Problem 1:
Motorola obtains mobile phones from its contract manufacturer located in China to supply the
U.S. market, which is served from a warehouse located in Memphis. Daily demand at the
Memphis warehouse is normally distributed, with a mean of 5,000 and a standard deviation of
4,000. The warehouse follows a continuous review policy and aims for a cycle service level
(CSL) of 99%. The company is considering the possibilities of using either sea transportation
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 incurs an annual holding cost of 20% of the phone cost.
Given the minimum order quantity requirements, Motorola would order 175,000 phones at a
time (on average, once every 35 days) if using sea transport and 5,000 phones at a time (on
average, daily) if using air transport.
First, assume that Motorola uses sea transportation.
(a) Determine the safety stock level that the warehouse should set.
(b) Determine the expected annual safety stock holding cost.
(c) Determine the expected annual cycle stock holding cost.
(d) Determine the expected annual in-transit stock (i.e., pipeline stock) holding cost.
(e) Determine the expected annual transportation cost.1
Next, assume that Motorola uses air transportation.
(f) Determine the safety stock level that the warehouse should set.
(g) Determine the expected annual safety stock holding cost.
(h) Determine the expected annual cycle stock holding cost.
(i) Determine the expected annual in-transit stock holding cost.
(j) Determine the expected annual transportation cost.
