Optimal Capacity Conversion for Product Transitions Under High Service Requirements

Hongmin Li (), Stephen C. Graves () and Woonghee Tim Huh ()
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Hongmin Li: W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287
Stephen C. Graves: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139
Woonghee Tim Huh: Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada

Manufacturing & Service Operations Management, 2014, vol. 16, issue 1, 46-60

Abstract: We consider the capacity planning problem during a product transition in which demand for a new-generation product gradually replaces that for the old product. Capacity for the new product can be acquired both by purchasing new production lines and by converting existing production lines for the old product. Furthermore, in either case, the new product capacity is “retrofitted” to be flexible, i.e., to be able to also produce the old product. This capacity planning problem arises regularly at Intel, which served as the motivating context for this research. We formulate a two-product capacity planning model to determine the equipment purchase and conversion schedule, considering (i) time-varying and uncertain demand, (ii) dedicated and flexible capacity, (iii) inventory and equipment costs, and (iv) a chance-constrained service-level requirement. We develop a solution approach that accounts for the risk-pooling benefit of flexible capacity (a closed-loop planning approach) and compare it with a solution that is similar to Intel's current practice (an open-loop planning approach). We evaluate both approaches with a realistic but disguised example and show that the closed-loop planning solution leads to savings in both equipment and inventory costs and matches more closely the service-level targets for the two products. Our numerical experiments illuminate the cost trade-offs between purchasing new capacity and converting old capacity and between a level capacity plan versus a chase capacity plan.

Keywords: capacity planning; product transition; equipment conversion; flexible capacity; risk pooling (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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