Capacity expansion with lead times and autocorrelated random demand

Sarah M. Ryan

Naval Research Logistics (NRL), 2003, vol. 50, issue 2, 167-183

Abstract: The combination of uncertain demand and lead times for installing capacity creates the risk of shortage during the lead time, which may have serious consequences for a service provider. This paper analyzes a model of capacity expansion with autocorrelated random demand and a fixed lead time for adding capacity. To provide a specified level of service, a discrete time expansion timing policy uses a forecast error‐adjusted minimum threshold level of excess capacity position to trigger an expansion. Under this timing policy, the expansion cost can be minimized by solving a deterministic dynamic program. We study the effects of demand characteristics and the lead time length on the capacity threshold. Autocorrelation acts similarly to randomness in hastening expansions but has a smaller impact, especially when lead times are short. However, the failure either to recognize autocorrelation or to accurately estimate its extent can cause substantial policy errors. © 2003 Wiley Periodicals, Inc. Naval Research Logistics, 2003

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:wly:navres:v:50:y:2003:i:2:p:167-183

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