Motorola obtains cell phones from its contract manufacturer located in China to supply the U.S. market, which 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 fill rate of 98 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. Assume that Motorola takes ownership of the inventory on delivery.
Assume that Motorola follows a periodic review policy. Given lot sizes by sea and air, Motorola would have to place an order every 20 days using sea transport but could order daily using air transport
a. Assume that Motorola follows a periodic review policy. What Order up to level (OUL) and safety inventory should the warehouse aim for when using sea or air transportation? How many days of safety inventory will Motorola carry under each policy?
b. How many days of cycle inventory does Motorola carry under each policy?
c. Under a periodic review policy, do you recommend sea or air transportation?
