StayFresh, a manufacturer of refrigerators in India, has two plants-one in Mumbai and the

other in Chennai. Each plant has a capacity of 300,000 units. The two plants serve the entire

country, which is divided into four regional markets: the North, with a demand of 100,000

units; the West, with a demand of 150,000 units; the South, with a demand of 150,000

units; and the East, with a demand of 50,000 units.

Two other potential sites for plants include Delhi and Kolkata. The variable

production and transport costs (in thousands of rupees) per refrigerator from each potential

production site to each market are as shown in Table 1.

StayFresh is anticipating a compounded growth in demand of 20 percent per year for

the next five years and must plan its network investment decisions. Demand is anticipated

to stabilize after five years of growth. Capacity can be added in increments of either 150,000

or 300,000 units. Adding 150,000 units of capacity incurs a one-time cost of 2 billion rupees,

whereas adding 300,000 units of capacity incurs a one-time cost of 3.4 billion rupees.

Assume that StayFresh plans to meet all demand and that capacity for each year must be in

place by the beginning of the year. Also assume that the cost for the fifth year will continue

for the next 10 years, that is, years 6 to 15. To begin with, assume a discount factor of 0.2,

how should the production network for the company evolve over the next five years?

Table 1: Production and Transport Costs (000s Rs) per Refrigerator