Exercise 13.11: DoorRed Pharmacy
Inputs
Expected demand per day, D40
Standard deviation of demand, σD5
Order quantity, Q200
Reorder point, ROP 45
Replenishment lead time in days, L1
Unit costs, C$4
Inventory holding costs, h25%
Distribution of demand during lead time
Mean demand during lead time, DL40
SD of demand during lead time, σL5
Outputs
Current safety inventory 5
Cycle service level, CSL 84.13%
Cost of holding one unit for one year, H$1
Implied cost of understocking with backlogging $0.086
Daily demand for aspirin at DoorRed Pharmacy is normally distributed, with a mean of 40
bottles and a standard deviation of 5. The replenishment lead time from the supplier is one
day. The current inventory policy at DoorRed is to order 200 bottles when the quantity on
hand drops below 45. Each bottle costs DoorRed $4, and the pharmacy uses an annual
holding cost of 25 percent.
a. If all unfilled demand is assumed to be backlogged and carried over to the next cycle, what
cost of understocking justifies the current policy?
Exercise 13.11: DoorRed Pharmacy
Inputs
Expected demand per day, D40
Standard deviation of demand, σD5
Order quantity, Q200
Reorder point, ROP 45
Replenishment lead time in days, L1
Unit costs, C4.00$
Inventory holding costs, h25%
Distribution of demand during lead time
Mean demand during lead time, DL40
SD of demand during lead time, σL5
Outputs
Current safety inventory (tires) 5
Cycle service level, CSL 84.13%
Cost of holding one unit for one year, H$1
Implied cost of understocking with lost sales $0.073
Daily demand for aspirin at DoorRed Pharmacy is normally distributed, with a mean of 40
bottles and a standard deviation of 5. The replenishment lead time from the supplier is
one day. The current inventory policy at DoorRed is to order 200 bottles when the
quantity on hand drops below 45. Each bottle costs DoorRed $4, and the pharmacy uses
an annual holding cost of 25 percent.
b. If all unfilled demand is assumed to be lost, what cost of stocking out justifies the
current policy?