Investments In Production Capacity Research Articles

A production capacity investment decision-making tool for the indoor vertical farming industry

Indoor vertical farming (VF) systems are a form of controlled environment agriculture, making use of technology to improve food availability and security while reducing environmental impacts. Commercially, it is a young industry with potential to disrupt the food supply chain status quo but is faced with uncertainty and risk with respect to product demand and production technology efficacy. As a result, VF firms must make decisions to develop production capacity that meets market demand while ensuring long-term profitability. This research presents a method for VF firms to facilitate the allocation of capital resources to new production capacity considering demand and production uncertainty. The method makes use of two mixed integer linear programming models, executed sequentially, to identify a production technology plan and then to identify production capacity plans under a range of different demand scenarios. Profit is used to evaluate performance and the method includes a multi-criteria comparison of how production plans perform using a range of preselected criteria.

Peripheral financialisation and monopoly capitalism in Nigeria: the case of the Dangote Business Group

Abstract This article examines financialisation of non-financial corporations (NFCs) in developing countries using the example of the Dangote Business Group in Nigeria, the largest conglomerate on the Nigeria Stock Exchange (NSE). Our findings suggest that Nigeria is characterised by a financialisation process, where speculative activities expand in banking and capital markets, but not in manufacturing NFCs. Macro-financialisation in banking and capital markets does little to provide finance for Nigeria’s manufacturing NFCs. In the face of insufficient financing from banks and the capital market, NFCs rely on internal funding and trade credit within diversified business groups (DBGs). At the firm level, the financial accounts of Nigerian manufacturing NFCs such as the Dangote Group show weak evidence of speculative financial activities and high levels of investment in productive capacity. This results from a combination of volatile capital markets with excessive risk for NFCs and profitable opportunities in the real economy. While these two factors curtail the negative implications of speculative macro-financial activities, monopoly capitalist concentration processes in DBGs work to undermine effective demand through the disproportionate allocation of profit at the expense of wages.

Behind China’s Overseas Food Investments: A Tale of Two Dairies

ABSTRACT China’s wave of outbound foreign direct investment (OFDI) in food production has created vast commercial opportunities for host countries but has also raised concerns about political dependence on the Chinese market, charges of commodity expropriation, and concerns over the loss of food brands and technologies. While most attention is focused on the political drivers behind Chinese investments in grain production, this article examines the dairy industry, a sector that answers both to policy, and to productive and consumer forces. Using records from the Shanghai Stock Exchange, this article examines the rise of OFDI by China’s dairy giants as the result of the consolidation of the domestic industry, the political promotion of agrarian globalisation, and the complex consumer appeal of foreign foods. Against this background, two contrasting case studies show how the aims and strategies of dairy investments have changed. Guangming’s disastrous 2014 purchase of a controlling stake in Israel’s Tnuva dairy cooperative capped off the initial rush for branded assets. In contrast, the China Animal Husbandry Group’s successful investment in the Mataura Valley Milk plant in New Zealand represents the subsequent trend towards greenfield investments in productive capacity.

Risk-adjusted Social Discount Rates

When evaluating public and private investment projects, those that contribute more to the collective risk should be more penalized through an upward adjustment of their discount rate. This paper shows how to estimate the risk-adjusted discount rate for different projects, with applications to the electricity sector. Using the standard framework of consumer theory, we express any investment project’s beta in terms of the easier-to-measure price and income elasticities of the goods generated by the project. When considering an investment in production capacity, the beta has a flat term structure, and is positive (negative) for normal (inferior) goods. When considering core infrastructures carrying goods or services, such as energy transmission and distribution assets, the beta has a decreasing term structure with very high values at short horizons for infrastructures facing capacity constraints. We provide a real-case example of a cross-border electricity connection with negative beta for the exporting country.

Long-run market equilibria in coupled energy sectors: A study of uniqueness

We propose an equilibrium model for coupled markets of multiple energy sectors. The agents in our model are operators of sector-specific production and sector-coupling technologies, as well as price-sensitive consumers with varying demand. We analyze long-run investment in production capacity in each sector and investment in coupling capacity between sectors, as well as production decisions determined at repeated spot markets. We show that in our multi-sector model, multiplicity of equilibria may occur, even if all assumptions hold that would be sufficient for uniqueness in a single-sector model. We then contribute to the literature by deriving sufficient conditions for the uniqueness of short- and long-run market equilibrium in coupled markets of multiple energy sectors. We illustrate via simple examples that these conditions are indeed required to guarantee uniqueness in general. The uniqueness result is an important step to be able to incorporate the proposed market equilibrium problem in more complex computational multilevel equilibrium models, in which uniqueness of lower levels is a prerequisite for obtaining meaningful solutions. Our analysis also paves the way to understand and analyze more complex sector coupling models in the future.

Long-run market equilibria in coupled energy sectors: A study of uniqueness

We propose an equilibrium model for coupled markets of multiple energy sectors. The agents in our model are operators of sector-specific production and sector-coupling technologies, as well as price-sensitive consumers with varying demand. We analyze long-run investment in production capacity in each sector and investment in coupling capacity between sectors, as well as production decisions determined at repeated spot markets. We show that in our multi-sector model, multiplicity of equilibria may occur, even if all assumptions hold that would be sufficient for uniqueness in a single-sector model. We then contribute to the literature by deriving sufficient conditions for the uniqueness of short- and long-run market equilibrium in coupled markets of multiple energy sectors. We illustrate via simple examples that these conditions are indeed required to guarantee uniqueness in general. The uniqueness result is an important step to be able to incorporate the proposed market equilibrium problem in more complex computational multilevel equilibrium models, in which uniqueness of lower levels is a prerequisite for obtaining meaningful solutions. Our analysis also paves the way to understand and analyze more complex sector coupling models in the future.

Developing the stress testing algorithms for companies: A metal industry case study

Subject. The article addresses the development of stress testing algorithms for companies operating in the real economy. Objectives. The study generalizes stress-testing algorithms and assesses the hypothesis about the resistance of steel companies to external shocks. Methods. I employ general scientific principles and methods of research, like abstraction, generalization of approaches of domestic and foreign authors to stress testing and industry analysis. Results. I developed methods of aggregated direct single-factor historical stress testing based on the top-down approach. The methodology includes three stages. First, I identify stress-testing parameters: stress factors, variables and constant model parameters. Revenue, which is influenced by market risk, is defined as a stress factor. At the second stage, I substantiate the algorithms for predicting stress-testing parameters, then I calculate the predictive values of variable and permanent parameters of the model, assess the volatility of the stress factor, calculate confidence intervals and justify stress-testing scenarios. At the final stage, the results of stress testing are analyzed. The methodology was tested on the investigation of data of 454 metallurgical enterprises. Conclusions. The companies assigned to the first group (20% of companies that account for 80% of revenue) have a high degree of resilience in the short term, owing to their operational efficiency, which ensures continuity of operations. In the long term, iron and steel companies have insufficient resilience due to the high loan debt burden offsetting the aggressive dividend policy, and inadequate investment in production capacity and safety.

Effects of Inefficiency on Marginal Costs, Degree of Economies of Scale and Technical Change: A Theoretical Relationship

In this paper, a theoretical relationship is obtained to measure the effect that inefficiency has on marginal costs, degree of economies of scale and technical change. It is shown that when the relationship between inefficiency and output level is ignored, the estimation of marginal costs and the degree of economies of scale are incorrect. The measurement of technical change is also wrongly calculated if one does not consider the variation of inefficiency over time. This could lead to incorrect pricing decisions that would transfer inefficiency to the consumer via prices and non-optimal investments in productive capacity. In addition, the effect of technical change on costs could be erroneously estimated. The empirical application of this theoretical model to Spanish port authorities during the period 2008-2016 shows that marginal costs of port services were overestimated, the degree of economies of scale was underestimated and the time variations of the inefficiency were interpreted erroneously as technical change when the relationship between inefficiency and output and time is not considered.

The Funding Debate: Optimizing Pension Risk within a Corporate Risk Budget

Defined Benefit (DB) pension risk management has traditionally focused on achieving a balance between the risks associated with the liabilities and the expected returns on investments. This approach does not capture the fact that a DB pension plan is part of running an overall business and must compete for capital against alternative investments the corporation can make. Pension funding strategies should be assessed against other corporate cash uses and strategies, such as investment in productive capacity, research and development initiatives, share or debt buybacks, or potential acquisitions. Considering pension funding relative to potential corporate actions within the same net present value (NPV), internal rate of return (IRR) or similar analytical framework, a company can optimise the use of available cash resources and balance alternative strategies against each other.

Emissions Trading Hybrids: The Case of the EU ETS

AbstractWe argue that the European Union Emissions Trading System (EU ETS) has evolved into a hybrid of two design variants, allowance trading (cap-and-trade) and credit trading (performance standard rate trading), with an added feature of industry support to minimize carbon leakage. In particular the current rules tying free allowances to production capacity expansion, plant closure and capacity use have transformed the efficient cap-and-trade program that stood at the origins of the EU ETS into a system that even surpasses credit trading in paying hidden product subsidies to firms. This combination of rules encourages an inefficiently high level of investment in production capacity and an inefficiently high output in industries exposed to international competition. The result is a sub-optimal EU Emissions Trading ‘Hybrid’ (which we therefore label as ‘EU ETH’).

A strategic and global manufacturing capacity management optimisation model: A Scenario-based multi-stage stochastic programming approach

Large-scale multinational manufacturing firms often require a significant investment in production capacity and extensive management efforts in strategic planning in an uncertain business environment. In this research we first discuss what decision terms and boundary conditions a holistic capacity management model for the manufacturing industry must contain. To better understand how these decision terms and constraints have been employed by the recent model developers in the area of capacity and resource management modelling for manufacturing, 69 optimisation-based (deterministic and stochastic) models have been carefully selected from 2000 to 2018 for a brief comparative analysis. The results of this comparison shows although applying uncertainty into capacity modelling (in stochastic form) has received a greater deal of attention most recently (since 2010), the existing stochastic models are yet very simplistic, and not all the strategic terms have been employed in the current model developments in the field. This lack of a holistic approach although is evident in deterministic models too, the existing stochastic counterparts proved to include much less decision terms and inclusive constraints, which limits them to a limited applications and may cause sub-optimal solutions. Employing this set of holistic decision terms and boundary conditions, this work develops a scenario-based multi-stage stochastic capacity management model, which is capable of modelling different strategic terms such as capacity level management (slight, medium and large capacity volume adjustment to increase/decrease capacity), location/relocation decisions, merge/decomposition options, and product management (R&D, new product launch, product-to-plant and product-to-market allocation, and product phase-out management). Possibility matrix, production rates, different financial terms and international taxes, inflation rates, machinery depreciation, investment lead-time and product cycle-time are also embedded in the model in order to make it more practical, realistic and sensitive to strategic decisions and scenarios. A step-by-step open-box validation has been followed while designing the model and a holistic black-box validation plan has been designed and employed to widely validate the model. The model then has been verified by deploying a real-scaled case of Toyota Motors UK (TMUK) decision of mothballing one of their production lines in the UK after the global recession in 2010.

Structural Transformation in South Africa: Moving Towards a Smart, Open Economy for All

South Africa’s post-apartheid economic transformation project has not generally delivered a “better life for all” as promised at the dawn of democracy. While most middle and upper-middle income countries have continued to see industry leading overall growth, with high investment levels, one of the most striking features of South Africa’s economy is that it remains strongly oriented towards resource-based sectors. South Africa has in fact prematurely de-industrialised. While the financial sector has grown, investment levels in productive capacity and infrastructure have remained low. At the same time, concentration levels and profits have remained high. This has profound effects on the ability to generate jobs and support livelihoods. This paper unpacks the factors that have led to poor outcomes, and puts forward ideas for a reindustrialization agenda by drawing lessons from three industry studies, metals, machinery and equipment, the food and agro-processing sector and the automotive sector. In order to reindustrialise, investment in productive capacity is critical. It requires a new vision and programme for industrialisation under a political settlement which prioritises long-term investment in productive capacity, and rewards effort and creativity rather than incumbency. The vision proposed takes into account the political economy factors that shape outcomes, and puts forward priorities for a reindustrialization agenda.

A multilevel model of the European entry-exit gas market

In entry-exit gas markets as they are currently implemented in Europe, network constraints do not affect market interaction beyond the technical capacities determined by the TSO that restrict the quantities individual firms can trade at the market. It is an up to now unanswered question to what extent existing network capacity remains unused in an entry-exit design and to what extent feasible adjustments of the market design could alleviate inefficiencies. In this paper, we offer a four-level modeling framework that is capable of analyzing these issues and provide some first results on the model structure. In order to decouple gas trading from network congestion management, the TSO is required to determine technical capacities and corresponding booking fees at every entry and exit node up front. Firms book those capacities, which gives them the right to charge or discharge an amount of gas at a certain node up to this capacity in every scenario. Beyond these technical capacities and the resulting bookings, gas trade is unaffected by network constraints. The technical capacities have to ensure that transportation of traded quantities is always feasible. We assume that the TSO is regulated and determines technical capacities, fees, and transportation costs under a welfare objective. As a first step we moreover assume perfect competition among gas traders and show that the booking and nomination decisions can be analyzed in a single level. We prove that this aggregated model has a unique solution. We also show that the TSO’s decisions can be subsumed in one level as well. If so, the model boils down to a mixed-integer nonlinear bilevel problem with robust aspects. In addition, we provide a first-best benchmark that allows to assess welfare losses that occur in an entry-exit system. Our approach provides a generic framework to analyze various aspects in the context of semi-liberalized gas markets. Therefore, we finally discuss and provide guidance on how to include several important aspects into the approach, such as network and production capacity investment, uncertain data, market power, and intra-day trading.

RISK ASSESSMENT OF PRODUCTION CAPACITY INVESTMENT IN GROWING COMPONENT MARKET

Supply and demand increase rapidly in a Hi-Tech component market which is in its growing stage, due to the demand increase of finished products with components performance improvement. Intense price competition among the component manufacturers occurs due to less difference in component performance within same generation. In this type of market, large errors often occur between the predicted market price and the actual price, as a result, high amount capacity investment is very susceptible to price prediction errors. If a mistake is made in the decision-making of capacity investment, the component manufacturer may face huge loss. In the worst case, the component manufacturer may have to make the decision on whether to withdraw from the market. In the past, Japanese component manufacturers led the world with low-margin high-turnover strategy in such uncertain market with their high technological innovation in production. But in recent years, they have lost in the price competition with Korea and Taiwan companies. The reason is thought to be the change of market environment, such as the market expansion with globalization. In this study, we will focus on the decision-making of capacity investment. Characteristics of manufacturers are defined the as different estimation of the demand sensitivity with price decrease and experience curve of investment amount which are the required information for decision-making. In this study, after the modeling of decision-making of capacity investment, the deficit risk of production capacity investment with different characteristics of manufacturers is to be evaluated. To avoid the deficit risk, how to correct the estimation of the information of the demand sensitivity with price decrease and experience curve of investment amount while doing the decision-making of capacity investment under a growing market is shown in the result.

Sales and Operations Planning (S&OP) Concepts and Models under Constraints: Literature Review

Globalization has had a significant impact on company’s management, particularly in the supply chain (lead time, investment in production capacity and technology, organization & management ...). The sales and operations planning (S&OP) include all the processes that link the strategic objectives of the enterprise with the production plan. The impact of the S&OP on operational performance was consistently and significantly demonstrated in the operational aspects of production ; quality (conformity of production, product quality and reliability), delivery (the delivery agility, reliability of supply, manufacturing deadlines, lead times), stocks (reduction of inventory levels, inventory optimization) and flexibility (flexible volume and mix). Our objective in this paper is to present, in the first part, a literature overview of the sales and operations planning, and various research and models developed. In the second part, we will emphasize the transversal aspect of our research that involves both operational issues, tactical and strategic in a context subject to different constraints.

Forest-based biofuel production in the Nordic countries: Modelling of optimal allocation

Biofuels have been promoted as a likely avenue for the future transportation energy mix. Hence, production of biofuels using lignocellulosic feedstocks, such as forest-based biomass, is expected to increase globally. Forest biomass abundance and experience with applying biomass conversion technologies gives the Nordic countries an advantage in catering to biofuel production capacity investment. Yet, given uncertainties in the techno-economic variables of biofuel conversion technologies, as well as differences between the Nordic countries in terms of labor costs, bioheat market prices and electricity and forest biomass costs and prices, it is unclear which of the Nordic countries are comparatively attractive for future investment in forest-based biofuel production capacity. In this paper, we quantify how techno-economic cost components of a novel forest-based biofuel production technology affect optimal allocation of biofuel production capacity in the Nordic countries at a regional level. We apply a scenario analysis approach using an endogenous biofuel capacity investment module in the Nordic Forest Sector Model (NFSM). In each scenario, we alter the techno-economic features of the technology and quantify total biofuel production allocation volume in each region and at a national level. We find that optimal capacity allocation is affected by the type of feedstock used in the technology and will affect existing industries dependent on forest feedstocks. Electricity selling or purchasing will have little effect on allocation because it comprises a small revenue or cost proportion. Bioheat may affect allocation, but this will depend on local demand. Finally, labor costs may affect allocation, but this will depend on the labor intensity, which changes with scale. The results are relevant for policy incentives to proliferate future forest-based biofuel production in the Nordic countries.

A Multilevel Model of the European Entry-Exit Gas Market

In entry-exit gas markets as they are currently implemented in Europe, network constraints do not affect market interaction beyond the technical capacities determined by the TSO that restrict the quantities individual firms can trade at the market. It is an up to now unanswered question to what extent existing network capacity remains unused in an entry-exit design and to what extent feasible adjustments of the market design could alleviate inefficiencies. In this paper, we offer a four-level modeling framework that is capable of analyzing these issues and provide some first results on the model structure. In order to decouple gas trading from network congestion management, the TSO is required to determine technical capacities and corresponding booking fees at every entry and exit node up front. Firms book those capacities, which gives them the right to charge or discharge an amount of gas at a certain node up to this capacity in every scenario. Beyond these technical capacities and the resulting bookings, gas trade is unaffected by network constraints. The technical capacities have to ensure that transportation of traded quantities is always feasible. We assume that the TSO is regulated and determines technical capacities, fees, and transportation costs under a welfare objective. As a first step we moreover assume perfect competition among gas traders and show that the booking and nomination decisions can be analyzed in a single level. We prove that this aggregated model has a unique solution. We also show that the TSO's decisions can be subsumed in one level as well. If so, the model boils down to a mixed-integer nonlinear bilevel problem with robust aspects. In addition, we provide a first-best benchmark that allows to assess welfare losses that occur in an entry-exit system. Our approach provides a generic framework to analyze various aspects in the context of semi-liberalized gas markets. Therefore, we finally discuss and provide guidance on how to include several important aspects into the approach, such as network and production capacity investment, uncertain data, market power, and intra-day trading.

Production or Transmission Investments? A Comparative Analysis

A successful transformation to a carbon neutral energy system requires the correct investments in transmission and production capacity. In a zonal pricing electricity market, the one proposed by the European Commission to integrate the European electricity markets, I analyze the effects that investments in transmission and production capacity have on consumer welfare and suppliers’ profits. In the specific setting of this paper, I show that when the competition is perfect, an investment in transmission capacity between zones (inter Transmission System Operator (TSO) investment) and an investment in production capacity generate the same equilibrium outcome allocations. In contrast, when the competition is imperfect, an inter TSO investment and an investment in production capacity generate different equilibrium outcome allocations.

Economic Upgrading in Bangladesh’s Apparel Value Chain during the Post-MFA Period

Bangladesh’s success in the global apparel value chain following the expiration of the Multi-Fibre Arrangement in 2005 deserves study to understand how a least developed country can become a major source of apparels within a short period of time. This article shows that even under a quasi-hierarchical governance structure, suppliers in Bangladesh have made significant progress in economic upgrading, particularly process and product upgrading. Competitive pressure linked to the ‘open sourcing’ of apparels has caused leading firms to ease conditionalities on the production process. Preferential access to major markets, timely responses to buyers’ changing demands, favourable policies related to the import of raw materials, production and export of apparels and new labour-related policies have facilitated economic upgrading. Suppliers have accordingly benefited from substantial investment in productive capacity, technological know-how and workers’ skills. Further upgrading would require more investment in firm-level productivity and improvement in physical and social compliance.

Evergreening and operational risk under price competition

Abstract “Evergreening” is a strategy wherein an innovative pharmaceutical firm introduces an upgrade of its current product when the patent on this product expires. The upgrade is introduced with a new patent and is designed to counter competition from generic manufacturers that seek to imitate the firm's existing product. However, this process is fraught with uncertainty because the upgrade is subject to stringent guidelines and faces approval risk. Thus, an incumbent firm has to make an upfront production capacity investment without clarity on whether the upgrade will reach the market. This uncertainty may also affect the capacity investment of a competing manufacturer who introduces a generic version of the incumbent's existing product but whose market demand depends on the success or failure of the upgrade. We analyze a game where capacity investment occurs before uncertainty resolution and firms compete on prices thereafter. Capacity considerations that arise due to demand uncertainty introduce new factors into the evergreening decision. Equilibrium analysis reveals that the upgrade's estimated approval probability needs to exceed a threshold for the incumbent to invest in evergreening. This threshold for evergreening increases as the intensity of competition in the generic market increases. If evergreening is optimal, the incumbent's capacity investment is either decreasing or nonmonotonic with respect to low end market competition depending on whether the level of product improvement in the upgrade is low or high. If the entrant faces a capacity constraint, then the probability threshold for evergreening is higher than the case where the entrant is not capacity constrained. Finally, by incorporating the risk-return trade-off that the incumbent faces in terms of the level of product improvement versus the upgrade success probability, we can characterize policy for a regulator. We show that the introduction of capacity considerations may maximize market coverage and/or social surplus at incremental levels of product improvement in the upgrade. This is contrary to the prevalent view of regulators who seek to curtail evergreening involving incremental product improvement. © 2016 Wiley Periodicals, Inc. Naval Research Logistics 63: 71–89, 2016