Ollah's Organic Pet Shop also sells bags of cedar chips for pet bedding or snacking (buyer's choice). The supplier has offered Ollah the following terms:
Order 1-100 bags, and the price is $6.00 a bag. Order 101 or more bags, and the price is $4.50 a bag.
Annual demand is 630, fixed ordering costs are $9 per order, and the per-bag holding cost is estimated to be around $2 per year.
a. What is the economic order quantity for the bags?
b. What order quantity should Ollah order, based on the volume discount? Is this different from the EOQ? If so, how could this be?
c. Suppose the lead time for bags is a constant 2 weeks, and average weekly demand is 12.6 bags, with a standard deviation of 3.2 bags. If Ollah wants to maintain a 98% percent service level, what should her reorder point be?