Supply Allocation under Sequential Advance Demand Information

Abstract

We study the problem of allocating supply under advance demand information (ADI). We consider a company that must allocate limited inventory to different markets that open sequentially. To reduce uncertainty, the company receives advance demand information and updates forecasts about its markets each time it makes an allocation decision. We study the value and optimal use of this information. Our research is motivated by an agri-food manufacturer that operates in several European countries. We develop the optimal policy under relaxed conditions and an efficient heuristic policy that performs close to optimal under general conditions. We derive structural properties of the model to gain managerial insights, and we derive the optimal policy in closed-form for the case of markets with identical prices. We use numerical experiments to demonstrate that the value of ADI can be significant. The managerial insights of this study include the observations that in environments as the one that motivated our research, early markets receive systematically less supply than late markets and that the value of ADI is greatest if the initial supply is close to the initial forecasts.