Optimal Capacity Decisions for Production Facilities

Abstract As a firm experiences growth, it requires increased capacity to meet the larger demand for its products or services. Also, old equipment may have to be replaced for economic reasons. Therefore, it is necessary to provide appropriate capacity for both replacement and expansion purposes. In this article, the capacity decision is considered as a multistage problem, which derives its multistage nature from the time factor. It is viewed as a time-phased sequence of decision problems, and, to analyze the problem, a stochastic linear programming formulation is considered. Using a technique developed by Szwarc, the problem is reduced to the standard linear programming format in order to determine the optimal capacity schedule.