*** Note Special Time ***



       Department of Systems Engineering and Engineering Management,

                    The Chinese University of Hong Kong


Optimal Capacity Investment Decisions
with Two-sided Fixed Capacity Adjustment Costs

Mr. Qing YE
Department of Industrial and Operations Engineering
University of Michigan

Date : February 17, 2006 (Friday)

Time : 1:30 p.m. - 2:30 p.m.

Venue : Room 513, William M.W. Mong Engineering Building

(Engineering Building Complex Phase 2), CUHK

In this paper, we consider the optimal management of capacity when a firm
faces fixed costs and variable costs to purchase capacity. The firm can also
salvage capacity and receive a variable value per unit capacity salvaged but
faces a (different) fixed cost in this case. Each period, the firm faces a
stochastic demand, and maintenance costs for capacity it decides to keep.

The firm would thus like to decide how much capacity it should purchase or
salvage each period. We introduce a new concept, which we call (K1, K2)-
concavity, and show that the profit-to-go function satisfies this property.
This enables us to characterize the optimal policy structure, which is rather
complex consisting of multiple regions in which different decisions are made.
We show how special cases of this problem (e.g., no fixed costs, expansion or
contraction not allowed) reduce to well-known results, and how (K1, K2)-
concavity is a generalization of concavity, K-concavity and sym-K-concavity.
We also show how different lead times for purchasing or salvaging capacity can
be integrated into the model. Finally, we extend the model to the case where
demand is Markov modulated, and a portion of capacity can deteriorate in each

Qing Ye is a Ph.D. candidate in the Department of Industrial and Operations
Engineering at the University of Michigan at Ann Arbor. His expected
graduation date is August 2006. He received his B.S. in Automation from
Tsinghua University in 1998, and M.S. in Systems Engineering from Tsinghua
University in 2001. His primary research interest is to study firms' optimal
operational decisions under competition and uncertainty in demand and supply.
Specifically, he studies firms' investment decisions in capacity under
uncertainty and competition, the effects of information asymmetry on
operational decisions, and the performance of procurement and (out)sourcing
strategies in supply chain management. @


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Enquiries : Mrs. Monica Wong
Tel : 2609 8315
Email : monica@se.cuhk.edu.hk

For more information please

refer to http://www.se.cuhk.edu.hk/~seg5810/