Deterministic Capacity Expansion Under Deterioration

Abstract

This paper considers the deterministic capacity expansion problem with deterioration. First, the paper extends the conventional model by incorporating capacity deterioration effects and operating costs that are a function of: (i) the age of the facility and (ii) the extent of utilization of capacity. The model still has the useful properties of the standard model, enabling the use of efficient algorithms. Second, the paper extends well-known planning horizon results to this model using a novel dual-based approach, which also provides additional intuition. Finally, interesting computational results are provided that compare optimal and near-optimal forecast horizon values. The impact of capacity deterioration and convexity in variable costs on forecast horizons is also considered.