Int. J.

Production Economics 141 (2013) 593–604

Contents lists available at SciVerse ScienceDirect

Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

Production capacity planning for multiple products under uncertain

demand conditions
Jyh-Wen Ho a, Chih-Chiang Fang b,n
a
Department of Industrial Management and Enterprise Information, Aletheia University, Taipei, Taiwan
b
Department of Information Management, Shu-Te University, Kaohsiung, Taiwan

a r t i c l e i n f o abstract

Article history: This study chiefly deliberates issues regarding capacity allocation for multiple products. When producing
Received 6 March 2009 multiple products, a manufacturer needs to allocate a favorable production quantity to each product
Accepted 18 September 2012 under conditions of uncertain demand since the excess or shortage of a product will in turn cause the loss
Available online 3 October 2012
of profit. The proposed model and the corresponding algorithm in this study are used to find out the
Keywords: optimal capacity allocation under the given probability density function of specific demands and to
Uncertain demand effectively allocate limited capacity to multiple products with an aim to maximize profit. Finally, the
Capacity allocation numerical example suggests that the marginal profit, the inventory holding cost, the shortage cost, the
Production cost loss of excess production, and market demands should be considered in an effort to discover an optimal
Newsvendor problem
capacity allocation with regard to multiple products.
Crown Copyright & 2012 Published by Elsevier B.V. All rights reserved.

1. Introduction
Nowadays, a manufacturing system is generally equipped with
more than one production line when producing multiple products,
which raises the problem of how to effectively allocate limited
resources to each production line so as to maximize profits.
Specifically, it might be more complicated to determine the optimal
capacity allocation under conditions of uncertain demand, which
raises a well-known newsvendor problem discussed in numerous
studies. In the last decades, Khouja (1999) reviewed the extensive
contributions to the newsvendor problem. However, most of
studies regarding the newsvendor problem mainly focused on the
classical single-period problem. Qin et al. (2011) also presented a
review study to the newsvendor problem in supply chain environ-
ment, and they indicated that the trend of model development is
toward analyzing the impact of market price, marketing effort, and
stocking quantity on customer demand.
These studies generally employ the traditional inventory
model to make decisions on lot sizing and order quantity, which,
however, consider the production of a single product rather than
multiple products in relation to capacity allocation. Accordingly,
the management should be capable of fully recognizing the
production efficiency of each product, namely the relationship
between production capacity allocation and total production
n
Correspondence to: Department of Information Management, Shu-Te Universit,
No. 59, Hengshan Road, Yanchao, Kaohsiung County 82445, Taiwan.
Tel.: þ 886 7 6158000x3010; fax: þ886 7 6158000x3099.
E-mail addresses: au4408@mail.au.edu.tw (J.-W. Ho),
ccfang@mail.stu.edu.tw (C.-C. Fang).
quantity, and thereby could develop the ability to convert limited
capacity into a maximum total profit.
Reyes (2005) considered the idea that if a manufacturer can
effectively utilize information regarding market demand, then pro-
duction efficiency can be significantly improved as a result of a drop
in inventory levels. In this regard, several studies have concentrated
on investigating market demand for various products. Vairaktarakis
(2000) discussed uncertain demand under interval and discrete
scenarios, respectively. Abdel-Malek et al. (2004) calculated the
optimal production quantity for each product with the assumption
that the probability density function (pdf) of the demand is uniformly
distributed. Hood et al. (2003) utilized stochastic integer program-
ming to predict the changes in uncertain product demand situations.
Ji and Shao (2006) proposed the hybrid intelligent algorithm with
fuzzy demands to decide the wholesale prices of a newspaper for the
purpose of maximizing profits. Barahona et al. (2005) identified a
compromise for multiple demand conditions under different scenar-
ios via minimization of the expected value of the unmet demands.
Zhou et al. (2008) developed a risk decision model to address the
ordering issue of multiple products through linear programming,
which can meet demands under different risk measures. Kiesmuller
et al. (2011) proposed a replenishment policy for an inventory system
with stochastic demand where order quantities are required to have
a minimum size. Tang et al. (2012) developed a pricing and ordering
decision model and also assessed the possible yield risk for suppliers
in a supply chain under uncertain demand. The above studies mainly
focused on the problem of uncertainty of product’s demand and how
to meet the demand in order to reduce the loss of shortage cost or
holding cost.
On the other hand, some researchers have made an effort to
obtain optimal production quantity with various methods when

0925-5273/$ - see front matter Crown Copyright & 2012 Published by Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.ijpe.2012.09.016
594 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604

studying situations where manufacturers are producing multiple
products. Abdel-Malek and Montanari (2005) obtained the opti-
mal production quantity for each product using the Lagrangian
multipliers, Leibniz rule and Kuhn–Tucker conditions. Gerchak
et al. (2002) explored capacity planning under uncertain demand
conditions with nonlinear production costs. Chung et al. (2008)
developed a multi-product model to study how to improve the
quality of production decisions for the preseason stage by using
reactive production in response to a firm’s limited capacity.
However, these decisions were made without contemplating the
probable depreciation of the products. Thus, Mostard and Teunter
(2006) once deliberated the maximization of expected profit for
fashionable commodities since such commodities possess the
property of high return rates within a profitable selling season.
However, they focused their discussion on fashionable products
and therefore neglected the employment of multiple products,
thus reducing the practicability of their model.
Öner and Bilgic- (2008) analyzed the effects of co-production on
the production planning of multiple products with an assumption
of no demand substitution among different products. However, due
to finite capacity, the substitution effect among the multiple
products might exist in the capacity allocation problem. Kuyumcu
and Popescu (2006) investigated an optimization model to manage
multiple products by considering the substitution effects for capa-
city allocations. Mieghem and Rudi (2002) introduced a model
concerning the newsvendor networks to investigate capacity man-
agement for multiple products with consideration of the substitu-
tion effect. As a result, it would be necessary to discuss the effects of
multiple product substitutions when applying the proposed model
to the capacity allocation issue.
The objective of this study is to convert a limited capacity into
an optimal production strategy for multiple products in order to
maximize profits. The rest of this paper is organized as follows:
Section 2 develops the model by probing into the production and
profit functions. Section 3 gives the algorithm to obtain the
optimal capacity allocation concerning the multiple products.
In Section 4, the proposed model is applied to a numerical
example. Furthermore, the impact of variations of production
cost on capacity allocation and the tradeoff between the capacity
allocations of two kinds of products are also discussed. Section 5
draws conclusions and discusses future work.
2. Model for optimizing capacity allocations
In general, it might be burdensome for the management of a
manufacturer to determine the production quantities of each
product as a result of corresponding uncertain demands, yet they
could reasonably evaluate the probability distribution, the expec-
tation, or the standard deviation concerning the demands accord-
ing to their past experience with selling similar products. In this
study, the demands of the multiple products concerned are
considered to be mutually independent, and it is assumed that
parts of the products will be depreciated after the current selling
season. Furthermore, given finite capacity, a rise in the production
quantity of one product might lead to a drop in the production
quantity of other products, and the resultant profit structure
could be changed as well. Consequently, management should
consider not only the influence of each production quantity on the
total profit, but also the substitution effect of a change in the
production quantity of certain products and accordingly, should
be able, as a result, to convert limited capacity into an optimal
production capacity strategy with considerations of the marginal
profit, inventory holding costs, shortage costs, and the loss of
excess production for multiple products, all of which are illu-
strated in Fig. 1.
The production quantity is, in general, positively correlated to
the input capacity and thereby turns out to demonstrate a linear
relationship, yet certain products may yield increasing returns
resulting from economies of scale. In this regard, the linear and
power law production functions are widely discussed in past
research and are respectively expressed as
Q i ðai Þ ¼ di ai x0 ð1Þ
and
Q i ðai Þ ¼ ai ðai x0 Þbi ð2Þ

Total production capacity

Allocation of
the production ………………
capacity for
Product i α1 α2 α3 α n−1 αn

Q1 (α1 ) Q2 (α 2 ) Q3 (α 3 ) Qn −1 (α n −1 ) Qn (α n )
Production
function of
Product i α1 α2 α3 … … … … … … α n −1 αn

Production volume with a capacity size α i for Product i, i=1,2,… ,n

Maximize the profit under considerations of the marginal profit, inventory holding
cost, shortage cost, and loss of excess production for Product i, i =1,2,… ,n

Probability
distribution of f1 ( D1 ) f 2 ( D2 ) f 3 ( D3 ) f n −1 ( Dn −1 ) f n ( Dn )
the demand of …………………
Product i

Probability density function of the demand for Product i, i =1,2,… ,n

Fig. 1. The conversion from limited capacity to an optimal production capacity strategy.
 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604 595

where Qi(ai) is the production quantity of Product i; x0 is the total expected marginal profit (MPi), the evaluation results on different
capacity; ai is the ratio of input capacity of Product i to x0; di is the pdfs will be demonstrated as follows, respectively:
input–output coefficient of Product i under a linear production
function; and ai, bi are respectively the scale and shape factors of (1). If the demand pdf is a uniform distribution, Eq. (6) can be
Product i under a power law production function. However, in directly simplified and rewritten as
consideration of the possible inventory due to products not sold ( )
2UBi Q i ðai ÞLBi 2
in the last production period, the production planning of each MPi ¼ ðP i C pi Þ Oi ðQ i ðai ÞÞ ð7Þ
2ðUBi LBi Þ
production period should take account of its inventory in the
beginning; thus, Eqs. (1) and (2) are respectively rewritten as
(2). If the demand pdf is an exponential or a gamma distribution,
Q i ðai Þ ¼ Ii þ di ai x0 ð3Þ
according to Properties 1, 4, and 7 from Appendix B, namely,
lim F i ðDi Þ ¼ 0, lim Di F i ðDi Þ ¼ 0, and lim Oi ðDi Þ ¼ Ei ½Di ,
Di -UBi Di -LBi Di -LBi
and
Eq. (6) can be simplified and rewritten as
 
Q i ðai Þ ¼ Ii þ ai ðai x0 Þbi ð4Þ MPi ¼ ðP i C pi Þ Ei ½Di Oi ðQ i ðai ÞÞ ð8Þ
where Ei[Di] denotes the average demand of Product i.
where Ii denotes the inventory of Product i at the beginning of (3). If the demand pdf is a normal distribution, according to
each production period. Furthermore, since the demand type of Properties 8 and 11 from Appendix B, namely,
each product essentially affects the capacity allocation of multiple  
lim F i ðDi Þ ¼ 1=2 and lim Oi ðDi ÞDi F i ðDi Þ ¼ Ei ½Di =2, Eq.
products, the management should fully recognize the demand Di -UBi Di -LBi

type before determining the capacity allocation. For instance, the (6) can be simplified and rewritten as
most frequently used demand functions are Uniform, Exponential,  
E ½D  þ Q i ðai Þ
Gamma, and Normal density functions, where the corresponding MPi ¼ ðP i C pi Þ i i Oi ðQ i ðai ÞÞ ð9Þ
2
parameters can be made available through well-done market
research. Similarly, the other demand functions could be applied
to the proposed model in this study so as to carry out the capacity
allocation. Shortage of a product is incurred when the production quan-
Four aspects considered in evaluating the sales profit during tity cannot meet the market demand, resulting in certain oppor-
the current selling season in the proposed model are as follows: tunity costs, such as the loss of customers’ goodwill and the cost
(1) the expected marginal profit of the product, (2) the expected of delayed revenue, which must be considered to affect the
opportunity cost due to shortage of the product, (3) the expected expected product profits. Accordingly, the expected opportunity
inventory holding cost due to excess production and (4) the loss cost due to the shortage of the product for each product within
of revenue due to the drop in the market demand for the product. each production period can be calculated as follows:
Firstly, the expected marginal profit of each product within each Z UBi
production period is expressed as follows: OC i ¼ C bi ðDi Q i ðai ÞÞf i ðDi ÞdDi ð10Þ
Q i ðai Þ
Z Q i ðai Þ Z UBi
MPi ¼ ðPi C pi ÞDi f i ðDi ÞdDi þ ðP i C pi ÞQ i ðai Þf i ðDi ÞdDi ð5Þ where Cbi is the opportunity cost due to the shortage of Product i.
LBi Q i ðai Þ Eq. (10) can be integrated and arranged as
Z UBi Z UBi 
where Di is the demand quantity of Product i; f i ðdÞ is the pdf of OC i ¼ C bi Di f i ðDi ÞdDi  Q i ðai Þf i ðDi ÞdDi
Q i ðai Þ Q i ðai Þ
the demand of Product i; LBi and UBi are respectively the lower 
and upper limits of f i ðdÞ; Pi is the selling price per unit of Product ¼ C bi lim Di F i ðDi ÞQ i ðai ÞF i ðQ i ðai ÞÞ lim Oi ðDi Þ þ Oi ðQ i ðai ÞÞ
i and Cpi is the cost per unit of Product i. Accordingly, Eq. (5) can Di -UBi Di -UBi

be integrated and arranged as 

( Z ) Q i ðai Þ lim F i ðDi Þ þ Q i ðai ÞF i ðQ i ðai ÞÞ
Q i ðai Þ Di -UBi
MPi ¼ ðP i C pi Þ Q i ðai ÞF i ðQ i ðai ÞÞ lim Di F i ðDi Þ F i ðDi ÞdDi 
Di -LBi LBi
OC i ¼ C bi lim Di F i ðDi Þ lim Oi ðDi Þ þ Oi ðQ i ðai ÞÞ
   Di -UBi Di -UBi
þ ðPi C pi Þ Q i ðai Þ lim F i ðDi ÞF i ðQ i ðai ÞÞ 
Di -UBi
Q i ðai Þ lim F i ðDi Þ ð11Þ
 Di -UBi

¼ ðPi C pi Þ Q i ðai ÞF i ðQ i ðai ÞÞ lim Di F i ðDi ÞOi ðQ i ðai ÞÞ

Di -LBi Similarly, due to the fact that different pdfs would influence
  the evaluation results of the opportunity cost (OCi), the evaluation
þ lim Oi ðDi Þ þQ i ðai Þ lim F i ðDi ÞF i ðQ i ðai ÞÞ results on different pdfs will be demonstrated as follows,
Di -LBi Di -UBi
respectively:

MPi ¼ ðP i C pi Þ  lim Di F i ðDi ÞOi ðQ i ðai ÞÞ þ lim Oi ðDi Þ
Di -LBi Di -LBi (1). If the demand pdf is a uniform distribution, Eq. (11) can be
 directly simplified and rewritten as
þ Q i ðai Þ lim F i ðDi Þ ð6Þ  
Di -UBi
UBi ðUBi 2Q i ðai ÞÞ
OC i ¼ C bi þ Oi ðQ i ðai ÞÞ ð12Þ
R RR 2ðUBi LBi Þ
where F i ðdÞ ¼ f i ðdÞdDi and Oi ðdÞ ¼ f i ðdÞdDi . Furthermore, the
expressions off i ðdÞ, F i ðdÞ, and Oi ðdÞ with respect to the specific
(2). If the demand pdf is an exponential or a gamma distribution,
pdfs, such as uniform, exponential, gamma, and normal distribu-
according to Properties 1, 3, and 6 from Appendix B, namely,
tions, can be referred to in Appendix A. Due to the fact that
lim F i ðDi Þ ¼ 0, lim Di F i ðDi Þ ¼ 0, and lim Oi ðDi Þ ¼ 0,
different pdfs would influence the evaluation results of the Di -UBi Di -UBi Di -UBi
596 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604

 
Eq. (11) can be simplified and rewritten as 1=2, and lim Oi ðDi ÞDi F i ðDi Þ ¼ Ei ½Di =2, Eq. (16) can be
Di -LBi
OC i ¼ C bi Oi ðQ i ðai ÞÞ ð13Þ simplified and rewritten as

 
 þ  Q i ðai ÞEi ½Di 
(3). If the demand pdf is a normal distribution, according to HC i þ DLi ¼ C hi þ C pi Si þ Oi ðQ i ðai ÞÞ ð19Þ
2
Properties 8 and 10 from Appendix B, namely, lim F i ðDi Þ ¼
Di -UBi
 
1=2 and lim Oi ðDi ÞDi F i ðDi Þ ¼ Ei ½Di =2, Eq. (11) can be
Di -UBi
simplified and rewritten as When producing multiple products, it is crucial to deliberate
  how to effectively allocate limited capacity to each product in
E ½D Q i ðai Þ
OC i ¼ C bi i i þ Oi ðQ i ðai ÞÞ ð14Þ order to maximize profits. For instance, provided that a firm plans
2
to produce n kinds of products, the optimal capacity allocation of
such multiple products can be deliberated according to Eqs. (6),
Inventory holding costs might be incurred due to an improper (11) and (16), which is mathematically presented as follows:
estimation of the demand during the current period. On the other
hand, the inventory concerning fashionable commodities will incur a X
n
MaxpðaÞ ¼ pða1 , a2 ,. . ., an Þ ¼ ðMP i OC i HC i DLi Þ
loss of revenue due to the drop in market demand during the next i¼1
period. Accordingly, the expected inventory holding costs and the loss ð20Þ
subject to a1 þ a2 þ    þ an ¼ 1
of revenue due to the drop in the market demand for the fashionable
1 Z ai Z0; i ¼ 1,. . .,n
commodities can be modeled as
Z Q i ðai Þ where p(a) is the firm’s expected profit function for the multiple
HC i þ DLi ¼ C hi ðQ i ðai ÞDi Þf i ðDi ÞdDi products, which is continuous and differentiable at ai. Before
LBi
Z Q i ðai Þ discovering the ai which can maximize the objective function
 þ
þ C pi Si ðQ i ðai ÞDi Þf i ðDi ÞdDi ð15Þ p(a), it is required to perform the convexity test and to identify
LBi
only one (a1,a2,y,an) maximizing p(a), which could be proved by
where Ch is the inventory holding cost per unit, Si is the market price Proposition 1.
for the next period of Product I, and [Cpi  Si] þ , i.e. Max (0,Cpi Si),
signifies the loss of revenue due to the drop in the market demand for Proposition 1. For the p(a) which is continuous and differentiable
Product i on the condition that Si is lower than Cpi. Moreover, Eq. (15) with respect to a ¼{a1,a2,...,an}, p(a) is a concave function, and there
 
can be integrated and set as exists a unique root an ¼ a1 n , a2 n ,:::, an n maximizing p(a) if all the
( Z Z ) production functions Q i ðdÞ are increasing, and all the products’

 þ  Q i ðai Þ Q i ðai Þ
HC i þ DLi ¼ C hi þ C pi Si Q i ða i Þ f i ðDi ÞdDi  Di f i ðDi ÞdDi marginal profits (Pi  Cpi) are positive.
LBi LBi

(   Z )

 þ  Q i ðai Þ Proof. Assuming that R denotes a set defined on the n-dimen-
¼ C hi þ C pi Si Q i ðai Þ F i ðQ i ðai ÞÞ lim F i ðDi Þ  Di f i ðDi ÞdDi
Di -LBi LBi sional Euclidean space, and aAR, p(a) would be concave down-
   ward on the condition that the corresponding Hessian matrix is

 þ 
¼ C hi þ C pi Si Q i ðai Þ F i ðQ i ðai ÞÞ lim F i ðDi Þ negatively semi-definite, where the matrix is expressed as
Di -LB
 
 Q i ðai ÞF i ðQ i ðai ÞÞ lim Di F i ðDi ÞOi ðQ ðai ÞÞ þ lim Oi ðDi Þ 2 @2 pðaÞ @2 pðaÞ @2 pðaÞ
3
Di -LBi Di -LBi @a1 2 @a1 @a2 ::: @a1 @an

 6 2 7
 þ  6 @ pðaÞ @2 pðaÞ @2 pðaÞ7
HC i þ DLi ¼ C hi þ C pi Si Q i ðai Þ lim F i ðDi Þ þ lim Di F i ðDi Þ 6 ::: 7
Di -LBi Di -LBi HðpðaÞÞ ¼ 6 @a2 @a1 @a2 2 @a2 @an7 ð21Þ
 6 ::: ::: ::: ::: 7
4 2 2 2
5
@ pðaÞ @ pðaÞ @ pðaÞ
þ Oi ðQ i ðai ÞÞ lim Oi ðDi Þ ð16Þ @an @a1 @an @a2 ::: @an 2
Di -LBi

Similarly, due to the fact that different pdfs would influence where
the evaluation results of the holding cost and the loss of revenue
@2 pðaÞ
(HCi þDLi), the evaluation results on different pdfs will be demon- ¼0 ð22Þ
@ai @aj i a j
strated as follows, respectively:

and
(1). If the demand pdf is a uniform distribution, Eq. (16) can be
directly simplified and rewritten as

  @2 pðai Þ  þ 

 þ  LBi ðLBi 2Q i ðai ÞÞ ¼  P i C pi þ C bi þC hi þ C pi Si f i ðQ i ðai ÞÞQ 0i ðai Þ
HC i þ DLi ¼ C hi þ C pi Si þ Oi ðQ i ðai ÞÞ ð17Þ @ai 2
2ðUBi LBi Þ

 þ  00
þ F i ðQ i ðai ÞÞQ 00i ðai Þ  C hi þ C pi Si Q i ðai Þ o0 ð23Þ
(2). If the demand pdf is an exponential or a gamma distribution,
according to Properties 2, 4, and 7 from Appendix B, namely,
lim F i ðDi Þ ¼ 1, lim Di F i ðDi Þ ¼ 0, and lim Oi ðDi Þ ¼ Ei ½Di , According to Eq. (22), since the off-diagonal elements of the
Di -LBi Di -LBi Di -LBi
Hessian matrix are zero, H(p(a)) can be signified as
Eq. (16) can be simplified and rewritten as h2 2 2
i

 þ   diag @@apða2 Þ , @@apða2 Þ ,:::, @@apnða2 Þ . It can be seen in Eq. (23) that Q i ðdÞ is
1 2
HC i þ DLi ¼ C hi þ C pi Si Q i ðai ÞEi ½Di  þ Oi ðQ i ðai ÞÞ ð18Þ
strictly increasing with respect to ai, Q 0i ðdÞ 40 and Q 00i ðdÞ Z 0,
where Q 0i ðdÞ and Q 00i dÞ respectively represent the first and second
(3). If the demand pdf is a normal distribution, according to derivatives of Q i ðdÞ. Additionally, f i ðdÞ Z 0, (Pi  Cpi), Cbi, Chi, and
Properties 9 and 11 from Appendix B, namely, lim F i ðDi Þ ¼ @2 pðai Þ
Di -LBi [Cpi  Si] þ are positive. As a result, @ai 2
o 0. Furthermore, the
 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604 597

determinant of H(p(a)) can be expressed as 1.0

!
  2 2 2
@ pðaÞ @ pðaÞ @ pðaÞ
D ¼ ð1Þn HðaÞ ¼ ð1Þn      0
@a1 2 @a2 2 @an 2
! 100000
Y
n
@2 pðaÞ 0.8
¼  40 ð24Þ
i¼1
@ai 2
Initial feasible
solution α (0)
Since D 40, p(a) is a concave function, and there exists a 0.6
 
unique root an ¼ a1 n , a2 n ,:::, an n maximizing p(a). However, α2 α(1) (2)
α
200000
due to the nonlinear form of p(a), a* cannot be presented in
terms of a closed form. Therefore, the algorithm concerning the 0.4 α(3)
680000
nonlinear model with constraints would be employed to find out
600000
the optimal a*, which is discussed in the next section. 500000

0.2 400000
3. Solution procedures
300000
200000
To derive an optimal solution, the Generalized Reduced Gradient
Method (Lasdon et al., 1978) is used and amended to the algorithm 0 0.2 0.4 0.6 0.8 1.0
concerning the nonlinear model with constraints, which can obtain
α1
the optimal solution by randomly picking a feasible solution. Fig. 2
gives a contour map which illustrates the process of searching for Fig. 2. Contour map searching for the optimal solution for an objective function.
the optimal solution for an objective function with an initial feasible
solution.
Also, the proposed algorithm is stated as follows:
Start
Step 1:
Redefine the objective function and the constraints as follows:
Min Z ðaÞ ¼ pðaÞ
Set initial feasible solution
Subject to : Y ðaÞ ¼ 1ða1 þ a2 þ    þ an Þ ¼ 0
α ( 0) = {α1( 0) , α 2( 0) ,..., α n( 0 )
{
ai Z 0; i ¼ 1,. . .,n
Categorize the decision variables into the independent k=1
variables {a1, a2,...,an  1} and the dependent variable.
Step 2: Set α ( k ) = α ( 0 )
Determine the number of the maximal iteration.
Set initial iteration counter k¼1.
n o
Randomly pick a feasible solution að0Þ ¼ að0Þ ð0Þ ð0Þ
1 , a2 ,:::, an .
Let a(k) ¼ a(0). Calculate Gri( k ) , i = 1..n
Step 3:
Compute direction Gr ði kÞ , i ¼ 1,. . .N,
8
@pðaðkÞ Þ @pðaðkÞ Þ
>
>
>  @ai if i ¼ 1,. . .,n1 Solve for θ ( k ) and satisfy the equality
< @an
ðkÞ  ðkÞ constraints
Gr i ¼ Xp a
n1
>
>
>
@pðaðkÞ Þ
ðn1Þ @an  if i ¼ n α i( k +1) = α i( k ) + θ ( k ) Gri( k ) , i = 1..n ,
: @ai
and check α i( ) ≥ 0, i = 1..n k=k+1
i¼1 k +1

 þ 
where @p@ðaai i Þ ¼  P i C pi þ C bi þ C hi þ C pi Si ( k +1) ( k +1) ( k +1)
α1 + α2 + ... + α n −1 = 0

 þ  0
F i ðQ i ðai ÞÞQ i 0 ðai Þ C hi þ C pi Si Q i ðai Þ.
Step 4:
Solve for y(k) by minimizing the objective function in direction
Gr ði kÞ while satisfying the equality constraints ( ) ) − Z (α ( ) ) < ε
Z α(
k k +1 No

aði k þ 1Þ ¼ aði kÞ þ yðkÞ Gr ði kÞ (i¼1,2,...,n), check if aði k þ 1Þ Z0

(i¼1,2,...,n) is feasible, and the constraint Yes

Y aðk þ 1Þ ¼ að1k þ 1Þ þ að2k þ 1Þ þ    þ aðnk þ 1Þ 1 ¼ 0 should be Output the optimal solution
satisfied. α * = α (k )
Step 5:


 π (α * ) = − Z ( α * ) = − Z ( α ( k ) )
If Z að1kÞ , að2kÞ ,:::, aðnkÞ Z að1k þ 1Þ , að2k þ 1Þ ,:::, aðnk þ 1Þ o e (i.e. there has
Fig. 3. The flow chart demonstrating the acquisition of the optimal solutions of
an optimal solution), then go to Step 6. Otherwise, let
a* and p(a*).
k¼kþ1, and go to Step 3. (Note: e signifies a tiny value.)
Step 6:
The above algorithm can be written as a computer program for
Save and output the optimal solution of a* ¼ a(k þ 1) and
obtaining the optimal solution. The decision maker can apply
p(a*)¼ Z(a*) ¼  Z(a(k þ 1)). the solution algorithm to develop a computerized system for
598 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604

supporting the capacity allocation decision in practice. Fig. 3 gives
the flow chart showing the acquisition of the optimal solution of
a* and p(a*), which is presented as follows:
4. Application
In this section, the proposed model is applied to a numerical
example. In addition, the impact of variations of production cost
on capacity allocation and the tradeoff between the capacity
allocations for two kinds of products are also discussed.
4.1. Numerical example
Suppose that a manufacturer intends to produce three kinds of
electronic products. To avoid a considerable excess or shortage of
the products, the managers of the manufacturer conduct market
research in order to investigate and meet customer demand for
the products with an aim to convert limited capacity into an
optimal production capacity strategy. In light of the market
research, it is found that the demand distributions for the three
electronic products are all approximated to Gamma distribution.
Specifically, the expectations and the standard deviations con-
cerning the demand for the three products within the production
period (90 days) are as follows: E1[D1] ¼23,600, s1[D1]¼7100,
E2[D2]¼8100, s2[D2]¼1860, E3[D3]¼11,600, and s3[D3]¼ 3100
(Ei, si, and Di denote the expectation, the standard deviation,
and the demand of the ith product, respectively), which can be
observed in Fig. 4.
As can be seen in Fig. 4, the manufacturer is equipped with
three production lines to produce three products, respectively,
Prob.
Product 2
where the three production functions are all linear. Assume that
each production line operates 8 h/day, and the total capacity
within the production period (90 days) is 21,600 h. Furthermore,
Products 1, 2, and 3 are produced at rates of 30, 14, and 24 units/h,
respectively. However, the inventories of Products 1 and 2 during
the current production period in the beginning are 1200 and 200,
respectively, since both products fail to attain the predetermined
sales units. Moreover, the market prices of Products 1, 2, and 3 are
respectively $80, $225, and $140; the production costs per unit of
Products 1, 2, and 3 are respectively $60, $180, and $120; the
inventory holding costs per unit of Products 1, 2, and 3 are
respectively $2.25, $4.625, and $3.5, and the shortage costs per
unit of Products 1, 2, and 3 are respectively $6.75, $16.5, and
$11.25. Since the three products are not fashionable commodities,
there will be no loss of revenue due to unsold products during the
current production period. The abovementioned information about
the three products is listed in Table 1.
By using the proposed model, the optimal production capacity
strategy is a1* ¼33.52%, a2* ¼30.66%, and a3* ¼35.82%. In other
words, the managers should allocate 724.1, 662.3, and 773.6 h to
produce Products 1, 2, and 3, respectively, and the resultant
production quantities are 21,722, 9272, and 18,567 units with
an expected maximum profit of $614,220. From this result, the
capacity allocations on each product are near to even. Although
the marginal profit of Product 2 is more than the others, the
manufacturer was not willing to allocate more capacity to Product
2 because the expected demand is less and relatively stable. If the
capacity was allocated to Product 2 too much, the manufacturer
will take a risk of the unsold products. Moreover, the manufac-
turer did not allocate more capacity to Product 1 either due to the
uncertainty of the demand even though the expected demand of
Product 1 is more than the others. Table 2 lists the structures of
the manufacturer’s profits and costs and indicates that Product
2 gives 40% of the total profit under the effect of both the
marginal profit and the production rate. Besides, since the
variance in the market demand of Product 2 is smaller as
compared with that of Products 1 and 3, the profit stemming
from Product 2 turns out to be steadier than that stemming from
Products 1 and 3.

Product 3 Table 2
The structures of the manufacturer’s profits and costs.

Product 1 Product 2 Product 3

Product 1 Expected sales units 22,922 9472 18,567

Demand Expected profit $154,149 $246,427 $213,644
Quanity Expected profit percentage (%) 25.10 40.12 34.78
Expected marginal profit $180,848 $258,641 $228,350
0 10000 20000 30000 40000 Expected shortage cost $21,168 $4582 $5966
Expected inventory holding cost $5531 $7632 $8740
Fig. 4. The demand distribution of the three electronic products.

Table 1
The information about the three products.

Expectation and standard deviation of the demand distribution E1[D1] ¼23,600, E2[D2]¼ 8100, E3[D3] ¼ 16,600, s1[D1] ¼7100, s2[D2] ¼1860, s3[D3]¼ 3100
Capacity x0 ¼21,600 h
Production rate d1 ¼30, d2 ¼ 14, d3 ¼ 24
Inventory in the beginning I1 ¼1200, I2 ¼ 200, I3 ¼ 0
Market price P1 ¼80, P2 ¼ 225, P3¼ 140
Salvage value of the market price of the unsold products S1 ¼ $80, S2 ¼$225, S3 ¼$140
Production cost per unit Cp1 ¼$60, Cp2 ¼ $180, Cp3 ¼ $120
Inventory holding cost per unit Ch1 ¼$2.25, Ch2 ¼$4.625, Ch3 ¼$3.5
Shortage cost per unit Cb1 ¼$6.75, Cb2 ¼$16.5, Cb3 ¼ $11.25
 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604 599

4.2. Impact of variations of the production cost on the capacity capacity strategy to obtain the expected maximum profit. Accord-
allocation ingly, in light of the previous numerical example, Fig. 5 shows the
impacts of the production costs’ variations ranging from –50% to
Sometimes the price of the material or the parts will be so þ50% on the capacity allocations regarding the three products,
changeable as to affect the production cost and the resultant and Table 3 shows the impacts of the production costs’ variations
marginal profit. In such cases, it is crucial to deliberate whether ranging from –50% to þ 50% on the capacity allocations and the
the change in the production cost will affect the profit structure, expected profits regarding the three products.
and if this is the case, managers will need to adjust the production In general, as far as a manufacturer is concerned, with a rise in
the production cost of a product, the corresponding production
quantity will be reduced, i.e. the less capacity is allocated to this
product. However, it is noteworthy to observe which product
capacity should be substituted for such reduced capacity. As can
Product1 Product2 Product3 be seen in Fig. 5, when the production cost of Product 1 rises, the
0.7 manufacturer should allocate less production quantity to Product
Capacity
0.6
1 and allocate more production quantity to Product 3. Similarly,
0.5
as the production cost of Product 3 rises, the manufacturer should
0.4
0.3 allocate less production quantity to Product 3 and allocate more
0.2 production quantity to Product 1. The results suggest that the
0.1 substitution effect exists between Products 1 and 3. However, it is
0 found that the capacity allocated to Product 2 will not vary
-50% -40% -30% -20% -10% 0% +10% +20% +30% +40% +50% greatly while changing the production costs of Product 1 or 3,
C p1
which might be due to a smaller demand variance for Product 2,
resulting in a lower probability of a situation leading to inventory
Product1 Product2 Product3
0.6 excesses or shortages. In other words, the substitution effect does
Capacity
0.5 not tend to exist in a product with a smaller demand variance.
0.4 In this regard, a manufacturer should pay more attention to the
0.3
product with a larger demand variance since while changing the
0.2
production cost of such a product, the optimal capacity allocation
1
0.1
would vary more as compared with a product with a smaller
demand variance.
0
-50% -40% -30% -20% -10% 0% +10% +20% +30% +40% +50%
C p2

Table 4
Product1 Product2 Product3 The information about Products 1 and 2.
0.6
Capacity
0.5 Expectation and standard E[D1] ¼ 24,000, E[D2] ¼ 24,000, s[D1] ¼2400,
0.4 deviation s[D2] ¼6000
0.3 of the demand distribution
Capacity x0 ¼ 21,600 h
0.2
Production rate d1 ¼ 21, d2 ¼ 2121
0.1 Inventory in the beginning I1 ¼ 0, I2 ¼0
0 Market price P1 ¼ 90, P2 ¼110
-50% -40% -30% -20% -10% 0% +10% +20% +30% +40% +50% Production cost per unit Cp1 ¼ $70, Cp2 ¼$70
Cp3 Inventory holding cost per Ch1 ¼ $3, Ch2 ¼$3
unit
Fig. 5. The impacts of the production costs’ variations ranging from –50% to þ50% Shortage cost per unit Cb1 ¼ $10, Cb2 ¼ $10
on the capacity allocations regarding the three products.

Table 3
The impacts of the production costs’ variations ranging from –50% to þ 50% on the capacity allocations and the expected profits regarding the three products.

The variations in the production cost

Cp1  50%  40%  30%  20%  10% 0% þ10% þ20% þ30% þ40% þ50%
Product 1 59.37% 58.34% 57.14% 55.68% 53.86% 33.52% 28.15% 22.27% 19.33% 17.87% 16.95%
Product 2 36.94% 36.94% 36.94% 36.94% 36.94% 30.66% 33.37% 36.40% 37.94% 38.71% 39.20%
Product 3 3.69% 4.72% 5.92% 7.38% 9.20% 35.82% 38.49% 41.33% 42.73% 43.42% 43.85%
Profit $1,246,523 $1,111,535 $977,634 $845,229 $715,000 $614,220 $572,396 $554,824 $548,505 $545,129 $542,861

Cp2  50%  40%  30%  20%  10% 0% þ10% þ20% þ30% þ40% þ50%
Product 1 51.42% 51.42% 51.42% 51.42% 51.42% 33.52% 52.65% 52.65% 52.65% 52.65% 52.65%
Product 2 41.53% 40.98% 40.32% 39.51% 38.45% 30.66% 4.99% 4.99% 4.99% 4.99% 4.99%
Product 3 7.05% 7.60% 8.26% 9.07% 10.13% 35.82% 42.37% 42.37% 42.37% 42.37% 42.37%
Profit $1,288,283 $1,146,052 $1,004,487 $863,878 $724,751 $614,220 $575,976 $575,976 $575,976 $575,976 $575,976

Cp3  50%  40%  30%  20%  10% 0% þ10% þ20% þ30% þ40% þ50%
Product 1 59.37% 58.34% 57.14% 55.68% 53.86% 33.52% 28.15% 22.27% 19.33% 17.87% 16.95%
Product 2 36.94% 36.94% 36.94% 36.94% 36.94% 30.66% 33.37% 36.40% 37.94% 38.71% 39.20%
Product 3 3.69% 4.72% 5.92% 7.38% 9.20% 35.82% 38.49% 41.33% 42.73% 43.42% 43.85%
Profit $1,519,127 $1,324,298 $1,131,911 $945,673 $769,875 $614,220 $588,220 $588,220 $588,220 $588,219 $588,219
600 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604

price in comparison with the latter. The fashionable commodities,

however, will no longer be popular with customers after the
current selling season. The issue addressed is an investigation of
how the capacity should be allocated to result in the expected
maximum profit. To this end, it is assumed that Products 1 and 2
are daily and fashionable commodities, respectively, and the infor-
mation about the two products is listed in Table 4. Additionally,
Fig. 6 depicts the distributions of the demand for both kinds of
products.
From Table 5 and Fig. 7 it is shown that, with regard to Product 2,
the smaller the salvage values of the market price for the unsold
products, the larger are the profit losses. Consequently, the
manufacturer would bear a certain level of loss without selling
out Product 2 during the current selling season. Also, if the
salvage value of the market price of the unsold Product 2 is
greater than $50, the capacity should be allocated more to
Fig. 6. Distributions of the demand for two kinds of products. Product 2. Otherwise, the capacity should be allocated more to
Product 1. Such results account for the fact that when producing
both Products 1 and 2, the manufacturer should develop the
production capacity strategy by considering the costs and the
market demand for the products, or the manufacturer might
Table 5
entail considerable loss as a result of the out-of-fashion Product 2.
The effect of unsold products concerning Product 2 on the capacity allocation and As a result, on the condition that the salvage values of the unsold
the expected profit. fashionable commodities are smaller, i.e. on condition that the
fashionable commodities tend more to be out of date, though their
S1 S2 [Cp1  S1] þ [Cp2  S2] þ a1* (%) a2* (%) Total profit
marginal profits are abundant, it is inappropriate for the manufac-
$90 $20 $0 $50 59.61 40.39 $434,650 turer to carry out production by enlarging capacity because of the
$90 $30 $0 $40 59.34 40.66 $438,976 possibility of entailing probable losses.
$90 $40 $0 $30 59.06 40.94 $443,525
$90 $50 $0 $20 29.14 70.86 $517,354
$90 $60 $0 $10 25.22 74.78 $610,011
$90 $70 $0 $0 19.61 80.39 $762,462

5. Conclusion

How to convert a limited capacity into an optimal production

strategy for maximizing profit to a manufacturer is the main
0.90 Product1 Product2 objective of this study. It is crucial to effectively allocate limited
Capacity
0.80 capacity to each production line when producing multiple pro-
0.70
ducts. However, in practice, an ideal capacity planning strategy is
0.60
not easily devised since there are a lot of factors involved in
0.50
0.40 evaluating the market demand for products, such as the price of
0.30 the products. In this study, the proposed model and the corre-
0.20 sponding algorithm might be useful to develop an adequate
0.10 capacity planning strategy. In other words, the proposed model
0.00 could assist managers in effectively allocating limited capacity to
$20 $30 $40 $50 $60 $60
each product under conditions of uncertain demand so as to
S2
maximize profit. Furthermore, the numerical example suggests
Fig. 7. The impacts of the different salvage values of unsold Product 2 on the that the marginal profit, the inventory holding cost, the shortage
capacity allocations regarding the two kinds of products. cost, the loss of excess production, and market demands should
be considered in an effort to discover the optimal capacity
allocation concerning multiple products. Additionally, due to
finite capacity, the substitution effects of the capacity allocations
4.3. Comparison between daily and fashionable commodities should be considered when producing multiple products.
Future work may consider defective items produced during
The tradeoff between the capacity allocations of two kinds of the production process or incorporate the concern of budget
products is explored. One is concerned with daily commodities; constraints into the proposed model, which would enhance the
the other is concerned with fashionable commodities. The former effectiveness of the proposed model and would fit practical
exhibits steadier sales, smaller marginal profit, and less changeable circumstances more closely.
 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604 601

Appendix A

1. The expressions of f i ðdÞ, F i ðdÞ, and Oi ðdÞ with respect to the uniform distribution:
Z Z
1 Di Di 2
f i ðDi Þ ¼ F ðD Þ ¼ f i ðDi ÞdDi ¼ O ðD Þ ¼ F i ðDi ÞdDi ¼
UBi LBi i i UBi LBi i i 2ðUBi LBi Þ

2. The expressions of f i ðdÞ, F i ðdÞ, and Oi ðdÞ with respect to the exponential distribution:
Z Z

f i ðDi Þ ¼ li eli Di F i ðDi Þ ¼ f i ðDi ÞdDi ¼ eli Di Oi ðDi Þ ¼ F i ðDi ÞdDi ¼ 1=li eli Di

3. The expressions of f i ðdÞ, F i ðdÞ, and Oi ðdÞ with respect to the gamma distribution:
Z
Di yi 1 eDi =gi Gðyi ,Di =gi Þ
f i ðDi Þ ¼ F i ðDi Þ ¼ f i ðDi ÞdDi ¼ 
Gðyi Þgi y i Gðyi Þ
Z
1

Oi ðDi Þ ¼ F i ðDi ÞdDi ¼ Gðyi Þ gi Gð1þ yi ,Di =gi ÞDi Gðyi ,Di =gi Þ
R1 R1
where Gðyi Þ ¼ 0 t yi 1 et dt, Gðyi ,Di =gi Þ ¼ Di =g t yi 1 et dt
i

4. The expressions of f i ðdÞ, F i ðdÞ, and Oi ðdÞ with respect to the normal distribution:
pffiffi Z Z Di Ei ½Di =pffiffi2si ½Di 
1 2 1 2
f i ðDi Þ ¼ pffiffiffiffiffiffi eðDi Ei ½Di = 2si ½Di Þ F i ðDi Þ ¼ f i ðDi ÞdDi ¼ pffiffiffiffi eDi dDi
2psi ½Di  0sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi p 0 1
Z Z Di Ei ½Di =pffiffi2si ½Di 
1 @ 2si ½Di 2 ðDi Ei ½Di =pffiffi2si ½Di Þ2 2 Di 2
Oi ðDi Þ ¼ F i ðDi ÞdDi ¼ e þ ðDi Ei ½Di Þ pffiffiffiffi e dDi A
2 p p 0

Appendix B

Property 1. Given the exponential or gamma demand pdf, lim F i ðDi Þ ¼ 0 .

Di -1

Proof.

(1) For the exponential demand pdf,

1
lim F i ðDi Þ ¼ lim eli Di ¼  lim 0
Di -1 Di -1 Di -1 eli Di

(2) For the gamma demand pdf,

Gðyi ,Di =gi Þ
lim F i ðDi Þ ¼ lim 
Di -1 Di -1 Gðyi Þ

R1 R1
‘Gðyi Þ ¼ 0 t yi 1 et dt and Gðyi ,Di =gi Þ ¼ Di =gi t yi 1 et dt
R1 R1
yi 1 et dt lim t yi 1 et dt R1
D =g t D -1 Di =gi t yi 1 et dt 0
‘ lim F i ðDi Þ ¼ lim  R i1 i y 1 ¼  i R 1 y 1   R1
1  R1 0
Di -1 Di -1
0 t
i et dt 0 t
i et dt 0 t yi 1 et dt 0 t yi 1 et dt

Property 2. Based on Property 1, given the exponential or gamma demand pdf, lim F i ðDi Þ ¼ 1 .
Di -0

Proof.
Z 1
_ f i ðDi ÞdDi ¼ lim F i ðDi Þ lim F i ðDi Þ ¼ 1 ) lim F i ðDi Þ ¼ 1ð_ lim F i ðDi Þ ¼ 0Þ
0 Di -1 Di -0 Di -0 Di -1

Property 3. Given the exponential or gamma demand pdf, lim Di F i ðDi Þ ¼ 0 .

Di -1

Proof.

(1) For the exponential demand pdf,

Di
lim Di F i ðDi Þ ¼  lim Di eli Di ¼  lim  0 ð_ lim eli Di c lim Di Þ
Di -1 Di -1 Di -1 eli Di Di -1 Di -1
602 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604

(2) For the gamma demand pdf,

R1 y 1 t
Di =gi t e dt
i
Gðyi ,Di =gi Þ
lim Di F i ðDi Þ ¼  lim Di ¼  lim R 1 y 1
Di -1 Di -1 Gðyi Þ Di -1 D
i
1
0 t i et dt

By using L’Hôpital’s rule, it is obtained

 y 1
eDi =gi Di =gi i =gi Di yi þ 1
 lim ¼  lim  0 ð_ lim eDi =gi c lim Di yi þ 1 Þ
Di -1 Di 2 Di -1 gi yi eDi =gi Di -1 Di -1

Property 4. Given the exponential or gamma demand pdf, lim Di F i ðDi Þ ¼ 0 .

Di -0

Proof.

(1) For the exponential demand pdf,

Di 0
lim Di F i ðDi Þ ¼ lim Di eli Di ¼  lim  0
Di -0 Di -0 Di -0 eli Di 1

(2) For the gamma demand pdf,

1 R
yi 1 et dt R
1 yi 1 t
Gðyi ,Di =gi Þ D =g t t e dt
lim Di F i ðDi Þ ¼  lim Di ¼  lim Di R i1 i y 1   lim Di R01 y 1   lim Di  0
Di -0 Di -0 Gðyi Þ Di -0
0 t i e t dt Di -0
0 t i et dt Di -0

Property 5. Based on Properties 3 and 4, given the exponential or gamma demand pdf, lim Oi ðDi Þ þ lim Oi ðDi Þ ¼ Ei ½Di 
Di -1 Di -0

Proof.
R1
_ 0 Di f i ðDi ÞdDi ¼ Ei ½Di 
Z 1   Z 1Z
‘ Di f i ðDi ÞdDi ¼ lim Di F i ðDi Þ lim Di F i ðDi Þ  f i ðDi ÞdDi ¼ Ei ½Di 
Di -1 Di -0
0   0

) lim Di F i ðDi Þ lim Di F i ðDi Þ  lim Oi ðDi Þ lim Oi ðDi Þ ¼ Ei ½Di 
Di -1 Di -0 Di -1 Di -0

 
According to Properties 3 and 4, we have lim Di F i ðDi Þ lim Di F i ðDi Þ ¼ 0
Di -1 Di -0

‘ lim Oi ðDi Þ þ lim Oi ðDi Þ ¼ Ei ½Di 

Di -1 Di -0

Property 6. Given the exponential or gamma demand pdf, lim Oi ðDi Þ ¼ 0 .

Di -1

Proof.

(1) For the exponential demand pdf,

 1=l
lim Oi ðDi Þ ¼ lim 1=li eli Di ¼ lim l D i  0
Di -1 Di -1 Di -1 e i i

(2) For the gamma demand pdf,


lim Oi ðDi Þ ¼ lim Gðyi gi Þ1 gi Gð1 þ yi ,Di =gi ÞDi Gðyi ,Di =gi Þ
Di -1 Di -1

R1 R1
_Gð1þ yi ,Di =gi Þ ¼ Di =g t yi et dt and Gðyi ,Di =gi Þ ¼ Di =g t yi 1 et dt
i i
R R R1 R 1 y 1 t
gi D1i =gi tyi et dt Di D1i =gi tyi 1 et dt Di Di =g t yi 1 et dt Di =gi t
i e dt
¼ lim   lim 0 i
  lim
Di -1 Gðyi Þ Gðyi Þ Di -1 Gðyi Þ Di -1 Gðyi ÞDi 1

By using L’Hôpital’s rule, it is obtained

 y 1
eDi =gi Di =gi i =gi Di yi þ 1
 lim ¼  lim  0 ð_ lim eDi =gi c lim Di yi þ 1 Þ
Di -1 Gðyi ÞDi 2 Di -1 Gðyi Þgi yi eDi =gi Di -1 Di -1

Property 7. Based on Properties 5 and 6, given the exponential or gamma demand pdf, lim Oi ðDi Þ ¼ Ei ½Di  .
Di -0

Proof. According to Property 5, we have

 lim Oi ðDi Þ þ lim Oi ðDi Þ ¼ Ei ½Di 

Di -1 Di -0
 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604 603

Also, according to Property 6, we have

lim Oi ðDi Þ ¼ 0
Di -1

‘ lim Oi ðDi Þ ¼ Ei ½Di 

Di -0

Property 8. Given the normal demand pdf, lim F i ðDi Þ ¼ 1=2 .

Di -1

Proof. pffiffi
Z Di Ei ½Di = 2si ½Di  Z 1
1 2 1 2
lim F i ðDi Þ ¼ lim pffiffiffiffi eDi dDi  lim pffiffiffiffi eDi dDi
Di -1 Di -1 p 0 Di -1 p 0

Z 1 pffiffiffiffi
2 p
_ eDi dDi ¼
0 2
pffiffiffiffi
1 p 1
‘ lim F i ðDi Þ  pffiffiffiffi ¼
Di -1 p 2 2

1
Property 9. Given the normal demand pdf, lim F i ðDi Þ ¼  .
Di -1 2
Proof.
Z 1
_ f i ðDi ÞdDi ¼ lim F i ðDi Þ lim F i ðDi Þ ¼ 1
1 Di -1 Di -1

1
According to Property 8, we have lim F i ðDi Þ ¼
Di -1 2
1
‘ lim F i ðDi Þ ¼ 
Di -1 2
  E ½D 
Property 10. Given the normal demand pdf, lim Oi ðDi ÞDi F i ðDi Þ ¼  i i .
Di -1 2
Proof.  
lim Oi ðDi ÞDi F i ðDi Þ
Di -1
qffiffiffiffiffiffiffiffiffiffi 
pffiffi
si ½Di 2 ðDi Ei ½Di = 2si ½Di Þ2 R Di Ei ½Di =pffiffi2si ½Di  D 2 R Di Ei ½Di =pffiffi2si ½Di  D 2
¼ lim e þ ð D i E i ½D i Þ p1ffiffiffi e i dDi D i p1ffiffiffi e i dDi
Di -1 2p p 0 p 0
qffiffiffiffiffiffiffiffiffiffi pffiffi pffiffi 
2
si ½Di  ðDi Ei ½Di = 2si ½Di Þ 2 R D 2 s 2
 Epi ½D E ½D = ½D 
¼ lim e2p
ffiffiffii  i i i 0
i i
eDi dD i
Di -1 p

According to Property 8, we have

Z Di Ei ½Di =pffiffi2si ½Di 
1 2 1
lim F i ðDi Þ ¼ pffiffiffiffi eDi dDi ¼
Di -1 p 0 2
8
2 9
  <qffiffiffiffiffiffiffiffiffiffi2  DpiffiEi ½Di  =
si ½Di 
‘ lim Oi ðDi ÞDi F i ðDi Þ ¼ lim 2p e
2si ½Di 
 Ei ½D i
2  2
Ei ½Di 
Di -1 Di -1: ;
0 8
2 9 1
<qffiffiffiffiffiffiffiffiffiffi2  DpiffiEi ½Di  =
@_ lim si ½Di  2si ½Di  A
2p e  0
Di -1: ;

  Ei ½Di 
Property 11. Given the normal demand pdf, lim Oi ðDi ÞDi F i ðDi Þ ¼ .
Di -1 2
Proof.
R1
‘ 1 Di f i ðDi ÞdDi ¼ Ei ½Di 
 
R1 R
‘ lim Di F i ðDi Þ lim Di F i ðDi Þ  1 f i ðDi ÞdDi ¼ Ei ½Di 
Di -1 Di -1
   
¼ lim Di F i ðDi Þ lim Di F i ðDi Þ  lim Oi ðDi Þ lim Oi ðDi Þ ¼ Ei ½Di 
Di -1 Di -1 Di -1 Di -1

 
According to Property 10, we have lim Oi ðDi ÞDi F i ðDi Þ ¼  Ei ½D
2
i
Di -1
 
‘ Ei ½Di
þ lim Oi ðDi ÞDi F i ðDi Þ ¼ Ei ½Di 
2Di -1
 
‘ lim Oi ðDi ÞDi F i ðDi Þ ¼ Ei ½D
2
i
Di -1
604 J.-W. Ho, C.-C. Fang / Int. J. Production Economics 141 (2013) 593–604
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