Technology investment under flexible capacity strategy with demand uncertainty

Liu Yang, Yonggui Wang, Jun Ma, Chi To Ng and T.C.E. Cheng

International Journal of Production Economics, 2014, vol. 154, issue C, 190-197

Abstract: This paper investigates technology investment under flexible capacity strategy with demand uncertainty. Technology investment enables a firm to reduce its total production cost, while flexible capacity strategy aims to reduce a firm׳s production waste by postponing production until demand is known. Adopting a general technology investment cost, we examine how technology investment cost structure affects a firm׳s technology investment decisions. We derive the conditions under which the firm will benefit from technology investment. We show that the firm can increase its expected profit through technology investment only when the unit technology investment cost that varies inversely with the basic technology level is below a threshold. However, even though the technology investment cost is zero, the benefit from the increase in technology level is limited. Furthermore, we analytically determine the optimal technology levels and establish their relationships under different technology investment cost structures. Our findings will help firms evaluate various technology investment options and choose the most proper one.

Keywords: Technology investment; Flexible capacity strategy; Demand uncertainty (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:154:y:2014:i:c:p:190-197

DOI: 10.1016/j.ijpe.2014.04.008

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