Use of Advance Demand Information in Inventory Management with Two Demand Classes

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Virginia Tech

This work considers inventory systems with two demand classes, where advance demand information is available. Three related scenarios are presented: three-stage production-inventory systems are studied in first two, whereas pure inventory systems are studied in the last scenario.

In the first scenario, continuous review production-inventory systems are considered, where only one class provides advance demand information and early demand fulfillment is permitted. A new approach for production replenishment and order fulfillment in such systems is proposed, which combines the benefits of early fulfillment with Kanban-based pull systems. Simulation is used to compare the performance of the resulting policy with two other policies for a variety of scenarios (depending on the arrival rates, system utilizations, cost structures, arrival ratio, priority levels and amount of the advance demand information). A simulation-based lower bound on the optimal cost is established for some specific scenarios. The proposed policy outperforms the existing policies in every setting considered. Also, the proposed policy has added advantage of both retaining the benefit at high system utilizations and increasing the benefit up to the maximum level of advance demand information provided. A small fraction of customers providing advance demand information with early fulfillment acceptable is shown to have higher benefit than all customers providing same advance demand information with no early fulfillment.

In second scenario, both classes provide advance demand information in production-inventory systems, though only one class accepts early fulfillment. Different levels of system utilization, arrival ratio and backorder cost are considered in the simulation experiments to show the superiority of early fulfillment. Also, experiments suggest that lowering the expected supply lead time may be more beneficial than increasing the demand lead time by the same amount for production-inventory systems with utilization dependent supply lead times.

In third scenario, pure inventory systems are considered, where the demand classes provide different amount of advance demand information, and only one class accepts early fulfillment. The structure of an optimal policy is analytically characterized for periodic review systems under some specific conditions.

production and inventory control, advance demand information, multiple demand classes