Quoting Lead Times and Prices to Customers

Abstract

Firms in service and make-to-order manufacturing industries often quote lead times and prices to customers. We define uniform quotation mode (UQM) as the strategy where a firm offers a single lead time and price quotation, and differentiated quotation mode (DQM) is where a firm offers a menu of lead times and prices for customers to choose from. Both modes are followed in practice. Firms should determine which is more profitable. We classify customers into two groups: lead time sensitive (LS) and price sensitive (PS). LS customers value lead time reduction more than PS customers. We develop mathematical models of both quotation modes and analyze them to determine the most profitable mode under specified situations as well as the best lead time and price quotations within each mode. We find that DQM is dominated by UQM whenever PS customers have positive utilities from UQM or LS customers have positive utilities from DQM. Otherwise, which quotation mode is better depends on multiple factors, such as customer characteristics (including lead time reduction valuation and product valuation of a customer, and the proportion of LS customers) and production characteristics (including the desired service level and service or production cost).

Keywords: Price quotation, Lead time, Uniform quotation mode, Differentiated quotation mode