Lead Time Quotation and Customer Utility in an M/M type Base Stock System

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Abstract Information on demand and lead time is useful for production control and consumer’s decision. In this paper, a one-stage production and inventory system with a base stock policy, which is defined by Savasaneril et. al (2010), is considered. Each arriving customer decides whether he/she enters the system based on the quoted lead time informed by the system. The decision is made by a utility function of customers. An optimal lead time policy for the system to maximize the system’s profit is derived by a Markov decision process. Several kinds of heuristic policies are compared with optimal policies with respect to both profits and customer’s utilities.

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