Flexible Backup Supply and the Management of Lead-Time Uncertainty
Article first published online: 12 FEB 2009
© 2008 Production and Operations Management Society
Production and Operations Management
Volume 17, Issue 2, pages 184–199, March-April 2008
How to Cite
Kouvelis, P. and Li, J. (2008), Flexible Backup Supply and the Management of Lead-Time Uncertainty. Production and Operations Management, 17: 184–199. doi: 10.3401/poms.1080.0015
- Issue published online: 12 FEB 2009
- Article first published online: 12 FEB 2009
- Received: August 2006; Revised: May 2007; Accepted: July 2007 by George Shanthikumar.
- supply uncertainty;
- emergency response;
- dual sourcing;
- flexible backup supply;
- safety lead times
We consider replenishment decisions for a constant rate demand environment from a supplier with uncertain lead times. We study the potential use of a flexible backup supplier as an emergency response to accurate lead-time information arriving at (or close after) the beginning of the demand interval and well after an original order with the stochastic lead-time supplier has been placed. The emergency response decisions involve whether to order and how much from the flexible backup supplier, with the objective of minimizing the cost of meeting demand. We derive the optimal emergency-response policy and clearly outline its implications on the optimized safety lead time of the original order placement and on the cost of meeting demand. We examine the impact on the use of the flexible backup supplier of factors like the arrival time of accurate lead-time information and the response lead time of the backup supplier. We further study the potential benefits of the use of the flexible backup supplier in a dual role: as one of the two suppliers in a redundant supply system assigned to originally meet the demand and as an emergency response to later-arriving lead-time information. Our numerical studies illustrate the benefits from the use of the flexible backup supplier as an emergency response, but for reasonable purchase premiums and short lead times of flexible backup supply options, their use in a dual (regular and emergency response) role often leads to improved performance over safety lead-time single and uncertain lead-time supplier-replenishment strategies. The benefits of the backup supply options are accentuated the higher the lead-time uncertainty of the stochastic lead-time supplier is.