An economic optimization model for capacity expansion decisions

Abstract

A model is developed to identify the optimal capital expansion decisions for producers of s consumable products. The model features an optional selection of corporate level in a product tree hierarchy and a choice of several optimizing objective functions. The model assumes that intermediate product demand is directly dependent on demand for consumable products. Intermediate product demands are derived from demand for consumable products using a product tree similar to a bill of materials. Restrictions exist on the productive capacity of all products in the product tree, and interdependences exist between producers of the various products. Likewise, the availability of labor limits production capacities for all products in the product tree. The capital available for the capacity expansions can either be capital equity or corporate debt. The model identities the expansion strategy which optimizes the chosen economic objective function. A case study is analyzed with linear programming software to determine the optimal expansion strategy for a tire manufacturer given a hypothetical market demand for automobiles.