Evaluating flexible capacity strategy under demand uncertainty

Pao Yue-kong Library Electronic Theses Database

Evaluating flexible capacity strategy under demand uncertainty


Author: Yang, Liu
Title: Evaluating flexible capacity strategy under demand uncertainty
Degree: Ph.D.
Year: 2010
Subject: Hong Kong Polytechnic University -- Dissertations
Business logistics -- Management
Competition -- Mathematical models
Equilibrium (Economics) -- Mathematical models
Department: Dept. of Logistics and Maritime Studies
Pages: x, 214 p. : ill. ; 30 cm.
InnoPac Record: http://library.polyu.edu.hk/record=b2351748
URI: http://theses.lib.polyu.edu.hk/handle/200/5439
Abstract: Flexible capacity strategy (FCS) has been well adopted in different industries, but limited analytical studies have investigated it and almost all of them focus on monopoly or duopoly. None of them has investigated firms’ decisions when facing multiple competitors and two strategies simultaneously. Moreover, there is an absence of research on addressing the issue of flexibility degree, which means to what extent FCS can be fully exploited. Furthermore, the value of long term FCS has not been studied in existing research. To fill these research gaps, this thesis investigates FCS from different perspectives with uncertain demand. First, this thesis identifies five possible production strategies to evaluate long term FCS with consideration of the production cost structure. By conducting a comprehensive series of comparative analyses between different strategies, this thesis evaluates long term FCS and provides the optimal production strategies under different costing environments. It is shown that FCS can benefit or damage a firm’s profit. Second, this thesis constructs a two-strategy asymmetric oligopoly competition model consisting of r firms with FCS and s firms with in-flexible capacity strategy (IFCS) under demand uncertainty. This thesis characterizes capacity and production decisions of each firm at equilibrium. The results verify that all the flexible firms make the same decisions at equilibrium, and so do all the in-flexible firms. It is shown that production cost is one of the key factors affecting whether a firm should adopt FCS or not. Third, this thesis further investigates the endogenous flexibility of FCS in an oligopoly model by allowing firms to freely switch their strategies to maximize their profits. The results show that two strategies may always coexist under some conditions regardless of the number of firms. It is shown that the strategies that eventually survive in a market are insensitive to the total number of firms under certain environments but are sensitive under other environments. This result is further extended to a perfect competition environment. A practical approach is proposed to determine at equilibrium the exact numbers of firms adopting FCS and IFCS under any given demand distribution. Last but not least, this thesis probes into flexibility degree to quantify the performance of FCS in competition. This thesis develops a duopoly competition model in which two firms compete with each other with different flexibility degrees. The results characterize the equilibrium of the competition and show that a firm with a higher flexibility degree always secures a higher profit when the capacity costs are identical in the two firms. The research results highlight the strategic importance of the concept of FCS, provide insights on successful implementation of FCS, and propose suggestions to avoid the potential risk or damage of FCS.

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