Benefits of leadtime information and of its combination with demand forecast information

Abstract

This paper studies both the benefits of leadtime information and the interrelationships among demand forecast information, leadtime uncertainty, and leadtime information, for improving inventory control performance. To this end, it explicitly incorporates both leadtime information and demand forecast information into an inventory model although they have conventionally been dealt with individually in the literature. Specifically, it considers a periodic-review inventory model with uncertain leadtimes, in which both leadtime information and demand forecast information are available. The leadtime information is modeled as the information of the arrival of outstanding orders and the demand forecast information as the Martingale Model of Forecast Evolution (MMFE).The paper analyzes the way to use both leadtime information and demand forecast information for inventory control operations. Specifically, under certain conditions, the optimality of the state-dependent base-stock policy is shown, and an effective heuristic policy is developed.It also derives some managerial insights for exploiting both leadtime information and demand forecast information in the case where leadtimes are uncertain. For instance, while leadtime information itself significantly improves inventory control performance, it also enhances the benefits of demand forecast information. Specifically, the benefits of demand forecast information may significantly decrease as leadtime uncertainty increases. However, the decrease of the benefits of demand forecast information may be alleviated with leadtime information.