SmartBeans, located in Guelph, is Canada\'s largest online retailer of fair-trad

Question

SmartBeans, located in Guelph, is Canada's largest online retailer of fair-trade organic coffee, and imports coffee beans from several countries. SmartBeans operates 300 days a year and sells an average of 150 pounds of Harar (Ethiopia) Fair Trade Organic beans a day. After ordering, beans are always shipped from Ethiopia within exactly 9 days. Annual holding costs per pound are estimated to be 25% of the per pound cost of beans. The ordering cost is $25 per order. The cost of a pound of green coffee beans is $4.

c. [3] If SmartBeans orders in quantities of 1200 pound or more, it can get a 0.1% discount on the (entire) cost of beans. Should SmartBeans take the quantity discount? How much should SmartBeans order? Would your answer change if the discount is 0.1% per pound but only for orders in quantities of 3000 pounds or more?

d. [5] The demand for the Harar Fair Trade Organic beans is assumed to be normally distributed with a variance of 400 pounds per day, and lead time is assumed to be normally distributed with a variance of 4 days. Assume that management has specified that no more than a 5% risk of a stockout is acceptable. What is the standard deviation of demand during lead time? What is the safety stock needed to attain a 5% risk of stockout during lead time? What is the demand during lead time? What should be the reorder point? What is the number of kanbans? What is the annual holding cost of maintaining the level of safety stock needed to support a 5% risk of a stockout? Using an appropriately labelled diagram, graph ROP, EOQ, daily demand and lead time.

Explanation / Answer

The formula to be used is Economic Order Quantity EOQ = SQRT(2AD/h)

Answer c

From above it is apparent to accept the discount and place order for 1200 units to have minimum Annual Total Cost.

Under the second option of discount of .1% per pound, it is recommended to place orders of size 3000 pounds, as per the above mentioned calculations.

EOQ c-1200 Annual Demand-A 45000 45000 Ordering cost per order-D 25 25 Unit holding cost per year-h 1 1 Unit cost-p 4 4 2AD/h 2250000 Order quantity-Q 1500 1200 No. of orders A/Q--n 30 37.5 Average inventory Q/2--I 750 600 Annual ordering cost 750 937.5 Annual holding cost 750 600 Annual purchase cost 180000 180000 Annual Total Cost 181500 181537.5 Discount .1% on purchaseP 180 Total cost net of discount 181357.5

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