Question

Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs $16. Carrying costs are $1 per pound per week because space is very scarce. It costs the firm $8 to prepare an order. Assume Groundz is open 52 weeks per year, and closed on Mondays.
a. How many pounds should Groundz order at a time?
b. What is the total annual cost of managing this item?
c. The lead time for orders to arrive is 1.5 (work) weeks. If the standard deviation of weekly demand is 1.2 pounds, and Groundz wishes to achieve at least a 98% customer satisfaction level, what is the reorder point?
d. Groundz has been contacted by a new supplier who is offering to sell the same tea for $12 per pound. In return, Groundz can place orders only once a month. Inventory and ordering costs would remain the same. Is it more cost-effective for Groundz to switch suppliers? Should Groundz switch?

Answer 1

Answer

e.Yes, it is cost effective to switch suppliers as total cost reduces from $3.744 to $3.060 and hence Groundz should switch. Please check the calculations.

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Explanation  

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