Inventory and lead time planning with lead-time-sensitive demand

Supply and order lead times can have substantial effects on operations performance and perceived customer service, particularly under uncertain customer demand. Certain customers place a high premium on shorter order lead times, while others may be willing to trade a longer lead time for a lower price. This paper studies a problem in which a supplier wishes to determine the best positioning of a product with respect to order lead time and price. We consider a continuous review inventory replenishment system, where the difference between the procurement lead time and promised sales order lead time influences both cycle stock and safety stock costs, and procurement costs may increase as a result of investment in procurement lead time reduction. We provide models and methods for determining the best combination of price and sales lead time for systems with high economies of scale when demand depends on both sales lead time and price. Our results indicate that for a broad range of practical settings, such systems employ a pure make-to-stock policy or a policy that sets sales lead time equal to the procurement lead time at optimality.