Lead-time variability reduction in stochastic inventory models

Abstract

This research is motivated by the realization that Japanese manufacturers have devoted much time and effort to establish a long term partnership with their suppliers in order to reduce lead-time uncertainty. It is very common for a Japanese manufacturer to advance money to finance its suppliers and help them meet the rigid delivery standards imposed. However, there have been very few mathematical analyses of the advantages of investing in such efforts. The main objective of this paper is to provide an analytical model to quantify the tradeoffs associated with lower lead-time uncertainty. In particular, we consider the option of investing in order to reduce the lead-time variance in an inventory model with stochastic lead time. The paper also considers the option of investing in both setup cost and lead-time variability reduction. Numerical results are presented to demonstrate the use of the models. Sensitivity analysis is performed to indicate under what conditions investment is warranted.