TITLE:
The Effects of Output Growth on Preventive Investment Policy
AUTHORS:
Yahel Giat
KEYWORDS:
Process Improvement; Quality Costs; Reliability; Output Growth
JOURNAL NAME:
American Journal of Operations Research,
Vol.3 No.6,
October
24,
2013
ABSTRACT: We develop a multi-period dynamic model in which managers decide in each period how much to invest in improving process reliability. The optimal investment decision will minimize the firm’s total costs, which are comprised of its preventive costs and failure costs. We explicitly characterize the optimal investment scheme under different output growth projections and where the firm considers project obsolescence and investment salvageability. Our findings include: for sufficiently small output growth, investment will be made upfront; for sufficiently large output growth, investment will be made periodically until project termination; and for intermediate growth, investment will be staged until some period after which there will be no more investment. The general nature of the cost function in this model allows for its application in various cost reduction settings.