IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v44y1998i8p1071-1078.html
   My bibliography  Save this article

Investment Strategies for Flexible Resources

Author

Listed:
  • Jan A. Van Mieghem

    (J. L. Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208-2009)

Abstract

This article studies optimal investment in flexible manufacturing capacity as a function of product prices (margins), investment costs and multivariate demand uncertainty. We consider a two-product firm that has the option to invest in product-dedicated resources and/or in a flexible resource that can produce either product, but has to make its investment decision before demands are observed. The flexible resource provides the firm with a hedge against demand uncertainty, but at a higher investment cost than the dedicated resources. Our analysis highlights the important role of price (margin) and cost mix differentials, which, in addition to the correlation between product demands, significantly affect the investment decision and the value of flexibility. Contrary to the intuition also prevalent in the academic literature, we show that it can be advantageous to invest in flexible resources even with perfectly positively correlated product demands.

Suggested Citation

  • Jan A. Van Mieghem, 1998. "Investment Strategies for Flexible Resources," Management Science, INFORMS, vol. 44(8), pages 1071-1078, August.
  • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:8:p:1071-1078
    DOI: 10.1287/mnsc.44.8.1071
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.44.8.1071
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.44.8.1071?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Charles H. Fine & Robert M. Freund, 1990. "Optimal Investment in Product-Flexible Manufacturing Capacity," Management Science, INFORMS, vol. 36(4), pages 449-466, April.
    2. Eberly, Janice C. & Van Mieghem, Jan A., 1997. "Multi-factor Dynamic Investment under Uncertainty," Journal of Economic Theory, Elsevier, vol. 75(2), pages 345-387, August.
    3. Shanling Li & Devanath Tirupati, 1994. "Dynamic Capacity Expansion Problem with Multiple Products: Technology Selection and Timing of Capacity Additions," Operations Research, INFORMS, vol. 42(5), pages 958-976, October.
    4. Robert A. Jones & Joseph M. Ostroy, 1984. "Flexibility and Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 13-32.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bish, Ebru K. & Hong, Seong J., 2006. "Coordinating the resource investment decision for a two-market, price-setting firm," International Journal of Production Economics, Elsevier, vol. 101(1), pages 63-88, May.
    2. Harrison, J. Michael & Van Mieghem, Jan A., 1999. "Multi-resource investment strategies: Operational hedging under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 113(1), pages 17-29, February.
    3. 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.
    4. Ebru K. Bish & Qiong Wang, 2004. "Optimal Investment Strategies for Flexible Resources, Considering Pricing and Correlated Demands," Operations Research, INFORMS, vol. 52(6), pages 954-964, December.
    5. Jan A. Van Miegham, 1997. "Investment Strategies for Flexible Resources," Discussion Papers 1201, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Brian Tomlin & Yimin Wang, 2005. "On the Value of Mix Flexibility and Dual Sourcing in Unreliable Newsvendor Networks," Manufacturing & Service Operations Management, INFORMS, vol. 7(1), pages 37-57, June.
    7. Hongmin Li & Stephen C. Graves & Woonghee Tim Huh, 2014. "Optimal Capacity Conversion for Product Transitions Under High Service Requirements," Manufacturing & Service Operations Management, INFORMS, vol. 16(1), pages 46-60, February.
    8. Kai Huang & Shabbir Ahmed, 2009. "The Value of Multistage Stochastic Programming in Capacity Planning Under Uncertainty," Operations Research, INFORMS, vol. 57(4), pages 893-904, August.
    9. 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.
    10. Van-Anh Truong & Robin O. Roundy, 2011. "Multidimensional Approximation Algorithms for Capacity-Expansion Problems," Operations Research, INFORMS, vol. 59(2), pages 313-327, April.
    11. Brian Tomlin & Yimin Wang, 2008. "Pricing and Operational Recourse in Coproduction Systems," Management Science, INFORMS, vol. 54(3), pages 522-537, March.
    12. Mojtaba Farrokh & Ehsan Ahmadi & Minghe Sun, 2023. "A robust stochastic possibilistic programming model for dynamic supply chain network design with pricing and technology selection decisions," OPSEARCH, Springer;Operational Research Society of India, vol. 60(3), pages 1082-1120, September.
    13. Verter, Vedat & Dasci, Abdullah, 2002. "The plant location and flexible technology acquisition problem," European Journal of Operational Research, Elsevier, vol. 136(2), pages 366-382, January.
    14. Stephen C. Graves & Brian T. Tomlin, 2003. "Process Flexibility in Supply Chains," Management Science, INFORMS, vol. 49(7), pages 907-919, July.
    15. Shabbir Ahmed & Nikolaos V. Sahinidis, 2003. "An Approximation Scheme for Stochastic Integer Programs Arising in Capacity Expansion," Operations Research, INFORMS, vol. 51(3), pages 461-471, June.
    16. Hagspiel, V., 2011. "Flexibility in technology choice : A real options approach," Other publications TiSEM 4150e2d4-6ca2-4367-a8b9-2, Tilburg University, School of Economics and Management.
    17. Richard J. Arend, 2022. "Breaking Cournot: The Effects of Capacity-Adjusting Technology," JRFM, MDPI, vol. 15(9), pages 1-11, August.
    18. Georgiadis, Patroklos & Athanasiou, Efstratios, 2013. "Flexible long-term capacity planning in closed-loop supply chains with remanufacturing," European Journal of Operational Research, Elsevier, vol. 225(1), pages 44-58.
    19. Dipankar Bose & A. K. Chatterjee & Samir Barman, 2016. "Towards dominant flexibility configurations in strategic capacity planning under demand uncertainty," OPSEARCH, Springer;Operational Research Society of India, vol. 53(3), pages 604-619, September.
    20. Ahmed, Shabbir & Sahinidis, Nikolaos V., 2008. "Selection, acquisition, and allocation of manufacturing technology in a multi-period environment," European Journal of Operational Research, Elsevier, vol. 189(3), pages 807-821, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:44:y:1998:i:8:p:1071-1078. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.