Dynamic Capacity Investment with Two Competing Technologies

Abstract

With the recent focus on sustainability, firms making adjustments to their production or distribution capacity levels often have the option of investing in newer technologies with lower carbon footprints and/or energy consumption. These more sustainable technologies typically require a higher up-front investment but have lower operating (fuel or energy) costs. What complicates this decision is the fact that the projected dollar savings from the more sustainable technologies fluctuate considerably due to uncertainty in fuel prices, and the total capacity may not be utilized at 100% because of fluctuations in the demand for the product. We consider the firm's capacity adjustments over time given a portfolio of technology options when the demand and the fuel costs are stochastic and possibly dependent. Our model also allows for usage-based capacity deterioration. We provide the analytical structure of the optimal policy, which assigns different control limits for investing, staying put, and disinvesting in the capacities of the competing technology choices for each realization of demand and fuel costs at each period. We also present an application of our model to the problem of designing a delivery truck fleet for a beverage distributor.

Capacity and Inventory Management: Review, Trends, and Projections

“…Sustainab|Emission|Carbon|Green. The top three most cited domain papers studying these topics are Corbett and Klassen (2006), Wang et al (2013), and Hu et al (2015).…”

Impact of Electricity Pricing Policies on Renewable Energy Investments and Carbon Emissions

“…For extensive reviews on supply reliability and capacity planning problems, see Yano and Lee (1995) and Van Mieghem (2003), respectively. As recent examples of this literature, Oh and Özer (2013) incorporate forecast evolution into capacity planning, and Wang et al (2013) study capacity expansion and contraction in two competing technologies. In this stream of research, our paper is closely related to Aflaki and Netessine (2016), who study the competition between renewable and conventional energy sources.…”

OM Forum—Sustainable Operations Management: An Enduring Stream or a Passing Fancy?

“…Because of the tight orchestration between the research team and La Poste's management (the director of mail operations at La Poste was a coauthor on the paper), this research was sufficiently well grounded in practice to enable La Poste to commit to the purchase of 15,600 EVs in October 2011. Wang et al (2013) provide an extension to the previous paper by allowing for uncertain vehicle demand, which gives rise to a portfolio solution of vehicle technologies. The authors derive an optimal policy for investments in sustainable transport technologies, applying it to the case of Coca-Cola, where the optimal fleet composition is shown to consist of a nearly even mix of diesel and hybrid electric vehicles.…”