Optimal Inventory Policies under Imperfect Advance Demand Information

Abstract: We consider an inventory control problem where it is possible to col-lect some imperfect information on future demand. We refer to such information as imperfect Advance Demand Information (ADI), which may occur in dierent forms of applications. A simple example is a company that uses sales representa-tives to market its products, in which case the collection of sales representatives' information as to the number of customers interested in a product can generate an indication about the future sales of that product, hence it constitutes imper-fect ADI. Other applications include internet retailing, Vendor Managed Inventory (VMI) applications and Collaborative Planning, Forecasting, and Replenishment (CPFR) environments. We develop a model that incorporates imperfect ADI with ordering decisions. Under our system settings, we show that the optimal policy is of order-up-to type, where the order level is a function of imperfect ADI. We also provide some characterizations of the optimal solution. We develop an expression for the expected cost benets of imperfect ADI for the myopic problem. Our ana-lytical and empirical ndings reveal the conditions under which imperfect ADI is more valuable