Question: Peet's Coffees in Menlo Park, California, sells Melitta Number 101 coffee filters at a fairly steady rate of about 60 boxes of filters monthly. The filters are ordered from a supplier in Trenton, New Jersey. Peet's manager is interested in applying some inventory theory to determine the best replenishment strategy for the filters. Peet's pays $2.80 per box of filters and estimates that fixed costs of employee time for placing and receiving orders amount to about $20. Peet's uses a 22 percent annual interest rate to compute holding costs.

a. How large a standing order should Peet's have with its supplier in Trenton, and how often should these orders be placed?

b. Suppose that it takes three weeks to receive a shipment. What inventory of filters should be on hand when an order is placed?

c. What are the average annual holding and fixed costs associated with these filters, assuming they adopt an optimal policy?

d. The Peet's store in Menlo Park is rather small. In what way might this affect the solution you recommended in part (a)?