Single vs Dynamic Lead-Time Quotations in Make-To-Order Systems with Delay-Averse Customers

TL;DR

This paper models lead-time quotations in make-to-order systems with risk-averse customers, comparing single and dynamic policies, and analyzes their impact on profits and system efficiency through computational experiments.

Contribution

It introduces a model for lead-time quoting with risk-averse customers, analyzing both provider and social optimization under dynamic and single policies.

Findings

Dynamic lead-time policies outperform single policies in profit.

Risk aversion reduces system profits but can be mitigated by flexible compensation.

Profit loss with single quotes is generally small compared to dynamic policies.

Abstract

We develop a model for lead-time quotation in a Markovian make-to-order production or service system with strategic customers who exhibit risk aversion. Based on a CARA utility function of their net benefit, customers make individual decisions to join the system or balk by observing the state of the queue. The decisions of arriving customers result in a symmetric join/balk game. Regarding the firm's strategy, the provider announces a lead-time quotation for each state and a respective balking threshold. There is also a fixed entrance fee and compensation rate for the part of a customer' delay exceeding the quoted lead-time. Moreover, we consider the problem from the point of view of a social optimizer who maximizes the total net benefit of the system. We analyze the provider's and social optimizer's maximization problems and we consider two cases regarding the class of lead-time quotation policies, i.e., dynamic and single. We identify the optimal entrance thresholds in each case. Finally, through computational experiments we quantify the effect of risk aversion on the profits and the degree of flexibility that the compensation policy offers. It is shown that the detrimental effects of risk aversion can be addressed more efficiently for the provider's problem compared to the social optimizer's one. Furthermore, the profit loss when setting a single lead-time quote is generally small compared to the optimal dynamic quotation policy.