Stochastic inventory system with lead time flexibility: offered by a manufacturer/transporter

Abstract

This paper studies lead time flexibility in a two-stage continuous review supply chain in which the retailer uses the (R, Q) inventory system: when his inventory position reaches R, the retailer places orders with size Q to the manufacturer, who uses a transportation provider to deliver them with different lead time options. According to the contract, the manufacturer is able to expedite or postpone the delivery if the retailer makes such a request. Hence, the retailer has the flexibility to modify the lead time by using the most up-to-date demand information. The optimal lead time policy is found to be a threshold-type policy. The sensitivity analysis also shows that R is much more sensitive to the change of lead time than Q, and thus, the paper is primarily focused on finding optimal R. We also provide a cost approximation which yields unimodal cost in R. Furthermore, we analyze the order crossing problem and derive an upper bound for the probability of order crossing. Finally, we conduct an extensive sensitivity analysis to illustrate the effects of lead time flexibility on supply chain performance and discuss the managerial insights.