IDEAS home Printed from https://ideas.repec.org/a/inm/oropre/v52y2004i6p954-964.html
   My bibliography  Save this article

Optimal Investment Strategies for Flexible Resources, Considering Pricing and Correlated Demands

Author

Listed:
  • Ebru K. Bish

    (Grado Department of Industrial and Systems Engineering, Virginia Polytechnic Institute and State University, Blacksburg, Virginia 24061-0118)

  • Qiong Wang

    (Grado Department of Industrial and Systems Engineering, Virginia Polytechnic Institute and State University, Blacksburg, Virginia 24061-0118)

Abstract

We study the optimal resource investment decision faced by a two-product, price-setting firm that operates in a monopolistic setting and employs a postponed pricing scheme. The firm has the option to invest in dedicated resources as well as a more expensive, flexible resource that can satisfy both products. While the resource investment decision is made under demand uncertainty, pricing and resource allocation decisions are postponed to the time when demand curves are realized. Our analysis provides the structure of the firm's optimal resource investment strategy as a function of demand parameters and investment costs, and shows that the flexible resource investment decision follows a threshold policy. We also show that it can be optimal for the firm to invest in the flexible resource even when demand patterns are perfectly positively correlated. The reason for flexible capacity investment in this case is financial rather than risk pooling. On the other hand, we show that it can be optimal for the firm not to invest in the flexible resource even when demand patterns are perfectly negatively correlated. The flexible resource investment decision in this case depends on the profitability of the two products. Based on our analysis, we provide principles on the firm's optimal resource investment decision.

Suggested Citation

  • 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.
    • Handle: RePEc:inm:oropre:v:52:y:2004:i:6:p:954-964
    DOI: 10.1287/opre.1040.0138
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/opre.1040.0138
    Download Restriction: no
    File URL: https://libkey.io/10.1287/opre.1040.0138?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. Jan A. Van Mieghem & Maqbool Dada, 1999. "Price Versus Production Postponement: Capacity and Competition," Management Science, INFORMS, vol. 45(12), pages 1639-1649, December.
    2. Dangl, Thomas, 1999. "Investment and capacity choice under uncertain demand," European Journal of Operational Research, Elsevier, vol. 117(3), pages 415-428, September.
    3. Jan A. Van Mieghem, 2004. "Note--Commonality Strategies: Value Drivers and Equivalence with Flexible Capacity and Inventory Substitution," Management Science, INFORMS, vol. 50(3), pages 419-424, March.
    4. Beach, R. & Muhlemann, A. P. & Price, D. H. R. & Paterson, A. & Sharp, J. A., 2000. "A review of manufacturing flexibility," European Journal of Operational Research, Elsevier, vol. 122(1), pages 41-57, April.
    5. 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.
    6. Serguei Netessine & Gregory Dobson & Robert A. Shumsky, 2002. "Flexible Service Capacity: Optimal Investment and the Impact of Demand Correlation," Operations Research, INFORMS, vol. 50(2), pages 375-388, April.
    7. Jan A. Van Mieghem, 1998. "Investment Strategies for Flexible Resources," Management Science, INFORMS, vol. 44(8), pages 1071-1078, August.
    8. Yehuda Bassok & Ravi Anupindi & Ram Akella, 1999. "Single-Period Multiproduct Inventory Models with Substitution," Operations Research, INFORMS, vol. 47(4), pages 632-642, August.
    9. Charles H. Fine & Robert M. Freund, 1990. "Optimal Investment in Product-Flexible Manufacturing Capacity," Management Science, INFORMS, vol. 36(4), pages 449-466, April.
    10. Triantis, Alexander J & Hodder, James E, 1990. "Valuing Flexibility as a Complex Option," Journal of Finance, American Finance Association, vol. 45(2), pages 549-565, June.
    11. 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.
    12. 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.
    13. Jan A. Van Mieghem & Nils Rudi, 2002. "Newsvendor Networks: Inventory Management and Capacity Investment with Discretionary Activities," Manufacturing & Service Operations Management, INFORMS, vol. 4(4), pages 313-335, August.
    14. William C. Jordan & Stephen C. Graves, 1995. "Principles on the Benefits of Manufacturing Process Flexibility," Management Science, INFORMS, vol. 41(4), pages 577-594, April.
    15. 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. 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.
    3. Jan A. Van Mieghem, 2007. "Risk Mitigation in Newsvendor Networks: Resource Diversification, Flexibility, Sharing, and Hedging," Management Science, INFORMS, vol. 53(8), pages 1269-1288, August.
    4. Achal Bassamboo & Ramandeep S. Randhawa & Jan A. Van Mieghem, 2010. "Optimal Flexibility Configurations in Newsvendor Networks: Going Beyond Chaining and Pairing," Management Science, INFORMS, vol. 56(8), pages 1285-1303, August.
    5. Robert A. Shumsky & Fuqiang Zhang, 2009. "Dynamic Capacity Management with Substitution," Operations Research, INFORMS, vol. 57(3), pages 671-684, June.
    6. Brian Tomlin & Yimin Wang, 2008. "Pricing and Operational Recourse in Coproduction Systems," Management Science, INFORMS, vol. 54(3), pages 522-537, March.
    7. 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.
    8. Yueshan Yu & Xin Chen & Fuqiang Zhang, 2015. "Dynamic Capacity Management with General Upgrading," Operations Research, INFORMS, vol. 63(6), pages 1372-1389, December.
    9. Jan A. Van Mieghem & Nils Rudi, 2002. "Newsvendor Networks: Inventory Management and Capacity Investment with Discretionary Activities," Manufacturing & Service Operations Management, INFORMS, vol. 4(4), pages 313-335, August.
    10. Transchel, Sandra, 2017. "Inventory management under price-based and stockout-based substitution," European Journal of Operational Research, Elsevier, vol. 262(3), pages 996-1008.
    11. Fernando Bernstein & Gregory A. DeCroix & Yulan Wang, 2007. "Incentives and Commonality in a Decentralized Multiproduct Assembly System," Operations Research, INFORMS, vol. 55(4), pages 630-646, August.
    12. Ebru K. Bish & Ana Muriel & Stephan Biller, 2005. "Managing Flexible Capacity in a Make-to-Order Environment," Management Science, INFORMS, vol. 51(2), pages 167-180, February.
    13. Li, X. & Zuidwijk, R.A. & de Koster, M.B.M. & Dekker, R., 2016. "Competitive Capacity Investment under Uncertainty," ERIM Report Series Research in Management ERS-2016-005-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    14. Hyun-Soo Ahn & Rhonda Righter & J. Shanthikumar, 2005. "Staffing decisions for heterogeneous workers with turnover," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 62(3), pages 499-514, December.
    15. Kim, Nayeon & Montreuil, Benoit & Klibi, Walid & Zied Babai, M., 2023. "Network inventory deployment for responsive fulfillment," International Journal of Production Economics, Elsevier, vol. 255(C).
    16. Francas, David & Löhndorf, Nils & Minner, Stefan, 2011. "Machine and labor flexibility in manufacturing networks," International Journal of Production Economics, Elsevier, vol. 131(1), pages 165-174, May.
    17. Onur Boyabatlı & Tiecheng Leng & L. Beril Toktay, 2016. "The Impact of Budget Constraints on Flexible vs. Dedicated Technology Choice," Management Science, INFORMS, vol. 62(1), pages 225-244, January.
    18. 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.
    19. Julka, Nirupam & Baines, Tim & Tjahjono, Benny & Lendermann, Peter & Vitanov, Val, 2007. "A review of multi-factor capacity expansion models for manufacturing plants: Searching for a holistic decision aid," International Journal of Production Economics, Elsevier, vol. 106(2), pages 607-621, April.
    20. 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.

    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:oropre:v:52:y:2004:i:6:p:954-964. 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.