Optimal technology choice in a dynamic‐stochastic environment

The issue of technology management has become particularly relevant to operations planners as a result of the introduction of new, computer‐aided process technologies in recent years. At the same time, the fields of economics and management science have developed a number of models and paradigms for technology management and equipment replacement. In this article we present a model structure that builds on this theory and that is directed toward providing insights into the particular issues associated with fixed versus variable cost trade‐offs. A fairly general, dynamic, stochastic model is presented. This model links production planning with technology selection in a direct manner. The model computes optimal production plans in the face of uncertain demand in the course of evaluating the costs and benefits of each technology alternative. The key result of the article concerns conditions for the optimality of moves to lower variable cost technologies.