Problem:

Motorola obtains cell phones from its contract manufacturer located in China to serve the US Market. The US market is served from a warehouse located in Memphis, Tennessee. Daily demand at the Memphis warehouse is normally distributed with a mean of 5000 and standard deviation of 4000. The warehouse aims for a CSL (customer service level) of 99%. Assume demand is independent - from one day to another.

The company is debating whether to use sea or air transportation from China. Sea transportation incurs a fixed cost of $500 with a mean lead time of 36 days and standard deviation of 14 days. Air transportation results in a lead-time of 4 days with a fixed cost of $2500. Each phone sells for $100 and Motorola uses a holding cost of 20%.

Required:

Question 1) What is the optimal (Q, R) policy in each transportation mode (Sea vs. Air)?

Question 2) What safety factor and safety stock does the optimal inventory policy require for each transportation mode?

Question 3) Based on total annual cost - which transportation mode should Motorola go with?

Question 4) Suppose, it is possible to get rid of variability in the lead-time as the deliveries are made via sea transportation. What is the most Motorola would be willing to pay for this - i.e. the deliveries would be guaranteed to arrive within 36 days? Solve the problem and show all work.