This Article Full Text (PDF) References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via Google Scholar Google Scholar Articles by Gayon, J.-P. Articles by de Véricourt, F. Search for Related Content

Using Imperfect Advance Demand Information in Production-Inventory Systems with Multiple Customer Classes

Laboratoire G-SCOP, INP Grenoble, 38031 Grenoble Cedex 1, France
Department of Mechanical Engineering, University of Minnesota, Minneapolis, Minnesota 55419
European School of Management and Technology, 10178 Berlin, Germany
jean-philippe.gayon{at}inpg.fr
saif{at}umn.edu
devericourt{at}esmt.org

We consider a make-to-stock supplier that operates a production facility with limited capacity. The supplier receives orders from customers belonging to several demand classes. Some of the customer classes share advance demand information with the supplier by announcing their orders ahead of their due date. However, this advance demand information is not perfect because the customer may decide to order prior to or later than the expected due date or may decide to cancel the order altogether. Customer classes vary in their demand rates, expected due dates, cancellation probabilities, and shortage costs. The supplier must decide when to produce and, whenever an order becomes due, whether or not to satisfy it from on-hand inventory. Hence, the supplier is faced with a joint production-control and inventory-allocation problem. We formulate the problem as a Markov decision process and characterize the structure of the optimal policy. We show that the optimal production policy is a state-dependent base-stock policy with a base-stock level that is nondecreasing in the number of announced orders. We show that the optimal inventory-allocation policy is a state-dependent multilevel rationing policy, with the rationing level for each class nondecreasing in the number of announced orders (regardless of whether the class provides advance information). From numerical results, we obtain several insights into the value of advance demand information for both supplier and customers.

Key Words: advance demand information; production-inventory systems; inventory rationing; make-to-stock queues; Markov decision process
History: Received: July 28, 2005; accepted: August 16, 2007.