Capacity expansion for random exponential demand growth with lead times

Capacity expansion for random exponential demand growth with lead times

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Article ID: iaor20073587
Country: United States
Volume: 50
Issue: 6
Start Page Number: 740
End Page Number: 748
Publication Date: Jun 2004
Journal: Management Science
Authors:
Keywords: planning
Abstract:

The combination of demand uncertainty and a lead time for adding capacity creates the risk of capacity shortage during the lead time. We formulate a model of capacity expansion for uncertain exponential demand growth and deterministic expansion lead times when there is an obligation to provide a specified level of service. The service level, defined in terms of the ratio of expected lead-time shortage to installed capacity, is guaranteed by timing each expansion to begin when demand reaches a fixed proportion of the capacity position. Under this timing rule, the optimal facilities to install can be determined by solving an equivalent deterministic problem without lead times. Numerical results show the effects of the demand parameters and lead-time length on the expansion timing. The interaction of timing with expansion size is explored for the case when continuous facility sizes are available with economies of scale.

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