Problem:

I-mart manufactures cellular phones at its Seattle facility. The demand for phones at the Chicago DC averages 17,600 per month with a standard deviation of 5,500. The fixed cost of transportation and ordering is $100,000. Each phone costs $100, and I-mart has an annual holding cost of 25%. Delivery lead-time from the Seattle factory is 2 months.

Required:

Question 1) If I-mart desires a cycle service level (frequency of no stock-out) of 95%, how much safety stock should the Chicago DC carry?

Question 2) If they use an optimal order quantity approach, what is the resulting inventory policy?

Question 3) I-mart is considering sending the phones by airfreight instead of sending them by ground. Airfreight will cost an extra $5 per phone but will reduce the delivery lead-time to 0.5 month. Identify the tradeoff that I-mart must consider when deciding whether to go with the airfreight option. What would you recommend? Why? Quantify the costs and benefits of the change. Explain the solution in detail.