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A Coordinated Production Planning Model with Capacity Expansion and Inventory Management


  • Sampath Rajagopalan

    () (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

  • Jayashankar M. Swaminathan

    () (The Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina 27599)


Motivated by a problem faced by a large manufacturer of a consumer product, we explore the interaction between production planning and capacity acquisition decisions in environments with demand growth. We study a firm producing multiple items in a multiperiod environment where demand for items is known but varies over time with a long-term growth and possible short-term fluctuations. The production equipment is characterized by significant changeover time between the production of different items. While demand growth is gradual, capacity additions are discrete. Therefore, periods immediately following a machine purchase are characterized by excess machine capacity. We develop a mathematical programming model and an effective solution approach to determine the optimal capacity acquisition, production and inventory decisions over time. Through a computational study, we show the effectiveness of the solution approach in terms of solution quality and investigate the impact of product variety, cost of capital, and other important parameters on the capacity and inventory decisions. The computational results bring out some key insights---increasing product variety may not result in excessive inventory and even a substantial increase in set-up times or holding costs may not increase the total cost over the horizon in a significant manner due to the ability to acquire additional capacity. We also provide solutions and insights to the real problem that motivated this work.

Suggested Citation

  • Sampath Rajagopalan & Jayashankar M. Swaminathan, 2001. "A Coordinated Production Planning Model with Capacity Expansion and Inventory Management," Management Science, INFORMS, vol. 47(11), pages 1562-1580, November.
  • Handle: RePEc:inm:ormnsc:v:47:y:2001:i:11:p:1562-1580

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    References listed on IDEAS

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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. Jodlbauer, Herbert & Altendorfer, Klaus, 2010. "Trade-off between capacity invested and inventory needed," European Journal of Operational Research, Elsevier, vol. 203(1), pages 118-133, May.
    3. 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.
    4. Martínez-Costa, Carme & Mas-Machuca, Marta & Benedito, Ernest & Corominas, Albert, 2014. "A review of mathematical programming models for strategic capacity planning in manufacturing," International Journal of Production Economics, Elsevier, vol. 153(C), pages 66-85.
    5. Koca, Esra & Yaman, Hande & Selim Aktürk, M., 2015. "Stochastic lot sizing problem with controllable processing times," Omega, Elsevier, vol. 53(C), pages 1-10.
    6. Hahn, G.J. & Kuhn, H., 2012. "Simultaneous investment, operations, and financial planning in supply chains: A value-based optimization approach," International Journal of Production Economics, Elsevier, vol. 140(2), pages 559-569.
    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. Jaya Singhal & Kalyan Singhal, 2008. "A Noniterative Algorithm for the Linear-Quadratic Profit-Maximization Model for Smoothing Multiproduct Production," INFORMS Journal on Computing, INFORMS, vol. 20(2), pages 169-178, May.
    9. 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.
    10. Xiuli Chao & Hong Chen & Shaohui Zheng, 2009. "Dynamic Capacity Expansion for a Service Firm with Capacity Deterioration and Supply Uncertainty," Operations Research, INFORMS, vol. 57(1), pages 82-93, February.
    11. Klaus Altendorfer & Thomas Felberbauer & Herbert Jodlbauer, 2018. "Effects of forecast errors on optimal utilisation in aggregate production planning with stochastic customer demand," Papers 1812.00773,
    12. Dulluri, Sandeep & Raghavan, N.R. Srinivasa, 2008. "Collaboration in tool development and capacity investments in high technology manufacturing networks," European Journal of Operational Research, Elsevier, vol. 187(3), pages 962-977, June.
    13. repec:eee:energy:v:147:y:2018:i:c:p:950-964 is not listed on IDEAS


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