Increasing the service level (probability of meeting demand) results in higher order quantities and reduced risk of stockouts. However, it also increases carrying costs due to higher inventory levels.
If the cost ratio (CR) is high, it indicates that understocking costs are significantly higher than overstocking costs. In this case, the optimal order quantity will be closer to the mean demand. If CR is low, indicating that overstocking costs are higher, the optimal order quantity will be closer to the maximum demand.
The model is based on the concept of a newsvendor who purchases newspapers at a wholesale price and sells them at a retail price, but is unable to return any unsold newspapers to the wholesaler.