Risk-Sensitive Sizing of Responsive Facilities

We develop a risk-sensitive strategic facility sizing model that makes use of readily obtainable data and addresses both capacity and responsiveness considerations. The solution is generally robust to demand forecast uncertainty, which is important since capacity planning must be done at a stage when demand forecasts are necessarily poor. The model also leads to managerial insights, including: (1) optimal facility size eventually decreases in forecast uncertainty and is decreasing in the decision maker’s risk aversion, and (2) neglecting risk attitude considerations can result in very poor facility sizing decisions that deteriorate with increased forecast uncertainty. Finally, we derive accurate spreadsheet-implementable approximations to the optimal solution, which make this model a practical capacity planning tool.