Valuing Lead Time

Journal of Operations Management, Forthcoming

31 Pages Posted: 26 Jun 2014

See all articles by Suzanne de Treville

Suzanne de Treville

University of Lausanne - Faculty of Business and Economics; Swiss Finance Institute

Isik Bicer

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management

Valérie Chavez-Demoulin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Christophe Tasserit

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Stefan Wager

Stanford University - Department of Statistics

Date Written: March 22, 2013

Abstract

When do short lead times warrant a cost premium? Decision makers generally agree that short lead times enhance competitiveness, but have struggled to quantify their benefits. Blackburn (2012) argued that the marginal value of time is low when demand is predictable and salvage values are high. De Treville et al. (2014) used real-options theory to quantify the relationship between mismatch cost and demand volatility, demonstrating that the marginal value of time increases with demand volatility, and with the volatility of demand volatility. We use the de Treville et al. model to explore the marginal value of time in three industrial supply chains facing relatively low demand volatility, extending the model to incorporate factors such as tender-loss risk, demand clustering in an order-up-to model, and use of a target fill rate that exceeded the newsvendor profit-maximizing order quantity. Each of these factors substantially increases the marginal value of time. In all of the companies under study, managers had underestimated the mismatch costs arising from lead time, so had underinvested in cutting lead times.

Keywords: lead time, supply-chain mismatch cost, forecast evolution

JEL Classification: L60, L11, L23

Suggested Citation

de Treville, Suzanne and Bicer, Isik and Chavez-Demoulin, Valérie and Hagspiel, Verena and Schürhoff, Norman and Tasserit, Christophe and Wager, Stefan, Valuing Lead Time (March 22, 2013). Journal of Operations Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2431698

Suzanne De Treville (Contact Author)

University of Lausanne - Faculty of Business and Economics ( email )

Anthropôle 3073
Lausanne, 1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Isik Bicer

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management ( email )

RSM Erasmus University
PO Box 1738
3000 DR Rotterdam
Netherlands

Valérie Chavez-Demoulin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Anthropole
Lausanne, 1015
Switzerland

HOME PAGE: http://https://www.hec.unil.ch/people/vchavez&vue=contact&set_language=en&cl=en

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Norman Schürhoff

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
Switzerland
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christophe Tasserit

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Stefan Wager

Stanford University - Department of Statistics ( email )

Stanford, CA 94305
United States

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