Conditional Leadtime Flexibility in an Assemble-to-Order System

Abstract

Problem definition: We introduce and formalize a concept termed conditional leadtime flexibility (CLF), which refers to the industry practice where a manufacturer requests its upstream suppliers to dynamically adjust the pipeline orders' remaining leadtimes. Over a finite horizon, an assemble-to-order (ATO) manu- facturer makes joint decisions on inventory replenishment and leadtime adjustment to minimize the total discounted expected cost. Methodology/results: The problem is formulated as a multi-period dynamic programming with an enlarged state space to track the adjustable pipeline orders. The replenishment and leadtime adjustment decisions are made sequentially in each period. The analysis reveals that (i) the optimal cost-to-go function is both convex and additively separable; (ii) both the optimal replenishment and lead- time adjustment decisions follow general base-stock policies; and (iii) the convexity and additive separability allow us to perform a derivative analysis on the optimality equations and design an efficient algorithm. Managerial implications: Using real industry data, we numerically find that (i) CLF achieves notable cost savings over a wide range of parameters; (ii) the value of CLF comes from both the order expediting and deferring; and (iii) CLF outperforms dual-sourcing when the unit adjustment cost is less than 40% of the unit ordering cost from the express source. Our findings underscore the importance of CLF. 

Keywords: Conditional leadtime flexibility, assemble-to-order (ATO), inventory planning

JEL Classification: C61