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Capacity optimization under uncertainty: The impact of operational time lags
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences. University College London, UK; HEC Montréal, Canada.
2017 (English)In: European Journal of Operational Research, ISSN 0377-2217, E-ISSN 1872-6860, Vol. 262, no 2, 660-672 p.Article in journal (Refereed) Published
Abstract [en]

Time lags in switching operational modes are typical in the manufacturing and power sectors but are not treated in most real options models. In this paper, we consider a firm that has the opportunity to suspend and to resume production infinitely many times subject to a time lag after each startup decision. We contribute to the literature by allowing the firm to determine its level of installed capacity in conjunction with its optimal investment timing. We find that an increase in the length of the time lag results in an increase in the optimal capacity level. Capacity optimization also interacts with the length of the time lag to affect investment timing and the triggers to suspend and resume production, thereby weakening the result about hysteresis from a standard real options model. Under the assumption of a fixed level of capacity, a longer lag speeds up the decision to resume operations due to a positive upside to the revenue but delays the suspension of operations. By contrast, with capacity optimization, a longer time lag results in a larger capacity choice, which can indirectly delay the investment decision and the timing to resume operations. This indirect effect dominates when the level of market uncertainty is low and the time lag is initially small.

Place, publisher, year, edition, pages
2017. Vol. 262, no 2, 660-672 p.
Keyword [en]
Investment analysis, Real options, Time lag, Capacity optimization
National Category
Information Systems
Research subject
Computer and Systems Sciences
Identifiers
URN: urn:nbn:se:su:diva-144898DOI: 10.1016/j.ejor.2017.04.006ISI: 000403525300021OAI: oai:DiVA.org:su-144898DiVA: diva2:1117545
Available from: 2017-06-29 Created: 2017-06-29 Last updated: 2017-07-24Bibliographically approved

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Siddiqui, Afzal S.
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CiteExportLink to record
Permanent link

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Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
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