 Capacity Expansion for Random Exponential Demand Growth with Lead TimesSarah M. Ryan ()
Management Science, 2004, vol. 50, issue 6, 740-748 Abstract: The combination of demand uncertainty and a lead time for adding capacity creates the risk of capacity shortage during the lead time. We formulate a model of capacity expansion for uncertain exponential demand growth and deterministic expansion lead times when there is an obligation to provide a specified level of service. The service level, defined in terms of the ratio of expected lead-time shortage to installed capacity, is guaranteed by timing each expansion to begin when demand reaches a fixed proportion of the capacity position. Under this timing rule, the optimal facilities to install can be determined by solving an equivalent deterministic problem without lead times. Numerical results show the effects of the demand parameters and lead-time length on the expansion timing. The interaction of timing with expansion size is explored for the case when continuous facility sizes are available with economies of scale. Keywords: geometric Brownian motion; infinite-horizon expected discounted cost; service-level constraint; proportional reserve policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:50:y:2004:i:6:p:740-748 Access Statistics for this article More articles in Management Science from INFORMS Contact information at EDIRC. |
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