Modeling customer impatience in a newsboy problem with time-sensitive shortages

Abstract

Abstract Customers across all stages of the supply chain often respond negatively to inventory shortages. One approach to modeling customer responses to shortages in the inventory control literature is time-dependent partial backlogging. Partial backlogging refers to the case in which a customer will backorder shortages with some probability, or will otherwise solicit the supplier’s competitors to fulfill outstanding shortages. If the backorder rate (i.e., the probability that a customer elects to backorder shortages) is assumed to be dependent on the supplier’s backorder replenishment lead-time, then shortages are said to be represented as time-dependent partial backlogging. This paper explores various backorder rate functions in a single period stochastic inventory problem in an effort to characterize a diversity of customer responses to shortages. We use concepts from utility theory to formally classify customers in terms of their willingness to wait for the supplier to replenish shortages. Under mild assumptions, we verify the existence of a unique optimal solution that corresponds to each customer type. Sensitivity analysis experiments are conducted in order to compare the optimal actions associated with each customer type under a variety of conditions. Additionally, we introduce the notion of expected value of customer patience information (EVCPI), and then conduct additional sensitivity analyses to determine the most and least opportune conditions for distinguishing between customer behaviors.