The impact of stochastic lead time reduction on inventory cost under order crossover

The impact of stochastic lead time reduction on inventory cost under order crossover

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Article ID: iaor20112263
Volume: 211
Issue: 2
Start Page Number: 274
End Page Number: 281
Publication Date: Jun 2011
Journal: European Journal of Operational Research
Authors: , ,
Keywords: order review and release, uncertainty, variance reduction, lead time reduction
Abstract:

We use exponential lead times to demonstrate that reducing mean lead time has a secondary reduction of the variance due to order crossover. The net effect is that of reducing the inventory cost, and if the reduction in inventory cost overrides the investment in lead time reduction, then the lead time reduction strategy would be tenable. We define lead time reduction as the process of decreasing lead time at an increased cost. To date, decreasing lead times has been confined to deterministic instances. We examine the case where lead times are exponential, for when lead times are stochastic, deliveries are subject to order crossover, so that we must consider effective lead times rather than the actual lead times. The result is that the variance of these lead times is less than the variance of the original replenishment lead times. Here we present a two‐stage procedure for reducing the mean and variance for exponentially distributed lead times. We assume that the lead time is made of one or several components and is the time between when the need of a replenishment order is determined to the time of receipt.

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