Evaluating Long-Term Service Performance under Short-Term Forecast Updates

Managing customer satisfaction in a cost effective way has always been a major challenge faced by inventory managers. We study the problem of a newsvendor selling a perishable product with short-term demand patterns and a long-term service target. The newsvendor determines his long-term order at the first stage, and revises the order according to a short-term forecast update at the second stage. He also evaluates a long-term service target for his overall performance across all possible forecast updates. We characterize his optimal inventory policy that minimizes the expected inventory cost such that the long-term service target is met. Both in-stock rate and fill rate targets are examined