Using imperfect advance demand information in lost-sales inventory systems

Motivated by real-life applications, we consider an inventory system where it is possible to collect information about the quantity and timing of future demand in advance. However, this advance demand information (ADI) is imperfect because (i) it may turn out to be false, (ii) a time interval is provided for the demand occurrences rather than its exact time and (iii) there are yet customer demand occurrences for which ADI cannot be provided. To make best use of this information and integrate it with inventory supply decisions, we propose a lost-sales inventory model with a general representation of imperfect ADI. We allow for returning excess stock built up due to imperfectness. A partial characterization of the optimal ordering and return policy is provided. Through an extensive numerical study we investigate the value of ADI and factors that affect that value. We show that using imperfect ADI can yield substantial savings, the amount of savings being sensitive to the quality of information; the benefit of the ADI increases considerably if the excess stock can be returned. We apply our model to two cases: spare parts and machine sales. The value of imperfect ADI turns out to be significant in both.