Optimal Policy with Commitment Lead Time

What is it about?

We consider a manufacturer who operates a two-component single end product ATO system. We investigate a centralized control scheme with a preorder strategy. The time from a customer's order until the date the end product is actually needed is called the commitment lead time. Under the preorder strategy, a commitment cost should be paid to the customer. The manufacturer aims to find the optimal component base-stock levels and the optimal commitment lead time such that the long-run average cost consisting of component inventory holding cost, backordering cost and commitment cost is minimized.

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Why is it important?

The need for designing company operations such that the supply and demand mismatch is minimized or avoided has motivated many researchers and resulted in a rich literature on demand and supply management. Among the various methods, information sharing has received a lot of attention. The benefits of acquiring and providing information about future demand are undeniable. Having information on future customer demand helps companies in reducing their inventory levels without sacrificing high service levels.