A study of decision rules for capacity additions†

Abstract

In this paper, a general mathematical model for capacity decision-making is a developed. The model attempts to determine the optimal sizes of capacity step additions and also the optimal timings for these additions. The model is built with independent variables such as a general demand function, a general price function, the experience curve coat coefficient, the technological improvement cost coefficient, capacity shortage costs plus overcapacity costs, discount rate, length of planning horizon, and others. A computer algorithm has been developed to solve this model that has (2N + 2) simultaneous nonlinear equations with (2N + 2) unknowns, where N is the proposed number of capacity step additions. The computer output includes optimal number of capacity steps, their optimal sizes, and also the optimal timings of their additions. In all, 390 combinations of input parameters are analysed, and the resulting conclusions are discussed.

Notes

† This research article or parts of it may not be used or quoted without the written consent of the authors or The Pennsylvania State University.