Service Impact of Shortage Costs

Example 3.4 Impact of goodwill cost on optimal service level 

Referring back to Examples 3.2 and 3.3, Table 3.3 shows the comparative values of the newsvendor-optimal order quantity, Q, and the values of service measures a and P for goodwill costs g = k(p - c), with k ranging from 0 to 10. Thus, from Table 3.3, as g ranges from 0 to relatively large values, service—measured both by a and P—clearly improves, as does the expected unsold inventory. For comparison. Table 3.3 displays a ratio of the optimal order quantity to the expected demand, QVp, and also shows the standardized value of the optimal order quantity, z = (Q - p)/o. These values are, of course, specific to the parameters specified in our example scenario and would obviously change as the various cost factors and demand distribution parameters change. 

Newsvendor optimal in-stock probability versus overage-to-rmderage ratio. 

---