Evaluation of Lead Time in Production/Inventory Systems with Non-stationary Stochastic Demand

For the past decade, new techniques for production management–such as kanban (pull-through) systems, internal set-ups, zero inventory, etc–have gained tremendous interest. However, research indicates that the production environment is more important than specific techniques. One aspect of this environment is the production lead time. This paper examines the impact of lead time, in conjunction with the characteristics of the demand process, on costs through the use of a periodic-review production/inventory model with a non-stationary stochastic demand process. Our results indicate that costs are affected by a combination of production lead time and demand variances. While the demand means have no effect on costs, both the shapes of the demand distributions and the relative magnitude of the penalty costs do have an effect.