Leadtime management in a periodic-review inventory system: A state-dependent base-stock policy

We examine a single-item, periodic-review inventory system with stochastic leadtimes, in which a replenishment order is delivered immediately or one period later, depending probabilistically on costly effort. The objective is to determine an inventory policy and an effort-choice strategy that minimize the expected total costs. Our analytical and computational analysis suggests that (i) a state-dependent base-stock policy is optimal, (ii) the optimal effort strategy is such that the marginal cost of effort is equal to the value of immediate delivery, and (iii) the cost impact of leadtime reduction can be very large. We also provide some counter-intuitive results, compared with the traditional multi-period newsvendor model. Leadtime Management in a Periodic-Review Inventory System: A State-Dependent Base-Stock Policy Jun-Yeon Lee a, , Leroy B. Schwarz b a School of Business Administration University of Houston-Victoria Victoria, TX 77901, USA b Krannert Graduate School of Management Purdue University West Lafayette, IN 47906, USA