Inventory Management for Customers with Alternative Lead Times

Production and Operations Management, Forthcoming

30 Pages Posted: 16 Apr 2008 Last revised: 14 Dec 2008

See all articles by Haifeng Wang

Haifeng Wang

Tsinghua University - Department of Automation; The Chinese University of Hong Kong - Department of Systems Engineering & Engineering Management

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management

Date Written: February 2, 2008

Abstract

This paper considers a multiperiod inventory model in which a supplier provides alternative lead-time choices to customers: a short or a long lead time. The supplier operates in a batch-production mode. Orders from slow customers can be taken by the supplier and included in the next production cycle, while orders from fast customers have to be satisfied from the onhand inventory. We denote the action of providing a short lead-time product to a long lead-time customer as the inventory-commitment decision, and we also denote the initial inventory stocking as the inventory-replenishment decision. We first characterize the optimal inventory-commitment policy. We then prove that the optimal inventory-replenishment policy is a base-stock type. We extend our analysis to models to consider a multicycle setting, a case of a supply capacity constraint, and a case in which the inventory holding cost is charged in real time. We also compare the performances of the optimal inventory-commitment policy and the inventory-rationing policy. Finally, we use the customer-choice model to characterize the demand-induction and demand-cannibalization effects.

Keywords: capacitated inventory models, lead-time flexibility, demand induction and demand cannibalization

Suggested Citation

Wang, Haifeng and Yan, Houmin, Inventory Management for Customers with Alternative Lead Times (February 2, 2008). Production and Operations Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1121250 or http://dx.doi.org/10.2139/ssrn.1121250

Haifeng Wang (Contact Author)

Tsinghua University - Department of Automation ( email )

Beijing, 100084
China

The Chinese University of Hong Kong - Department of Systems Engineering & Engineering Management ( email )

Hong Kong

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management ( email )

Shatin, New Territories
Hong Kong

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