Investment in the reduction of uncertainties in just-in-time purchasing systems

When the uncertainties of supply caused by lead-time variability, natural disasters, or other reasons are not considered as given, but as manageable, a company invests to reduce these uncertainties to save a company’s operating cost. This article examines economic trade-offs of investments directed toward the reduction of uncertainties. Two models are presented. The first introduces the ability of a purchaser to reduce the variance of the lead time of its supplier. The second model adds the ability of the purchaser to not only influence the variance of its supplier’s lead time, but to influence the proportion of defective units produced by the supplier. This article develops explicit solutions for jointly choosing optimal variances for both lead time and proportion of defective units with a reorder-point model. Two cases are considered; defective rate is independent of lead time, or defective rate depends on lead time.