Due date setting with supply constraints in systems using MRP

Abstract

We propose a new model for quoting due dates in a make-to-order environment where customers request due dates. The model incorporates inventory costs, fill rate issues, and service level issues. In particular, we consider order delay costs that measure the positive difference between the due date requested by the customer and the due date committed by the supplier. The underlying two-stage production model assumes that production is constrained primarily by an uncertain procurement process, as is the case in many assembly systems. This simplification results in a news vendor-like formulation that enables us to obtain a simple approximately optimal due date setting policy that is well suited to MRP environments. The model also yields several interesting policy conclusions. For example, in environments where the importance of service level performance does not reach a certain threshold relative to the importance of order acceptance, the optimal policy is to always quote the requested due date. A special case of our formulation of the problem is to minimize lead-times. However, we show that a lead-time minimization often yields longer quoted due dates than our general formulation.