The impact of lead time compression on demand forecasting risk and production cost: A newsvendor model

• A model that can solve the trade-off between demand forecasting and production cost with lead time is proposed.
• Some conditions that increase the firm’s profitability are investigated.
• The impact of lead time compression in firm’s bottom lines is analyzed.

Short lead time reduces the exposure of demand forecasting risk, but an additional production cost is incurred to pay it. To solve this trade-off problem, a model is proposed based on classical newsvendor problem with lead time as a controllable variable. In this model, the demand forecasting process and the production cost structure are assumed as general functions with the amount of compressed lead time, respectively. Our investigation shows that under some circumstances, the trade-off problem can be solved and the proposed model can increase the profitability of enterprise. Finally, some numerical examples are given to illustrate the model.