Dynamic Leadtime Management in Supply Chains

One way to hedge against random fluctuations of demand in supply chains is to keep inventories at various points in the chain. Another is to actually modify the leadtimes in the system dynamically. Working with multiple suppliers, using multiple transportation options, having the option to expedite certain processes, or having different possible routes for a unit to go through the supply chain are all examples of having flexibility in the supply chain leadtimes. In this paper, we study a serial inventory system with complete leadtime flexibility. For expositional purposes, we use a terminology that corresponds to making shipment (routing) decisions in the supply chain, however, the model can represent many different types of leadtime flexibility, such as the ones described above. In particular, we allow the option of shipping units from any stage in the supply chain to any downstream stage. This option gives the manager an additional flexibility that can be utilized as the uncertain demand is revealed. The shipments incur origin-destination dependent costs. Under a certain supermodularity assumption on the shipment costs, we show that optimal policies can be characterized as extended echelon base stock policies, which is a natural generalization of the well known echelon base stock policies.