Dynamic Capacity Investment with Two Competing Technologies

With the recent focus on sustainability, firms making adjustments to their production or distribution capacity levels often have the option of investing in newer technologies with lower carbon footprints and/or energy consumption. These more sustainable technologies typically require a higher up-front investment but have lower operating (fuel or energy) costs. What complicates this decision is the fact that the projected dollar savings from the more sustainable technologies fluctuate considerably due to uncertainty in fuel prices, and the total capacity may not be utilized at 100% because of fluctuations in the demand for the product. We consider the firm's capacity adjustments over time given a portfolio of technology options when the demand and the fuel costs are stochastic and possibly dependent. Our model also allows for usage-based capacity deterioration. We provide the analytical structure of the optimal policy, which assigns different control limits for investing, staying put, and disinvesting in the capacities of the competing technology choices for each realization of demand and fuel costs at each period. We also present an application of our model to the problem of designing a delivery truck fleet for a beverage distributor.