Models for first-pass FMS investment analysis

Consider a firm that could choose either an inexpensive product-specific (dedicated) facility or a costly flexible facility, or a combination of the two, in order to satisfy demand for two product groups. Flexible technology offers benefits of scale and scope economies. However, it may have added operational costs due to the need to have excess capacity (to permit changeovers) and to maintain cycle stocks. As a consequence, the economic viability of flexible technology is significantly affected by the choice of operating doctrine. This article presents first-pass decision models to help the firm choose the optimum sizes of facilities and the degree of flexibility for the flexible facility such that the contingent operational costs are simultaneously optimized. Two variations of the problems are considered. Whereas, the first applies to a situation in which the demand rates are constant and predictable, the second considers random demands. In each case, this study provides a formulation of the problem, structural results, and the sensitivity of the results to cost parameters. These results have modest data and computational requirements, making them suitable for first-cut attempts at narrowing available choices.