The DoorRed Pharmacy has 25 retail outlets in the Chicago region. The current policy is to carry everydrug in each retail outlet. DoorRed is investigating the possibility of centralizing some of the drugs in onecentral location.
The DoorRed Pharmacy has 25 retail outlets in the Chicago region. The current policy is to carry everydrug in each retail outlet. DoorRed is investigating the possibility of centralizing some of the drugs in onecentral location.
Delivery charge would increase by $0.02 per unit if a drug were centralized. Theincrease in delivery charge comes from the additional cost of operating the shuttle from the centrallocation to each of the other locations. At each retail outlet, DoorRed has weekly replenishment (areplenishment order is placed once every seven days), and replenishment orders with suppliers must beplaced three days before delivery. DoorRed plans to stick to once a week ordering even if a drug iscentralized. DoorRed uses an inventory holding cost of 20 percent and aims for a cycle of 99 percent.Assume that demand across stores is independent.a. Consider a drug with daily demand at each store that is normally distributed, with a mean of 300and a standard deviation of 50. The drug costs $10 per unit. What is the annual holding cost ofsafety inventory across all retail stores? If the drug were centralized in one location, what wouldbe the annual cost of holding safety inventory at the central location be? What would theannual increase in delivery charge be? Do you recommend centralization?b. Now consider a drug with daily demand at each store that is normally distributed, with a meanof 5 and a standard deviation of 4. The drug costs $10 per unit. What is the annual holding costof safety inventory across all retail stores
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