Lead Time Management through Expediting in a Continuous Review Inventory System

We consider a continuous review inventory system where delivery lead times can be managed by expediting in‐transit orders shipped from the supplier. First, we propose an ordering/expediting policy and derive expressions for evaluating the operating characteristics of such systems. Second, using extensive numerical experiments, we quantify the benefits of such an expediting policy. Third, we investigate a number of managerial issues. Specifically, we analyze the impact of the number of expediting hubs and their locations along the shipment network on the performance of such systems and offer insights into the design of the shipment network. We show (i) a single expediting hub that is optimally located in a shipment network can capture the majority of cost savings achieved by a multi‐hub system, especially when expediting cost is not low or demand variability is not high; (ii) when expediting time is proportional to the time to destination, for small‐enough or large‐enough demand variations, a single expediting hub located in the middle of the shipment network can capture the majority of cost savings of an optimally located hub; and (iii) in general, hubs close to the retailer significantly drive down costs, whereas hubs close to the supplier may not offer much cost savings.