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A New Approach to Stockout Penalties

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  • Benjamin L. Schwartz

    (Institute for Defense Analyses)

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    Abstract

    Classical inventory theory considers that stockouts generate penalty costs to the firm, often assumed to be proportional to the excess of demand over supply. While such a concept is sometimes appropriate, it does not correctly reflect the effect of loss of goodwill. The latter is characterized by the fact that a disappointed customer reacts in the future to change his purchasing habits. Thus the nature of the effect is that subsequent demand is perturbed, a phenomenon quite different from having an immediate penalty cost imposed. Models with this property are termed perturbed demand, abbreviated PD. In this paper, this concept is defined precisely, and some of its properties are developed. Some typical cases are solved to determine optimal policies when PD prevails.

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    File URL: http://dx.doi.org/10.1287/mnsc.12.12.B538
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 12 (1966)
    Issue (Month): 12 (August)
    Pages: B538-B544

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    Handle: RePEc:inm:ormnsc:v:12:y:1966:i:12:p:b538-b544

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    Cited by:
    1. Ernst, Ricardo & Powell, Stephen G., 1998. "Manufacturer incentives to improve retail service levels," European Journal of Operational Research, Elsevier, vol. 104(3), pages 437-450, February.
    2. Dana, James D, Jr, 2001. "Competition in Price and Availability When Availability is Unobservable," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 497-513, Autumn.
    3. Liberopoulos, George & Tsikis, Isidoros & Delikouras, Stefanos, 2010. "Backorder penalty cost coefficient "b": What could it be?," International Journal of Production Economics, Elsevier, vol. 123(1), pages 166-178, January.
    4. Ernst, Ricardo & Powell, Stephen G., 1995. "Optimal inventory policies under service-sensitive demand," European Journal of Operational Research, Elsevier, vol. 87(2), pages 316-327, December.

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