《Effect of Lead Time Uncertainty》.pdf

Decision Sciences Volume 35 Number 1 Winter 2004 Printed in the U.S.A. The Effect of Lead Time Uncertainty on Safety Stocks Sunil Chopra Kellogg Graduate School of Management, Northwestern University, Evanston, IL, 60201, e-mail: s-chopra@kellogg.northwestern.edu Gilles Reinhardt† Department of Management, DePaul University, Chicago, IL, 60604, e-mail: greinhar@condor.depaul.edu Maqbool Dada Krannert Graduate School of Management, Purdue University, West Lafayette, IN, 47907, e-mail: dada@mgmt.purdue.edu ABSTRACT The pressure to reduce inventory investments in supply chains has increased as competi- tion expands and product variety grows. Managers are looking for areas they can improve to reduce inventories without hurting the level of service provided. Two areas that man- agers focus on are the reduction of the replenishment lead time from suppliers and the variability of this lead time. The normal approximation of lead time demand distribution indicates that both actions reduce inventories for cycle service levels above 50%. The normal approximation also indicates that reducing lead time variability tends to have a greater impact than reducing lead times, especially when lead time variability is large. We build on the work of Eppen and Martin (1988) to show that the conclusions from the normal approximation are flawed, especially in the range of service levels where most companies operate. We show the existence of a service-level threshold greater than 50% below which reorder points increase with a decrease in lead time variability. Thus, for a firm operating just below this threshold, reducing lead times decreases reorder points, whereas reducing lead time variability increases reorder points. For firms operating at these service levels, decreasing lead time is the right lever if they want to cut inventories, not reducing lead time variability. Subject Areas: Inve