Capacity expansion with lead times and autocorrelated random demand

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2003-01-01
Authors
Ryan, Sarah
Ryan, Sarah
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Ryan, Sarah
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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.

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<p>This is the peer reviewed version of the following article: Ryan, S. M., “Capacity Expansion with Lead Times and Correlated Random Demand,” Naval Research Logistics, 50(2), pp. 167-183 (2003), which has been published in final form at <a href="http://dx.doi.org/10.1002/nav.10055" target="_blank">http://dx.doi.org/10.1002/nav.10055</a>. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.</p>
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