Turn the previous problem around. Now assume that the store’s service level requirement obligates it to meet customer demand on 99% of all order cycles. In other words, use model 4. What (R,Q) policy should it use? Then find the (approximate) model 3 cost parameter (the cost per cycle with a shortage) that is equivalent to this service level.

Previous Problem

The first (R,Q) model in this section assumes that the total shortage cost is proportional to the amount of demand that cannot be met from on-hand inventory. Similarly, the second model assumes that the service level constraint is in terms of the fill rate, the fraction of all customer demand that can be met with on-hand inventory. Consider the following variations of these models. The first, labeled model 3, assumes that a shortage cost is incurred on every order cycle that experiences a stockout. This cost is independent of the size of the stockout. The second model, labeled model 4, prescribes a service level constraint but now on the fraction of order cycles that experience no stockouts.