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Capacity Expansion/Contraction of a Facility with Demand Augmentation Dynamics

Author

Listed:
  • Sol M. Rocklin

    (MIT-Lincoln Laboratory, Lexington, Massachusetts)

  • Arik Kashper

    (AT&T Bell Laboratories, Holmdel, New Jersey)

  • George C. Varvaloucas

    (AT&T Bell Laboratories, Holmdel, New Jersey)

Abstract

We analyze the cost-effective addition or removal of capacity from a facility governed by demand augmentation dynamics. That is, if the demand for goods or services exceeds the planned capacity of the facility during any period of a multiperiod planning horizon, then additional capacity must be introduced within that period to meet the deficit. The paper obtains an optimal management strategy that minimizes the sum of capital, labor, maintenance, and underpro-vision costs for N consecutive periods in the face of uncertain demands. Dynamic programming is used to demonstrate that, under certain conditions on the cost functions, an inventory-like ( S ′, S ″) policy is optimal, appropriately interpreted to define the removal as well as the augmentation of capacity. The threshold levels S ′ and S ″, can be evaluated for each period without a costly search procedure. In addition, we show how to calculate various quantities of interest associated with the optimal policy.

Suggested Citation

  • Sol M. Rocklin & Arik Kashper & George C. Varvaloucas, 1984. "Capacity Expansion/Contraction of a Facility with Demand Augmentation Dynamics," Operations Research, INFORMS, vol. 32(1), pages 133-147, February.
    • Handle: RePEc:inm:oropre:v:32:y:1984:i:1:p:133-147
    DOI: 10.1287/opre.32.1.133
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    Citations

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    Cited by:

    1. Lijian Lu & Xiaoming Yan, 2016. "Capacity investment decisions under risk aversion," Naval Research Logistics (NRL), John Wiley & Sons, vol. 63(3), pages 218-235, April.
    2. Giovanni Pantuso & Kjetil Fagerholt & Stein W. Wallace, 2016. "Uncertainty in Fleet Renewal: A Case from Maritime Transportation," Transportation Science, INFORMS, vol. 50(2), pages 390-407, May.
    3. Owen Q. Wu & Roman Kapuscinski, 2013. "Curtailing Intermittent Generation in Electrical Systems," Manufacturing & Service Operations Management, INFORMS, vol. 15(4), pages 578-595, October.
    4. Sarah M. Ryan, 2003. "Capacity expansion with lead times and autocorrelated random demand," Naval Research Logistics (NRL), John Wiley & Sons, vol. 50(2), pages 167-183, March.
    5. Metin Çakanyıldırım & Robin O. Roundy & Samuel C. Wood, 2004. "Optimal machine capacity expansions with nested limitations under stochastic demand," Naval Research Logistics (NRL), John Wiley & Sons, vol. 51(2), pages 217-241, March.
    6. Qing Ye & Izak Duenyas, 2007. "Optimal Capacity Investment Decisions with Two-Sided Fixed-Capacity Adjustment Costs," Operations Research, INFORMS, vol. 55(2), pages 272-283, April.
    7. Poretus, Evan L. & Angelus, Alexander, 2000. "Simultaneous Production and Capacity Management under Stochastic Demand for Perishable Goods," Research Papers 1419r, Stanford University, Graduate School of Business.

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