Title: Sensitivity analysis of optimal capacity acquisition under demand uncertainty for a multi-resource firm: complementarity and substitution effects

Authors: J. Prince Vijai; P. Sashikala

Addresses: Department of Operations and Information Technology, ICFAI Business School, IFHE University, Hyderabad, 501203, India ' Department of Operations and Information Technology, ICFAI Business School, IFHE University, Hyderabad, 501203, India

Abstract: We consider a firm that offers two products to serve the market using two dedicated resources and one flexible resource. We model the firm's capacity acquisition decision as a two-stage stochastic optimisation problem with recourse. In the first stage, the firm determines the capacity acquisition level before realisation of products demand. Whereas, in the second stage, after the products demand is realised, the firm determines the production allocation level. Our objective is to study the impact of both strategic and operational cost parameters as well as products demand correlation on optimal capacity acquisition decision. We conduct post-optimality sensitivity analysis via numerical example, and found interestingly that the firm's processing network exhibits complementarity as well as substitution effects. We discuss our results and implications in the context of multi-resource processing network.

Keywords: capacity acquisition; demand uncertainty; demand correlation; multi-resource processing networks; flexible resources; two-stage stochastic optimisation; sensitivity analysis; complementarity; substitution effects; strategic costs; operational costs; product demand.

DOI: 10.1504/IJAMS.2016.078520

International Journal of Applied Management Science, 2016 Vol.8 No.3, pp.246 - 270

Available online: 18 Aug 2016 *

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