Increasing the service level in a probabilistic model will generally result in what effect on the costs?

Increasing the service level in a probabilistic inventory model typically leads to an increase in the cost of the inventory policy. This is because a higher service level necessitates maintaining a higher stock of inventory to ensure that demand is met even in uncertain conditions. As you raise the service level, you are trying to ensure that stockouts—situations where demand exceeds supply—are minimized.

To achieve this, businesses generally need to carry more inventory, which directly increases holding costs associated with storing that inventory. In addition, there can be increased costs related to safety stock—extra inventory that is maintained to mitigate the risks of stockouts due to variability in demand or lead times. This balancing act between service level and inventory costs is a fundamental concept in supply chain management; the trade-off reflects the need to provide adequate service to customers while managing operational costs effectively.