Investigation of Optimal Production Ramp-ups under Demand Uncertainty

Abstract

This paper explores the effect of demand uncertainty on the decision variable of operation time and its interaction with yield and learning during production ramp-up. A dynamic profit model for production ramp-up coupled with learning and demand uncertainty is built to identify optimal ramp-ups under various manufacturing contexts. Numerical simulations are explored to determine the various factors leading to changes in optimal production ramp-ups due to demand uncertainty. Results demonstrate that, under increasing demand uncertainty, firms should generally be conservative and slow down the ramp-up. It is also demonstrated that demand uncertainty leads to slower ramp-up regardless of varying learning rates and capacity/demand constraints. The only exception is products with high profit margin in which optimal ramp-ups are insensitive to demand uncertainty.

Keywords: Demand uncertainty; Learning; Profit model; Production ramp-up.