Article ID: | iaor20104021 |
Volume: | 58 |
Issue: | 2 |
Start Page Number: | 383 |
End Page Number: | 395 |
Publication Date: | Mar 2010 |
Journal: | Operations Research |
Authors: | Keskinocak Pnar, Griffin Paul M, Savaaneril Seil |
Keywords: | queues: applications |
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.