A pharmacy dispenses a prescription painkiller drug from its retail location. The daily demand for this drug is normally distributed with a mean of 20 units and a standard deviation of 9 units. This drug, costing $30/unit, is currently procured from a local distributor, via a periodic review replenishment policy (under total demand backlogging) with a review period of 7 days (assume 365 days in a year) and an order-up-to level of 225 units. The distributor guarantees a two-day supply lead time. The pharmacy has an inventory holding cost rate of $0.25/S/year. (a) What are the current cycle service level and the implied unit shortage cost for this item? ixed cost of fixed cost of $2 shipment shipment 0/shipment for 40,000 lbs. I days for LTL shipments or LTL total relevant cost (b) If the shortage cost is estimated to be $1.00/unit of shortage, what should be the optimal cycle service level and order-up-to level for this drug? Calculate the resulting product fill rate and the expected annual shortage cost.
