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Advance demand information and a restricted production capacity: on the optimality of order base-stock policies

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Wijngaard, Jacob

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This paper considers the optimality of order aggregation in a single-item production/inventory problem with advance demand information and a restricted production capacity. The advance demand information is modeled by introducing a positive customer order lead time. The paper proves, when customer order lead times are less than a threshold value, it is allowed to aggregate the orders over time when establishing the optimal production decision. This implies the optimality of an order base-stock policy. It shows also that in case of linear inventory cost, the positive effect of advance demand information is equal to a cost reduction that is proportional to idle time and foreknowledge horizon. The results hold for the backlogging case as well as for the lost-sales case.

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Springer

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Operations research, Management science

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10.1007/s00291-006-0076-x

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