We consider a make-to-stock supplier that operates a production facility with limited capacity. The supplier receives orders from customers belonging to several demand classes. Some of the customer classes share advance demand information with the supplier by announcing their orders ahead of their due date. However, this advance demand information is not perfect because the customer may decide to order prior to or later than the expected due date or may decide to cancel the order altogether. Customer classes vary in their demand rates, expected due dates, cancellation probabilities, and shortage costs. The supplier must decide when to produce and, whenever an order becomes due, whether or not to satisfy it from on-hand inventory. Hence, the supplier is faced with a joint production-control and inventory-allocation problem. We formulate the problem as a Markov decision process and characterize the structure of the optimal policy. We show that the optimal production policy is a state-dependent base-stock policy with a base-stock level that is nondecreasing in the number of announced orders. We show that the optimal inventory-allocation policy is a state-dependent multilevel rationing policy, with the rationing level for each class nondecreasing in the number of announced orders (regardless of whether the class provides advance information). From numerical results, we obtain several insights into the value of advance demand information for both supplier and customers.advance demand information, production-inventory systems, inventory rationing, make-to-stock queues, Markov decision process

A model of a single-item make-to-stock production system is presented. The item is demanded by several classes of customers arriving according to Poisson processes with different backorder costs. Item processing times have an Erlang distribution. It is shown that certain structural properties of optimal stock and capacity allocation policies exist for the case where production may be interrupted and restarted. Also, a complete characterization of the optimal policy in the case of uninterrupted production when excess production can be diverted to a salvage market is presented. A heuristic policy is developed and assessed based on the results obtained in the analysis. Finally the value of production status information and the effects of processing time variability are investigated.

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