Leadtime-Inventory Trade-Offs in Assemble-to-Order Systems

This paper studies the trade-off between inventory levels and the delivery leadtime offered to customers in achieving a target level of service. It addresses the question of how much a delivery leadtime can be reduced, per unit increase in inventory, at a fixed fill rate. We show that for a class of assemble-to-order models with stochastic demands and production intervals there is a simple linear trade-off between inventory and delivery leadtime, in a limiting sense, at high fill rates. The limiting slope is easy to calculate and can be interpreted as the approximate marginal rate for trading off inventory against leadtime at a constant level of service. We also investigate how various model features affect the trade-off—in particular, the impact of orders for multiple units of a single item and of orders for multiple units of different items.