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Demand and Production Management with Uniform Guaranteed Lead Time
Author(s) -
Rao Uday S.,
Swaminathan Jayashankar M.,
Zhang Jun
Publication year - 2005
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/j.1937-5956.2005.tb00229.x
Subject(s) - lead time , newsvendor model , lead (geology) , hedge , production (economics) , order (exchange) , supply chain , revenue , computer science , procurement , revenue management , build to order , comparative statics , business , microeconomics , operations research , industrial organization , risk analysis (engineering) , economics , operations management , marketing , finance , ecology , geomorphology , engineering , biology , geology
Recently, innovation‐oriented firms have been competing along dimensions other than price, lead time being one such dimension. Increasingly, customers are favoring lead time guarantees as a means to hedge supply chain risks. For a make‐to‐order environment, we explicitly model the impact of a lead time guarantee on customer demands and production planning. We study how a firm can integrate demand and production decisions to optimize expected profits by quoting a uniform guaranteed maximum lead time to all customers. Our analysis highlights the increasing importance of lead time for customers, as well as the tradeoffs in achieving a proper balance between revenue and cost drivers associated with lead‐time guarantees. We show that the optimal lead time has a closed‐form solution with a newsvendor‐like structure. We prove comparative statics results for the change in optimal lead time with changes in capacity and cost parameters and illustrate the insights using numerical experimentation.