibility, Sharing, and Hedging," Management Science, INFORMS, vol. 53(8), pages 1269-1288, August.
    2. Ebru K. Bish & Qiong Wang, 2004. "Optimal Investment Strategies for Flexible Resources, Considering Pricing and Correlated Demands," Operations Research, INFORMS, vol. 52(6), pages 954-964, December.
    3. Bish, Ebru K. & Hong, Seong J., 2006. "Coordinating the resource investment decision for a two-market, price-setting firm," International Journal of Production Economics, Elsevier, vol. 101(1), pages 63-88, May.
    4. Yueshan Yu & Xin Chen & Fuqiang Zhang, 2015. "Dynamic Capacity Management with General Upgrading," Operations Research, INFORMS, vol. 63(6), pages 1372-1389, December.
    5. Alain Bensoussan & Benoit Chevalier-Roignant & Alejandro Rivera, 2022. "A model for wind farm management with option interactions," Post-Print hal-04325553, HAL.
    6. Qin, Ruwen & Nembhard, David A., 2012. "Demand modeling of stochastic product diffusion over the life cycle," International Journal of Production Economics, Elsevier, vol. 137(2), pages 201-210.
    7. Hongmin Li & Stephen C. Graves & Woonghee Tim Huh, 2014. "Optimal Capacity Conversion for Product Transitions Under High Service Requirements," Manufacturing & Service Operations Management, INFORMS, vol. 16(1), pages 46-60, February.
    8. Bish, Ebru K. & Lin, Kyle Y. & Hong, Seong-Jong, 2008. "Allocation of flexible and indivisible resources with decision postponement and demand learning," European Journal of Operational Research, Elsevier, vol. 187(2), pages 429-441, June.
    9. Kettunen, Janne & Bunn, Derek W., 2016. "Risk induced resource dependency in capacity investments," European Journal of Operational Research, Elsevier, vol. 250(3), pages 914-924.
    10. 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.
    11. Onur Boyabatlı & Tiecheng Leng & L. Beril Toktay, 2016. "The Impact of Budget Constraints on Flexible vs. Dedicated Technology Choice," Management Science, INFORMS, vol. 62(1), pages 225-244, January.
    12. Robert A. Shumsky & Fuqiang Zhang, 2009. "Dynamic Capacity Management with Substitution," Operations Research, INFORMS, vol. 57(3), pages 671-684, June.
    13. Bunn, Derek W. & Oliveira, Fernando S., 2016. "Dynamic capacity planning using strategic slack valuation," European Journal of Operational Research, Elsevier, vol. 253(1), pages 40-50.
    14. Oliveira, Fernando S. & Costa, Manuel L.G., 2018. "Capacity expansion under uncertainty in an oligopoly using indirect reinforcement-learning," European Journal of Operational Research, Elsevier, vol. 267(3), pages 1039-1050.
    15. Brian Tomlin & Yimin Wang, 2008. "Pricing and Operational Recourse in Coproduction Systems," Management Science, INFORMS, vol. 54(3), pages 522-537, March.
    16. Liu Yang & Chi To Ng & Yaodong Ni, 2017. "Flexible capacity strategy in an asymmetric oligopoly market with competition and demand uncertainty," Naval Research Logistics (NRL), John Wiley & Sons, vol. 64(2), pages 117-138, March.
    17. Lu, Qihui & Chen, Xiangfeng, 2018. "Capacity expansion investment of supplier under make-to-order and make-to-stock supply chains," International Journal of Production Economics, Elsevier, vol. 198(C), pages 133-148.
    18. Li, Xishu & Zuidwijk, Rob & de Koster, M.B.M, 2023. "Optimal competitive capacity strategies: Evidence from the container shipping market," Omega, Elsevier, vol. 115(C).
    19. Achal Bassamboo & Ramandeep S. Randhawa & Jan A. Van Mieghem, 2010. "Optimal Flexibility Configurations in Newsvendor Networks: Going Beyond Chaining and Pairing," Management Science, INFORMS, vol. 56(8), pages 1285-1303, August.
    20. Bish, Ebru K. & Suwandechochai, Rawee, 2010. "Optimal capacity for substitutable products under operational postponement," European Journal of Operational Research, Elsevier, vol. 207(2), pages 775-783, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:popmgt:v:32:y:2023:i:9:p:2740-2757. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1937-5956 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.