Impact of product mix flexibility and allocation policies on technology

In this article we present two contrasting models: (i) a static allocation model (SAM) that does not capture benefits of operational flexibility and (ii) a dynamic allocation model (DAM) that recognizes explicitly the impact of operational policies. As the resulting optimization models are intractable, we develop solution procedures suitable for practical problems. In addition, we report results of a simulation study to examine the impact of alternative allocation policies and to verify the solutions provided by the procedures developed in this article. Our results suggest that explicit inclusion of the effect of operating policies in making technology and capacity choices can make a significant difference. The results also indicate that service levels are not overly sensitive to the alternative operating policies. Together these results imply that capacity strategies generated by our dynamic allocation model are robust with respect to the alternate operating policies considered in our experiments.