Inventory Management with Advance Capacity Information

One of the important aspects of supply chain management is dealing with demand and supply uncertainty. The uncertainty of future supply can be reduced, if a company is able to obtain advance capacity information (ACI) on future supply/production capacity availability from its supplier. We address a periodic-review inventory system under stochastic demand and stochastic limited supply, for which ACI is available. We show that the optimal ordering policy is a state-dependent base stock policy characterized by a base stock level that is a function of ACI. We establish a link to inventory models using advance demand information (ADI) by developing a capacitated inventory system with ADI, and showing that the model is closely related to the proposed ACI model. Our numerical results reveal several managerial insights. In particular, we show that ACI is most beneficial when there exists sufficient flexibility to react to anticipated demand and supply capacity mismatches. Further, most of the benefits can be reached with only limited future visibility. We also show that the system parameters affecting the value of ACI interact in a complex way, and therefore need to be considered in an integrated manner.