Dynamic lead-time quotation for an M/M/1 base-stock inventory queue

Dynamic lead-time quotation for an M/M/1 base-stock inventory queue

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Article ID: iaor20104021
Volume: 58
Issue: 2
Start Page Number: 383
End Page Number: 395
Publication Date: Mar 2010
Journal: Operations Research
Authors: , ,
Keywords: queues: applications
Abstract:

We study a dynamic lead-time quotation problem in a base-stock inventory system characterized by lead-time sensitive Poisson demand and exponentially distributed service times. We show that the optimal profit is unimodal in the base-stock level. We compare the base-stock system with a make-to-order (MTO) system and show that the lead-time quotes are lower in an MTO system and that increasing the base-stock level does not necessarily decrease the expected number of customers waiting. Numerical results show that when customers are less sensitive to lead-time quotes, the benefit of quoting lead times with a higher precision is significant, whereas when customers are more sensitive to lead-time quotes, the benefit of holding inventory is significant.

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