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Investment strategy for flexible capacity considering demand-side disruption risk

Author

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  • Cuicui Meng
  • Jianhua Ji
  • Xinjun Li

Abstract

This article considers a firm selling two product families and confronting demand-side disruption risk. The firm has the option to invest in dedicated capacities and flexible capacity. To study the optimal investment strategy, we model the firm's decision as a two-stage stochastic programming problem, in which deviation risk is restricted within a certain level. Our analysis provides the necessary and sufficient conditions for the optimal strategy and the threshold policy for the flexible capacity investment. The results in the context of deviation risk constraint are compared with results derived outside of the context of deviation risk constraint. Furthermore, a numerical example is given to depict the optimal investment strategy.

Suggested Citation

  • Cuicui Meng & Jianhua Ji & Xinjun Li, 2016. "Investment strategy for flexible capacity considering demand-side disruption risk," International Journal of Systems Science, Taylor & Francis Journals, vol. 47(6), pages 1245-1257, April.
    • Handle: RePEc:taf:tsysxx:v:47:y:2016:i:6:p:1245-1257
    DOI: 10.1080/00207721.2014.919428
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    Cited by:

    1. 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.

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