Investment strategy for flexible capacity considering demand-side disruption risk. Issue 6 (25th April 2016)

• Record Type: Journal Article
• Authors: Meng, Cuicui; Ji, Jianhua; Li, Xinjun
• Is Part Of: International journal of systems science. Volume 47:Issue 6(2016)
• Page Start: 1245
• Page End: 1257
• Publication Date: 2016-04-25
• Subjects: flexible capacity -- disruption risk -- stochastic programming -- deviation risk constraint; System analysis -- Periodicals; 003.3
• DOI: 10.1080/00207721.2014.919428
• Languages: English
• ISSNs: 0020-7721

Abstract

Abstract : This article considers a firm selling two product families and confronting demand-side disruption risk. The firm has the option to invest in dedicated capacities and flexible capacity. To study the optimal investment strategy, we model the firm's decision as a two-stage stochastic programming problem, in which deviation risk is restricted within a certain level. Our analysis provides the necessary and sufficient conditions for the optimal strategy and the threshold policy for the flexible capacity investment. The results in the context of deviation risk constraint are compared with results derived outside of the context of deviation risk constraint. Furthermore, a numerical example is given to depict the optimal investment strategy.