Maintaining Optimum Inventory Problem


Powered by Koffe (PBK) is a new campus coffee store. PBK uses 50 bags of whole bean coffee every month, and you may assume that the demand is perfectly steady throughout the year. PBK has signed a year-long contract to purchase its coffee from a local wholesaler, Phish Roasters, for a price of $25 per bag and an $85 fixed cost of placing an order which is independent of the size of the order. The holding cost due to storage etc. is $1.50 per bag per month.

a. What is the optimal order size in bags?
b. Given your answer in (a), how many times does PBK order in a year?
c. Given your answer in (a), how many months of supply of coffee does PBK have on average?
d. On average, how many dollars per year does PBK spend to hold coffee?
e. A South American import/export company has offered PBK a deal for next year. PBK can buy a years’ worth of coffee at one go from them for $20 per bag and a fixed cost of $2000. Whom should PBK order from for the next year? Quantitatively justify your answer.


The question belongs to Operations Management and it is about a coffee store named Powered By Koffe. PBK has entered into contract with a coffee bean supplier and it requires PBK to pay for placing the order as well. The company wants to know the optimum size for placing the order to minimize the cost of order placement. This has been given calculated in the solution in the Excel sheet.

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