Dynamic Lead-Time Quotation for an M/M/1 Base-Stock Inventory Queue

Authors:
Seçil Savaşaneril;Paul M. Griffin;Pınar Keskinocak
Affiliations:
Department of Industrial Engineering, Middle East Technical University, 06531, Ankara, Turkey;Harold and Inge Marcus Department of Industrial Engineering, Pennsylvania State University, University Park, Pennsylvania 16801;School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, Georgia 30332
Venue:
Operations Research
Year:
2010

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Abstract

We study a dynamic lead-time quotation problem in a base-stock inventory system characterized by lead-time sensitive Poisson demand and exponentially distributed service times. We show that the optimal profit is unimodal in the base-stock level. We compare the base-stock system with a make-to-order (MTO) system and show that the lead-time quotes are lower in an MTO system and that increasing the base-stock level does not necessarily decrease the expected number of customers waiting. Numerical results show that when customers are less sensitive to lead-time quotes, the benefit of quoting lead times with a higher precision is significant, whereas when customers are more sensitive to lead-time quotes, the benefit of holding inventory is significant.