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Dynamic Capacity Investment with Two Competing Technologies

Author

Listed:
  • Wenbin Wang

    (Department of Operations Management, School of International Business Administration, Shanghai University of Finance and Economics, 200433 Shanghai, China)

  • Mark E. Ferguson

    (Management Science Department, Moore School of Business, University of South Carolina, Columbia, South Carolina 29208)

  • Shanshan Hu

    (Department of Operations and Decision Technologies, Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Gilvan C. Souza

    (Department of Operations and Decision Technologies, Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

Abstract

With the recent focus on sustainability, firms making adjustments to their production or distribution capacity levels often have the option of investing in newer technologies with lower carbon footprints and/or energy consumption. These more sustainable technologies typically require a higher up-front investment but have lower operating (fuel or energy) costs. What complicates this decision is the fact that the projected dollar savings from the more sustainable technologies fluctuate considerably due to uncertainty in fuel prices, and the total capacity may not be utilized at 100% because of fluctuations in the demand for the product. We consider the firm's capacity adjustments over time given a portfolio of technology options when the demand and the fuel costs are stochastic and possibly dependent. Our model also allows for usage-based capacity deterioration. We provide the analytical structure of the optimal policy, which assigns different control limits for investing, staying put, and disinvesting in the capacities of the competing technology choices for each realization of demand and fuel costs at each period. We also present an application of our model to the problem of designing a delivery truck fleet for a beverage distributor.

Suggested Citation

  • Wenbin Wang & Mark E. Ferguson & Shanshan Hu & Gilvan C. Souza, 2013. "Dynamic Capacity Investment with Two Competing Technologies," Manufacturing & Service Operations Management, INFORMS, vol. 15(4), pages 616-629, October.
    • Handle: RePEc:inm:ormsom:v:15:y:2013:i:4:p:616-629
    DOI: 10.1287/msom.2013.0438
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    References listed on IDEAS

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