The Value of Supplier Information to Improve Management of a Retailer's Inventory

Abstract

ABSTRACTThe distribution of lead time demand is essential for determining reorder points in inventory systems. Usually, the distribution of lead time demand is approximated directly. However, in some cases it may be worthwhile to take the demand per unit time and lead time into account, particularly when specific information is available.This paper deals with the situation where a supplier, who produces on order in fixed production cycles, provides information on the status of the coming production run. The retailer can use this information to gain insight into the lead‐time process. A fixed order (svQ) strategy is presented, with a set of reorder points sv depending on the time t until the first possible delivery, which is determined by the information of the supplier. A Markov model that analyzes a given (svQ) strategy is used to quantify the value of the information provided by the supplier. Some numerical examples show that the approach may lead to considerable cost savings compared to the traditional approach that uses only one single reorder point, based on a two‐moments approximation. Using this numerical insight, the pros and cons of a more frequent exchange of information between retailers and suppliers can be balanced.