Reconfigurable capacity for uncertain markets.

We investigate the conditions under which it would be economically advantageous to invest in reconfigurable capacity. In general, a buyer's choice is between buying dedicated manufacturing system (DMS) equipment, which is generally cheaper but only functional for one product generation, or buying reconfigurable manufacturing system (RMS) equipment, which will last more than one generation albeit at the expense of potentially higher initial investment, maintenance and production costs. The attractiveness of reconfigurable equipment depends on the probability that the next generation product will soon be demanded (or the frequency of product change), and the relative investment and maintenance costs of reconfigurable versus new dedicated equipment. We develop several models to gain insight into the question of when it would be optimal to invest in reconfigurable capacity. We characterize the structure of optimal investment policies and show how investment policies change with problem parameters. After investigating the situation where a firm only invests in one system at a time, either DMS or RMS, we next address how the firm should optimally allocate its capacity investments between DMS and RMS capacity when they can be purchased in fixed but different module sizes. Given the stochastic nature of demand, and new product introduction intervals, the firm has to decide every period how many reconfigurable and dedicated modules to buy or salvage. We characterize the structure of the optimal investment policy when DMS and RMS module sizes are identical. In this case, we use multimodularity properties of value functions to show that the optimal policy structure of our model is of an ISD (Invest/Stay Put/Disinvest) type. We also provide comparative statics results on how the thresholds defining the ISD structure are affected by changes in problem parameters. Interestingly, the amount of reconfigurable capacity is not necessarily monotonic in the probability of new product introductions or relative cost of dedicated capacity. The ISD policy is unfortunately sub-optimal when DMS and RMS capacity have different module sizes. We provide numerical examples that display characteristics of the optimal policy with different module sizes. Finally, we are able to fully characterize the structure of the optimal investment policy under an irreversible investment assumption.Ph.D.Applied SciencesIndustrial engineeringOperations researchUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/123245/2/3068932.pd