Evaluating Long-Term Service Performance in Two-Stage Newsvendor Models

Abstract

Managing customer satisfaction in a cost effective way has always been a major challenge faced by inventory managers. This paper studies long-term service performance of a two-stage newsvendor selling a perishable product with short-term demand patterns. We characterize the optimal inventory policy to minimize the expected inventory cost such that a long-term stock availability target is satisfied. Both in-stock probability and fill rate targets are examined and compared. In particular, we address the following questions: How should an inventory manager evaluate his long-term fill rate performance without observing the lost sales? How are in-stock probabilities and fill rates connected with respect to different demand patterns? How does the forecast update impact the evaluation of the long-term service performance? How do the short-term cost trade-offs under different long-term service targets depend on the monotone structures of the forecast signal?

Keywords: Newsvendor Model, inventory model, service measures, forecast updates, Two-stage newsvendor model, fill rate

JEL Classification: C61, M11