Modelling imperfect advance demand information and analysis of optimal inventory policies

Modelling imperfect advance demand information and analysis of optimal inventory policies

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Article ID: iaor20084271
Country: Netherlands
Volume: 177
Issue: 2
Start Page Number: 897
End Page Number: 923
Publication Date: Mar 2007
Journal: European Journal of Operational Research
Authors: , ,
Keywords: supply & supply chains
Abstract:

We consider an inventory control problem where it is possible to collect some imperfect information on future demand. We refer to such information as imperfect Advance Demand Information (ADI), which may occur in different forms of applications. A simple example is a company that uses sales representatives to market its products, in which case the collection of sales representatives' information as to the number of customers interested in a product can generate an indication about the future sales of that product, hence it constitutes imperfect ADI. Other applications include Internet retailing, Vendor Managed Inventory applications and Collaborative Planning, Forecasting, and Replenishment environments. We develop a model that incorporates imperfect ADI with ordering decisions. Under our system settings, we show that the optimal policy is of order-up-to type, where the order level is a function of imperfect ADI. We also provide some characterizations of the optimal solution. We develop an expression for the expected cost benefits of imperfect ADI for the myopic problem. Our analytical and empirical findings reveal the conditions under which imperfect ADI is more valuable.

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