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Planning for Surprise: Water Resources Development Under Demand and Supply Uncertainty I. The General Model

Author

Listed:
  • Donald Erlenkotter

    (Graduate School of Management, University of California, Los Angeles, California 90024)

  • Suresh Sethi

    (Faculty of Business, University of Toronto, Toronto, Ontario, Canada M5S 1V4)

  • Norio Okada

    (Tottori University, Koyama, Tottori 680, Japan)

Abstract

A study of water resources development in South Sweden revealed that water consumption unexpectedly stopped growing after construction had begun on a large project to expand water supplies. The project had a long lead time for completion, and planning had been based on traditional deterministic forecasts of future water use. To explore the implications of such an uncertain structural shift in future consumption patterns, we develop a model for determining the timing for initiating such a project. In this model, the original consumption forecast may be disrupted at some random future time by an event called a "surprise." As in the Swedish situation, we have modeled the surprise as an unexpected stagnation in future demand growth and benefit levels. We show that this form of uncertainty makes desirable delaying the initiation of the project beyond the time optimal under the original forecast. We then extend the model to include the lead time for the project as a variable, and demonstrate that the lead time should be reduced from that optimal under a deterministic future. Finally, we incorporate the option of abandoning the project when the surprise occurs, and show that higher salvage values for the project lead to earlier optimal commitment times.

Suggested Citation

  • Donald Erlenkotter & Suresh Sethi & Norio Okada, 1989. "Planning for Surprise: Water Resources Development Under Demand and Supply Uncertainty I. The General Model," Management Science, INFORMS, vol. 35(2), pages 149-163, February.
    • Handle: RePEc:inm:ormnsc:v:35:y:1989:i:2:p:149-163
    DOI: 10.1287/mnsc.35.2.149
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    Cited by:

    1. Jan A. Van Mieghem, 2003. "Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 269-302, July.
    2. Alain Bensoussan & Benoit Chevalier-Roignant & Alejandro Rivera, 2022. "A model for wind farm management with option interactions," Post-Print hal-04325553, HAL.
    3. Parlar, Mahmut & Perry, David, 1995. "Analysis of a (Q, r, T) inventory policy with deterministic and random yields when future supply is uncertain," European Journal of Operational Research, Elsevier, vol. 84(2), pages 431-443, July.
    4. Chien, Chen-Fu & Wu, Cheng-Hung & Chiang, Yu-Shian, 2012. "Coordinated capacity migration and expansion planning for semiconductor manufacturing under demand uncertainties," International Journal of Production Economics, Elsevier, vol. 135(2), pages 860-869.
    5. Alexandar Angelus & Evan L. Porteus, 2002. "Simultaneous Capacity and Production Management of Short-Life-Cycle, Produce-to-Stock Goods Under Stochastic Demand," Management Science, INFORMS, vol. 48(3), pages 399-413, March.
    6. Jinhui Han & Suresh P. Sethi & Chi Chung Siu & Sheung Chi Phillip Yam, 2023. "Co‐op advertising in randomly fluctuating markets," Production and Operations Management, Production and Operations Management Society, vol. 32(6), pages 1617-1635, June.
    7. Mahmut Parlar & Defne Berkin, 1991. "Future supply uncertainty in EOQ models," Naval Research Logistics (NRL), John Wiley & Sons, vol. 38(1), pages 107-121, February.
    8. Alain Bensoussan & Benoît Chevalier‐Roignant & Alejandro Rivera, 2022. "A model for wind farm management with option interactions," Production and Operations Management, Production and Operations Management Society, vol. 31(7), pages 2853-2871, July.
    9. Poretus, Evan L. & Angelus, Alexander, 2000. "Simultaneous Production and Capacity Management under Stochastic Demand for Perishable Goods," Research Papers 1419r, Stanford University, Graduate School of Business.

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