Stochastic Capacity Models

Capacity of a facility is defined as its maximum rate of production. Although capacity can be changed by paying the appropriate capital costs, it is often impossible or undesirable to expand or contract capacity to meet exactly a time-varying demand. This paper presents work designed to help determine the optimal amount and timing of capacity expansions for situations where demand or facility life are stochastic. A series of models is developed to handle time stationary and nonstationary demand functions and approximations are presented allowing the use of modified deterministic models to solve stochastic problems.