Demand and production management with uniform guaranteed lead time

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.