Groundz Coffee Shop uses 4 pounds of a luxurious specialty tea weekly; each pound costs $16.
Because space is very scarce, carrying costs are $52 per pound per year. It costs the firm $8 to prepare an order.
Assume 52 weeks per year, closed on Mondays.
1- Assume the basic EOQ model with no shortages applies..
a- How many pounds should Groundz order at a time?
b- In pursuing lowest annual total cost, how many orders should Groundz place annually?
c- How many days will there be between orders (assume 312 operating days)?
d- What is total annual cost (including item cost) of managing this item in this case?
e- At which level of inventory on hand should a new order be placed if the lead time to receive an order from the supplier is 30 working days?
2- The supplier has now offered Groundz a discount of $2 off all units if it makes its purchases every 4 weeks or 24 working days.
a- What are the annual carrying, order and total costs including cost item, if it accepts the proposed discount?
b- Should Groundz accept the offer? Explain.
3- Suppose now that the demand for tea is relatively constant at 0.67 pound per day. Lead time, however, is variable and is normally distributed with a mean of 30 days and a standard deviation of 4 days.
a- What safety stock provides an 80 % service level?
b- If the lead time standard deviation can be reduced from 4 days to 1, how much is safety stock reduced by this change and what reorder point now provides 80% service?