Title: Modelling lead time effects on joint inventory and price optimisation

Authors: Leopoldo Eduardo Cardenas-Barron, Neale R. Smith, Jose Luis Martinez-Flores, Marisela Rodriguez Salvador

Addresses: Management Department, Industrial and Systems Engineering Department, Instituto Tecnologico y de Estudios Superiores de Monterrey, 2501 Garza Sada Av., C.P. 64849, Monterrey, Mexico. ' Center for Quality and Manufacturing, Instituto Tecnologico y de Estudios Superiores de Monterrey, 2501 Garza Sada Av., C.P. 64849, Monterrey, Mexico. ' Interdisciplinary Center for Postgraduate Studies, Research and Consulting, Universidad Popular Autonoma del Estado de Puebla, 1103 Colonia Santiago, C.P. 72410, Puebla, Puebla, Mexico. ' Center for Quality and Manufacturing, Instituto Tecnologico y de Estudios Superiores de Monterrey, 2501 Garza Sada Av., C.P. 64849, Monterrey, Mexico

Abstract: In this paper, we study the effect of lead time from the buyer|s point of view on joint price and inventory optimisation problems in a continuous time setting using an average profit maximising model that extends the familiar EOQ model. The behaviour of the model is studied using numerical experiments that show that as lead time increases, the optimal price increases and the optimal profit and lot size decrease. Additional numerical experiments are performed that show how the purchase cost must be decreased to allow a firm to maintain constant pricing and profit when lead times increase. The work has important implications for firms that implement global sourcing, both in terms of pricing and purchase cost negotiation.

Keywords: inventories; pricing; lead times; global sourcing; inventory optimisation; price optimisation; buyers; continuous time settings; average profits; profit maximisation; economic order quantities; EOQ; optimal price increases; lot size decrease; purchase costs; constant pricing; negotiations; logistics management; economics; globalisation.

DOI: 10.1504/IJLEG.2010.036304

International Journal of Logistics Economics and Globalisation, 2010 Vol.2 No.3, pp.270 - 291

Published online: 01 Nov 2010 *

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