Lead-time Coordination between Marketing and Operations in an Internal Market

Motivated by the operational environment in high-tech industries, this paper examines the coordination between and when time to market and capacity marketing operations utilization are both main factors. In contrast to earlier joint lot-sizing literature which focuses on price-quantity coordination, our model captures the inter-relationship between order quantity, capacity level, and lead-time. Besides the setup and inventory holding costs considered in EOQ-type models, our model incorporates additional cost components for capacity consumption, WIP inventory, and lead-time (as related to the customer's safety stock cost). We first analyze the centralized system-optimum solution and a decentralized Stackelberg game solution for the model, then compare their asymptotic performance as different cost components vary. We examine three coordination schemes for and . We show that the well-known marketing operations quantity discount scheme does not coordinate the system in this setting. We propose a lead-time reduction operations scheme where offers a more favorable lead-time provided that convinces the customer to place a larger order. We show that lead-time marketing and order-size alone do not guarantee to coordination the system. It is essential to add a price-adjustment scheme in the form of a discount or extra-payment in order for the system to be perfectly coordinated.