The thesis deals with a firm's investment to reduce setup costs in the manufacturing process. Related researches suggest that we consider this decision as a dynamic process improvement which is one area of a firm's manufacturing strategy to link manufacturing function to the changes in the market.
We incorporate the concept of product life cycle into our mathematical model to examine this link explicitly.
We partition the parameter space into three cases. A closed-form optimal investment schedule is identified for each of the three cases. They are: no investment, one-time investment and continuous investment. Some reduction in the setup cost is optimal if and only if remaining future demand is large enough. The continuous investment schedule is optimal when demand per period is large enough. Moreover, the continuous investment schedule allows the firm to avoid uncertainty by shortening the forecasting horizon. Thus aggressive marketing strategy can be justified when coupled with setup reduction. Numerical examples are given to clarify the practical implications.
Finally, limitations of this study and suggestions for further extensions are outlined.