Responding to Shipment Delays: The Roles of Operational Flexibility & Lead-Time Visibility

Abstract

We consider a periodic review stochastic inventory system in which shipments procured from a different country are subjected to random delays. For this inventory system, we analyze various response strategies devised to mitigate the risk of demand-supply mismatch resulting from shipment delays. These strategies differ in two dimensions: Operational flexibility, defined by the flexible resource employed; and lead-time visibility, defined by the availability of information on shipment delays. For each of the response strategies, we provide analytical characterization of the optimal inventory policy. By comparing the optimal policies across different levels of operational flexibility and lead-time visibility, our analysis provides insights on operational flexibility, lead-time visibility and their interaction. We provide cost comparison of these strategies, using an extensive set of numerically solved examples. We show that while the operational flexibility mitigates the adverse effect of known long lead-times, the lead-time visibility provides protection from the risk of lead-time uncertainty. Further, we show that operational flexibility and lead-time visibility enhance each other's values, or in other words are complementary in nature.