A produce-to-stock system with advance demand information and secondary customers

Seyed M.R. Iravani*, Liu Tieming, K. L. Luangkesorn, David Simchi-Levi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

We consider a manufacturer (i.e., a capacitated supplier) that produces to stock and has two classes of customers. The primary customer places orders at regular intervals of time for a random quantity, while the secondary customers request a single item at random times. At a predetermined time the manufacturer receives advance demand information regarding the order size of the primary customer. If the manufacturer is not able to fill the primary customer's demand, there is a penalty. On the other hand, serving the secondary customers results in additional profit; however, the manufacturer can refuse to serve the secondary customers in order to reserve inventory for the primary customer. We characterize the manufacturer's optimal production and stock reservation policies that maximize the manufacturer's discounted profit and the average profit per unit time. We show that these policies are threshold-type policies, and these thresholds are monotone with respect to the primary customer's order size. Using a numerical study we provide insights into how the value of information is affected by the relative demand size of the primary and secondary customers.

Original languageEnglish (US)
Pages (from-to)331-345
Number of pages15
JournalNaval Research Logistics
Volume54
Issue number3
DOIs
StatePublished - Apr 2007

Keywords

  • Advance order information
  • Markov decision process
  • Produce-to-stock
  • Value of information

ASJC Scopus subject areas

  • Modeling and Simulation
  • Ocean Engineering
  • Management Science and Operations Research

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