Capacity expansion with lead times and autocorrelated random demand

Capacity expansion with lead times and autocorrelated random demand

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Article ID: iaor2004102
Country: United States
Volume: 50
Issue: 2
Start Page Number: 167
End Page Number: 183
Publication Date: Mar 2003
Journal: Naval Research Logistics
Authors:
Keywords: programming: dynamic, facilities
Abstract:

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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