A Model for Optimal Delivery Time Guarantees

Many manufacturing and distribution firms guarantee to meet a standard delivery time promise and pay significant compensation to customers when deliveries are late. If the firm promises its customers a delivery time that is too short, it will frequently not make the promise, have to pay significant compensation, and possibly lose market share over time. If the delivery time guarantee is too long, customers will find the delivery time unattractive and will buy elsewhere. Hart (1993) and others (Hill 1995) call this a “performance service guarantee.” Although a delivery time performance-guarantee scenario will be used as the context for this article, other performance service guarantee contexts could have been used as well. Other similar performance service guarantees include no-stockout guarantees (Hart 1993), waiting time guarantees (Friedman and Friedman 1997; Kumar, Kalwani, and Dada 1997), and up-time maintenance guarantees (Hill 1992). It should be noted, however, that an unconditional satisfaction guarantee (Hart 1988) is more complex and is not addressed in this article. According to data collected by the Center for Advanced Purchasing Studies, delivery promises are far from perfect in many industries in the United States. On-time delivery benchmarks for several industries are summarized in Table 1. In their book on time-based competition, Stalk and Hout (1990) state that