Configuring information updating schemes of partial imperfect advance demand information in production-inventory systems

Abstract

We consider a make-to-stock system, where a supplier produces a single product to meet a single customer’s order. The order quantity is fixed, but the order time is random. Before the order becomes due, it goes through multiple stages, and the transition time from one stage to the next is random. The customer provides advance demand information (ADI) by updating the order status information to the supplier when the order progresses to a key stage. We study the supplier’s optimal production policy. By formulating this problem as a Markov decision process, we show that the optimal production policy is a state-dependent base-stock policy, and the optimal base-stock level after receiving the update is higher than before. We extend the model to the case with multiple updates. We numerically examine the configuration of information updating schemes, i.e. the timing and number of updates. We find that partial ADI with one update can capture most of the benefits of full ADI in most cases. However, the timing of update is crucial for the benefit of ADI. For a few cases where only one update is less effective, increasing the number of updates slightly can capture most of the benefits of full ADI.