Most Productive Scale Size versus Demand Fulfillment: A Solution to the Capacity Dilemma

26 Pages Posted: 18 Jan 2014

See all articles by Chia-Yen Lee

Chia-Yen Lee

National Cheng Kung University

Date Written: January 16, 2014

Abstract

The field of economics tends to associate capacity planning with economic scale size and find the characteristics of the production function whereas the field of operations research community tends to focus on demand fulfillment to reduce the loss of sales or inventory for profit maximization. However, it is troublesome capacity dilemmas for firms that need to achieve economic scale size and demand fulfillment simultaneously; in particular, firms operate in stochastic environments. This study fills a gap between these two. To improve capacity planning, this study proposes a multi-objective mathematical programming with data envelopment analysis (DEA) constraints. In particular, compromise programming sets a target which shows a tradeoff between the most-productive-scale-size (MPSS) benchmark and a potential demand fulfillment benchmark. In addition, the minimax regret (MMR) approach and the stochastic programming (SP) technique are used to address target variation caused by demand fluctuations. This study pushes the ex-post DEA analysis of efficiency estimation (i.e. position) towards the ex-ante DEA analysis of production planning (i.e. direction). The result shows that the proposed models provide managerial insights to address the capacity dilemma.

Keywords: data envelopment analysis, multi-objective decision analysis, demand uncertainty, most productive scale size, stochastic programming, capacity planning

JEL Classification: D24, C44, D61

Suggested Citation

Lee, Chia-Yen, Most Productive Scale Size versus Demand Fulfillment: A Solution to the Capacity Dilemma (January 16, 2014). Available at SSRN: https://ssrn.com/abstract=2380129 or http://dx.doi.org/10.2139/ssrn.2380129

Chia-Yen Lee (Contact Author)

National Cheng Kung University ( email )

No.1, University Road
Tainan
Taiwan

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