Using Imperfect Advance Demand Information in Lost-Sales Inventory Systems with the Option of Returning Inventory

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 imperfect in formation and integrate it with inventory supply decisions, we allow for returning excess stock built up due to imperfectness to upstream supplier and we propose a lost-sales inventory model with a general representation of imperfect ADI. A partial characterization of the optimal ordering and returning 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 a spare parts case. The value of imperfect ADI turns out to be significant.