Optimal component stocking policy for assemble-to-order systems with lead-time-dependent component and product pricing

Short delivery time and the efficient management of component inventories are two crucial elements that determine the competitiveness of many contract assembly manufacturers, especially in the electronics industry. In this paper, we develop and analyze an optimization model to determine the optimal stocking quantities for components of an assemble-to-order product in an environment where demand is uncertain and the price for the final product and the costs of components depend on their delivery lead times. We provide an efficient solution procedure to solve the problem in which the manufacturer must deliver the full order quantity possibly in multiple shipments. We further extend our model to the situation where the manufacturer has the option of not delivering the full quantity but instead takes the penalty for a delivery shortage. We derive some analytical results that illustrate how different model parameters affect the optimal solution and provide useful insights for managing components in the assemble-to-order environment.