Foster Drugs is now considering a periodic review model in an attempt to coordin

Question

Foster Drugs is now considering a periodic review model in an attempt to coordinate ordering for its many products. They are proposing a 2 week review period. Demand during the two week review period plus the one week lead time is normally distributed with a mean of 450 (3 weeks x 150/week) and a standard deviation of 70.

A. If the firm would still like to have a 1% stockout rate, what would you recommend as their replenishment level?

B. Under this policy, what would Foster Drugs be paying in terms of annual holding cost for ONLY the safety stock they plan to keep?

C. In comparing your assessment of both policies (e.g., accounting for lead time, safety stock costs, etc.), which policy would you recommend and why?

D. What if this product were worth $295 instead of $2.95, would you favor continuous or periodic review for this more expensive item?

Explanation / Answer

Periodic review system

Avaerage demand = 150

Leadtime = 1 week

Review period=2 weeks

Service level= 0.99(stock out rate is 1%)

Replenishment level= Average demand during leadtime+Safetystock

Leadtime demand= 450(Given)

Safetystock = z*standard deviation of demand

z value for servicelevel 0.99 =NORM.S.INV(0.99) =2.33

So Safety stock = 2.33*70 = 163 units

Replenishment level= 450+163=613 units

B) The holding cost value would be = Safetystock/2*Holding cost= 163/2* Holding cost

Please put the holding cost value as it is not provided (to the formula above)

Please comment if any doubt

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