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Production network, technology choice, capacity investment and inventory sourcing decisions: operational hedging under demand uncertainty

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Abstract

Our research is motivated by capacity investment and inventory sourcing decisions that firms make while investing in multi-plant production facilities to offer products and services to the markets. We study the strategic choice between investing alternative technologies in a production network and examine for conditions under which flexible technology to be chosen over dedicated technology and vice-versa. We model a firm’s technology choice, capacity investment, and inventory sourcing decisions in face of demand uncertainty as a two-stage stochastic optimization problem for a production network. We conduct numerical studies to examine a situation under which flexible technology to be chosen over dedicated technology in a production network. We observe that optimal amount of capacity to be acquired in a production network with flexible technology is less compared to a network with dedicated technologies. However, optimal levels of inventories to be sourced in a production network with flexible technology is more compared to a network with dedicated technologies. We show that a production network with flexible technology can hedge against demand uncertainty using operational measures such as extra inventory and flexible capacity; in case products demand is either negatively or positively correlated then the value of investing in flexible technology in a production network diminishes.

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Acknowledgements

The author would like to acknowledge the extended support of Prof. A.K. Rao, IBS Hyderabad, Prof. Amitabh S. Raturi, University of Cincinnati, and Prof. Shailesh S. Kulkarni, University of North Texas, in his research work.

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  1. Department of Operations and Information Technology, ICFAI Business School, The ICFAI Foundation for Higher Education, (Deemed-To-Be-University U/S 3 of the UGC Act, 1956), Hyderabad, 501203, India

    J. Prince Vijai

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Vijai, J.P. Production network, technology choice, capacity investment and inventory sourcing decisions: operational hedging under demand uncertainty. OPSEARCH 58, 1164–1191 (2021). https://doi.org/10.1007/s12597-021-00511-x

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