A single store within a pharmacy chain orders drugs directly from the manufacturer. Because of the importance of customers getting the drugs they need, the pharmacy has a service level of 99%.
Drug A has a mean demand of 300 pills/day, with a standard deviation of 100 pills/day. Delivery time from the point the order is made to when it is delivered is 14 days. Storage of the drug at the pharmacy costs $0.10/pill/year.
(a) What is the safety stock required to keep Drug A in stock?
(b) What is the re-order point for Drug A?
(c) How much does the safety stock of Drug A cost the store each year?
The pharmacy chain decides to set up a distribution center for its drugs; instead of ordering the drugs from the manufacturer, the store will order the drug from a distribution center from now on. As a result, instead of taking 14 days for Drug A to get to the customer, it now takes only 2 days.
(d) What is the new safety stock?
(e) How much does this new safety stock cost per year?