Capacity expansion and replacement in growing markets with uncertain technological breakthroughs
Coauthor(s): Sampath Rajagopalan, Thomas Morton.
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The accelerated pace of technological change has led to rapid obsolescence of productive capacity in electronics and other industries. Managers must consider the impact of future technologies while making acquisition and replacement decisions in such environments. We consider a problem where a sequence of technological breakthroughs are anticipated but their magnitude and timing are uncertain. A firm, operating in such an environment, must decide how much capacity of the current technology to acquire to meet future demand growth. It must also determine whether to upgrade any of the older vintages. We formulate this proglema nd present some structural results. Using these results, we then develop a highly efficient regeneration point-based dynamic programming algorithm. The effectiveness of the proposed algorithm is illustrated through a computational study. The sensitivity of the firs tperiod decision to various parameters is also explored.
Source: Management Science
Rajagopalan, Sampath, Medini Singh, and Thomas Morton. "Capacity expansion and replacement in growing markets with uncertain technological breakthroughs." Management Science 44, no. 1 (January 1998): 12-30.