Inventory Control Systems Model for Strategic Capacity Acquisition

Variation of installed industrial capacity has been found to follow a cyclic pattern. This paper discusses the application of control theory to the problem of the timely acquisition of extra production capacity. The control system based model presented here is compared with a System Dynamics model proposed by Sterman. Key differences are the method of implementing rational decisions about deployment of extra capacity and the use of a nonlinear APVIOBPCS inventory model. Benefits of this new model are a more measurable process and the ability to select parameter values to optimise capacity deployment. Simulation of the model indicates that the results found by Sterman underestimate the production backlog and time taken to reach equilibrium. The use of a Proportional, Integral, and Derivative (PID) controller in the capacity control loop model illustrates that it is possible not only to alter the backlog levels but at the same time to reduce the sales force and improve the revenue. The model also shows clearly that the impact of not increasing capacity promptly results in catastrophic failure of sales as a structural, rather than a business, problem. This model is simple enough to be implemented as a spreadsheet for use as a guide by managers.