Publication Type

Journal Article

Version

Preprint

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

Additional URL

http://dx.doi.org/10.1287/mnsc.2014.2093

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