Capacity Policy for an OEM under Production Ramp-Up and Demand Diffusion

Abstract

This paper presents a study on capacity policy for an OEM, launching a new short life cycle consumer durable product, and undergoes a demand diffusion process and a production ramp-up process with learning. The demand/supply dynamic system is described by the Bass diffusion demand rate and time constant production rate. The mismatch of demand peak and production plateau creates challenges for balancing the interactive trajectories. Indivisible lumpy capacity increments in the production network exacerbate the difficulty. In conjunction with mathematical and graphical analysis and computation power, we model a discrete optimization model (running on CPLEX) to investigate “how the OEM should determine an optimal capacity size” and “when to market the new product and expand capacity” under various Bass parameters, which describe the behavior intensity of the innovation and imitation of new product consumers.