Inventory Management for Customers with Alternative Lead Times

It is common for suppliers operating in batch-production mode to deal with patient and impatient customers. This paper considers inventory models in which a supplier provides alternative lead times to its customers: a short or a long lead time. Orders from patient customers can be taken by the supplier and included in the next production cycle, while orders from impatient customers have to be satisfied from the on-hand inventory. We denote the action to commit one unit of on-hand inventory to patient or impatient customers as the inventory-commitment decision, and the initial inventory stocking as the inventory-replenishment decision. We first characterize the optimal inventory-commitment policy as a threshold type, and then prove that the optimal inventory-replenishment policy is a base-stock type. Then, we extend our analysis to models to consider cases of a multi-cycle setting, a supply-capacity constraint, and the on-line charged inventory-holding cost. We also evaluate and compare the performances of the optimal inventory-commitment policy and the inventory-rationing policy. Finally, to further investigate the benefits and pitfalls of introducing an alternative lead-time choice, we use the customer-choice model to study the demand gains and losses, known as demand-induction and demand-cannibalization effects, respectively.