Paul's Pronto Packaging (PPP) manufactures and supplies Carl's Calzone Castle (and others) with cardboard boxes for their calzones. PPP wants to balance the costs of holding inventory with the need for good customer service and efficient internal manufacturing. If PPP runs out of inventory when an order comes in, they will need to buy from a competitor across the street but will have to pay a premium price. Data:

• Each box normally costs $0.15 to produce internally, or $0.20 if bought from the competitor across the street
• Each setup for a manufacturing batch costs $100
• PPP sells an average of 10,000 boxes a week
• Inventories are financed with a line of credit - the rate is 10% per year
• PPP uses a periodic review inventory system that is reviewed weekly
• Manufacturing produces boxes with a lead time of 1 week
• PPP holds 1.5 weeks-of-supply on average for its safety stock

Questions:

1. What is the right service level to target for your pizza boxes (the probability that all orders will be filled?
2. What is the economic order quantity that PPP should use when manufacturing?
3. What Re-Order Point (ROP) should PPP use to place orders on manufacturing?