Technology choice and capacity expansion with two product families: tradeoffs between scale and scope

Recent developments in modern technologies such as CIM, FMS and CAD provide a great degree of operational flexibility and permit production of a variety of products with little or no changeover costs. In contrast, dedicated technologies with specialized equipment are designed to produce a limited range of products more efficiently. In this paper, we examire the tradeoffs between scale and scope economies in a two-product environment with general, dynamic demand patterns. We use a discrete period, finite horizon mathematical program to determine the optimal mix of dedicated and flexible technologies. Since the problem is difficult to solve optimally, we develop a two-phased heuristic procedure to obtain good expansion plans that determine type of technologies and amount of capacity additions. These procedures are based on easily solvable subproblems derived from the planning problem. Our computational results suggest that the methods work well and provide acceptable solutions with reasonable effort.