Capacity Expansion Under Stochastic Demands

James C. Bean, Julia L. Higle and Robert L. Smith
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James C. Bean: The University of Michigan, Ann Arbor, Michigan
Julia L. Higle: The University of Arizona, Tucson, Arizona
Robert L. Smith: The University of Michigan, Ann Arbor, Michigan

Operations Research, 1992, vol. 40, issue 3-supplement-2, S210-S216

Abstract: We consider the problem of optimally meeting a stochastically growing demand for capacity over an infinite horizon. Under the assumption that demand for product follows either a nonlinear Brownian motion or a non-Markovian birth and death process, we show that this stochastic problem can be transformed into an equivalent deterministic problem. Consistent with earlier work by A. Manne, the equivalent problem is formed by replacing the stochastic demand by its deterministic trend and discounting all costs by a new interest rate that is smaller than the original, in approximate proportion to the uncertainty in the demand.

Keywords: facilities/equipment planning: capacity expansion; probability: stochastic model applications (search for similar items in EconPapers)
Date: 1992
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