Using imperfect advance demand information in ordering and rationing decisions

Date
2009
Authors
Tan, T.
Güllü, R.
Erkip, N.
Advisor
Instructor
Source Title
International Journal of Production Economics
Print ISSN
0925-5273
Electronic ISSN
Publisher
Elsevier
Volume
121
Issue
2
Pages
665 - 677
Language
English
Type
Article
Journal Title
Journal ISSN
Volume Title
Abstract

In this paper, we consider an inventory problem with two demand classes having different priorities. The appropriate policy of rationing the available stock, i.e. reserving some stock for meeting prospective future demand of preferred customers at the expense of deliberately losing some of the currently materialized demand of lower demand class(es), relies on the estimation of the future demand. Utilizing current signals on future demand, which we refer to as imperfect advance demand information (ADI), decreases uncertainty on future demand and may help to make better decisions on when to start rejecting lower class demand. We develop a model that incorporates imperfect ADI with inventory ordering (replenishment) decision and rationing available stock. In a two-period setting, we show some structural properties, solve the rationing problem, and propose solution methods based on Monte Carlo simulation for the ordering problem. We conduct numerical tests to measure the impact of system parameters on the expected value of imperfect ADI, and provide useful managerial insights.

Course
Other identifiers
Book Title
Keywords
Inventory/production, Advance demand information, Customer reliability, Periodic review, Demand classes, Rationing
Citation
Published Version (Please cite this version)