solution

Ollamh’s Organic Pet Shop sells about 4,000 bags of free-range dog biscuits every year. The fixed ordering cost is $15, and the cost of holding a bag in inventory for a year is $2. a. (*) What is the economic order quantity for the biscuits?

 b. (**) Suppose Ollamh decides to order 200 bags at a time. What would the total ordering and holding costs for the year be? (For this problem, don’t consider safety stock when calculating holding costs.)

c. (**) Average weekly demand for free-range dog biscuits is 80 bags per week, with a standard deviation of 16 bags. Ollamh uses a continuous inventory review system to manage inventory of the biscuits. Ollamh wants to set the reorder point high enough that there is only a 5% chance of running out before the next order comes in. Assuming that the lead time is a constant 2 weeks, what should the reorder point be?

 d. (**) Suppose Ollamh decides to use a periodic review system to manage the free-range dog biscuits, with the vendor checking inventory levels every week. Under this scenario, what would the restocking level be, assuming the same demand and lead time characteristics listed in problem 13 and the same 95% service level? (Note that because the standard deviation of weekly demand is 16, basic statistics tells us the standard deviation of demand over 3 weeks will be 23 * 16 ≈ 28.)