Manufacturing Capacity Investment Decision Multiperiod Capacity Acquisition And Expansion Models

Abstract

newline Capacity investment decision has long-term consequences on production planning and inventory management for manufacturing firms while meeting future market demand (Rajagopalan and Swaminathan, 2001). The decision is strategic in nature because firms invest a huge amount of capital in installing and building manufacturing capacity by anticipating growth in market demand. If the capacity acquisition is less than market demand then it may result in product shortages and lost sales revenue. In case, the capacity acquisition is more than market demand then it would result in excess capacity and low utilization. Hence, it is clear that there is a trade-off between having too high and too low capacity (Van Mieghem, 2003). newlineIn the case where firms plan to produce multiple products, there may be a choice of investment in dedicated or flexible or both capacities. Dedicated capacity implies that the machine or technology can support to produce only a specific product or product family; whereas, flexible capacity implies that the machine or technology can support to produce multiple products with some adjustments in setup. In practice, it is observed that firms always make choices while investing in manufacturing capacity and consider whether to invest in either dedicated capacities or flexible capacity or both (Fine and Freund, 1990). Hence, today s capacity investment decision which determines capacity sizing, type of manufacturing capacity, and timing of capacity expansion over the planning horizon plays an important role in meeting future market demand for the firms at an optimal cost. newlineIn the review of the literature on capacity investment models (Van Mieghem, 2003; Wu et al., 2005) and capacity expansion models (Julka et al., 2007; Geng and Jiang, 2009; Martinez-Costa et al., 2014), it is noted that there is a scarcity of studies which combine capacity investment and expansion decisions.