Manufacturing lead-time rules: Customer retention versus tardiness costs

Inaccurate production backlog information is a major cause of late deliveries, which can result in penalty fees and loss of reputation. We identify conditions when it is particularly worthwhile to improve an information system to provide good lead-time information. We first analyze a sequential decision process model of lead-time decisions at a firm which manufactures standard products to order, and has complete backlog information. There are Poisson arrivals, stochastic processing times, customers may balk in response to quoted delivery dates, and revenues are offset by tardiness penalties. We characterize an optimal policy and show how to accelerate computations. The second part of the paper is a computational comparison of this optimum (with full backlog information) with a lead-time quotation rule that is optimal with statistical shop-status information. This reveals when the partial-information method does well and when it is worth implementing measures to improve information transfer between operations and sales.