Weekly demand for electric motors at a Japanese motor manufacturer is normally d

Question

Weekly demand for electric motors at a Japanese motor manufacturer is normally distributed, with a mean of 1,000 and a standard deviation of 1,000. Motors are currently assembled in China and delivered at a cost of 20,000 yen/motor. The supplier takes eight weeks to supply an order. A local Japanese manufacturer has offered to deliver motors with a lead time of one week at a cost of 20,400 yen per motor. The motor manufacturer is targeting a Cycle Service Level (Type I) of 99 percent and monitors its inventory continuously with (Q, r) policy. The manufacturer incurs a holding cost of 25 percent. Should the manufacturer accept the local supplier’s offer?

Explanation / Answer

Yes. The manufacturer should accept the local supplier's offer as it will increase the customer satisfaction because the demand will be fulfilled in time. There is benefit for manufacturer also, as it will reduce his holding cost.

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