Logo Logo

Capacity Management, Investment and Hedging: Review and Recent Developments, Manufacturing & Service Operations Management (M&SOM)

Abstract

This article reviews the literature on strategic capacity management concerned with determining the sizes, types, and timing of capacity investments and adjustments under uncertainty. Specific attention is given to recent developments to incorporate multiple decision makers, multiple capacity types, hedging and risk aversion. Capacity is a measure of processing abilities and limitations and is represented as a vector of stocks of various processing resources, while investment is the change of capacity and includes expansion and contraction. After discussing general issues in capacity investment problems, the article reviews models of capacity investment under uncertainty in three settings: The first reviews optimal capacity investment by single and multiple risk-neutral decision makers in a stationary environment where capacity remains constant. Allowing for multiple capacity types, the associated optimal capacity portfolio specifies the amounts and locations of safety capacity in a processing network. Its key feature is that it is unbalanced, i.e., regardless of how uncertainties are realized, one typically will never fully utilize all capacities. The second setting reviews the adjustment of capacity over time and the structure of optimal investment dynamics. The article ends by reviewing how to incorporate risk-aversion in capacity investment and contrasts hedging strategies involving financial versus operational means.

Type

Article

Author(s)

Jan A. Van Mieghem

Date Published

2003

Citations

Van Mieghem, A. Jan. 2003. Capacity Management, Investment and Hedging: Review and Recent Developments. Manufacturing & Service Operations Management (M&SOM) . 5(4): 269-302.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more