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  • September – October 2011
  • Article
  • Production and Operations Management

The Manufacturer's Incentive to Reduce Lead Times

By: Santiago Kraiselburd, Richard Pibernik and Ananth Raman
  • Format:Print
  • | Pages:15
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Abstract

It is generally a well acknowledged fact that, ceteris paribus, reducing the lead times between downstream and upstream parties in a supply chain is desirable from an overall system perspective. However, an upstream party (e.g., a manufacturer) may have strong disincentives to offer shorter lead times, even if lead time reduction came at no cost. This paper investigates a manufacturer's incentive to reduce lead times. We consider a setting in which the downstream party has the ability to exert a costly effort to increase demand (e.g., through sales promotions, advertising, etc.) during the selling season and compare two situations: one where there is zero lead time (i.e., all demand can be satisfied after observing the demand realization), and one where orders need to be made before demand is realized. In our analysis, the latter situation corresponds to a newsvendor model with the additional decision of choosing a sales effort to increase demand at a convex increasing cost after observing demand. We identify two interacting effects that may inhibit shorter lead times. A so-called "safety stock effect" can be observed when a lower risk of stocking out under short lead times induces the downstream party to alter its order quantity. A second effect, termed as "effort effect," arises if shorter lead times impact the downstream party's optimal sales effort and, as a consequence, lead to different order quantities. We provide a formal characterization of both effects, insight into how these effects interact, and information on which conditions the manufacturer has an incentive to offer shorter lead times.

Keywords

Cost; Demand and Consumers; Order Taking and Fulfillment; Production; Supply Chain Management; Sales; Manufacturing Industry; Retail Industry

Citation

Kraiselburd, Santiago, Richard Pibernik, and Ananth Raman. "The Manufacturer's Incentive to Reduce Lead Times." Production and Operations Management 20, no. 5 (September–October 2011): 639–653.
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About The Author

Ananth Raman

Technology and Operations Management
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More from the Authors
  • Hamptonshire Gas and Convenience By: Ananth Raman, Nathan Craig and Ehsan Valavi
  • Human-Computer Interactions in Demand Forecasting and Labor Scheduling Decisions By: Caleb Kwon, Ananth Raman and Jorge Tamayo
  • Innovations in Retail Operations: Thirty Years of Lessons from Production and Operations Management By: Marshall Fisher and Ananth Raman
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