Consider a company that allows back ordering. That is, the company notifies customers that a temporary stock-out

Question:

Consider a company that allows back ordering. That is, the company notifies customers that a temporary stock-out exists and that their order will be filled shortly. What conditions might argue for such a policy? What effect does such a policy have on storage costs? Should costs be assigned to stock-outs? Why? How would you make such an assignment? What assumptions are implied by the model in Figure 13.7? Suppose a ``loss of goodwill cost'' of w dollars per unit per day is assigned to each stock-out. Compute the optimal order quantity Q^∗ and interpret your model.

Figure 13.7