Dynamic expansion of flexible capacity with and without pricing coordination

Abstract This research presents an optimal multi-period dynamic capacity expansion framework for a shared flexible capacity producing two products. The framework allows modeling coordinated and non-coordinated capacity and marketing decisions under demand uncertainties. In our two-level decision process, the upper level considers the strategic capacity expansion and formulates multi-period uncertainty as a stochastic dynamic programming (DP) problem, and the lower level considers each period’s pricing and capacity allocation decisions in response to available capacity and market demand. We compare capacity expansion decisions under centralized pricing schemes that coordinate the pricing decisions of different products based on the overall interest of the firm and the decentralized pricing schemes based on the interests of individual product managers. Numerical results show that adopting a decision coordination strategy may help firms to maintain flexibility and reduce capacity expansion investment while enhancing overall profitability.

[1]  James R. Bradley,et al.  The Simultaneous Planning of Production, Capacity, and Inventory in Seasonal Demand Environments , 1999, Oper. Res..

[2]  Jan A. Van Mieghem,et al.  Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments , 2003, Manuf. Serv. Oper. Manag..

[3]  Nikolaos V. Sahinidis,et al.  An Approximation Scheme for Stochastic Integer Programs Arising in Capacity Expansion , 2003, Oper. Res..

[4]  Cheng-Hung Wu,et al.  An innovative approach for strategic capacity portfolio planning under uncertainties , 2010, Eur. J. Oper. Res..

[5]  Hanan Luss,et al.  Operations Research and Capacity Expansion Problems: A Survey , 1982, Oper. Res..

[6]  Jong-hyun Ryu,et al.  A long-term capacity expansion planning model for an electric power system integrating large-size renewable energy technologies , 2017, Comput. Oper. Res..

[7]  U. W. Thonemann,et al.  Coordination of pricing and inventory control across products , 2009 .

[8]  J. Birge,et al.  Setting Single-Period Optimal Capacity Levels and Prices for Substitutable Products , 1998 .

[9]  Ebru K. Bish,et al.  Optimal capacity for substitutable products under operational postponement , 2010, Eur. J. Oper. Res..

[10]  S. D. Wu,et al.  Managing Capacity in the High-Tech Industry: A Review of Literature , 2005 .

[11]  S. D. Wu,et al.  Incentive Schemes for Semiconductor Capacity Allocation: A Game Theoretic Analysis , 2005 .

[12]  Zhong Li,et al.  Optimizing capacity investment on renewable energy source supply chain , 2017, Comput. Ind. Eng..

[13]  S. David Wu,et al.  Decentralizing semiconductor capacity planning via internal market coordination , 2002 .

[14]  Chen-Fu Chien,et al.  A simulation analysis for evaluating TFT-LCD fab capacity expansion with a distant transportation problem , 2014 .

[15]  Geert-Jan van Houtum,et al.  Capacity and Inventory Management: Review, Trends, and Projections , 2019, Manuf. Serv. Oper. Manag..

[16]  James T. Lin,et al.  A stochastic dynamic programming approach for multi-site capacity planning in TFT-LCD manufacturing under demand uncertainty , 2014 .

[17]  Douglas R. Bish,et al.  Comparative Statics Analysis of Multiproduct Newsvendor Networks Under Responsive Pricing , 2012, Oper. Res..

[18]  Reha Uzsoy,et al.  A survey of semiconductor supply chain models Part II: demand planning, inventory management, and capacity planning , 2018, Int. J. Prod. Res..

[19]  Cheng-Hung Wu,et al.  Coordinated capacity planning in two-stage thin-film-transistor liquid-crystal-display (TFT-LCD) production networks , 2014 .

[20]  Martin L. Puterman,et al.  Markov Decision Processes: Discrete Stochastic Dynamic Programming , 1994 .

[21]  Kamran Moinzadeh,et al.  Capacity Expansions with Bundled Supplies of Attributes: An Application to Server Procurement in Cloud Computing , 2020 .

[22]  Shabbir Ahmed,et al.  Dynamic Capacity Acquisition and Assignment under Uncertainty , 2003, Ann. Oper. Res..

[23]  Liming Liu,et al.  Post-entry container port capacity expansion , 2012 .

[24]  Majid Taghavi,et al.  A Lagrangian relaxation approach for stochastic network capacity expansion with budget constraints , 2018, Annals of Operations Research.

[25]  Mohsen Elhafsi,et al.  Pricing and capacity planning for product-line expansion and reduction , 2017, Int. J. Prod. Res..

[26]  Albert Corominas,et al.  A review of mathematical programming models for strategic capacity planning in manufacturing , 2014 .

[27]  Stefan Minner,et al.  Mixed integer linear programming formulation for flexibility instruments in capacity planning problems , 2016, Comput. Ind. Eng..

[28]  Shabbir Ahmed,et al.  Partially Adaptive Stochastic Optimization for Electric Power Generation Expansion Planning , 2018, INFORMS J. Comput..

[29]  Wen-Chih Chen,et al.  Evaluating capacity pooling strategy in semiconductor manufacturing: a productivity perspective study , 2011 .

[30]  Tim Baines,et al.  A review of multi-factor capacity expansion models for manufacturing plants: Searching for a holistic decision aid , 2007 .

[31]  Chen-Fu Chien,et al.  Coordinated capacity migration and expansion planning for semiconductor manufacturing under demand uncertainties , 2012 .

[32]  Maqbool Dada,et al.  Pricing and the Newsvendor Problem: A Review with Extensions , 1999, Oper. Res..

[33]  Moacir Godinho Filho,et al.  Smart production planning and control in the Industry 4.0 context: A systematic literature review , 2020, Comput. Ind. Eng..