Flexible versus dedicated technology: A capacity expansion model

Abstract

Over the past two decades, flexible manufacturing systems have been adopted in a variety of industries. Shorter product lives have necessitated acquiring flexible facilities. Further, the economies of scope that can be derived from producing products with different seasonality have made flexible facilities attractive. At the same time, dedicated facilities (such as transfer lines) have not disappeared because they offer economies of scale beneficial in high volume manufacturing environments. Hence, when producing a wide variety of products with different seasonality and demand growth rates, firms need to consider both economies of scale and economies of scope in deciding whether to acquire capacity of flexible or dedicated technology or both. In this paper, we consider the problem of making capacity acquisition decisions, when there is a choice of flexible and dedicated technologies available in a deterministic multi-product manufacturing environment with demand assumed to be nondeclining over time. We present a novel formulation of the problem and show the equivalence of the formulation to the uncapacitated plant location formulation. This enables us to use a very efficient solution procedure (Erlenkotter 1978) to solve even large problems optimally. We then present the results of an extensive computational study performed to evaluate the impact of key problem parameters on the proportion of flexible and dedicated capacity acquired. An interesting result of the study is that the proportion of flexible capacity acquired decreases with increasing scale economies. We also find that investment in flexible technology is significant even when it is relatively more expensive than dedicated technology.