Optimal Expediting Policies for a Serial Inventory System with Stochastic Lead Time and Visibility of Orders In Transit

Recent supply chains face higher volatility due to increased length and complexity. Cost pressure from severe competition drives industries to outsource its production to Asia, which in turn makes the supply chains long and complex. As a result, it is increasingly critical to manage supply chains actively to reduce uncertainty in delivery lead time and increase service rates. Often operating multiple delivery modes such as standard freight shipping and air is an effective way of addressing both delivery lead time uncertainty and service rates. We propose a model on how to operate multiple delivery modes in an optimal way and discuss a necessary order tracking system such as radio frequency identification as a prerequisite for expediting in a stochastic delivery lead time environment. We consider a serial supply chain and an expediting option from intermediate installations to the very downstream of the chain. The goods move stochastically among the installations and the system faces a stochastic demand. We identify systems that yield simple and tractable optimal policies, in which both regular ordering and expediting follow a variant of the base stock policy. We show that optimal expediting results in a significant reduction in the total logistics cost and the reduction increases as variability in delivery lead time increases. Furthermore, we show that expediting allows the system to be operated in a leaner way due to the reduced regular order amount and provide various managerial insights linking expediting, base stock levels, and expediting costs based on analytical and numerical analyses.