Interactive high-low search: The case of lost sales

Interactive high-low search: The case of lost sales

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Article ID: iaor1989427
Country: United Kingdom
Volume: 40
Issue: 8
Start Page Number: 769
End Page Number: 780
Publication Date: Aug 1989
Journal: Journal of the Operational Research Society
Authors:
Abstract:

The paper considers the problem of supplying perishable goods to disloyal customers. As in traditional stock-control literature, a penalty is incurred whenever there is a stockout. However, in contrast to mainstream models, loss of goodwill is explicitly treated by incorporating the behavioural assumption that a fixed proportion of unsatisfied demand is lost forever after each stockout. The problem consists of finding supply levels which minimize costs of over- and underproduction, given unknown but deterministic demand. The paper derives optimal adaptive search procedures under varying assumptions of a priori knowledge about demand. Optimal strategies are compared to myopic strategies. The methodology extends the mathematical theory of ‘high-low search’ for a hidden point to incorporate the ‘Heisenberg principle’: the position of the hidden point (demand) is directly influenced by the actions (supply levels) of the searcher.

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