- Email: [email protected]
Capacity expansion: Analysis of simple models with applications
4 !6
Book Reviews
will be stimulated by this work to expand their knowledge further.
J. Chr. van DALEN Twente University of Technology Enschede, Netherlands
J. FREIDENFELDS
Capacity Expansion: Analysis of Simple Models with Applications North-Holland, New York, 1981, xii + 291 pages, $51.00 The book gives an excellent review of models to be used for the determination of capacity expansion of durable facilities. Of course, the subject matter is as old as management science itself. Therefore it is not surprising that the author has made use of the results of many other authors doing research in the same area. What makes the book so interesting is: (1) the very systematic and clear review of the existing expansion models supplied with many original ideas and techniques that the author developed from practical investigations, while a member of the Technical Staff at Bell Telephone Laboratories. This provides a very attractive aspect for the reader: (2) the practical applications. You can smell, as it were, the common fertilization of theory and practice. The book is divided into three parts. The first part gives the background for the models. The most important issue is the strong link with economics. The author has shown that, from several points of view, the present worth is a reasonable decision criterion and even better than using the internal rate of return as measure of profitability. Several aspects are included, such as uncertainty and the cost of money, the effect of price inflation and decisions under a limited budget. In the second part 'simple' models are discussed. It has been assumed that the demand for additional units of capacity will grow linearly over an unbounded horizon. For that situation rather simple formulas have been derived to determine the optimal size of capacity expansion. When a sequence of different sizes has to be looked for,
dynamic programming (both backward and forward formulations) have been used. Sensitivity studies have been made to measure the influence of changes in the future costs. Unfortunately the author has omitted to use a practical definition of sensitivity, i.e., the difference between the real (present worth) costs for the capacity expansions which are optimal for the wrong estimated cost factor in question and the real minimal (present worth) costs. This sensitivity can be expressed as ( B g / r ) ( ¢ - ln(l + ¢)) which can be found by subtracting formula (4.9) from (4.7). The third part contains more complex models and applications. Again dynamic programming is used as one of the most suitable techniques. However the use of heuristic algorithms increases with increasing complexity. After discussing problems of nonlinear demand and the interaction of two different capacity types, the uncertain demand problem is introduced. It is rather surprising to see that the capacity expansion problem with a general birth/death process for the demand can be transformed into an equivalent deterministic problem. The next complication is the allowance of capacity to run out and adding penalty costs to this phenomenon. We now have both sizing and timing decisions, i.e., the decision how much capacity to be added and the decision when to add. The foregoing models have been used as a basis for a number of applications such as the determination of electrical capacity consisting of a mixture of machines with different operating costs, and sizing local telephone network feeder cables. Part three ends with a survey of other difficult capacity expansion models. It can be concluded that this book is very worthwhile for a large public from students to practitioners, working in areas ranging from economics to management science and operations research. Maybe in the next edition the mind of the reader can be expanded by several exercises.
D.K. LEEG WATER Erasmus University Rotterdam, Netherlands
Book Reviews
will be stimulated by this work to expand their knowledge further.
J. Chr. van DALEN Twente University of Technology Enschede, Netherlands
J. FREIDENFELDS
Capacity Expansion: Analysis of Simple Models with Applications North-Holland, New York, 1981, xii + 291 pages, $51.00 The book gives an excellent review of models to be used for the determination of capacity expansion of durable facilities. Of course, the subject matter is as old as management science itself. Therefore it is not surprising that the author has made use of the results of many other authors doing research in the same area. What makes the book so interesting is: (1) the very systematic and clear review of the existing expansion models supplied with many original ideas and techniques that the author developed from practical investigations, while a member of the Technical Staff at Bell Telephone Laboratories. This provides a very attractive aspect for the reader: (2) the practical applications. You can smell, as it were, the common fertilization of theory and practice. The book is divided into three parts. The first part gives the background for the models. The most important issue is the strong link with economics. The author has shown that, from several points of view, the present worth is a reasonable decision criterion and even better than using the internal rate of return as measure of profitability. Several aspects are included, such as uncertainty and the cost of money, the effect of price inflation and decisions under a limited budget. In the second part 'simple' models are discussed. It has been assumed that the demand for additional units of capacity will grow linearly over an unbounded horizon. For that situation rather simple formulas have been derived to determine the optimal size of capacity expansion. When a sequence of different sizes has to be looked for,
dynamic programming (both backward and forward formulations) have been used. Sensitivity studies have been made to measure the influence of changes in the future costs. Unfortunately the author has omitted to use a practical definition of sensitivity, i.e., the difference between the real (present worth) costs for the capacity expansions which are optimal for the wrong estimated cost factor in question and the real minimal (present worth) costs. This sensitivity can be expressed as ( B g / r ) ( ¢ - ln(l + ¢)) which can be found by subtracting formula (4.9) from (4.7). The third part contains more complex models and applications. Again dynamic programming is used as one of the most suitable techniques. However the use of heuristic algorithms increases with increasing complexity. After discussing problems of nonlinear demand and the interaction of two different capacity types, the uncertain demand problem is introduced. It is rather surprising to see that the capacity expansion problem with a general birth/death process for the demand can be transformed into an equivalent deterministic problem. The next complication is the allowance of capacity to run out and adding penalty costs to this phenomenon. We now have both sizing and timing decisions, i.e., the decision how much capacity to be added and the decision when to add. The foregoing models have been used as a basis for a number of applications such as the determination of electrical capacity consisting of a mixture of machines with different operating costs, and sizing local telephone network feeder cables. Part three ends with a survey of other difficult capacity expansion models. It can be concluded that this book is very worthwhile for a large public from students to practitioners, working in areas ranging from economics to management science and operations research. Maybe in the next edition the mind of the reader can be expanded by several exercises.
D.K. LEEG WATER Erasmus University Rotterdam, Netherlands