Optimal Sizing and Timing of Modular Capacity Expansions

Evan L. Porteus, Alexandar Angelus and Samuel C. Wood
Additional contact information
Evan L. Porteus: Stanford U
Alexandar Angelus: Strategic Decision Group
Samuel C. Wood: Stanford U

Research Papers from Stanford University, Graduate School of Business

Abstract: We build a discrete time, serially correlated stochastic demand, nonstationary, finite horizon, capacity expansion model that includes (1) economies of scale in capacity costs, (2) positive expansion leadtimes, and (3) a fixed maximum cumulative capacity, called the shell size. When the shell size is finite, we have what is called the modular approach to capacity expansion, in which a shell is built along with the first module, and additional modules (of varying sizes) can be added at less cost than entire new plants of their respective sizes. (When the shell size is infinite, we have the traditional approach in which every expansion is a new plant.) We show that an (s, S) expansion point, expansion level, policy is optimal: Capacity is expanded to S if and only if the initial level is below s. These parameters depend on the period, the last observed demand, and the shell size. We also show that the optimal value of the enterprise is a convex decreasing function of the lump-sum cost incurred at the time of each expansion. We illustrate the model with a numerical example taken from semiconductor manufacturing.

Date: 2000-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://gsbapps.stanford.edu/researchpapers/library/RP1479R2.pdf
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to gsbapps.stanford.edu:443 (certificate verify failed) (http://gsbapps.stanford.edu/researchpapers/library/RP1479R2.pdf [302 Found]--> https://gsbapps.stanford.edu/researchpapers/library/RP1479R2.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:1479r2

Access Statistics for this paper

More papers in Research Papers from Stanford University, Graduate School of Business Contact information at EDIRC.
Bibliographic data for series maintained by ().