Optimizing Capital Investment Decisions at Intel Corporation

• Published in: Interfaces (Providence) 2013-01, Vol.43 (1), p.62-78
• Main Authors: Kempf, Karl G., Erhun, Feryal, Hertzler, Erik F., Rosenberg, Timothy R., Peng, Chen
• Format: Article
• Language: English
• Subjects: Business orders; capacity expansion; Capital investments; capital-intensive industries; Collaboration; Computer simulation; Corporate planning; Corporations; Cost control; Debt management; Decisions; dual sourcing; Economic capital; Economic forecasts; expedited equipment lead times; Financing; forecast revision; Forecasting; Forecasting techniques; Industrial machinery; Information services; Information services industry; Innovations; Integrated circuits; Investment; Investment decision; Investments; isoprofit analysis; Manufacturing; Manufacturing processes; Monte Carlo method; Monte Carlo methods; Monte Carlo simulation; Optimization; option contracts; Peng Zhen; Prices; Procurement; Production capacity; Purchase options; Semiconductor industry; Stochastic models; stochastic programming; Studies; Suppliers; Supply and demand; Supply chain management; Technological change; U.S.A
• ISSN: 0092-2102; 2644-0865; 1526-551X; 2644-0873
• DOI: 10.1287/inte.1120.0659

Intel Corporation spends over $5 billion annually on manufacturing equipment. With increasing lead times from equipment suppliers and increasing complexity in forecasting market demand, optimizing capital investment decisions is a significant managerial challenge. In response to this challenge, we developed a capital supply chain velocity program for ordering, shipping, and installing production equipment. At the core of this velocity program is a new and additional procurement framework that enables Intel to purchase options from its equipment suppliers for a faster delivery of some equipment. The framework seamlessly combines statistical forecasting with Monte Carlo simulation and stochastic programming to determine the number of options Intel should procure and exercise, and it includes built-in scenario and sensitivity analysis capabilities to support Intel’s contract selection, options reservation, and equipment procurement decisions. The velocity program and the framework provided Intel with hundreds of millions of dollars in cost savings and at least $2 billion in revenue upside during a recent period of global economic crisis.