Optimal Replenishment Policies for Multiechelon Inventory Problems Under Advance Demand Information

Manufacturing & Service Operations Management · 2003 · Volume 5 · Issue 2

Abstract

Customers and downstream supply chain partners often place, or can be induced to place, orders in advance of future requirements. We show how to optimally incorporate advance demand information into periodic-review, multiechelon, inventory systems in series. While the state space for series systems appears to be formidably large, we decompose the problem across locations, as in Clark and Scarf (1960), and reduce the state space at each location by using modified echelon inventory positions (that nets known requirements). We prove the optimality of state-dependent, echelon base-stock policies for finite and infinite horizon problems. We also show that myopic policies are optimal and very easy to compute when costs and demands are stationary. We provide managerial insights into the value of advance demand information through a numerical study.

Keywords

Multiechelon, Stochastic Inventory System, Facilities-in-Series, Advance Demand Information

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