MODELS FOR OPTIMAL LEAD TIME REDUCTION

Abstract

Most inventory and production planning models in the academic literature treat lead times either as constants or random variables with known distributions outside of management control. However, a number of recent articles in the popular press have argued that reducing lead times is a dominant issue in manufacturing strategy. The benefits of reducing customer lead times that are frequently cited include increased customer demand, improved quality, reduced unit cost, lower carrying cost, shorter forecast horizon, less safety stock inventory, and better market position. Although the costs of reducing lead times in the long term may be relatively insignificant compared with the benefits, in the short term these costs can have a significant impact on the profitability of a firm. This article develops a conceptual framework within which the costs and benefits of lead time reduction can be compared. Mathematical models for optimal lead time reduction are developed within this framework. The solutions to these models provide methods for calculating optimal lead times, which can be applied in practice. Sensitivity analysis of the optimal solutions provides insight into the structure of these solutions.

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