To change or not to change the lead time in a dynamic order-up-to inventory system?

The lead time in an inventory system has an impact on inventory holding and shortage costs as well as on the purchase or production costs. Usually, shorter lead times result in lower inventory costs while also entailing higher purchase or production costs. The former results from a reduced exposure to demand uncertainty, while the latter is due to expediting the production and/or delivery process which typically comes with additional expenses. In this paper, we propose a decision support model to help decide on lead time changes given a demand forecasting system in use. We focus on a periodic review dynamic order-up-to inventory system in a nonstationary demand environment in which forecast distributions are a crucial input to the inventory system. The decision support model quantifies the effect of reducing (or extending) the lead time on the exposure to forecast uncertainty by translating it into a justified increase (or required decrease) in unit purchase or production cost. We apply the decision support model to a case study and illustrate its use for deciding what lead time to use.