Inventory Management for Customers with Alternative Lead Times

Abstract

This paper considers a multiperiod inventory model in which a supplier provides alternative lead-time choices to customers: a short or a long lead time. The supplier operates in a batch-production mode. Orders from slow customers can be taken by the supplier and included in the next production cycle, while orders from fast customers have to be satisfied from the onhand inventory. We denote the action of providing a short lead-time product to a long lead-time customer as the inventory-commitment decision, and we also denote the initial inventory stocking as the inventory-replenishment decision. We first characterize the optimal inventory-commitment policy. We then prove that the optimal inventory-replenishment policy is a base-stock type. We extend our analysis to models to consider a multicycle setting, a case of a supply capacity constraint, and a case in which the inventory holding cost is charged in real time. We also compare the performances of the optimal inventory-commitment policy and the inventory-rationing policy. Finally, we use the customer-choice model to characterize the demand-induction and demand-cannibalization effects.