On the value of information in dynamic production inventory problems under forecast evolution

In this article we explore how total system costs and inventory positions are affected when forecasts are incorporated explicitly in production/inventory systems. We assume that forecasts for demand of a certain item are available in each period, and they evolve from one period to the next in accordance with an additive evolution model. In order to analyze the effects of the forecasts on the production/inventory system we compare the optimal ordering policy and the expected costs of the model that keeps forecasts with that of a comparable standard inventory model. We show that under mild assumptions the former yields lower expected costs and inventory levels than the latter. (C) 1996 John Wiley & Sons, Inc