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Chapter 999

DUEDATEMANAGEMENTPOLICIES

Põnar Keskinocak

School of Industrial and Systems Engineering

Georgia Institute of Technology, Atlanta, GA 30332 pinar@isye.gatech.edu

Sridhar Tayur

Graduate School of Industrial Administration

Carnegie Mellon University, Pittsburgh, PA 15213

stayur@gsia.cmu.edu Pınar Keskinocak is supported by NSF Career Award DMII-0093844. This research is also supported in part by a grant from The Logistics Institute Asia Pacific(TLI-AP). 1 2

Introduction

To gain an edge over competitors in an increasingly global and com- petitive marketplace, companies today need to differentiate themselves not only in cost, but in the overall “value" of the products and the ser- vices they offer. As customers demand more and more variety of prod- ucts, better, cheaper, and faster, an essential value feature for customer acquisition and retention is the ability to quote short and reliable lead times. Reliability is important for customers especially in a business- to-business setting, because it allows them to plan their own operations with more reliability and conÞdence [66]. We deÞne thelead timeas the difference between the promised due date of an order (or job) and its arrival time 2

Hence, quoting a lead time

is equivalent to quoting a due date. The importance of lead time quota- tion becomes even more prevalent as many companies move from mass production to mass customization, or from a make-to-stock (MTS) to a make-to-order (MTO) model to satisfy their customers" unique needs. Hence, companies need to determine in real time if and when an order can be fulÞlled proÞtably. The Internet as a new sales channel further increases the importance of effective lead time quotation strategies, as customers who place orders online expect to receive reliable lead time as well as price quotes. For example, many customers were extremely dissatisÞed with their online purchasing experience during the 1999 hol- iday season, mainly due to unreliable delivery date quotes, lack of order status updates, and signiÞcant order delays [48]. Quoting unreliable lead times not only leads to potential loss of fu- ture business, but may also result in monetary penalties. Seven e-tailers, including Toys R Us and Macy"s had to pay a total of $1.5 million to set- tle a Federal Trade Commission (FTC) action over late deliveries made during the 1999 holiday season [40]. According to the FTC, the e-tailers promised delivery dates when fulÞllment was not possible and failed to notify customers when shipments would be late. Sometimes a company may self-impose a penalty for missed due-dates. For example, due to the increasing insistence of many steel users on consistent reliable deliver- ies, Austin Trumanns Steel started to offer a program called Touchdown Guarantee in 1986. Under the program, if the company agrees to a re- quested delivery date at the time an order is placed, it has to deliver 2 In this paper, we focus on lead times quoted to customers. Lead times can also be used for internal purposes, e.g., planned lead times are used for determining the release times of the orders to the shopfloor [69]. We do not discuss planned lead times in this paper.

Due Date Management Policies3

on time or pays the customer 10% of the invoice value of each item not delivered [52]. A common approach to lead time quotation is to promise a constant lead time to all customers, regardless of the characteristics of the order and the current status of the system [65] [110]. Despite its popularity, there are serious shortcomings ofÞxed lead times [62]. When the demand is high, these lead times will be understated leading to missed due dates and disappointed customers, or to higher costs due to expediting. When the demand is low, they will be overstated and some customers may choose to go elsewhere. The fundamental tradeoffin lead time quotation is between quot- ing short lead times and attaining them. In case of multiple customer classes with different capacity requirements or margins, this tradeoff also includes capacity allocation decisions. In particular, one needs to decide whether to allocate future capacity to a low-margin order now, or whether to reserve capacity for potential future arrivals of high-margin orders. Lead-time related research has developed in multiple directions, in- cluding lead time reduction [54] [99], predicting manufacturing lead times, the relationship between lead times and other elements of man- ufacturing such as lot sizes and inventory [42] [61] [68], anddue date management(DDM) policies. Our focus in this survey is on DDM, where a DDM policy consists of a due date setting policy and a sequenc- ing policy. In contrast to most of the scheduling literature [49] [78] [88], where due dates are either ignored or assumed to be set exogenously (e.g., by the sales department, without knowing the actual production schedule), we focus on the case where due dates are set endogenously. Most of the research reviewed here does not consider inventory decisions and hence is applicable to MTO systems. Previous surveys in this area include [5] [26]. Most of the research on DDM ignores the impact of the quoted due dates on the customers" decisions to place an order. Recently, a small but increasing number of researches studied DDM from a proÞtmaxi- mization rather than a cost minimization perspective, considering order acceptance decisions (or the effect of quoted lead times on demand) in addition to due date quotation and scheduling decisions. Although this is a step forward from the earlier DDM research, it still ignores another important factor that affects the demand: price. With the goal of mov- ing towards integrated decision making, the latest advances in DDM researchfocusonsimultaneouspriceandleadtimequotation. The paper is organized as follows. In Section 1, we discuss the charac- teristics of a DDM problem, including decisions, modeling dimensions, 4 objectives and solution approaches. In Section 2, we discuss commonly used scheduling rules in DDM policies. Offline DDM models, which as- sume that the demand and other input about the problem are available at the beginning of the planning horizon, are discussed in Section 3. Online models, which consider dynamic arrivals of orders over time, are presented in Section 4. Models for DDM in the presence of service level constraints are discussed in Section 5. We review the DDM models with order acceptance and pricing decisions in Section 6. We conclude with future research directions in Section 7. We reviewed a broad range of papers in this survey; however, we do not claim that we provide an all-inclusive coverage of all the papers published in the DDM literature and regret any omissions. We would be delighted to receive copies of or references to any work that was not included in this survey.

1. Characteristics of a Due Date Management

Chapter 999

DUEDATEMANAGEMENTPOLICIES

Põnar Keskinocak

School of Industrial and Systems Engineering

Georgia Institute of Technology, Atlanta, GA 30332 pinar@isye.gatech.edu

Sridhar Tayur

Graduate School of Industrial Administration

Carnegie Mellon University, Pittsburgh, PA 15213

stayur@gsia.cmu.edu Pınar Keskinocak is supported by NSF Career Award DMII-0093844. This research is also supported in part by a grant from The Logistics Institute Asia Pacific(TLI-AP). 1 2

Introduction

To gain an edge over competitors in an increasingly global and com- petitive marketplace, companies today need to differentiate themselves not only in cost, but in the overall “value" of the products and the ser- vices they offer. As customers demand more and more variety of prod- ucts, better, cheaper, and faster, an essential value feature for customer acquisition and retention is the ability to quote short and reliable lead times. Reliability is important for customers especially in a business- to-business setting, because it allows them to plan their own operations with more reliability and conÞdence [66]. We deÞne thelead timeas the difference between the promised due date of an order (or job) and its arrival time 2

Hence, quoting a lead time

is equivalent to quoting a due date. The importance of lead time quota- tion becomes even more prevalent as many companies move from mass production to mass customization, or from a make-to-stock (MTS) to a make-to-order (MTO) model to satisfy their customers" unique needs. Hence, companies need to determine in real time if and when an order can be fulÞlled proÞtably. The Internet as a new sales channel further increases the importance of effective lead time quotation strategies, as customers who place orders online expect to receive reliable lead time as well as price quotes. For example, many customers were extremely dissatisÞed with their online purchasing experience during the 1999 hol- iday season, mainly due to unreliable delivery date quotes, lack of order status updates, and signiÞcant order delays [48]. Quoting unreliable lead times not only leads to potential loss of fu- ture business, but may also result in monetary penalties. Seven e-tailers, including Toys R Us and Macy"s had to pay a total of $1.5 million to set- tle a Federal Trade Commission (FTC) action over late deliveries made during the 1999 holiday season [40]. According to the FTC, the e-tailers promised delivery dates when fulÞllment was not possible and failed to notify customers when shipments would be late. Sometimes a company may self-impose a penalty for missed due-dates. For example, due to the increasing insistence of many steel users on consistent reliable deliver- ies, Austin Trumanns Steel started to offer a program called Touchdown Guarantee in 1986. Under the program, if the company agrees to a re- quested delivery date at the time an order is placed, it has to deliver 2 In this paper, we focus on lead times quoted to customers. Lead times can also be used for internal purposes, e.g., planned lead times are used for determining the release times of the orders to the shopfloor [69]. We do not discuss planned lead times in this paper.

Due Date Management Policies3

on time or pays the customer 10% of the invoice value of each item not delivered [52]. A common approach to lead time quotation is to promise a constant lead time to all customers, regardless of the characteristics of the order and the current status of the system [65] [110]. Despite its popularity, there are serious shortcomings ofÞxed lead times [62]. When the demand is high, these lead times will be understated leading to missed due dates and disappointed customers, or to higher costs due to expediting. When the demand is low, they will be overstated and some customers may choose to go elsewhere. The fundamental tradeoffin lead time quotation is between quot- ing short lead times and attaining them. In case of multiple customer classes with different capacity requirements or margins, this tradeoff also includes capacity allocation decisions. In particular, one needs to decide whether to allocate future capacity to a low-margin order now, or whether to reserve capacity for potential future arrivals of high-margin orders. Lead-time related research has developed in multiple directions, in- cluding lead time reduction [54] [99], predicting manufacturing lead times, the relationship between lead times and other elements of man- ufacturing such as lot sizes and inventory [42] [61] [68], anddue date management(DDM) policies. Our focus in this survey is on DDM, where a DDM policy consists of a due date setting policy and a sequenc- ing policy. In contrast to most of the scheduling literature [49] [78] [88], where due dates are either ignored or assumed to be set exogenously (e.g., by the sales department, without knowing the actual production schedule), we focus on the case where due dates are set endogenously. Most of the research reviewed here does not consider inventory decisions and hence is applicable to MTO systems. Previous surveys in this area include [5] [26]. Most of the research on DDM ignores the impact of the quoted due dates on the customers" decisions to place an order. Recently, a small but increasing number of researches studied DDM from a proÞtmaxi- mization rather than a cost minimization perspective, considering order acceptance decisions (or the effect of quoted lead times on demand) in addition to due date quotation and scheduling decisions. Although this is a step forward from the earlier DDM research, it still ignores another important factor that affects the demand: price. With the goal of mov- ing towards integrated decision making, the latest advances in DDM researchfocusonsimultaneouspriceandleadtimequotation. The paper is organized as follows. In Section 1, we discuss the charac- teristics of a DDM problem, including decisions, modeling dimensions, 4 objectives and solution approaches. In Section 2, we discuss commonly used scheduling rules in DDM policies. Offline DDM models, which as- sume that the demand and other input about the problem are available at the beginning of the planning horizon, are discussed in Section 3. Online models, which consider dynamic arrivals of orders over time, are presented in Section 4. Models for DDM in the presence of service level constraints are discussed in Section 5. We review the DDM models with order acceptance and pricing decisions in Section 6. We conclude with future research directions in Section 7. We reviewed a broad range of papers in this survey; however, we do not claim that we provide an all-inclusive coverage of all the papers published in the DDM literature and regret any omissions. We would be delighted to receive copies of or references to any work that was not included in this survey.

1. Characteristics of a Due Date Management