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

Date
2004-01-01
Authors
Pak, Dohyun
Pornsalnuwat, Nattapol
Ryan, Sarah
Ryan, Sarah
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Ryan, Sarah
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Abstract

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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<p>The Version of record of this manuscript has been published and is available in Engineering Economist 2004, <a href="http://dx.doi.org/10.1080/00137910490453301" target="_blank">http://www.tandfonline.com/10.1080/00137910490453301</a>. Posted with permission.</p>
Keywords
capacity expansion, demand growth, random factors, service providers, communication satellites, computational methods, correlation methods, costs, dynamic programming, electric power systems, mathematical models, plant expansion
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