A highly perishable drug spoils after three days. That is, a fresh unit on day t may be used on day t, day t+1, and day t+2, but must be disposed of at the end of day t+2.
Each time an order for the drug is placed, a fixed cost of $200 is incurred, as well as a purchase cost of $50 per unit. It costs no money to hold the drug in inventory, but a cost of $100 is incurred each time the hospital needs a unit of the drug and does not have any available. Because of environmental regulations, a disposal fee of $25 per unit is incurred each time a unit of the drug spoils.
Orders are placed at the end of the day. An order placed at the end of day t arrives at the beginning of day t+2.
Assume that on day 1 the hospital has an inventory of 50 fresh units of the drug.
Three inventory management strategies are being considered:
Strategy 1. If the ending inventory on day t is less than R1, order Q1 units.
Strategy 2. If the ending inventory on day t is less than R2 units, order enough to bring the beginning inventory on day t+2 up to S2 units.
Strategy 3. Place an order for Q3 units every T3 days.
Management's objective is to minimize average total daily cost, where total daily cost is the sum of ordering cost, purchase cost, shortage cost, and spoilage cost. Note that you will need to keep track of the age distribution of the units on hand at the beginning of each day. The hospital uses an FIFO (first-in-first-out) policy for managing inventory.
Using a simulation based on the 1000 days of estimated requirements, determine the optimal values of the parameters for the three strategies (R1 and Q1 for Strategy 1; R2 and S2 for Strategy 2; Q3 and T3 for Strategy 3).
Using an appropriate statistical procedure applied to the output from your simulation, determine if the three strategies, with their optimal parameter values, differ in their average total daily cost. Which strategy would you recommend to management, given their objective, and why? Use excel.