Capacity expansion decision in supply chains: A control theory application

The importance of capacity expansion decisions to lift constraints in parts of supply chains has increased significantly in recent years owing to general ever-increasing performance requirements. Within a supply chain, insufficient capacity gradually leads to deteriorating delivery performance, and as a consequence, lowers revenue and market share. However, supply chain capacity expansion decisions are rather complex, and what should be taken into account includes not only the resources requirements but also the structure of the chain with its three main flows: goods, information and financial flows. Furthermore, for financial reasons, usually only limited investments can be made to expand capacities of a supply chain at one time. Therefore, it is critical to systemically address this decision by identifying the main (and mostly inter-dependent) factors affecting such a decision. This research proposes an approach to combine system dynamics loops and control theory simulations to thereby study and analyse the impacts of various factors on capacity expansion strategies within a supply chain. In order to identify those factors that play a key role in supply chain capacity expansion decisions, a set of control theory simulation experiments are designed. The study shows that financial reporting delays can distract capacity expansion decisions, which signifies that they are as important as delivery lead time and can position a supply chain in distress by creating huge backlogs. It also shows that placing too much emphasis on sales force effectiveness (accurate forecasting) speeds up the reaction to demand changes and concludes that a balanced policy is desirable.