Models for capacity acquisition decisions considering operational costs

In this article, the authors study a capacity acquisition problem by considering technology choice and operational factors in a stochastic environment. The motivation for the present work comes from developments in modern flexible technologies and a problem encountered in a real industrial setting. The authors study the impact of operational factors such as setup times, demand patterns, and inventory/back order costs on the decisions of capacity acquisition and technology choice. They consider three alternatives in capacity and technology decisions: (i) a flexible system, (ii) a dedicated system, and (iii) a combination of these two systems. For each system, the authors develop a model that integrates investment decisions and operational decisions to determine an optimal amount of capacity to purchase and the time and the types of parts to produce. The objective is to minimize the capacity acquisition cost at the beginning of the planning horizon and the total expected operational costs over an infinite planning horizon. To solve the problem in this article, a solution procedure is proposed. Managerial insights are also derived from extensive computational results.