Control of a production–inventory system with returns under imperfect advance return information

We consider a production–inventory system with product returns that are announced in advance by the customers. Demands and announcements of returns occur according to independent Poisson processes. An announced return is either actually returned or cancelled after a random return lead time. We consider both lost sale and backorder situations. Using a Markov decision formulation, the optimal production policy, with respect to the discounted cost over an infinite horizon, is characterized for situations with and without advance return information. We give insights in the potential value of this information. Also some attention is paid to combining advance return and advance demand information. Further applications of the model as well as topics for further research are indicated.

Highlight
► We model a stochastic production/inventory system with advance return information (ARI).
► The optimal policy is characterized with/without ARI, with lost sales/backorders.
► The benefit of using ARI is limited.
► The benefit of ARI is non-monotonic with the return lead time for several probability distributions.