Question 3 (14 marks) Happy Tea Trading Company has been specializing in the finest assortment of teas for both wholesale and retail customers. Happy Tea is planning to establish a store in Central, Hong Kong where people enjoy drinking jasmine green tea. Happy Tea estimates that the annual sale of jasmine green tea will be 20,250 packs. (Each pack consists of 100 tea bags.) The cost of each pack of tea is $5. Happy Tea has determined that the cost of placing a purchase order of tea packs is $20 per order. The cost to carry one pack of tea for 1 year is $1. The average lead time for a purchase order is 3 weeks. The supplier is reluctant to make frequent deliveries, which has forced Happy Tea to place large orders to avoid any disruption in supply. Since Happy Tea is aware that excess inventory on hand will increase carrying costs, it wants to determine the economic order quantity (EOQ) for the tea packs. The average daily sale and the maximum daily sale of the tea packs is 56 units and 112 units, respectively. Required: a. Compute the economic order quantity (EOQ) that will optimally balance Happy Tea's ordering costs and holding costs. Also compute the relevant annual total inventory costs if the EOQ model is adopted. (4 marks) b. Compute the safety inventory and the reorder point, taking into account the safety inventory. (4 marks) c. What is lead time in inventory management? Discuss the best strategies that Happy Tea can use to reduce the lead time for an order and help address its concern with the high carrying cost. ( 6 marks) Question 3 (14 marks) Happy Tea Trading Company has been specializing in the finest assortment of teas for both wholesale and retail customers. Happy Tea is planning to establish a store in Central, Hong Kong where people enjoy drinking jasmine green tea. Happy Tea estimates that the annual sale of jasmine green tea will be 20,250 packs. (Each pack consists of 100 tea bags.) The cost of each pack of tea is $5. Happy Tea has determined that the cost of placing a purchase order of tea packs is $20 per order. The cost to carry one pack of tea for 1 year is $1. The average lead time for a purchase order is 3 weeks. The supplier is reluctant to make frequent deliveries, which has forced Happy Tea to place large orders to avoid any disruption in supply. Since Happy Tea is aware that excess inventory on hand will increase carrying costs, it wants to determine the economic order quantity (EOQ) for the tea packs. The average daily sale and the maximum daily sale of the tea packs is 56 units and 112 units, respectively. Required: a. Compute the economic order quantity (EOQ) that will optimally balance Happy Tea's ordering costs and holding costs. Also compute the relevant annual total inventory costs if the EOQ model is adopted. (4 marks) b. Compute the safety inventory and the reorder point, taking into account the safety inventory. (4 marks) c. What is lead time in inventory management? Discuss the best strategies that Happy Tea can use to reduce the lead time for an order and help address its concern with the high carrying cost. ( 6 marks)
