An Economic Model for Justifying the Reduction of Delivery Variance in an Integrated Supply Chain

This paper addresses the economic impact of improving delivery performance in a serial make‐to‐order supply chain when delivery performance is evaluated with respect to a delivery window. Building on contemporary management theories that advocate variance reduction as the critical step in improving the overall performance of a system, an expected cost model is developed that financially quantifies the benefit of reducing delivery variance to the final customer in a serial supply chain. The objective of the model is to determine the variance level that minimizes the costs associated with untimely delivery (expected earliness and lateness) and the investment cost required for reducing the delivery variance. A logarithmic investment function is used and the model solution involves the minimization of a convex‐concave total cost function. Numerical examples are provided to illustrate the model and the solution procedure.