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Production network, technology choice, capacity investment and inventory sourcing decisions: operational hedging under demand uncertainty

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  • J. Prince Vijai

    (ICFAI Business School, The ICFAI Foundation for Higher Education, (Deemed-To-Be-University U/S 3 of the UGC Act, 1956))

Abstract

Our research is motivated by capacity investment and inventory sourcing decisions that firms make while investing in multi-plant production facilities to offer products and services to the markets. We study the strategic choice between investing alternative technologies in a production network and examine for conditions under which flexible technology to be chosen over dedicated technology and vice-versa. We model a firm’s technology choice, capacity investment, and inventory sourcing decisions in face of demand uncertainty as a two-stage stochastic optimization problem for a production network. We conduct numerical studies to examine a situation under which flexible technology to be chosen over dedicated technology in a production network. We observe that optimal amount of capacity to be acquired in a production network with flexible technology is less compared to a network with dedicated technologies. However, optimal levels of inventories to be sourced in a production network with flexible technology is more compared to a network with dedicated technologies. We show that a production network with flexible technology can hedge against demand uncertainty using operational measures such as extra inventory and flexible capacity; in case products demand is either negatively or positively correlated then the value of investing in flexible technology in a production network diminishes.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:opsear:v:58:y:2021:i:4:d:10.1007_s12597-021-00511-x
    DOI: 10.1007/s12597-021-00511-x
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