IDEAS home Printed from https://ideas.repec.org/a/wly/navres/v56y2009i8p766-779.html
   My bibliography  Save this article

To wait or not to wait: Optimal ordering under lead time uncertainty and forecast updating

Author

Listed:
  • Yimin Wang
  • Brian Tomlin

Abstract

There has been a dramatic increase over the past decade in the number of firms that source finished product from overseas. Although this has reduced procurement costs, it has increased supply risk; procurement lead times are longer and are often unreliable. In deciding when and how much to order, firms must consider the lead time risk and the demand risk, i.e., the accuracy of their demand forecast. To improve the accuracy of its demand forecast, a firm may update its forecast as the selling season approaches. In this article we consider both forecast updating and lead time uncertainty. We characterize the firm's optimal procurement policy, and we prove that, with multiplicative forecast revisions, the firm's optimal procurement time is independent of the demand forecast evolution but that the optimal procurement quantity is not. This leads to a number of important managerial insights into the firm's planning process. We show that the firm becomes less sensitive to lead time variability as the forecast updating process becomes more efficient. Interestingly, a forecast‐updating firm might procure earlier than a firm with no forecast updating. © 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2009

Suggested Citation

  • Yimin Wang & Brian Tomlin, 2009. "To wait or not to wait: Optimal ordering under lead time uncertainty and forecast updating," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(8), pages 766-779, December.
    • Handle: RePEc:wly:navres:v:56:y:2009:i:8:p:766-779
    DOI: 10.1002/nav.20381
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/nav.20381
    Download Restriction: no
    File URL: https://libkey.io/10.1002/nav.20381?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Christopher S. Tang & Kumar Rajaram & Ayd{i}n Alptekinou{g}lu & Jihong Ou, 2004. "The Benefits of Advance Booking Discount Programs: Model and Analysis," Management Science, INFORMS, vol. 50(4), pages 465-478, April.
    2. L. Beril Toktay & Lawrence M. Wein, 2001. "Analysis of a Forecasting-Production-Inventory System with Stationary Demand," Management Science, INFORMS, vol. 47(9), pages 1268-1281, September.
    3. Jing-Sheng Song & Paul H. Zipkin, 1996. "Inventory Control with Information About Supply Conditions," Management Science, INFORMS, vol. 42(10), pages 1409-1419, October.
    4. Mark E. Ferguson, 2003. "When to commit in a serial supply chain with forecast updating," Naval Research Logistics (NRL), John Wiley & Sons, vol. 50(8), pages 917-936, December.
    5. Tong Wang & Beril L. Toktay, 2008. "Inventory Management with Advance Demand Information and Flexible Delivery," Management Science, INFORMS, vol. 54(4), pages 716-732, April.
    6. Robert R. Meyer & Michael H. Rothkopf & Stephen A. Smith, 1979. "Reliability and Inventory in a Production-Storage System," Management Science, INFORMS, vol. 25(8), pages 799-807, August.
    7. Jing-Sheng Song, 1994. "The Effect of Leadtime Uncertainty in a Simple Stochastic Inventory Model," Management Science, INFORMS, vol. 40(5), pages 603-613, May.
    8. Haresh Gurnani & Christopher S. Tang, 1999. "Note: Optimal Ordering Decisions with Uncertain Cost and Demand Forecast Updating," Management Science, INFORMS, vol. 45(10), pages 1456-1462, October.
    9. Mahmut Parlar & Defne Berkin, 1991. "Future supply uncertainty in EOQ models," Naval Research Logistics (NRL), John Wiley & Sons, vol. 38(1), pages 107-121, February.
    10. Brian Tomlin, 2009. "Impact of Supply Learning When Suppliers Are Unreliable," Manufacturing & Service Operations Management, INFORMS, vol. 11(2), pages 192-209, August.
    11. Warren H. Hausman, 1969. "Sequential Decision Problems: A Model to Exploit Existing Forecasters," Management Science, INFORMS, vol. 16(2), pages 93-111, October.
    12. Ravi Anupindi & Ram Akella, 1993. "Diversification Under Supply Uncertainty," Management Science, INFORMS, vol. 39(8), pages 944-963, August.
    13. Brian Tomlin, 2006. "On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks," Management Science, INFORMS, vol. 52(5), pages 639-657, May.
    14. Mark E. Ferguson & Gregory A. DeCroix & Paul H. Zipkin, 2005. "Commitment decisions with partial information updating," Naval Research Logistics (NRL), John Wiley & Sons, vol. 52(8), pages 780-795, December.
    15. Z. Kevin Weng, 1995. "Channel Coordination and Quantity Discounts," Management Science, INFORMS, vol. 41(9), pages 1509-1522, September.
    16. Candace Arai Yano & Hau L. Lee, 1995. "Lot Sizing with Random Yields: A Review," Operations Research, INFORMS, vol. 43(2), pages 311-334, April.
    17. Antonio Arreola‐Risa & Gregory A. DeCroix, 1998. "Inventory management under random supply disruptions and partial backorders," Naval Research Logistics (NRL), John Wiley & Sons, vol. 45(7), pages 687-703, October.
    18. Joseph M. Milner & Panos Kouvelis, 2005. "Order Quantity and Timing Flexibility in Supply Chains: The Role of Demand Characteristics," Management Science, INFORMS, vol. 51(6), pages 970-985, June.
    19. Rema Hariharan & Paul Zipkin, 1995. "Customer-Order Information, Leadtimes, and Inventories," Management Science, INFORMS, vol. 41(10), pages 1599-1607, October.
    20. Guillermo Gallego & Özalp Özer, 2001. "Integrating Replenishment Decisions with Advance Demand Information," Management Science, INFORMS, vol. 47(10), pages 1344-1360, October.
    21. Jiri Chod & Nils Rudi, 2006. "Strategic Investments, Trading, and Pricing Under Forecast Updating," Management Science, INFORMS, vol. 52(12), pages 1913-1929, December.
    22. Stephen C. Graves & David B. Kletter & William B. Hetzel, 1998. "A Dynamic Model for Requirements Planning with Application to Supply Chain Optimization," Operations Research, INFORMS, vol. 46(3-supplem), pages 35-49, June.
    23. Jing-Sheng Song & Candace A. Yano & Panupol Lerssrisuriya, 2000. "Contract Assembly: Dealing with Combined Supply Lead Time and Demand Quantity Uncertainty," Manufacturing & Service Operations Management, INFORMS, vol. 2(3), pages 287-296, July.
    24. Brian Tomlin & Yimin Wang, 2005. "On the Value of Mix Flexibility and Dual Sourcing in Unreliable Newsvendor Networks," Manufacturing & Service Operations Management, INFORMS, vol. 7(1), pages 37-57, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alexandre Forel & Martin Grunow, 2023. "Dynamic stochastic lot sizing with forecast evolution in rolling‐horizon planning," Production and Operations Management, Production and Operations Management Society, vol. 32(2), pages 449-468, February.
    2. Riezebos, Jan & Zhu, Stuart X., 2020. "Inventory control with seasonality of lead times," Omega, Elsevier, vol. 92(C).
    3. Liu, Zhongyi & Li, Mengyu & Lei, Ying & Zhai, Xin, 2022. "A joint strategy based on ordering and insurance for mitigating the effects of supply chain disruption on risk-averse firms," International Journal of Production Economics, Elsevier, vol. 244(C).
    4. Taher Ahmadi & Zümbül Atan & Ton de Kok & Ivo Adan, 2019. "Optimal control policies for an inventory system with commitment lead time," Naval Research Logistics (NRL), John Wiley & Sons, vol. 66(3), pages 193-212, April.
    5. Brian M. Lewis & Alan L. Erera & Maciek A. Nowak & White Chelsea C., 2013. "Managing Inventory in Global Supply Chains Facing Port-of-Entry Disruption Risks," Transportation Science, INFORMS, vol. 47(2), pages 162-180, May.
    6. Xiang Fang & Jun Ru & Yunzeng Wang, 2021. "The Effect of List Price on Channel Performance with Consignment," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 235-252, January.
    7. Jochen Schlapp & Moritz Fleischmann & Danja Sonntag, 2022. "Inventory timing: How to serve a stochastic season," Production and Operations Management, Production and Operations Management Society, vol. 31(7), pages 2891-2906, July.
    8. Liu, Weifeng & Zhu, Feilin & Zhao, Tongtiegang & Wang, Hao & Lei, Xiaohui & Zhong, Ping-an & Fthenakis, Vasilis, 2020. "Optimal stochastic scheduling of hydropower-based compensation for combined wind and photovoltaic power outputs," Applied Energy, Elsevier, vol. 276(C).
    9. Luo, Sha & Ahiska, S. Sebnem & Fang, Shu-Cherng & King, Russell E. & Warsing, Donald P. & Wu, Shuohao, 2021. "An analysis of optimal ordering policies for a two-supplier system with disruption risk," Omega, Elsevier, vol. 105(C).
    10. Dina Smirnov & Yale T. Herer & Assaf Avrahami, 2021. "Two‐Phase Newsvendor with Optimally Timed Additional Replenishment: Model, Algorithm, Case Study," Production and Operations Management, Production and Operations Management Society, vol. 30(9), pages 2871-2889, September.
    11. Sechan Oh & Özalp Özer, 2013. "Mechanism Design for Capacity Planning Under Dynamic Evolutions of Asymmetric Demand Forecasts," Management Science, INFORMS, vol. 59(4), pages 987-1007, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Taleizadeh, Ata Allah & Tafakkori, Keivan & Thaichon, Park, 2021. "Resilience toward supply disruptions: A stochastic inventory control model with partial backordering under the base stock policy," Journal of Retailing and Consumer Services, Elsevier, vol. 58(C).
    2. Tong Wang & Atalay Atasu & Mümin Kurtuluş, 2012. "A Multiordering Newsvendor Model with Dynamic Forecast Evolution," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 472-484, July.
    3. Süleyman Demirel & Roman Kapuscinski & Man Yu, 2018. "Strategic Behavior of Suppliers in the Face of Production Disruptions," Management Science, INFORMS, vol. 64(2), pages 533-551, February.
    4. Seung Hwan Jung, 2020. "Offshore versus Onshore Sourcing: Quick Response, Random Yield, and Competition," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 750-766, March.
    5. Luo, Sha & Ahiska, S. Sebnem & Fang, Shu-Cherng & King, Russell E. & Warsing, Donald P. & Wu, Shuohao, 2021. "An analysis of optimal ordering policies for a two-supplier system with disruption risk," Omega, Elsevier, vol. 105(C).
    6. Kaijie Zhu & Ulrich W. Thonemann, 2004. "Modeling the Benefits of Sharing Future Demand Information," Operations Research, INFORMS, vol. 52(1), pages 136-147, February.
    7. Gregory A. DeCroix, 2013. "Inventory Management for an Assembly System Subject to Supply Disruptions," Management Science, INFORMS, vol. 59(9), pages 2079-2092, September.
    8. Soroush Saghafian & Mark P. Van Oyen, 2016. "Compensating for Dynamic Supply Disruptions: Backup Flexibility Design," Operations Research, INFORMS, vol. 64(2), pages 390-405, April.
    9. Tong Wang & Beril L. Toktay, 2008. "Inventory Management with Advance Demand Information and Flexible Delivery," Management Science, INFORMS, vol. 54(4), pages 716-732, April.
    10. Jana Ralfs & Gudrun P. Kiesmüller, 2022. "Inventory management with advance demand information and flexible shipment consolidation," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 44(4), pages 1009-1044, December.
    11. Iida, Tetsuo, 2015. "Benefits of leadtime information and of its combination with demand forecast information," International Journal of Production Economics, Elsevier, vol. 163(C), pages 146-156.
    12. Long He & Ying Rong & Zuo‐Jun Max Shen, 2020. "Product Sourcing and Distribution Strategies under Supply Disruption and Recall Risks," Production and Operations Management, Production and Operations Management Society, vol. 29(1), pages 9-23, January.
    13. Svoboda, Josef & Minner, Stefan & Yao, Man, 2021. "Typology and literature review on multiple supplier inventory control models," European Journal of Operational Research, Elsevier, vol. 293(1), pages 1-23.
    14. Brian Tomlin, 2009. "Impact of Supply Learning When Suppliers Are Unreliable," Manufacturing & Service Operations Management, INFORMS, vol. 11(2), pages 192-209, August.
    15. Tetsuo Iida & Paul Zipkin, 2010. "Competition and Cooperation in a Two-Stage Supply Chain with Demand Forecasts," Operations Research, INFORMS, vol. 58(5), pages 1350-1363, October.
    16. Sechan Oh & Özalp Özer, 2013. "Mechanism Design for Capacity Planning Under Dynamic Evolutions of Asymmetric Demand Forecasts," Management Science, INFORMS, vol. 59(4), pages 987-1007, April.
    17. Guillermo Gallego & Özalp Özer, 2003. "Optimal Replenishment Policies for Multiechelon Inventory Problems Under Advance Demand Information," Manufacturing & Service Operations Management, INFORMS, vol. 5(2), pages 157-175, February.
    18. Erjie Ang & Dan A. Iancu & Robert Swinney, 2017. "Disruption Risk and Optimal Sourcing in Multitier Supply Networks," Management Science, INFORMS, vol. 63(8), pages 2397-2419, August.
    19. Taher Ahmadi & Zümbül Atan & Ton de Kok & Ivo Adan, 2019. "Optimal control policies for an inventory system with commitment lead time," Naval Research Logistics (NRL), John Wiley & Sons, vol. 66(3), pages 193-212, April.
    20. Fang, Yaner & Shou, Biying, 2015. "Managing supply uncertainty under supply chain Cournot competition," European Journal of Operational Research, Elsevier, vol. 243(1), pages 156-176.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:navres:v:56:y:2009:i:8:p:766-779. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1520-6750 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.