Abstract
We consider capacity management with a long-term strategic choice, such as the number of production lines to install before demand is known, and short-term tactical decisions relating to production, inventory, and subcontracting (recourse actions made after demand is known). We present an integrated scenario-based mathematical modeling and solution framework. For a single-product environment, we examine properties of total profit as a function of demand and the long-term capacity z. We investigate two measures of risk (profit variance and mean downside risk) and their corresponding profit-risk frontiers. Computational experiments are used to illustrate parameter sensitivity results obtained from the model.
Similar content being viewed by others
References
Artzner, P., F. Delbaen, J. Eber, and D. Heath. (1999). “Coherent Measures of Risk.” Mathematical Finance 9, 203–228.
Carr, S. and W. Lovejoy. (2000). “The Inverse Newsvendor Problem: Choosing an Optimal Portfolio for Capacitated Resources.” Management Science 46(7), 912–927.
Cohen, M. and A. Huchzermeier. (1998). “Global Supply Chain Management: A Survey of Research and Applications.” In S. Tayur, R. Ganeshan, and M. Magazine (eds.), Quantitative Models for Supply Chain Management, chapter 21, pp. 669–702.
Davis, M., M. Dempster, S. Sethi, and D. Vermes. (1987). “Optimal Capacity Expansion under Uncertainty.” Advances in Applied Probability 19, 156–176.
Eppen, G.D., K.R. Martin, and L. Schrage. (1989). “A Scenario Approach to Capacity Planning.” Opera-tions Research 37, 517–527.
Erkip, N., W.H. Hausman, and S. Nahmias. (1990). “Optimal Centralized Ordering Policies in Multi-Echelon Inventory Systems with Correlated Demands.” Management Science 36, 381–392.
Fine, C. and R. Freund. (1990). “Optimal Investment in Product-Flexible Manufacturing Capacity.” Management Science 36(4), 449–466.
Harrison, M. and J.V. Mieghem. (1999). “Multi-Resource Investment Strategies: Operational Hedging under Demand Uncertainty.” European Journal of Operational Research 113, 17–29.
Karmarkar, U. and S. Kekre. (1987). “Manufacturing Configuration, Capacity and Mix Decisions Considering Operational Costs.” Journal of Manufacturing Systems 6, 315–324.
Lehmann, E. (1966). “Some Concepts of Dependence.” Annals of Mathematical Statistics 37, 1137–1153.
Luss, H. (1982). “Operations Research and Capacity Expansion Problems: A Survey.” Operations Research 30, 907–947.
Markowitz, H. (2000). Mean-Variance Analysis in Portfolio Choice and Capital Markets. Fabozzi Associates.
Paraskevopoulos, D., E. Karakitsos, and B. Rustem. (1991). “Robust Capacity Planning under Uncertainty.” Management Science 37, 787–800.
Rao, U., A. Scheller-Wolf, and S. Tayur. (2000). “Development of a Rapid-Response Supply Chain at Caterpillar.” Operations Research 48, 189–204.
Rinks, D., J. Ringuest, and M. Peters. (1987). “A Multivariate Utility Function Approach to Stochastic Capacity Planning.” Engineering Cost and Production Economics 12(1-4), 3–13.
Shaked, M. and G. Shanthikumar. (1994). Stochastic Orders and Their Applications. Academic Press.
Singhal, V., A. Raturi, and J. Bryant. (1994). “On Incorporating Business Risk into Continuous Review Inventory Models.” European Journal of Operational Research 75, 136–150.
Yao, D. (1994). Stochastic Modeling and Analysis of Manufacturing Systems. Springer.
Zsidisin, G., A. Panelli, and R. Upton. (2000). “Purchasing Organization Involvement in Risk Assessments, Contingency Plans, and Risk Management.” Supply Chain Management: An International Journal 5, 187–197.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Kekre, S., Rao, U., Sarthi, S. et al. Risk-Based Integration of Strategic and Tactical Capacity Planning. Ann Oper Res 132, 85–108 (2004). https://doi.org/10.1023/B:ANOR.0000045278.94269.1b
Issue Date:
DOI: https://doi.org/10.1023/B:ANOR.0000045278.94269.1b