Capacity and lead-time management when demand for service is seasonal and lead-time sensitive

In today’s competitive business environment, quick service with minimal waiting time is an important factor for customers when choosing a service. Many service organizations guarantee a uniform lead-time to all customers in order to gain competitive advantages in the market. In selecting a lead-time to quote, the firm has to take into consideration not only how customers will react to the delivery time guarantee, but also whether it has adequate capacity to fulfill the commitment. A short lead-time can bring both benefits and costs. It can increase customer demand, but might require a higher capacity level. We present a mathematical model and a solution method for determining the optimal quoted lead-time and capacity level for a profit-maximizing firm with time-varying and lead-time sensitive demand. The firm incurs convex capacity costs and pays lateness penalties whenever the actual lead-time exceeds the quoted lead-time. A few studies have been conducted on the relationship between uniform lead-time, capacity, demand, and overall profitability. However, none of them takes the time variation of demand into account. Our work differs from previous research in that we explicitly model such a demand pattern.