Technology investment under flexible capacity strategy with demand uncertainty

Liu Yang, Yonggui Wang, Jun Ma, Chi To Ng, Edwin Tai Chiu Cheng

Research output: Journal article publicationJournal articleAcademic researchpeer-review

18 Citations (Scopus)

Abstract

This paper investigates technology investment under flexible capacity strategy with demand uncertainty. Technology investment enables a firm to reduce its total production cost, while flexible capacity strategy aims to reduce a firms production waste by postponing production until demand is known. Adopting a general technology investment cost, we examine how technology investment cost structure affects a firms technology investment decisions. We derive the conditions under which the firm will benefit from technology investment. We show that the firm can increase its expected profit through technology investment only when the unit technology investment cost that varies inversely with the basic technology level is below a threshold. However, even though the technology investment cost is zero, the benefit from the increase in technology level is limited. Furthermore, we analytically determine the optimal technology levels and establish their relationships under different technology investment cost structures. Our findings will help firms evaluate various technology investment options and choose the most proper one.
Original languageEnglish
Pages (from-to)190-197
Number of pages8
JournalInternational Journal of Production Economics
Volume154
DOIs
Publication statusPublished - 1 Jan 2014

Keywords

  • Demand uncertainty
  • Flexible capacity strategy
  • Technology investment

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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