Question

(26 pts) Motorola obtains cell phones from its contract manufacturer located in China to serve the U.S. market. The U.S. market is served from a warehouse located in Memphis, Tennessee. Daily demand at the Memphis warehouse is normally distributed, with a mean of 5,000 and a standard deviation of 4,000. The warehouse aims for a CSL of 99 percent. The company is debating whether to use sea or air transportation from China. Sea transportation results in a lead time of 36 days and costs $0.50 per phone. Air transportation results in a lead time of 4 days and costs $1.50 per phone. Each phone costs $100, and Motorola uses an annual inventory holding ratio of 20 percent. a) What reorder point and safety inventory should the warehouse aim for when using sea or air transportation

Answer 1

Answer:

when sea transportation is used:

safety stock = Z-score x √lead time x standard deviation of demand

• Z-score for 99% = 2.58
• lead time = 36 days
• standard deviation of demand = 4,000 units

safety stock = 2.58 x √36 x 4,000 units = 61,920 units

reorder point = lead time demand + safety stock

• lead time demand = 36 days x 5,000 units = 180,000 units
• safety stock = 61,920

reorder point = 180,000 units + 61,920 units = 241,920 units

when air transportation is used:

safety stock = Z-score x √lead time x standard deviation of demand

• Z-score for 99% = 2.58
• lead time = 4 days
• standard deviation of demand = 4,000 units

safety stock = 2.58 x √4 x 4,000 units = 20,640 units

reorder point = lead time demand + safety stock

• lead time demand = 4 days x 5,000 units = 20,000 units
• safety stock = 20,640

reorder point = 20,000 units + 20,640 units = 40,640 units