An inventory policy involving lead time and setup cost as decision variables for the lead time demand with compound Poisson process

Abstract

The Japanese experience of Just-in-Time (JIT) production has shown that there are advantages and benefits associated with the efforts to reduce inventory lead time and the inventory cost. Almost all inventory models assume that lead time is prescribed, regardless of whether it is deterministic or probabilistic, and thus is not subject to control. However, in many practical situations, lead time and setup cost can be reduced at added costs. This article relaxes the assumption that lead time demand is deterministic and assumes that it is a compound Poisson process. Also, the article combines the concept of capital investment allocated to reducing lead time and setup cost. A model is derived to determine an optimal integrated inventory policy with controllable lead time and setup cost. The expected annual integrated total cost function is derived and a solution procedure is established to find out the optimal solution.