Optimal inventory policies under service-sensitive demand

The service level provided by a retailer influences demand and sales in several ways. In the short run, sales can fall short of demand when customers experience stockouts and choose not to backorder. In the long run, demand itself may decline as customers who experience excessive stockouts shift per...

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Bibliographic Details
Published inEuropean journal of operational research Vol. 87; no. 2; pp. 316 - 327
Main Authors Ernst, Ricardo, Powell, Stephen G.
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 07.12.1995
Elsevier
Elsevier Sequoia S.A
SeriesEuropean Journal of Operational Research
Subjects
Applied sciences
Customer services
Exact sciences and technology
Inventory
Inventory control
Inventory control, production control. Distribution
Operational research and scientific management
Operational research. Management science
Service
Supply & demand
Variance analysis
Service
Inventory
Inventory control
Modeling
Optimal policy
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Summary:The service level provided by a retailer influences demand and sales in several ways. In the short run, sales can fall short of demand when customers experience stockouts and choose not to backorder. In the long run, demand itself may decline as customers who experience excessive stockouts shift permanently to more reliable sources. The traditional approach to determining inventory policies assumes a fixed stockout cost attributable to each stockout occasion. In practice, stockout costs are difficult to determine, at least in part because they reflect the long-term loss of demand due to inadequate service. In this paper we model the response of long-run demand to the service level of the retailer, and determine optimal order-up-to inventory policies in the presence of service-sensitive demand. We show under what conditions inventory policy is sensitive to both the mean and the variance of long-run demand.
ISSN:0377-2217
1872-6860
DOI:10.1016/0377-2217(94)00117-U