Modelling lead time effects on joint inventory and price optimisation

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.