Publication Type
Journal Article
Version
submittedVersion
Publication Date
1-2016
Abstract
This paper studies the flexible versus dedicated technology choice and capacity investment decisions of a multiproduct firm under demand uncertainty in the presence of budget constraints. The firm operates under a capital budget for financing the capacity investment, and an operating budget, which is uncertain in the capacity investment stage, for financing the production. We investigate how the tightening of the capital budget and a lower financial flexibility in the production stage (the likelihood of having a sufficient operating budget) shape the optimal technology choice. We find that the dominant regime is one where dedicated technology should be adopted for a larger investment cost range, and thus, is the best response to the tighter capital budget, whereas flexible technology is the best response to lower financial flexibility. We identify the key roles that the capacity intensity (the ratio of unit capacity cost to total unit capacity and production cost) of each technology and the pooling value of operating budget with dedicated technology, which brings this technology closer to flexible technology in terms of the resource network’s flexibility, play in a budget-constrained environment. Managerially, our results underline that in the presence of financial constraints, firms should manage technology adoption together with plant location, which shapes capacity intensity, or product portfolio, which shapes financial flexibility.
Keywords
Capacity, Flexibility, Budget, Multi-product Newsvendor, Financial Constraints.
Discipline
Operations and Supply Chain Management | Technology and Innovation
Research Areas
Operations Management
Areas of Excellence
Analytics for Business, Consumer and Social Insights
Publication
Management Science
Volume
62
Issue
1
First Page
225
Last Page
244
ISSN
0025-1909
Identifier
10.1287/mnsc.2014.2093
Publisher
INFORMS
Citation
BOYABATLI, Onur; LENG, Tiecheng; and TOKTAY, L. Beril.
The Impact of Budget Constraints on Flexible vs. Dedicated Technology Choice. (2016). Management Science. 62, (1), 225-244.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3282
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1287/mnsc.2014.2093