Consider an item whose inventory is controlled by a periodic review, base-stock policy. Suppose the review period is 1 week (7 days), the replenishment lead time is 4 days, and the daily demand is normally distributed with a mean of 100 and a standard deviation 50. The cost of placing the order is $200, and the unit cost of the product is $40. The annual interest rate is 25% in this industry.

What is the basestock level (order-up-to level) S to assure that the coverage probability is 0.90? What is the average inventory level? What is the annual total inventory-related cost? How many times of stock-out do you expect per year? (Assume 52 weeks per year).

Suppose the manager simply sets the safety stock level equal to one week of average demand. What is the service level? What is the average inventory level? What is the annual total inventory-related cost? How many stock-outs do you expect per year?