Service level enhancement in newsvendor model

• This paper considers a decision rule for newsvendor model with emergency order.
• The model involves service level revision during the consumption period of the item.
• Emergency order is placed if service level is dropped to a certain value.

Nowadays, competition in global market forced companies to offer high service levels for customers with high expectations. An important type of service levels that businesses usually use in controlling inventory systems is the fill rate. Typically, in such businesses, a vendor orders a batch at the beginning of an inventory cycle such that a certain expected fill rate is met. An obvious shortcoming of this method of ordering is that the expected fill rate may drop to an unacceptable value during consumption period. This disruption in expected fill rate may lead to significant losses to a business. We, thus, propose a newsvendor model which allows the vendor to place an initial order that satisfies a predetermined fill rate. When the expected fill rate drops to a specific value during consumption, another order is placed to increase the expected fill rate. Propositions are developed to reduce the difficulty of the model and we devise a simple solution method which determines the initial optimal lot size, optimal lot size of the second order, and the reorder point.