Capacity selection under uncertainty with ratio objectives

Capacity choice or expansion, whether organic or via mergers and acquisitions, creates firms of widely varying scales. The ex-post profitability of such a transformed firm relative to its original size will typically be evaluated on ratio (rate) measures like earnings per share or profits to asset ratio, as such are the only meaningful ways to compare profitability of firms of substantially different sizes. It thus seems desirable that ex-ante capacity selection decisions will also be guided by a ratio objective. We explore capacity choice decisions under demand uncertainty through the ratio measures: (1) Expected ``newsvendor'' (i.e., single period) costs per unit capacity. (2) Expected (newsvendor) profit per unit of capacity. (3) Expected profit per costs of acquiring capacity. (4) A weighted average of a ratio and non-ratio objectives. We allow the capacity-acquisition costs and capacity's production capability to be general non-linear functions. Cost and profit obj...

• Type: Journal
• Year: 2002
• Where: EOR
• Authors: Yigal Gerchak, Elkafi Hassini, Saibal Ray
• Keywords: Capacity Choice, EOR 2002, Ratio Objectives, Ratio Optimizers