Technology choice with stochastic demands and dynamic capacity allocation: A two‐product analysis

In this paper we examine issues related to technology choice and capacity expansion in an environment characterized by two product families with stochastic demands. The motivation for our work comes from developments in modern technologies such as FMS and CIM that provide considerable operational flexibility. In this paper we focus on the tradeoffs between product mix flexibility of integrated technologies and dedicated facilities designed to produce efficiently a limited range of products. We present an investment model to determine optimal mix of technology and capacity choices in order to satisfy specified service levels. Based on the detailed analysis of a special case with uniform distributions, we develop a solution procedure that is amenable for extension to other demand distributions. The scope of this approach for deriving managerial insights is illustrated with computational results.