The H&C Pharmacy has 40 retail outlets in the Detroit region. The current policy is to carry every drug in each retail outlet. H&C is investigating the possibility of centralizing some of the drugs in one central location. The delivery charge would increase by $0.02 per unit if a drug were centralized. The increase in delivery charge comes from the additional cost of operating the shuttle from the central location to each of the other outlets. At each retail outlet, H&C has weekly replenishment (the review period is 7 days), and the lead time is 3 days. H&C plans to stick to once-a-week ordering even if a drug is centralized.

H&C uses an inventory holding cost of 20 percent and aims for a cycle service level of 95 percent. Assume that demand across stores is independent.

Consider a drug with daily demand at each store that is normally distributed, with a mean of 5 and a standard deviation of 3. The drug costs $20 per unit.

Disaggregate option

A) Determine the standard deviation of demand over the lead time and review period. B) Determine the safety stock per store. C) Determine the total safety inventory for this policy.

Aggregate option

D) Determine the aggregated standard deviation of demand. E) Determine the aggregated standard deviation of demand over the lead time and review period. F) Determine the total safety inventory for this policy.

Comparison

G) Determine the annual holding cost savings of safety inventory between the two options.