Inventory Models with Two Delivery-Time Options

Abstract

In this chapter, we consider a multi-period inventory model in which a seller provides alternative delivery lead-time choices to customers: a short lead time and a long lead time . In addition to the cyclic inventory replenishment decision, the seller makes the inventory commitment decision, i.e., whether to use a unit of on-hand inventory to satisfy a long lead-time customer immediately. We first characterize the optimal inventory commitment and replenishment policies in a non-capacitated setting. The optimal inventory commitment policy is subject to a commitment level, and the optimal replenishment policy is of a base-stock type. We then consider an extended model with a supply-capacity constraint , in which the commitment policy further includes rejections of short and long lead-time orders. We show that the optimal inventory commitment policy for short lead-time customers is characterized by a switching commitment level and that the optimal inventory commitment policy for long lead-time customers is characterized by three switching commitment levels. We then compare the performance of the optimal dynamic commitment policy with that of a static rationing policy through numerical studies.