Guzzo Pharmacies, Inc. (Summary) - Guzzo Pharmacies uses a fixed-order quantity inventory control system for prescription drugs. Weekly sales data for a common steroid drug is given in Exhibit 13.1 - Ordering cost is estimated at $165 per order and the ordering lead time is 2 weeks - The unit cost of the drug is $28.60 - Two years ago, the average inventory was $5,243,000 whereas the total inventory costs were $1,866,000. Last year, the average inventory was $5,483,000 whereas the total inventory related costs were $1,896,000. The inventory related costs include some fixed costs such as the cost of security at the central warehouse. These costs are incurred regardless of the value of the inventory - All orders arrive from the supplier in a single shipment, no partial deliveries - GPI operates 52 weeks per year - If a stock-out occurs during the order cycle, GPI special orders a small quantity of the product at $625 per stock-out occurrence, which is usually enough to get them through the end of the cycle - GPI would like to determine the service level, which is defined as the probability of not having a stock-out during an order cycle; that will minimize the expected total annual cost of inventory holding, ordering, and penalty cost resulting from stock-outs - GPI considers the inventory policies of 90%,91%,92%,,98%,99% of service levels and would like to pick the one that minimizes the annual expected total costs which includes the holding cost for the average basic inventory, holding cost for the safety stock, ordering cost, and the penalty costs associated with stock-outs - There is also a quantity discount option that needs to be considered: A 1.5% discount is offered for orders over 3,000 units. The GPI management would like to repeat the analysis by considering the discount offer and determine the best order quantity and the service level that minimizes the total expected annual costs