VOLUME AND CAPACITY INTERACTION IN FACILITY DESIGN

Abstract

This paper addresses the joint facilities design problem of determining both demand and capacity with stochastic demand arrivals and stochastic processing throughput. Using a simple M/M/1 queueing model of a profit maximizing firm, we link marketing and production decision variables by recognizing appropriate congestion costs, and show that coordinated decision-making provides results superior to making demand and capacity decisions sequentially. Sensitivity analysis indicates that the model is robust with respect to its assumptions and parameters. An example illustrates the approach and demonstrates the application of the model.