The Effect of Technological Improvement on Capacity Expansion for Uncertain Exponential Demand with Lead Times

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2004-01-01
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Pak, Dohyun
Pornsalnuwat, Nattapol
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Ryan, Sarah
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Industrial and Manufacturing Systems Engineering
The Department of Industrial and Manufacturing Systems Engineering teaches the design, analysis, and improvement of the systems and processes in manufacturing, consulting, and service industries by application of the principles of engineering. The Department of General Engineering was formed in 1929. In 1956 its name changed to Department of Industrial Engineering. In 1989 its name changed to the Department of Industrial and Manufacturing Systems Engineering.
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We formulate a model of capacity expansion that is relevant to a service provider for whom the cost of capacity shortages would be considerable but difficult to quantify exactly. Due to demand uncertainty and a lead time for adding capacity, not all shortages are avoidable. In addition, technological innovations will reduce the cost of adding capacity but may not be completely predictable. Analytical expressions for the infinite horizon expansion cost and shortages are optimized numerically. Sensitivity analyses allow us to determine the impact of technological change on the optimal timing and sizes of capacity expansions to account for economies of scale, the time value of money and penalties for insufficient capacity.

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The Version of record of this manuscript has been published and is available in Engineering Economist 2004, http://www.tandfonline.com/10.1080/00137910490453301. Posted with permission.

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Thu Jan 01 00:00:00 UTC 2004
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