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Starbucks sells gourmet coffee in bags. Each bag costs $10 and is sold at $25. It costs $20 to Starbucks to place an order to its coffee supplier. The replenishment lead time from the supplier is 3 months. Suppose that the demand during lead time is normally distributed with mean 50 and standard deviation 25. The internal rate of return for Starbuck's is 20% per year, which can be regarded as the carrying cost of inventory. Starbucks uses continuous replenishment policy to replenish its coffee bag stock.
a. What is the distribution of annual demand, i.e., mean and standard deviation
b. What is the EOQ lot size if we ignore the demand variability (uncertainty)?
c. What is the reorder point that achieves 96.5% of service level?
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