Integrating Replenishment Decisions with Advance Demand Information

Abstract

There is a growing consensus that a portfolio of customers with different demand lead times can lead to higher, more regular revenues and better capacity utilization. Customers with positive demand lead times place orders in advance of their needs, resulting in advance demand information. This gives rise to the problem of finding effective inventory control policies under advance demand information. We show that state-dependent (s, S) and base-stock policies are optimal for stochastic inventory systems with and without fixed costs. The state of the system reflects our knowledge of advance demand information. We also determine conditions under which advance demand information has no operational value. A numerical study allows us to obtain additional insights and to evaluate strategies to induce advance demand information.