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Sensitivity analysis of optimal capacity acquisition under demand uncertainty for a multi-resource firm: complementarity and substitution effects

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  • J. Prince Vijai
  • P. Sashikala

Abstract

We consider a firm that offers two products to serve the market using two dedicated resources and one flexible resource. We model the firm's capacity acquisition decision as a two-stage stochastic optimisation problem with recourse. In the first stage, the firm determines the capacity acquisition level before realisation of products demand. Whereas, in the second stage, after the products demand is realised, the firm determines the production allocation level. Our objective is to study the impact of both strategic and operational cost parameters as well as products demand correlation on optimal capacity acquisition decision. We conduct post-optimality sensitivity analysis via numerical example, and found interestingly that the firm's processing network exhibits complementarity as well as substitution effects. We discuss our results and implications in the context of multi-resource processing network.

Suggested Citation

  • J. Prince Vijai & P. Sashikala, 2016. "Sensitivity analysis of optimal capacity acquisition under demand uncertainty for a multi-resource firm: complementarity and substitution effects," International Journal of Applied Management Science, Inderscience Enterprises Ltd, vol. 8(3), pages 246-270.
    • Handle: RePEc:ids:injams:v:8:y:2016:i:3:p:246-270
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    Cited by:

    1. J. Prince Vijai, 2021. "Production network, technology choice, capacity investment and inventory sourcing decisions: operational hedging under demand uncertainty," OPSEARCH, Springer;Operational Research Society of India, vol. 58(4), pages 1164-1191, December.

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