A heuristic for capacity expansion planning with multiple facility types

Abstract

A capacity expansion model with multiple facility types is examined, where different facility types represent different quality levels. Applications for the model can be found in communications networks and production facilities. The model assumes a finite number of discrete time periods. The facilities are expanded over time. Capacity of a high‐quality facility can be converted to satisfy demand for a lower‐quality facility. The costs considered include capacity expansion costs and excess capacity holding costs. All cost functions are nondecreasing and concave. An algorithm that finds optimal expansion policies requires extensive computations and is practical only for small scale problems. Here, we develop a heuristic that employs so‐called distributed expansion policies. It also attempts to decompose the problem into several smaller problems solved independently. The heuristic is computationally efficient. Further, it has consistently found near‐optimal solutions.