Using the same wine example as in Problem 1, determine an inventory policy for wine that yields a 99 percent service level.

Problem 1

Suppose a restaurant serves an average of 5,000 bottles of wine per year. The standard deviation of the annual demand for wine is 1,000 bottles. The annual holding cost for a bottle of wine is $1. It costs $10 to place an order for wine, and it takes an average of three weeks (with a standard deviation of one week) for the wine to arrive. Assume that when the restaurant is out of wine, it incurs a penalty of $5 as the result of lost goodwill. Also, the restaurant earns a profit of $2 per bottle of wine. Determine an optimal ordering policy for the wine.