Using Imperfect Advance Demand Information in Production-Inventory Systems with Multiple Customer Classes

We consider a make-to-stock supplier who operates a production facility with limited capacity. The supplier receives orders from customers belonging to several demand classes. Some of the customer classes share advance demand information with the supplier by announcing their orders ahead of their due date. However, this advance demand information is not perfect because the customer may decide to order prior to or later than the expected due date or may decide to cancel the order altogether. Customer classes vary in their demand rates, expected due dates, cancellation probabilities, and shortage costs. The supplier must decide when to produce, and, whenever an order becomes due, whether or not to satisfy it from on-hand inventory. Hence, the supplier is faced with a joint production control and inventory allocation problem. We formulate the problem as a Markov decision process and characterize the structure of the optimal policy. We show that the optimal production policy is a state-dependent base-stock policy with a base-stock level that is non-decreasing in the number of announced orders. We show that the optimal inventory allocation policy is a state-dependent multi-level rationing policy, with the rationing level for each class non-decreasing in the number of announced orders (regardless of whether or not the class provides advance information). From numerical results, we obtain several insights into the value of advance demand information for both supplier and customers.