Dynamic Capacity Expansion Problem with Multiple Products: Technology Selection and Timing of Capacity Additions

This paper examines a multiproduct dynamic investment model for making technology choices and expansion decisions over a finite planning horizon. The motivation for our problem comes from recent developments in the field of flexible technology such as CAD, CAM, and CIM that permit firms to invest in these more expensive, flexible technologies to provide a competitive edge in the form of an ability to respond rapidly to changing product mix. On the other hand, more specialized (dedicated) equipment may be less costly. The decisions on appropriate mixes of dedicated and flexible capacity involve many complex considerations such as economies of scale, demand patterns, and mix flexibility. We formulate the problem as a mathematical program with the objective of minimizing total investment cost. Since the problem is difficult to solve optimally, we develop a two-phased approach and present heuristics to obtain good expansion schedules. These procedures are based on an easily solvable sequence of subproblems derived from the planning problem. Our computational results suggest that these methods work well and provide acceptable solutions with reasonable effort.