Integrated Approach of Lost-Sales Costing and Service Level Constraint for Continuous-Review Inventory Control

The traditional approach to deal with backorders and lost sales in reorder-level inventory control policies is either to model stockout cost or to constrain the problem through a service level definition. This paper aims at presenting a (r, Q) policy that combines these approaches by underlining the importance of both components in a lost-sale setting with stochastic customer demand. In fact, backlogging may not be representative of real customer behavior in many competitive environments, such as in a retailer or e-commerce context. Considering skewed customer demand, a generalization on average inventory is given for the formulation of the objective function of total costs for the considered optimization horizon. The impact of the implemented ready-rate service level on total costs and lost sale quantities for the novel approach are investigated for varying lost-sale costs.