Lead time management in supply chains

In recent years speed and cost have emerged as important competitive priorities in supply chains. Firms are now investing substantially in lead time reduction; however, the focus of such investments has been quite different for make-to-stock (MTS) and make-to-order (MTO) firms. The demand for MTS items tends to be deterministic but price-sensitive, while demand for MTO items is more variable and sensitive to both price and delivery lead time. These differences in market characteristics require that MTS firms focus on supplying predictable demand at the lowest possible cost while MTO firms focus on reducing the delivery lead time. Our research deals with the costs and benefits of lead time management in supply chains, taking into account the differences in competitive environments. In particular, we develop separate lead time management models for profit-maximising MTS and MTO firms.; For the MTO firm, we assume that customer demand is stochastic and the mean demand rate is decreasing in both price and a uniform guaranteed delivery lead time offered by the firm. To further model the premium for lower delivery lead times, we assume that price is decreasing in the length of the guaranteed delivery lead time. We also capture economies of scale by assuming the unit operating cost to be a decreasing convex function of the demand rate. The MTO firm may invest in increasing capacity in order to reduce delivery lead time, but must be able to satisfy customers according to a pre-specified service level. Our analytical model for delivery lead time management of such MTO firms trades off the costs of investment against the resultant benefits. Our model allows a MTO firm to determine the optimum level of the guaranteed delivery time, processing rate and investment that maximise its profit. We show that ignoring: (i) the dependence of market price on the lead time offered and economies of scale, when they exist, and (ii) the inherent preference of customers for price or lead time, can lead to potentially large profit losses.; Normally MTS firms invest in developing more efficient processes that reduce operating costs. While the process-improving investments can be of various types, we focus on investments in reducing supplier lead time and develop models for supply lead time management for MTS firms. We show that such investments in lead time reduction can, after accounting for all the associated costs and benefits, result in substantial reduction of inventory costs. We examine different types of investment and amortisation schemes in supplier lead time reduction and the different cost models they generate. We compute the cost-minimising inventory and supply lead time levels for each type of model. We also perform comparative statics with respect to model parameters, and find several "apparently" counter-intuitive results.; We then assume that a MTS firm sets its price as a percentage mark-up over its total operating costs per unit. In that case, any investment in reducing operating costs can lower price and help the firm to gain a greater market share. For the case of investment in set-up time (cost) reduction, we are able to formulate an integrated production-marketing model for a profit-maximising MTS firm where price and demand, and hence profit, are functions of the firm's operating variables. We show that when demand depends on the operating variables in a profit maximisation model, some of the best known properties from classical inventory management no longer hold. We are also able to show that if a MTS firm ignores the explicit dependence by either assuming demand to be constant or price to be an independent decision variable, sub-optimality occurs and the firm can lose substantial profits. For the case of investment in supply lead time reduction, we are also able to formulate the profit-maximising problem in terms of the operating variables of the firm and to indicate how it can be solved.