CAPACITY PLANNING WITH DEMAND UNCERTAINTY

Abstract

ABSTRACT We examine how the ability to augment capacity on an as-needed basis affects capacity planning. If it is feasible and desirable to augment all resources on an as-needed basis, optimal capacity planning can be done separately for each resource. Optimality of this simple rule is lost if even one capacity resource imposes “hard” constraints. Simulations indicate that simplifying capacity planning to focus on an expected bottleneck resource dominates product- or resource-level capacity planning, when all resources impose hard constraints and the firm's product mix problem is significant.