The effect of foreknowledge of demand in case of a restricted capacity: The single-stage, single-product case

One of the important aspects of supply chain management is the possibility to realize advance demand information deeper in the chain. Foreknowledge of demand is useful in the control of a production–inventory system. Knowing the customer orders in advance makes it possible to anticipate properly. It is an important condition to produce and deliver the right quantity of the right product “just-in-time”. It reduces the need of safety stock and spare capacity and it helps to reduce the bullwhip effect through the chain. But the question of the effectiveness of foreknowledge is not an easy one. Having foreknowledge of the customer orders does not remove the demand uncertainty completely. And the effect of the advance demand information may be hampered by the restricted flexibility of the resources. The subject of this paper is the influence of a restricted production capacity on the effect of advance demand information. The single-stage, single-product case is considered here, the lost-sales version as well as the backlogging version. The main result is that for high utilization rates and small forecast horizon, the inventory reduction due to foreknowledge is equal to (1 − ρ)h·R, with h the forecast horizon and R the production speed. Connected with that is the result that for small forecast horizon it is allowed to aggregate the demand information over the forecast horizon. This leads to a heuristic that appears to be close to optimal for the case with a larger forecast horizon.