Investment strategy for flexible capacity considering demand-side disruption risk

Cuicui Meng, Jianhua Ji and Xinjun Li

International Journal of Systems Science, 2016, vol. 47, issue 6, 1245-1257

Abstract: This article considers a firm selling two product families and confronting demand-side disruption risk. The firm has the option to invest in dedicated capacities and flexible capacity. To study the optimal investment strategy, we model the firm's decision as a two-stage stochastic programming problem, in which deviation risk is restricted within a certain level. Our analysis provides the necessary and sufficient conditions for the optimal strategy and the threshold policy for the flexible capacity investment. The results in the context of deviation risk constraint are compared with results derived outside of the context of deviation risk constraint. Furthermore, a numerical example is given to depict the optimal investment strategy.

Date: 2016
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DOI: 10.1080/00207721.2014.919428

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