Abstract
AbstractWe consider a firm which faces a Poisson customer demand and uses a base‐stock policy to replenish its inventories from an outside supplier with a fixed lead time. The firm can use a preorder strategy which allows the customers to place their orders before their actual need. The time from a customer's order until the date a product is actually needed is called commitment lead time. The firm pays a commitment cost which is strictly increasing and convex in the length of the commitment lead time. For such a system, we prove the optimality of bang‐bang and all‐or‐nothing policies for the commitment lead time and the base‐stock policy, respectively. We study the case where the commitment cost is linear in the length of the commitment lead time in detail. We show that there exists a unit commitment cost threshold which dictates the optimality of either a buy‐to‐order (BTO) or a buy‐to‐stock strategy. The unit commitment cost threshold is increasing in the unit holding and backordering costs and decreasing in the mean lead time demand. We determine the conditions on the unit commitment cost for profitability of the BTO strategy and study the case with a compound Poisson customer demand.
Highlights
The consequences of demand and supply uncertainties and eventual mismatch between demand and supply are well known to many companies
We show that there exists a unit commitment cost threshold which dictates the optimality of either a buy-to-order (BTO) or a buy-to-stock strategy
We find that the preorder strategy helps with high demand uncertainty, even when the unit commitment cost is high
Summary
The consequences of demand and supply uncertainties and eventual mismatch between demand and supply are well known to many companies. The need for designing company operations such that this mismatch is minimized or avoided has motivated many researchers and resulted in a rich literature on demand and supply management. Information sharing has received a lot of attention. The benefits of acquiring and providing information about future demand are undeniable. Having information on future customer demand helps companies in reducing their inventory levels without sacrificing high service levels. Customers, who provide information on the timing and quantity of their future demand get a high quality service
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