Optimal Capacity Conversion for Product Transitions Under High Service Requirements

The MIT Faculty has made this article openly available. Please share how this access benefits you. Your story matters. We consider the capacity planning problem during a product transition in which demand for a new-generation product gradually replaces that for the old product. Capacity for the new product can be acquired both by purchasing new production lines and by converting existing production lines for the old product. Furthermore, in either case, the new product capacity is " retro-fitted " to be flexible, i.e., to be able to also produce the old product. This capacity planning problem arises regularly at Intel, which served as the motivating context for this research. We formulate a two-product capacity planning model to determine the equipment purchase and conversion schedule, considering (i) time-varying and uncertain demand, (ii) dedicated and flexible capacity, (iii) inventory and equipment costs, and (iv) a chance-constrained service level requirement. We develop a solution approach that accounts for the risk-pooling benefit of flexible capacity (a closed-loop planning approach) and compare it with a solution that is similar to Intel's current practice (an open-loop planning approach). We evaluate both approaches with a realistic but disguised example and show that the closed-loop planning solution leads to savings in both equipment and inventory costs, and matches more closely the service level targets for the two products. Our numerical experiments illuminate the cost tradeoffs between purchasing new capacity and converting old capacity, and between a level capacity plan versus a chase capacity plan. 1 Introduction Technology advances often drive frequent product upgrades in the high-tech industry. For example, Intel continually introduces new processors into the market, driven by its tick-tock cadence strategy where each " tick " represents a new generation of silicon technology and each " tock " represents a new product architecture (Shenoy and Daniel, 2006). As a result, a new microprocessor is introduced to the market each year and the company is constantly in transition, i.e., moving the production from one product to the next. In this paper, we study the capacity planning decisions during a product transition. During the transition period, the demand for the older generation product gradually ramps down whereas that for the new product ramps up. Therefore, companies need to 1 manage production according to this demand behavior. For each transition, many changes take place throughout the manufacturing process, often requiring upgrades or replacement of equipment; for example, at Intel, …