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Optimal capacity expansion under uncertainty

Published online by Cambridge University Press:  01 July 2016

M. H. A. Davis ,
M. A. H. Dempster ,
S. P. Sethi  and
D. Vermes
M. H. A. Davis*
Affiliation:
Imperial College, London
M. A. H. Dempster*
Affiliation:
Dalhousie University
S. P. Sethi*
Affiliation:
University of Toronto
D. Vermes*
Affiliation:
University of Szeged
*
∗Postal address: Department of Electrical Engineering, Imperial College, London SW7 2BT, England.
∗∗ Postal address: Department of Mathematics, Statistics and Computing Science and School of Business Administration, Dalhousie University, Halifax, Nova Scotia, Canada B3H 1Z5.
∗∗∗ Postal address: Faculty of Management Studies, University of Toronto, Toronto, Ontario, Canada M5S 1V5.
∗∗∗∗ Postal address: Bólyai Institute, University of Szeged, Szeged, Hungary.
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Abstract

Capacity expansion is the process of providing new facilities over time to meet rising demand. A general mathematical model of this process is presented, incorporating uncertain future demand (including the possibility of ‘surprises’), non-zero lead times and random cost overruns. In this model the decision maker controls the rate of investment in the current expansion project. Optimization is studied by methods of stochastic control theory. Numerical algorithms are presented which determine the optimal policy in some simple cases.

Keywords

STOCHASTIC CONTROL THEORYPIECEWISE-DETERMINISTIC PROCESSESDYNAMIC PROGRAMMING
Type
Research Article
Information
Advances in Applied Probability , Volume 19 , Issue 1 , March 1987 , pp. 156 - 176
Copyright
Copyright © Applied Probability Trust 1987 

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