AWS Lambda functions can experience cold starts, which occur when a new worker is created for each concurrent invocation, causing latency. To handle cold starts, developers can use function warmers or Provisioned Concurrency. Function warmers analyze invocation events and attempt to manage handler processing, while Provisioned Concurrency provides consistent warm invocations with low latency in production workloads by preparing workers before receiving traffic. Provisioned Concurrency is recommended over function warmers for its benefits in reducing latency and increasing performance. Implementing a tracing and monitoring tool, such as Lumigo, can also help optimize Lambda deployments and ensure scalability.