Reference no: EM13677539

Motorola obtains cell phones from its contact 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 a holding cost of 20 percent. Given the minimum lot sizes, Motorola would order 100,000 phones at a time (on average, once every 20 days) if using sea transport and 5,000 phones at a time (on average, daily) if using air transport. To begin with, assume Motorola takes ownership of the inventory on delivery.

a. Assuming that Motorola follows a continuous review policy, what reorder point and safety inventory should the warehouse aim for when using sea or air transportation? How many days of safety and cycle inventory will Motorola carry under each policy?

b. How many days of cycle inventory does Motorola carry under each policy?

c. Under a continuous review policy, do you recommend sea or air transportation if Motorola does not own the inventory while in transit? Does your answer change if Motorola has ownership of the inventory while in transit?

The DoorRed Pharmacy has 25 retail outlets in the Chicago region. The current policy is to carry every drug in each retail outlet. DoorRed is investigating the possibility of centralizing some of the drugs in one central location. Delivery charge would increase by $0.02 per unit if a drug were centralized. The increase in delivery charge comes from the additional cost of operating the shuttle from the central location to each of the other locations. At each retail outlet, DoorRed has weekly replenishment (a replenishment order is placed once every seven days), and replenishment orders with suppliers must be placed three days before delivery. DoorRed plans to stick to once a week ordering even if a drug is centralized. DoorRed uses an inventory holding cost of 20 percent and aims for a cycle of 99 percent. Assume that demand across stores is independent.

a. Consider a drug with daily demand at each store that is normally distributed, with a mean of 300 and a standard deviation of 50. The drug costs $10 per unit. What is the annual holding cost of safety inventory across all retail stores? If the drug were centralized in one location, what would be the annual cost of holding safety inventory at the central location be? What would the annual increase in delivery charge be? Do you recommend centralization?

b. Now consider a drug with daily demand at each store that is normally distributed, with a mean of 5 and a standard deviation of 4. The drug costs $10 per unit. What is the annual holding cost of safety inventory across all retail stores.