Two Measures of Production System Flexibility and their Application to Identify Optimal Capacity Investment

We motivate the use of a company’s capability to handle the requirements con-cerning mean customer required lead time and customer demand variation as measures for production system flexibility within a Value Chain. Thus, the cus-tomer driven production planning concept is applied which links together custom-er demand variation, mean customer required lead time and service level. Thereby inventory holding and capacity costs for certain levels of required customer demand variation and mean customer required lead time are derived. For a service level constraint model, the cost optimum for capacity and inventory holding costs is shown to imply the ability to handle a certain mean customer required lead time flexibility when capacity demand variation is predefined. Further, the optimal costs are shown to increase in capacity demand variance. Applying the developed method a manager can either identify the minimum mean customer required lead time for a predefined capacity demand variation or he/she can identify the optimal values for the two flexibility measures discussed to minimize costs.