Delivery performance in vendor selection decisions

Increased reliance upon outsourcing has made the issue of vendor selection even more critical to the success of the modern manufacturing organization. The usual performance measure on which selection is based has been the distribution of the vendor's delivery lead-time (LT), often as characterized by the mean and variance. In this paper, we show that the distribution of demand per unit time (DPUT) must also be considered if an optimal decision is to be made. We consider a standard fixed quantity-reorder point (Q, r) inventory policy. We first show that the optimal policy and the resulting costs remain invariant to changes in the mean lead-time demand (LTD) when the variance of LTD is fixed. A change in the mean LTD is completely (linearly) absorbed by the reorder point r, while the safety stock is unaffected. Intuitively, we would expect that the vendor with the shortest expected lead-time would represent the best choice. However, this expectation is not always correct and we then provide a simple rule for vendor selection based upon the coefficient of variation (CV) for the distribution of DPUT. In particular, when the CV is small (large), it pays to choose a vendor whose lead-time variance (mean) is small. A series of numerical examples illustrates the main theoretical points.