Capacity Expansion Policy and Its Risk in New Product Diffusion
(English)Manuscript (preprint) (Other academic)
It is difficult to know how much one should invest in expanding capacity when a new product is introduced to market, because there is often a lack of data for sales history. Based on the Bass diffusion model, we analyze the principles of capacity augmentation using progressive expansion and lumping expansion policies. In addition, decisions for capacity expansion also rely on four scenarios for collecting forecast information, either one or a combination of market demand, backlogs and sales information. For both progressive and lumping policies, this paper suggests the use of sales information for capacity forecasting. This should restrict the sales by limiting the speed of capacity expansion, and thus creates a drift of diffusion curve and avoids the over-investment of capacity. It is also important to define the initial capacity level, which is preferably at a value near the initial demand in a market. In the worst case of having too low initial capacity, delay of sales and adding initial inventory can significantly improve the system performance, in particular when capacity expansion is based on sales forecast. The result of this study is strategically important for defining the capacity position in a new product diffusion process.
Bass diffusion, capacity expansion, system dynamics, information, risk management
Engineering and Technology
IdentifiersURN: urn:nbn:se:liu:diva-78761OAI: oai:DiVA.org:liu-78761DiVA: diva2:535615