Strategic facility location, capacity acquisition, and technology choice decisions under demand uncertainty: Robust vs. non-robust optimization approaches

Abstract

This paper presents a robust optimization (RO) modeling approach to develop insights into strategic capacity planning and resource acquisition decisions, including the facility location problem and the technology choice problem. The main purpose of the proposed model and numerical experiments is to examine the effects of economies of scale, economies of scope, and the combined effects of scale and scope under uncertain demand realizations using robust optimization. The type of capacities, or technology alternatives, that a firm can acquire can be classified on two basic dimensions. The first dimension relates to the effects of scale via distinction between labor-intensive technologies and capital-intensive technologies. The second dimension relates to the effects of scope via distinction between product-dedicated and flexible technologies. Moreover, each product-dedicated and flexible technology can have different levels of labor or capital-intensity, leading to the joint effects of economies of scale and economies of scope. Extensive computational results document how the optimal technology choice patterns depend on the cost structures and levels of model robustness specified to accommodate uncertain demand realizations. The results obtained by the two-stage robust optimization approach are compared to the results obtained by a non-robust approach.